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Under Armour’s Profitability Could Decline in 1Q16

Phalguni Soni

Pre-Earnings Analysis: What to Expect from Under Armour in 1Q16

(Continued from Prior Part)

Key drivers affecting Under Armour’s profitability and margins

Under Armour’s (UA) bottom line was pressured in 2015 for several reasons. The acquisition of connected fitness apps Endomondo and MyFitnessPal resulted in acquisition-related costs and interest expenses incurred to finance the acquisition.

Under Armour’s (UA) margins have also been affected due to a higher US dollar, an increasingly relevant factor considering the firm’s progressively higher overseas exposure. Plus, the number of Under Armour’s retail doors has grown (RPG) significantly during 2015, resulting in higher occupancy costs.

UA’s investments in marketing, digital, and the supply chain have also taken their toll on earnings, among other factors. The impact of these higher costs has been partially mitigated by lower product costs. However, the net impact has been a decline in margins.

Margins

Under Armour’s gross margin declined from 49.0% in 2014 to 48.1% in 2015. The company’s operating income margin also came in lower at 10.3% in 2015, compared to 11.5% in 2014.

How do Under Armour’s margins compare to its rivals?

Nike (NKE) earned an operating income margin of 14.1% in the trailing 12-month period. Under Armour earned an EBITDA margin of 12.9% in 2015. In contrast, Lululemon Athletica (LULU), the Gap (GPS), and L Brands (LB) earned EBITDA margins of 21.5%, 13.5%, and 21.8%, respectively, in the trailing 12-month period.

Most of the differential can be attributed to differential sales and channel mix among these firms. As we discussed earlier, UA’s profitability has been pressured lately, a situation we expect to continue in 2016.

However, lower product costs are likely to temper the impact. As a result, UA’s operating income is expected to grow more slowly than its earnings. We’ll discuss this in greater detail in the following article.

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