Under Armour Projects Return to Profitability This Year

Under Armour will get back in the black this year.

That was the predication of Patrik Frisk, who stepped into the role of chief executive officer of the Baltimore-based activewear brand a year ago.

In a call with analysts after reporting stronger-than-expected fourth-quarter results Wednesday morning, Frisk said: “We plan to return to profitability in 2021…and return to double-digit operating margin over the long term.” To do that, the company will increase its focus on direct-to-consumer initiatives, downplay wholesale and, despite an improvement in North America, continue to grow its international business.

Last year, Frisk said e-commerce sales were up 40 percent and now represent nearly half of the company’s total direct-to-consumer business, which includes its full-price and factory outlet stores. Frisk said the Brand House stores are being evolved to “drive more profitable formats,” while the outlets will be more focused on clearing excess product.

Overall, Frisk said, Under Armour “made significant progress on our way to becoming a stronger brand and a better-run company during the past year. From managing through a three-month global retail shutdown and relaunching our North American e-commerce platform to executing a comprehensive restructuring effort and divesting the MyFitnessPal platform, our mantra The Only Way Is Through turned out to be even more foretelling than perhaps we had intended it to be.”

While he acknowledged that challenges remain as a result of the ongoing pandemic, he said the company is “significantly better equipped to navigate through the changes given our improved levels of agility and optionality.”

Over the past year, Frisk continued, consumer behavior has changed and the company will continue to de-emphasize its presence in the wholesale channel. In the quarter, wholesale revenue was down 12 percent, according to David Bergman, chief financial officer, who added that Under Armour will close some 2,000 to 3,000 “undifferentiated” wholesale accounts this year and end 2021 with closer to 10,000 doors.

Frisk said most of the impact of the wholesale exiting strategy will come in the second half of this year and continue for the next two to three years. “And what we’ll be left with when we’re through that journey is really what we believe are more appropriate doors for us, doors that we feel are going to win.” He said the goal is to bring Under Armour back to a “more premium position” in the market, aided by a bigger focus on full-price selling at the company’s own stores and e-commerce site as well as less promotional activity at its outlets. “All of that together is going to elevate the brand,” he said.

UA will continue to introduce products and franchises such as last year’s Curry Brand with NBA star Stephen Curry which made its debut in December; a new HOVR Phantom 2 shoe; the Infinity Bra, and the Project Rock collection with Dwayne Johnson. Frisk said in men’s, the Project Rock collection “continues to work really well for us,” along with the HeatGear, ColdGear and Rush products. In women’s, the Infinity Bra has been a standout performer. There are high expectations this year for the launch of a UA Flow running shoe, which is expected to create “opportunities for shelf space expansion within running, specialty, and key wholesale accounts.”

In the fourth quarter ended Dec. 31, Under Armour reported net income rose to $184.5 million, or 40 cents a share, compared with a loss of $15.3 million, or 3 cents a share, a year ago. Total sales dipped 3 percent to $1.40 billion from $1.44 billion in the year-ago period, but topped analyst estimates of $1.27 billion. E-commerce sales rose 25 percent and total direct-to-consumer sales increased 11 percent, with better-than-expected traffic at the company’s retail stores.

By region, sales declined in the North America and EMEA (Europe, the Middle East and Africa) regions — 6 percent to $924 million and 11 percent to $655 million, respectively, but overall international revenue rose 7 percent to $448 million, sparked by a 26 percent jump in Asia-Pacific and 2 percent in Latin America.

Apparel revenue decreased 4 percent to $931 million due primarily to drops in training and team sports categories, and footwear revenue dropped 7 percent to $241 million in the period while accessories revenue increased 32 percent to $145 million thanks to the launch of the brand’s popular sports masks.

“Improving brand strength and consistent operational execution delivered better than expected results in the fourth quarter,” said Frisk. “Our global team was exceptionally resilient and disciplined amid a highly challenging year which included the COVID-19 pandemic and for Under Armour, a comprehensive restructuring effort including further operating model refinements.”

Frisk said that as Under Armour continues to “navigate uncertainty around the pandemic, we remain focused on execution and the efforts necessary to stabilize our business further and improve our ability to deliver sustainable shareholder value over the long term.”

This led the company to project a revenue gain in the high single digits for the full year of 2021, with North America expected to grow in the high single digits and international in the high teens. Operating income is expected to reach $5 million to $25 million. Excluding the impact of continued restructuring efforts, adjusted operating income is expected to reach $130 million to $150 million, the company said. However, Bergman said for the first quarter of this year, UA is projecting an operating loss of about $55 million to $70 million.

For the year, the net loss was $549 million on a 15 percent drop in sales to $4.5 billion. North America revenue decreased 19 percent to $2.9 billion and international revenue fell 4 percent to $1.4 billion with the EMEA down 4 percent, Asia-Pacific down 1 percent and Latin America down 16 percent. Apparel revenue decreased 17 percent to $2.9 billion, footwear revenue declined 14 percent to $934 million, and accessories revenue was flat at $414 million. Under Armour’s Class A stock closed up 8.4 percent, or $1.73, at $22.45 on the New York Stock Exchange Wednesday.

Analysts who follow the firm were generally upbeat about the company’s future. Simeon Siegel of CFA, for example, said the stronger-than-expected fourth-quarter results showed “compelling progress,” and while there remains “heavy lifting ahead,” he commended the company on its progress. Cowen’s John Kernan raised its price target to $27 from $23 on the stock as a result of the continued restructuring and the brand’s move to increase its full-price selling. And as a result of an expected return to team sports, “robust international/Asia trends, and a product cycle full of newness,” he now expects the company’s guidance for fiscal year 2021 to be “conversative,” and raised his earnings-per-share guidance to 75 cents from a consensus of 37 cents.

However, others were not as convinced. Camilla Yanushevsky of CFRA Research maintained a “sell” rating on the stock, with the belief that the company’s “growth narrative is broken,” and its continued focus on true sports products rather than ath-leisure will be detrimental as the world comes out of the pandemic.