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Feb 13, 2018

Under Armour posts rise in Q4 revenue on higher footwear, apparel sales

Under Armour

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Under Armour Inc. renewed faith that it can bounce back from the worst slump in its history as robust international growth cushions weakness on the home front.

The athletic-wear company reported fourth-quarter revenue that topped projections, led by a 47 per cent increase in sales outside North America. That helped drive the stock up as much as 20 per cent on Tuesday, the most in more than two years.

The results provide optimism that Baltimore-based Under Armour can restore its cachet as a trailblazing athletic brand. As part of its push to improve design and results, the company will eliminate about 40 per cent of its products by the end of next year to focus on its best-performing lines. It also announced another round of cost cutting and restructuring.

“It is taking the right steps to realign its product offerings to market conditions,” said Chen Grazutis, an analyst at Bloomberg Intelligence. “Under Armour is still very underpenetrated in international markets compared to its peers, and that’s where the real opportunity remains.”

The company expects 2018 to be similar to last year, according to a statement Tuesday, with full-year revenue increasing at a low-single-digit rate from US$5 billion in 2017. North American sales will drop by a mid-single-digit percentage, while it sees international growth of at least 25 per cent.

The jury is still out on whether the slimmed-down product portfolio “will “be enough to bring back demand for the brand in the U.S.,” Grazutis said. “While the domestic sporting goods market will remain challenging in 2018, it appears management has acknowledged that, and set expectations lower.”

Just two years ago, Under Armour was an investor darling. At the time, NBA star Stephen Curry’s shoe line was pumping life into its sneaker business, helping boost 2015 revenue 29 per cent. Since then, a rebound by Adidas AG has hurt the company.

Plank embarked on a comeback plan, calling 2017 a “reset year.” He has made management changes, including a new chief operating officer and finance head, and admitted that -- like many young companies -- it grew too fast. Under Armour began a restructuring plan that’s included writing down inventory and other underperforming assets. The CEO is also refocusing the company on performance-wear, after forays into high-end fashion.

“We were getting a bit too progressive,” Plank said in an interview. We got a “little bit off course.”

Shares Advance

With the changes showing signs of paying off, Under Armour shares rose as high as US$17.10 in New York, in their biggest intraday gain since January 2016. The stock had lost about a third of its value in the past 12 months, and was the worst-performing equity in the S&P 500 last year.

Apparel, footwear and accessories all saw gains last quarter, Under Armour said. Sales reached $1.37 billion, compared with the average projection of US$1.31 billion. Excluding some items, earnings per share were flat. Analysts had estimated a gain of less than 1 cent.

While sales from North America -- where Under Armour gets about three-quarters of its revenue -- fell 4.5 per cent in the period, the decline slowed from a 12 per cent drop the previous quarter. The company also reported a 56 per cent increase in Asia-Pacific revenue, a 46 percent gain in the Europe, Middle East and Africa region, and 36 per cent growth in Latin America.

Fewer Products

Patrik Frisk joined Under Armour in July as operating chief, after a career leading brands such as North Face and Timberland. One of his first initiatives was reviewing how the company manages categories. He realized that in its push for growth it had been making too many products, with diminishing returns.

“We didn’t do enough due diligence in the past,” Frisk said in an interview. Discontinuing items “allows us to give each designer and product developer more time to actually make better products.”

The company continued to reduce expenses by announcing another round of cost cutting and restructuring for this year that it said will result in as much as US$130 million in charges.

Gross margin, a measure of profitability, dropped in the quarter, though it beat analysts’ estimates, and Under Armour forecast it will increase in 2018.

The company is seeking an amendment to its credit agreement because the hit to profitability has raised its leverage ratio. Chief Financial Officer Dave Bergman said it was a “short-term” issue.

“We want to be clear, there is a lot of work for us to do in 2018,” Plank said on a call with analysts. But “we feel very confident in the strategy and the plan that we have in place,” he said.