When Under Armour (NYSE: UA)(NYSE: UAA) released strong first-quarter 2019 results on Thursday, investors were rightly pleased. Revenue increased a modest 1.6% to $1.205 billion, helping Under Armour swing to a net profit of $22.5 million, or $0.05 per share, from a loss of $0.07 per share in the same year-ago period. Both the top and bottom lines arrived well ahead of analysts' consensus models for a breakeven quarter on revenue closer to $1.18 billion -- and shares soared as much as 9% before settling to close up around 4% on the day.
To better understand what's driving Under Armour, it helps to listen to management's perspective during their subsequent quarterly conference calls. Here are five important points they brought up during this quarter's call:
1. On the recent change in segment reporting
Starting with the first quarter of 2019, we have realigned our segments to exclude certain corporate costs and are now reporting these costs as "Corporate Other." This includes a portion of global corporate overhead costs, which, to date, have previously been recorded primarily within our North American operating segment. [...] We feel this change provides improved visibility with respect to the performance and underlying business results of our operating segments.
-- Under Armour CFO Dave Bergman
Bergman reminded investors that Under Armour shifted its reporting of costs related to "support functions" -- think digital, IT, and supply chain investments, as well as some global marketing costs for prominent athletes -- into their own segment in an effort increase transparency into the progress of ongoing efforts to revitalize their core North American business, where a general slowdown in athletic apparel and retail partner bankruptcies have stymied growth in recent years.
IMAGE SOURCE: UNDER ARMOUR
2. On progress in North America
[North American] revenue was down 3%, a little better than planned due to a slight benefit from operational enhancements and improved service levels. As expected, our results reflect fewer sales to the off-price channel and softer demand on our direct-to-consumer business as we work to reset toward a more premium price point. All said, we're right on track with our revenue expectation for the full year being relatively flat. In the near term, with our foundation stabilized in this region, I am looking forward to digging in deeper with the North American team and continuing to execute against our long-term strategic plan by working to reestablish Under Armour as the performance authority in our largest market.
-- Under Armour COO Patrik Frisk
Bearish investors might balk at Under Armour's extended slump in North America. But bulls should be encouraged the company is continuing to take small steps to effectively stabilize its biggest business and reposition the Under Armour brand for sustained, profitable stateside growth.
3. Entering a promising new international market
We also announced the opening of the first UA Brand House in India, where Michael Phelps joined Patrik and myself, along with others, to help celebrate our entrance into market that is immensely passionate for sport and represents a solid opportunity for Under Armour over the long term.
-- Under Armour Chairman and CEO Kevin Plank
For perspective, Under Armour's international segment continued to outperform, with sales climbing 12% (or 17% at constant currencies) to $328 million and comprising roughly 27% of total revenue. Growth was most pronounced in the Asia-Pacific region (up 25% as reported, and 30% at constant currency) -- and that was without any brand houses prior to this period in the potentially massive India market.
Later in the call, Frisk elaborated:
I would say that India specifically is something we're excited about. But again, India is a long-term play for us. We want to be present in that market. It's a huge market for the future. We're very encouraged by what we're doing there. We're going to be opening a number of new stores this year, [and the] first signs are very positive. But again, India is much more of a longer-term play, but it's an important play for us.
4. On reinvesting in growth
In the quarter, slightly higher-than-planned revenue and gross margin, along with more disciplined cost management, delivered a better-than-expected bottom line. With this slight overdelivery, we favorably adjusted our full-year outlook. This is not to say, however, that this will be our typical approach moving forward. In fact, if we were to see additional top-line or gross margin expansion above our plan, we may choose to further invest in marketing and product initiatives to support building the long-term Under Armour brand.
Under Armour did modestly raise its full-year outlook for both adjusted gross margin (to be up 70 to 90 basis points from 2018, up 10 basis points from both ends of its old range) and operating income (of between $220 million and $230 million, a $10 million increase from the low of its previous guidance). But in the future, Plank is being forthright in stating the company may choose to plow those extra profits right back into growing business rather than letting them fall to the bottom line. This could be a welcome change of pace for long-term investors who are pining for Under Armour to echo its previous years of outsize growth.
5. The bottom line
Given [Under Armour's first-quarter] results, we are on track to deliver on our full-year expectations. And as we progress through the final year of our operational transformation, we continue to run more efficiently and effectively toward driving long-term profitable growth.
Put simply, Under Armour is exactly where it wants to be in these final stages of its multi-year turnaround. And when all is said and done, it should emerge a stronger company that's better positioned than ever to achieve its longer-term goals.
Even with shares up 23% so far in 2019 as of this writing, that's why I think patient investors would do well to consider opening or adding to their positions now.
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