Under Armour beats estimates

Sales and profit exceed analysts’ expectations for the fourth quarter

Under Armour stock leapt Tuesday after the Baltimore-based athletic brand reported sales and profits that beat expectations and said its turnaround plan is working.

Its shares rose nearly 7 percent to close at $22.21 each in the day’s trading.

The company is entering its third year of a restructuring aimed at stabilizing business and reversing a slide in sales.

“In total, 2018 was a productive, evolutionary year for Under Armour, one that we delivered against our plan, made great strides forward in our transformation,” Kevin Plank, Under Armour’s chairman and CEO, said during a conference call. “We’re back on offense … first and foremost it starts and it ends with the brand, the brand, the brand, and delivering innovative products and experiences that make our athletes better.”

Sales for the sports apparel maker rose 2 percent to $1.4 billion, surpassing Wall Street’s revenue estimates of $1.38 billion, the company said. Sales were $1.37 billion in the fourth quarter of 2017.

The company reported net income of $4 million, or a penny per share, for the three months that ended Dec. 31, compared with a loss of $87.9 million, or 20 cents a share, in the last three months of 2017.

On an adjusted basis, earnings were 9 cents per share, beating analysts’ expectations of 4 cents per share. Under Armour’s adjusted results exclude impacts of its restructuring plan and federal tax reform.

Jim Duffy, a Stifel analyst, rated the stock a buy, noting that Under Armour topped sales and adjusted earnings estimates and did a better-than-expected job of reducing inventory, all boding well for a turnaround.

For the full year, sales rose 4 percent, reaching $5.2 billion. Under Armour posted a net loss for 2018 of $46 million, or 10 cents per share. On an adjusted basis, the company said it earned of $122 million, or 27 cents per share.

The brand continued to struggle in its key U.S. market, with sales down by 6 percent to $965 million in the fourth quarter, but its international business — more than a quarter of total sales — remained a strong growth driver, jumping 24 percent to $395 million. Sales jumped by double digits in Europe and Asia-Pacific regions.

Apparel sales for the quarter inched up 2 percent to $970 million, with growth in the training category. Footwear sales, a key growth focus for the brand, fell 4 percent to $235 million, mostly because of lower sales to off-price wholesale customers.

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 U.S. sales have slowed since the end of 2016 and in 2017’s third quarter, the company’s sales fell for the first time since it went public in 2005.

Under Armour President Patrik Frisk reminded analysts on a call Tuesday that selling wholesale to retailers makes up the bulk of the U.S. business.

“When you’ve lost space on the shelf, you have to earn it back, and it takes a little bit of time and that’s really what you’re seeing,” Frisk said. “Trust is kind of earned, so you’ve got to earn it back, you’ve got to fight your way back on to the shelf.”

Reflecting the results of its restructuring, the company saw improvements in its gross profit margin, reduced selling and administrative expenses by 1 percent and slashed its excess inventory by 12 percent.

The company said it made a strategic decision to tackle excess inventory last year instead of over a longer time period, selling much through off-price channels such as T.J. Maxx. The move is expected to eventually lead to more product sold at full price and protect the brand’s premium status, but in the short run it hurts U.S. sales as less inventory is sold to those off-price channels.

The stronger than expected quarter wasn’t enough to change another analyst’s sell rating on the company’s stock.

Camilla Yanushevsky, equity analyst at CFRA Research, cautioned that Under Armour may have trouble meeting growth targets in its “direct to consumer” sales channels, which include websites and company stores around the globe, especially if a global economic slowdown makes competition in emerging markets more intense.

Citing Under Armour’s flat direct to consumer sales in the fourth quarter and a decline in the third quarter, Yanushevsky said she remains wary of the brand achieving growth goals, especially at a time when both Lululemon Athletica and Nike saw sharp increases. And, while its 24 percent international revenue was “commendable,” she called Under Armour’s goal of growing that to 42 percent by 2023 “overly ambitious.”

Analysts had been expecting a lackluster quarter.

In a report issued Monday, Camilo Lyon, an analyst with Canaccord Genuity, criticized the brand for a lack of creative direction and weak growth in its key U.S. market while rivals Nike, Adidas and lululemon have outpaced Under Armour’s growth rate.

“We would much rather own Nike...and lululemon...both of which are taking share in [North America] from [Under Armour] we believe,” Lyon wrote.

But Under Armour highlighted new product releases such as its HOVR running shoe line and said it’s seen success with its Project Rock, Unstoppable and women’s collections as well as its line of signature basketball shoes promoted by NBA star Stephen Curry.

The new year is off to a strong start, the company said, thanks to Under Armour endorser Tom Brady winning his 6th Super Bowl, a partnership to design space suits for Virgin Galactic and starts by brand athletes Curry and Joel Embiid in the NBA All-Star game.

Under Armour expects sales to grow 3 percent to 4 percent this year, but remain flat in the U.S. The company promised additional launches in the HOVR line this year.