Under Armour (UAA 22.27, +1.19 +5.65%) holds onto some gains
after second quarter sales beat market expectations and the company’s net loss
came in around market expectations. Gains hold up despite underwhelming
guidance from the conference call.
Sales growth of 7.7% to $1.17 bln was enough to beat Street views while the company’s adjusted net loss of $0.08/share came in in-line with market expectations. Adjusted gross margins declined 60 basis points to 45.3% driven predominantly by inventory management initiatives. In total, inventory increased 11% in the quarter to $1.3 bln.
Revenue to wholesale customers increased 9% to $710 mln and direct-to-consumer revenue was up 7% to $414 mln. The direct-to-consumer business represented 35% of global revenue in the quarter.
Sales in North America were up 1.6% to $843 mln (up 1.3% currency neutral) and the international business continued to deliver strong growth with a 28% increase to $302 mln (up 24% currency neutral), representing 26% of total revenue. Within the international business, revenue in EMEA was up 31% (up 25% currency neutral), up 34% in Asia-Pacific (up 28% currency neutral) and up 7% in Latin America (up 12% currency neutral).
Apparel revenue increased 10% to $747 mln, led by strength in training and running sales. Footwear revenue was up 15% to $271 mln, with strength noted in the running and team sports divisions. Accessories revenue decreased 14% to $106 mln on softened demand.
For fiscal 2018 UAA expects net revenue to increase approximately 3-4% reflecting a low to mid-single-digit decline in North America and international growth of greater than 25%. This guidance is raised from previous expectations which were for revenue growth of low single-digit percentage rate reflecting a mid-single-digit decline in North America and international growth of greater than 25%.
From a product perspective for FY18, apparel is expected to grow at a mid-single digit rate, footwear at a low-single digit rate, and accessories is expected to decline at a low-single digit rate. Adjusted gross margins for FY18 are now expected to improve slightly compared to 2017 as benefits from product costs and lower planned promotional activity are offset by increased inventory management actions. Operating loss is now expected in the range of $50-60 mln. Excluding the impact of the restructuring plan, adjusted operating income is expected to be $130-160 mln. Excluding the impact of the restructuring efforts, adjusted diluted earnings per share is expected to be in the range of $0.14-0.19, unchanged from previous guidance.
UAA management also updated shareholders on its restructuring plan which was originally announced on February 13. Management detailed that, after further review, the company has identified approximately $80 mln of additional restructuring initiatives and now expects to incur approximately $190-210 mln of pre-tax restructuring and related charges in 2018. In the second quarter, UAA recognized pre-tax costs totaling $85 mln consisting of $64 mln in cash related charges and $21 mln in non-cash charges. Based on the updated restructuring plan, in 2018 the company expects to incur:
- Up to $155 mln in cash related charges, consisting of up to $75 mln in facility and lease terminations and up to $80 mln in contract termination and other restructuring charges; and,
- Up to $55 mln in non-cash charges comprised of up to $20 mln of inventory related charges and up to $35 mln of asset related impairments.
In parting, UAA guided for third quarter revenues on the
conference call. The company expects third quarter revenue to be in line to
slightly down versus last year – UAA reported revenues of $1.406 bln last year.
Additionally, third quarter adjusted gross margins are expected to be down approximately
50 basis points due to continued inventory management action. Also, third
quarter adjusted operating income is expected to be approximately $75-80 mln
and adjusted diluted earnings per share are expected to be firmly under market
expectations at $0.11-0.12.
The stock holds up well in the face of tepid guidance. Shares had lost nearly 4.5% in the five sessions leading into the quarterly report, and now sit about 11.5% off 2018 highs. Shares have found some resistance in the 50-day simple moving average (22.09), which the stock bumped up against a few times this morning.