Under Armour Is Quietly Improving

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Friends,

Under Armour, the performance athletic apparel manufacturer that has struggled for most of the last decade reported Q4 2020 earnings yesterday.

Here’s what you need to know (Source):

• Revenue was down 3 percent to $1.4 billion.

• Wholesale revenue decreased 12 percent to $662 million.

• Direct-to-consumer revenue increased 11 percent to $655 million.

• Gross margins increased 210 basis points to 49.4 percent compared to the prior year.

While the results seem to be a mixed bag, equity investors were pleased with Under Armour’s continued progress in fixing inventory management issues, growing their eCommerce channels, and improving gross margins.

The result?

Under Armour’s stock ($UAA) was up over 8% on the day and is now up more than 100% in the last six months alone, albeit still down 50% from its all-time-high in 2015.

For those of you who don’t already know, after seeing their revenue grow from $1.1 billion to $4.8 billion between 2010 and 2016, Under Armour has struggled recently.

Here’s what I mean…

From 2016 to 2020, Under Armour’s growth has been sedated — even falling slightly to $4.5 billion.

Furthermore, check out their historical stock price:

• January 2010 to December 2015: +1,082%

• January 2016 to February 2021: -46%

Their response?

Despite founding the company more than two decades ago, Kevin Plank stepped down as CEO in October 2019 and handed the reigns to corporate turnaround specialist and COO at the time, Patrik Frisk.

Patrik Frisk subsequently introduced a $550 million to $600 million turnaround plan centered on an increase in performance-related innovation—the initial concept Under Armour was built on—while fixing structural issues within their business like inventory management, e-commerce strategy, and global expansion.

The best part?

It appears to be working.

Sure, Under Armour has benefited, similar to Nike & Lululemon, as more consumers continue to look for athletic apparel to wear for at-home workouts or to wear around the house.

But to be fair, equity investors can’t be sure how long that increased demand will last. I believe their excitement has more to do with CEO Patrik Frisk executing on the $600M turnaround plan he revealed last year.

Total revenue is down, as it should be with retail foot traffic still heavily suppressed worldwide, but margins have improved dramatically, and their eCommerce strategy is executing to perfection.

Last quarter, more shoppers visited Under Armour’s online store to buy workout & athleisure wear gear than at any time in the companies history.

Again, a rising tide has lifted all boats to some degree, but for Under Armour, a company that has struggled with margins and inventory management for the last 5 years, it’s amazing progress.

As Under Armour continues to withdraw from 2,000 to 3,000 wholesale stores by 2022, which will assist with inventory management and lower the percentage of their product that ends up on sales racks in discount department stores like Kohl’s, Marshalls, and TJ Maxx, their pivot to a more efficient D2C model, should also help global expansion.

Historically, Under Armour has significantly lagged market leaders like Nike when it comes to international sales. For example, Nike generated 60% of its revenue from international sales in 2019 — compared to only 30% for Under Armour.

As Nike continued to accelerate sales through digital channels in 2020, Under Armour has started to catch up, seeing a 7% rise in revenue through international markets last quarter — despite a 3% decline in overall revenue.

Again, that’s amazing progress.

In the end, it’s way too early to determine the potential impact of Under Armour’s turnaround plan. They beat expectations last quarter, which was a good first step, but when it comes to rebuilding the structural foundation of a business that’s been beaten and bruised for years — it’s never going to be easy.

Have a great day, and we’ll talk tomorrow.

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