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Under Armour Takes Another Step Forward

Jason Hall, The Motley Fool

Athletic apparel and footwear maker Under Armour (NYSE: UA)(NYSE: UAA) reported its first-quarter earnings on May 2, delivering a modest 2% sales growth, while also making solid strides: higher profitability and lower expenses, which helped boost earnings and operating income.

Let's take a closer look at Under Armour's progress in the quarter and what to expect going forward.

Under Armour-sponsored athlete Bryce Harper.

Image source: Getty Images.

Higher margins, lower expenses help make up for tepid growth

Here's a closer look at some key metrics for Under Armour in the quarter:

Metric

Q1 2019

Q1 2018

Year-Over-Year Change

Revenue

$1.205 billion

$1.185 billion

1.6%

Net income (loss)

$22.5 million

($30.2 million)

N/A

Earnings per share

$0.05

($0.07)

N/A

Gross margin

45.2%

44.2%

2.3%

Operating income (loss)

$35.3 million

($28.7 million)

N/A

SG&A expense

$509.5 million

$514.6 million

(1%)

Data source: Under Armour. SG&A = selling, general, and administrative.

The good news from the first quarter is that, while sales growth remains relatively weak, the company's efforts to get expenses under control and improve profitability are paying off. This is a continuation of the trend we saw in the fourth quarter of 2018.

Moreover, those efforts are delivering steadily improving results on the bottom line, as the $22.5 million in net income -- $0.05 per share -- shows. This is not just a big improvement from last year's loss, but it's also a solid step forward from the $1 million in net income in the previous quarter.

A few things in particular drove Under Armour's improvement: Gross profit increased $21 million, while selling, general, and administrative expenses declined $5 million. The combined $26 million improvement helped to offset the $8 million in tax expense after having a positive tax benefit in both the first quarter of last year and the fourth quarter of 2018.

Moreover, the company didn't take any restructuring charges in the quarter; it took nearly $38 million in the prior-year quarter, and over $183 million in all of 2018.

International sales continue driving Under Armour's growth, but profit improvements vary by region

Drilling down to Under Armour's geographical segment results, the story continues to be weak sales in North America, with Asia-Pacific delivering double-digit sales growth and the rest of the world still growing, but slowing.

Segment

Q1 2019

Q1 2018

Year-Over-Year Change

North America

$843.25 million

$867.55 million

(2.8%)

EMEA

$134.10 million

$129.59 million

3.5%

Asia-Pacific

$144.29 million

$115.55 million

24.9%

Latin America

$49.19 million

$46.51 million

5.7%

Connected Fitness

$30.10 million

$28.83 million

4.4%


Data source: Under Armour. EMEA = Europe, Middle East, and Africa.

The athletic apparel and footwear categories in North America remain highly competitive, but it's worth noting that while Under Armour's sales in its biggest market continue to lag, its biggest competitor, industry heavyweight Nike, isn't having the same problem.

Nike recently reported 7% sales growth of its core Nike-branded products in North America, and global sales growth of 7% to $8.98 billion. It also reported big improvements in earnings to $1.1 billion, and projected "high-single-digit" growth in its current quarter (adjusted for currency exchange). 

North America and EMEA -- Europe, Middle East, and Africa -- are doing the heavy lifting on Under Armour's bottom line:

Segment Q1 2019 Operating Income Q1 2019 Operating Margin Q1 2018 Operating Income Q1 2018 Operating Margin
North America $160.27 million 19% $148.19 million 17.1%
EMEA $12.22 million 9.1% $7.15 million 5.5%
Asia-Pacific $19.80 million 13.7% $24.12 million 20.9%
Latin America ($359,000) (0.7%) ($1.88 million) (4%)
Connected Fitness $1.07 million 3.6% $3.41 million 11.8%

Data source: Under Armour. 

As the table above shows, despite declining sales in North America and tepid growth in EMEA, operating margins and operating income improved notably in both of those segments, while Asia-Pacific, despite being the fastest-growing region, became less-profitable in the quarter. 

Going forward: slow and steady

While Under Armour continues to deal with weak sales in North America, management is optimistic that the worst is behind it. Full-year sales guidance remained unchanged, with expectations for 3% to 4% revenue growth, driven by flat full-year North American sales and sales growth in the low double digits in the rest of the world. 

However, the benefits of last year's restructuring plan are now expected to pay off even more. Gross margin is now projected to increase 110 to 130 basis points from last year; adjusting for last year's restructuring expenses, gross margin is expected to increase 70 to 90 basis points, while full-year operating income is now expected to be between $220 million and $230 million, $10 million higher on the low end of guidance. 

Having the weight of its restructuring expense in the rearview mirror is already paying dividends, not just by lowering costs but also delivering higher margins as management promised. That has returned the company to profitability. However, the lingering question it still hasn't answered is this: When will sales growth return to North America? Investors want to know the answer as soon as possible. 

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Jason Hall owns shares of Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.