Under Armour shares soar 17% despite loss

Sales top expectations; revenue up by 5 percent

Under Armour’s stock jumped more than 17 percent Tuesday after the Baltimore athletic apparel brand reported stronger sales than expected at the end of 2017.

While weak demand for its apparel in the United States caused a steep loss for the quarter ended Dec. 31, Under Armour reported strong sales in international markets and online.

As a result, revenue grew 5 percent to $1.37 billion, exceeding analysts’ expectations for the critical October-to-December period. Under Armour shares surged, ending the day’s trading up $2.47 each at $16.70.

After years of rapid growth, Under Armour stumbled badly in 2017, as sales growth slowed amid store closings by key retailers, intense competition and changing demand for athletic apparel.

Under Armour’s CEO and founder, Kevin Plank, said a rocky 2017 will serve as a catalyst for a rebound by the company. Plank and other executives sought Tuesday to reassure investors that the business was stabilizing and seeing results from “tough decisions” made to become leaner, better manage inventory and improve margins, as well as become more responsive to consumers in developing and marketing its shoes and apparel.

“In 2017, we were a loud company and a quiet brand,” Plank said during a conference call with analysts. This year, Under Armour will be “a quiet company and a loud brand.”

Analysts cautioned that the company has its work cut out for it in recovering and returning to more sustained growth.

“While investors may cheer the modest upside on Under Armour’s top line and 2018 guidance that looks pragmatic, the fourth quarter provides a stark reminder that the company has a long road ahead of it,” Sharon Zackfia, an analyst with William Blair, said in a report Tuesday. That includes working to minimize risk in the challenging retail environment, she said, “all the while fending off competitors and trying to maintain a premium brand positioning.”

Zackfia called the outlook on the company’s path to recapturing superior sales and earnings growth “murky.”

For the fourth quarter, Under Armour reported a loss of $88 million, 20 cents per share. In the same period last year, it reported a profit of $103 million, or 23 cents per share.

Fourth-quarter revenue topped the $1.3 billion anticipated by analysts polled by the research firm Zacks. Sales for the year rose 3 percent to $5 billion.

Under Armour’s U.S. sales have slowed since the end of 2016. In 2017’s third quarter, the company’s sales fell for the first time since it went public in 2005 — dropping 12 percent — and the brand slashed projections for sales and earnings for the year, sending its stock to a four-year low.

In the fourth quarter, sales in its core North America core market continued to suffer, slipping 4 percent, but revenue soared 47 percent internationally, the company said. The Asia-Pacific region, including China, where Under Armour has more than 60 stores, is one of its highest-growth areas and the most profitable in its international business.

Apparel sales increased 2 percent to $952 million, led by growth in men’s training and soccer, but tempered by declines in team sports and outdoor categories. Footwear sales rose 9 percent, driven by strength in running, but offset by declines in team sports and basketball.

The brand also experienced stronger sales growth in its online and branded store channels, an 11 percent increase, while sales to wholesale customers, which include retailers such as sporting goods stores, fell 1 percent to $733 million. Sales through websites and branded stores made up 42 percent of the quarter’s global revenue.

At least one analyst didn’t see much in Under Armour’s earnings. Victor Ahluwalia, an analyst at CFRA Research, lowered the company’s stock rating to “strong sell” from “sell” and maintained a 12-month price target of $11 per share.

He said international growth was not as strong as it appeared when adjusted for new international store openings.

“They’re going to have trouble selling next year and that’s going to weigh on margins,” said Ahluwalia, citing prospects for another year of negative U.S. sales as well as elevated inventory. “Even though they talk about making changes, I don’t see anything specific or concrete.”

However, Andrew Burns, senior research analyst with D.A. Davidson Equity Capital Markets, said the turnaround framework makes sense and maintained a neutral stock rating. But he warned of a “difficult and slowly unfolding earnings recovery ahead.”

Under Armour has restructured top management and reorganized its business around categories such as running, basketball and women’s training. The company said that paid off in stronger quarterly sales in high growth categories of men’s training, running and women’s training.

Profit margins, the company said, should begin to improve toward the end of this year.

The company also announced its second restructuring plan Tuesday in less than a year, which will include up to $55 million in facility and lease terminations and up to $50 million in contract termination and other charges. The plan also includes up to $25 million in non-cash charges, including up to $10 million of inventory-related charges. It does not include layoffs, the company said.

“Following many years of rapid growth, we are in the process of simplifying operations,” Under Armour President Patrik Frisk told analysts on the call.

With continuing weakness in the U.S. retail environment, the company is exploring adjustments to achieve the right balance in where and how it sells in stores.

“It could mean reducing our presence in certain areas and increasing it certain areas,” said Lance Allega, vice president of investors relations. “It doesn’t mean exiting one big box to get into another big box.”

It also could mean targeting consumers with specialized interests, such as running, by looking for opportunities to expand in specialty shops, such as running stores.

As fashion has become a bigger seller in sports apparel, Plank said, the brand is placing more emphasis on style — but not at the expense of performance, an attribute he said helped build the brand.

It’s seeing results in products such as ColdGear Reactor and Unstoppable apparel collections and newly launched running shoes that use the company’s new HOVR shoe cushioning technology. Plank called those new running shoe styles, the Sonic and the Phantom, “home runs” for the brand.

“We’re not ignoring the market. We’re not tone deaf,” Plank said. “We just understand who we are. Who we are has built this company. … When you see the logo it means it will do something to make you better.”