In a manner of speaking, athletic apparel and footwear company Under Armour (UAA 13.93, -2.48, -15.1%) lived down to expectations in reporting its third quarter results and issuing full-year guidance. Even so, it is clear in the stock's response that investors were still surprised that things are as bad as they are for Under Armour, which isn't satisfying the criteria for being a growth company.
For the third quarter, revenue was down 5% to $1.4 billion, adjusted gross margins contracted 130 basis points to 46.2%, and adjusted diluted earnings per share were $0.22 versus reported earnings of $0.29 per diluted share in the same period a year ago when Under Armour reported a 22% increase in net revenues.
The depths of Under Armour's operational challenges are rooted in its core North American business, which reported a 12.1% year-over-year decrease in net revenues of $1.077 billion. Outside of North America, business was better. Net revenues increased 21.7% for EMEA, 51.9% for Asia-Pacific, 32.8% for Latin America, and 15.9% for the Connected Fitness segment.
In terms of product, the apparel business was the weak spot, registering an 8.0% decline in net revenue of $939.4 million. Conversely, footwear net revenue increased 2.2% to $285.1 million while net revenue for accessories jumped 1.4% to $123.5 million.
The company was direct with its acknowledgment that operational challenges and lower demand in North America, and primarily its wholesale business, were the drivers of its disappointing results. Unfortunately, Under Armour isn't expecting a meaningful change soon in its largest market, which is why it has lowered its sales and earnings outlook for the remainder of 2017.
The tough road ahead for Under Armour availed itself on the balance sheet, which revealed a 22% year-over-year increase in inventories.
With that bloated inventory, it is reasonable to assume Under Armour is going to be highly promotional in an effort to pare down that excess inventory, which could make things all the more challenging for competitor Nike (NKE 55.06, -0.22, -0.4%) as well.
Under Armour's full-year 2017 updated outlook includes an expectation for net revenue to be up at a low single-digit percentage rate (prior +9-11%), adjusted gross margins to be down approximately 190 basis points compared to 46.2% in 2016, and adjusted diluted earnings per share to be between $0.18 and $0.20 (prior $0.37-$0.40).
Including today's loss, UAA is down 52% year-to-date, befitting a stock that has distanced itself greatly from its former growth stock profile.