Under Armour Cuts View As Key Customer Faces Bankruptcy

Under Armour, Inc. (NYSE:UA) had to trim its 2016 outlook after one of its major customers, The Sports Authority, moved closer toward liquidation of its stores. Following, the development the company’s shares declined 3% on May 31 in after-hour trading session.

In Mar 2016, The Sports Authority filed for bankruptcy as it has been burdened with more than $1 billion of debt. It had planned to close some stores as well as cut costs to bring itself back on track. The sports retail giant was also looking for buyers, as an alternate option. However, all efforts failed after liquidators won an auction for the company’s assets in the beginning of May.

Under Armour, which became aware of the possible reorganization of The Sports Authority in the first quarter of 2016, did not expect its receivables to be materially impacted by the move. In fact, the company had even raised its 2016 outlook when it reported first-quarter earnings and announced its unrelenting support to The Sports Authority.

For the second quarter, Under Armour anticipates impairment charge of nearly $23 million related to The Sports Authority. Previously, the company had estimated sales of $163 million from the latter. However, now that the sports retailer has filed for bankruptcy, Under Armour is likely to recognize only $43 million of the sales.

The company now expects net revenues for 2016 to be nearly $4.925 billion as against the previous estimate of net revenue of about $5 billion. Nonetheless, this represents an increase of 24% over the 2015 level. Operating income is expected to be in the range of $440 million to $445 million, down from the previous estimate of $503 million to $507 million.

For the second quarter, the company continues to project revenue growth in the high 20% range. However, operating income is expected to be in the range of $17–$19 million as against the previous estimate of $40–$42 million.

Despite the unfavorable development discussed above, this Zacks Rank #3 (Hold) company continues to seek opportunities for increasing its global footprint and market share. Though Under Armour generates the major portion of its revenues from North America, it intends to expand business operations to other parts of the world to mitigate the risks stemming from geographic concentration. In the process, over the years the company has opened its factory and brand stores in Canada and China as well as awarded franchise licenses in many countries.

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