Un­der Ar­mour stock slides de­spite earn­ings

Com­pany says weaker-than-ex­pected growth is ahead

Baltimore Sun - - BUSINESS MARYLAND - By Lor­raine Mirabella lor­raine.mirabella@balt­sun.com

Un­der Ar­mour’s stock swooned Tues­day even as the Bal­ti­more-based ath­letic brand re­ported that sales and prof­its soared in the third quar­ter.

The com­pany’s shares plunged more than 13 per­cent Tues­day, clos­ing at $32.89 each, af­ter its ex­ec­u­tives warned of a weaker-thanex­pected growth out­look for the next two years.

“I be­lieve we op­er­ate in a re­silient in­dus­try,” said Kevin Plank, Un­der Ar­mour’s founder and CEO, as­sur­ing an­a­lysts dur­ing a con­fer­ence call that the com­pany re­mains on track to reach $7.5 bil­lion in sales by 2018.

Cit­ing the pop­u­lar­ity of the brand’s bas­ket­ball and run­ning shoes and ex­po­sure through events such as the sum­mer Olympics in Rio and New York Fash­ion Week, Un­der Ar­mour re­ported that sales surged to $1.47 bil­lion in the July-to-Septem­ber quar­ter, up from $1.2 bil­lion a year ear­lier.

The quar­ter marked the com­pany’s 26th con­sec­u­tive pe­riod of sales growth of more than 20 per­cent.

Un­der Ar­mour’s third-quar­ter in­come jumped 28 per­cent to $128 mil­lion from $100 mil­lion. Per-share earn­ings were 29 cents, up from 23 cents.

The re­sults beat an­a­lysts’ ex­pec­ta­tions of 25 cents per share earn­ings and $1.46 bil­lion in rev­enue. Back­ing out cur­rency fluc­tu­a­tions, sales grew 23 per­cent.

But the growth rate go­ing for­ward will be less ro­bust than pro­jected at the com­pany’s in­vestor day in 2015, Un­der Ar­mour CFO Chip Mol­loy told an­a­lysts.

The com­pany ex­pects fourth-quar­ter rev­enue growth of 20 per­cent, be­low an­a­lysts’ ex­pec­ta­tions of more than 22 per­cent.

Mean­while, Un­der Ar­mour’s profit mar­gins were squeezed by the tim­ing of liq­ui­da­tions, in­creased pro­mo­tions and for­eign ex­change rates, though the de­crease was par­tially off­set by im­prove­ments in prod­uct cost mar­gins.

Go­ing for­ward, Mol­loy said, he ex­pects an­nual op­er­at­ing-in­come growth in the mid-teens, while the com­pany in­vests in fast-grow­ing ar­eas such as footwear, in­ter­na­tional mar­kets and branded stores and web­sites. Man­age­ment had said it was plan­ning for op­er­at­ing in­come of $800 mil­lion by 2018 at a com­pound an­nual growth rate of 23 per­cent.

The market re­acted be­cause in­vestors an­tic­i­pated a tar­get of $7.5 bil­lion in sales as well as $800 mil­lion in op­er­at­ing in­come by 2018, said Ja­son Moser, an an­a­lyst with the Mot­ley Fool’s Mil­lion Dol­lar Port­fo­lio.

With the com­pany in­stead fo­cus­ing on ac­cel­er­at­ing in­vest­ments to go af­ter op­por­tu­ni­ties in footwear and in­ter­na­tional mar­kets, “the tar­get for that $800 mil­lion in op­er­at­ing in­come re­ally has been cut sig­nif­i­cantly, so the com­pany is now be­ing val­ued on that ex­pec­ta­tion,” he said.

When asked by an an­a­lyst why the com­pany would not hit $800 mil­lion in op­er­at­ing profit if it reaches $7.5 bil­lion in rev­enue by 2018, Plank de­fended the com­pany’s strat­egy. The ap­parel maker is tak­ing ad­van­tage of op­por­tu­ni­ties in footwear and in­ter­na­tional mar­kets, while ad­just­ing for fewer store dis­tri­bu­tion chan­nels, Plank said.

Plank said the land­scape in the North Amer­i­can market is shift­ing, re­fer­ring to the loss of whole­sale part­ner Sports Author­ity and oth­ers, forc­ing the brand to look to reach con­sumers through new dis­tri­bu­tion av­enues such as Kohl’s depart­ment stores start­ing next year.

Sales in the U.S. and Canada were up 16 per­cent while in­ter­na­tional sales jumped 74 per­cent. Sales out­side the U.S. ac­count for 15 per­cent of rev­enue.

In­ter­na­tional sales in the third quar­ter got a boost from bas­ket­ball star Stephen Curry’s sec­ond tour through Asia for Un­der Ar­mour and the ad­di­tion of three new web­sites, bring­ing the to­tal to 30 global sites.

Ap­parel sales rose 18 per­cent to $1.02 bil­lion, led by strength in men’s train­ing, women’s train­ing, golf and team sports.

Sales of footwear in­creased 42 per­cent to $279 mil­lion, driven by strong growth in run­ning and bas­ket­ball shoes.

“We be­lieve we are at a mo­ment in time where we can gain share in footwear and are pre­pared to make in­vest­ments to drive long-term prof­itable growth,” said Plank, adding that in­vest­ments are planned in tal­ent and in­fra­struc­ture to de­velop and market shoes.

Plank said the footwear and women’s busi­nesses each are ap­proach­ing $1 bil­lion in sales this year. The com­pany now ex­pects sales of about $4.9 bil­lion this year.

Fu­ture growth will de­pend on three key ar­eas, Plank said, “get­ting big fast, mak­ing re­tail a core com­pe­tency and get­ting more shoes on feet.”

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