For FY19, it bumped its EPS guidance to $0.33-$0.34 from its prior outlook of $0.31-$0.33 as it sees adjusted gross margin expanding by 70-90 basis points, up from its prior outlook of 60-80 basis points.
Click here to access UAA's earnings press release.
Inventory issues, combined with formidable competitive pressures from Nike (NKE), Adidas, and others has derailed the company's North American business over the past couple of years. That has been a major story for UAA and a primary cause for the weakness in its stock during that timeframe.
So, the fact that UAA continues to expect revenue to be relatively flat in North America this year, after falling by 2% last year -- which doesn't sound overly impressive on the surface -- is actually a meaningful positive. It demonstrates that UAA continues to see signs of stabilization in its largest market.
To rewind, in late 2018, the company laid out a five-year plan focused on protecting its brand first and then driving growth and profitability thereafter. Featuring at the core of this strategy were plans to lower promotional activity, reduce inventory in the wholesale channel, and use data analytics to improve costs.
UAA's improved margins indicate that this phase of its turnaround plan is working. In Q1, gross margin increased by 100 basis points to 45.2%, following last quarter's 160 basis point gain. Going hand-in-hand with the enhanced gross margin was a 24% reduction in inventory, along with product cost improvements.
However, what is a little discouraging is that its direct-to-consumer channel fell by 6% while wholesale increased by 5%. That performance in channel mix is the opposite of what UAA is striving for, as DTC carries stronger margins than does wholesale. Had DTC generated the same 4% revenue growth it achieved in FY18, UAA would have posted even stronger margins with an even larger EPS beat.
Margins are still trending in the right direction, though, and UAA continues to generate solid growth in its international markets, up 12% to $328 mln (27% of total revenue). Within the international markets, the standout remains Asia-Pacific, which jumped by 30% on a currency-neutral basis.
As growth remains healthy overseas, and as it has stabilized its North American business, UAA believes it is ready to transition from defense (reducing inventory and promotional activity) to offense. This part of its plan includes investing in its brand and launching new products.
For instance, it recently launched its HOVR cushioning platform in the running category. UAA expects the HOVR product line to be a key performer this year as it adds new styles.
UAA believes it has turned a corner, but whether it can pick up share against its core rival NKE remains to be seen. NKE's most recent quarterly report, presented on March 21, showed that it outperformed UAA in total revenue growth (+7%), North American revenue growth (+7%), and margin expansion (+130 bps).
One data point from UAA's Q1 report that suggests that its brand is still lagging behind NKE is that its direct-to-consumer channel declined yr/yr.
Key Takeaways: Shares of UAA are jumping higher this morning as its Q1 report provides further evidence that business has stabilized in North America, while international growth remains solid.
Outside of the headline numbers, the key metric is gross margin, which improved again. UAA now has a good handle on the inventory issues that plagued it in 2017 and into 2018, and it has improved its cost structure.
But the decline in its DTC channel put a lid on its margin improvement. It also indicates that consumers haven't completely warmed back up to the brand yet.
Overall, it was a good quarter for UAA, and the fact that shares were weak yesterday (-5%) also plays into today's gains. The key question facing UAA now is whether it can reignite growth in North America. To do so, it will need to make in-roads against its top competitor, NKE.