Under Armour (UAA) Q4 Earnings Meet, Sales Miss, Stock Down

Shares of Under Armour, Inc. (NYSE:UAA) are down roughly 15% during pre-market trading session on Feb 11, following the company’s fourth-quarter 2019 results, wherein the top line missed the Zacks Consensus Estimate, while the bottom line met the same. The company’s cautionary statement that the coronavirus outbreak in China is likely to hurt first-quarter 2020 sales also hurt the stock. Moreover, this athletic apparel maker did not provide an encouraging view for 2020, and expects soft sales in North America. These were enough to hurt investor sentiment.

Nonetheless, we note that both the top and the bottom lines improved year over year. The Baltimore-based company reported adjusted earnings of 10 cents a share that came a penny ahead of the prior-year quarter’s tally. Higher net revenues, lower cost of goods sold and reduced interest expense favorably impacted the bottom-line performance of this Zacks Rank #3 (Hold) company.

Net revenues grew 3.7% (or 4.1% on a currency neutral basis) to nearly $1,441.2 million but fell short of the Zacks Consensus Estimate of $1,464.8 million, after surpassing the same in the preceding quarter.

Apparel revenues inched up 0.2% year over year to $970.3 million, while Footwear revenues increased 10.3% to $259.3 million. Revenues from Accessories category grew 1.6% to $109.9 million. Meanwhile, Licensing revenues soared 35.5% to $62.2 million, whereas the company’s Connected Fitness segment reported an increase of 15.6% to $35 million.

Net revenues from North America rose 1.9% to $983 million. Remarkably, international business continued to witness decent growth, rising 6.6% (or up 8% on a currency-neutral basis). Within international business, net revenues from EMEA and Asia-Pacific regions grew 2.2% and 9.8% to $180.7 million and $183 million, respectively. Notably, Latin America revenues surged 11.8% to $55 million.

The company’s gross margin expanded 230 bps to 47.3%, driven mainly by pricing including lower discounts to wholesale partners, channel mix and supply chain efforts. SG&A expenses grew 3.4% to $607.5 million, however, as a percentage of net revenues, the same decreased 20 bps to 42.1%. Net interest expense fell sharply about 26.6% to $5.4 million.

Other Financial Details

Under Armour ended the quarter with cash and cash equivalents of $788.1 million, long-term debt (net of current maturities) of $592.7 million and total shareholders' equity of $2,150.1 million. While cash and cash equivalents increased 41.4% year over year, total debt was down about 18.7%. Additionally, management expects to incur capital expenditures of approximately $160 million in 2020 compared with $144 million in 2019.

Outlook

Given the current scenario in China, Under Armour now expects first-quarter 2020 revenues to be hit by approximately $50-$60 million. Management now envisions 2020 net revenues to be down at a low single-digit percent. This indicates a mid to high-single-digit percentage decline in North America but a low double-digit percentage increase in international business.

The company now expects earnings between 10 cents and 13 cents a share for 2020, inclusive of an estimated 1-2 cents adverse impact on account of equity interest in Japan licensee. The earnings projection is far below the current Zacks Consensus Estimate of 46 cents and adjusted earnings of 34 cents a share reported in 2019.

Under Armour now anticipates full-year gross margin to improve 30-50 bps. The expansion is likely to be backed by regional mix benefits and supply chain endeavors. Operating income is projected to reach between $105 million and $125 million, sharply down from $236.8 million reported in 2019. The company estimates net interest and other expense of $30 million.

The company also plans to undertake restructuring initiative to rebalance cost base in order to enhance profitability and cash flow generation. Management anticipates pre-tax benefits of approximately $30-$50 million in 2020 based on initial assessments and timing of a potential restructuring initiative.

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