Under Armour's stock turns flat after earnings were not as bad as feared

By Ciara Linnane

Coming after profit warnings from Nike, Puma and Adidas, the numbers were 'surprisingly better-than-expected,' analyst says

Under Armour Inc.'s stock was hovering between gains and losses Thursday, after the sporting apparel company's fiscal third-quarter earnings were better than feared, although revenue lagged consensus.

The Baltimore-based company (UA) beat on profit and offered better-than-expected per-share earnings guidance for the full year. Coming after Nike's Inc.s (NKE) shock profit warning in December and similar warnings from Adidas AG (XE:ADS) and Puma SE (XE:PUM), the numbers "were surprisingly better-than-expected, though "mixed" on an absolute basis," according to Wedbush analyst Tom Nikic, who has an outperform rating on the stock.

See also: Adidas Sees Challenges in North America. It's a Warning Shot for the Athletic Sector.

"While there's still a lot of work to be done, and it will take a while for changes to take hold, we think there's reason to hope for better days ahead," the analyst wrote in a note to clients.

Under Armour is the cheapest athletic-wear stock in Wedbush's coverage, trading at less than 13 times fiscal 2025 per-share earnings. "We think risk/reward is skewed highly positively if UAA can 'put it all together,'" said the note.

Under Armour posted net income of $114.1 million, or 26 cents a share, for the quarter, compared with $121.6 million, or 27 cents a share, in the year-earlier period.

Adjusted per-share earnings came to 19 cents, ahead of the 11-cent FactSet consensus.

But revenue fell to $1.486 billion from $1.582 billion a year ago, below the $1.503 billion FactSet consensus.

"Despite a mixed retail environment during the holiday season, our third quarter revenue results were in line with our expectations; we were able to deliver better than anticipated profitability and remain on track to achieve our full-year outlook," CEO Stephanie Linnartz said in a statement.

On a call with analysts, Linnartz said consumer buying behavior "was inconsistent market to market" and acknowledged that U.S. sales are not yet where they should be.

"With respect to driving U.S. sales, this remains a multiyear journey," she said, according to a FactSet transcript. "And candidly, we have much more work to do to become a healthier business capable of returning to growth in our largest market."

Wholesale revenue fell 13% to $712 million, while direct-to-consumer revenue rose 4% to $741 million.

In its fiscal second quarter, Linnartz had cautioned that inflation and subdued consumer confidence, still-high inventory levels and broad promotions were creating pressure in the wholesale business and softness in the company's future-orders book.

North America wholesale "is definitely a pressure point," Chief Financial Officer David Bergman said on the call.

Retailers are being cautious with inventories after a recent glut that led to broad-based discounting, and the current Middle East hostilities and activity in the Red Sea are increasing shipping costs and creating delays, he said.

About 20% of the company's apparel comes through that area, "so it's meaningful to us," he said.

Under Armour is mitigating the impact through regional airfreight, adjusted shipping lanes and by differing forward buys, among other moves, he added.

By geography, North America revenue fell 12% to $915 million in the quarter, while international revenue rose 7% to $566 million. International growth was driven by a 7% increase in EMEA, a 7% increase in Asia-Pacific and a 9% increase in Latin America.

By category, apparel revenue fell 6% to $1 billion and footwear revenue was down 7% to $331 million. Revenue from accessories was flat at $105 million.

Gross margin expanded by 100 basis points to 45.2%, driven by supply chain benefits stemming from lower freight costs. Those were partially offset by inventory management actions, including a higher percentage of sales from the off-price channel and increased promotion in the DTC business.

The company tweaked its 2024 guidance and now expects revenue to be down 3% to 4%, narrower than prior guidance of down 2% to 4%, mostly due to softer wholesale revenue.

It expects EPS of 57 cents to 59 cents and adjusted EPS of 50 cents to 52 cents.

The FactSet consensus is for EPS of 49 cents and for revenue to fall 2.9%.

Gross margin is expected to gain 120 basis points to 130 basis points, up from prior guidance of 100 basis points to 125 basis points.

Linnartz noted that her executive team is relatively new after a string of hires with two-thirds at the company for less than a year. New hires include designer John Varvatos as chief design officer and Yassine Saidi as new chief product officer. The company is still searching for a head of footwear, which remains its most important category, she said.

The team has hit the ground running, "but they do need time to settle in, get their teams organized," she said.

The stock has fallen 24% in the last 12 months, while the S&P 500 has gained 21%.

Read now: Lululemon Athletica's Q4 guidance edges up but low end of range could fall a penny short of FactSet consensus estimate

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-Ciara Linnane

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02-08-24 1153ET

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