Under Armour (UA, Financial)’s recent second quarter results were mixed. The company reported an 8% rise in revenue so that it reached $1.2 billion. Its North American sales generated positive growth after three successive quarterly falls, rising by 2%. Since North America accounts for 71% of sales, a return to positive growth in the region is an important development for the company.
Apparel sales growth of 9.8% and Footwear sales growth of 14.5% helped to boost the company’s top-line performance. There was disappointment, though, for Accessories sales. They declined by 14% due to weak demand.
Higher operating expenses also weighed on profits. This contributed to an adjusted loss of 8 cents per share. Revised plans for restructuring mean that the company’s near-term profit performance could be relatively volatile.
Changing business
Since reporting its second quarter results, the Under Armour stock price is marginally higher. Over the last year it has risen from $16.66 to $19.22, which is a gain of just over 15%. This is in line with the capital growth of the S&P 500 during the same time period.
A potential catalyst on Under Armour’s financial performance and stock price could be a reshaping of its business model. It is seeking to rationalise its product offering in order to maintain a focus on boosting athletic performance. It is aiming to add greater value to customers in order to build a stronger brand, being focused on longevity as well as sales growth over the near term.
It is also seeking to become a leaner and more efficient business. Reducing unnecessary costs and optimizing inventory levels are two examples of how the company could become more flexible. It is quickening the pace of product development and product innovation in order to differentiate itself from sector peers.
Although the company relies on North America for the majority of its sales, there is a strong international growth opportunity ahead for the business. It is experiencing faster growth internationally versus in North America, with second-quarter sales rising by 25% in EMEA, 28% in Asia Pacific and 12% in Latin America versus 2% in North America. As a result, the company seems likely to gradually shift its focus towards international markets, and a higher rate of top-line growth could be the end product.
Sales potential
Under Armour’s financial outlook may be boosted by its continued focus on selling directly to consumers. It is planning to add significantly to its global store estate in the current year, and in future years. This could help to strengthen its relationship with customers and may help it to offer a stronger omnichannel experience alongside its e-commerce activities.
Its relationship with Amazon may also deliver relatively reliable sales growth. It provides the company with access to a growing consumer audience across the globe. Under Armour is therefore increasing the range of products that it sells through Amazon, also providing diversity for the company in case of difficulties being experienced with its brick-and-mortar retail partners in future.
Near-term outlook
As mentioned, Under Armour made a loss in the second quarter of the year. Its bottom line is expected to come under further pressure in the short run from increasing restructuring costs. It announced in the second quarter results that a further $80 million will be required in order to improve the company’s performance. This is yet another increase to its planned restructuring costs following the decision to invest for future growth. It would be unsurprising for the company to rise again in the coming months. This has the potential to hurt its earnings performance and investor sentiment towards the company.
The restructuring that is taking place, though, is set to lead to an improved company that is better placed to deliver rising profitability in future years. It is set to lead to $75 million in annual savings from 2019 onwards, which could help to create a more efficient business that is better able to capitalize on the growth potential on offer. Since restructuring costs are also not expected to be recurring expenses over the medium term, it could be a case of short-term pain for long-term investment gain.
Verdict
The long-term growth prospects of Under Armour appear to be impressive. The company is investing heavily in increasing its direct-to-consumer offering, with international growth having the potential to catalyze its financial performance. It is also seeking to rationalize its product offering to improve the customer experience, while becoming increasingly efficient.
Although such changes will mean significant restructuring costs, which could increase in the short term, the prospects for the company’s stock price seem to be positive. As a result, it could offer investment potential over the coming years.
