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Under Armour (UAA) Q3 Earnings on Deck: Can the Company Take the Next Step?

Christopher Vargas

Under Armour UAA is set to report its third quarter results Monday, November 4, before the opening bell. The athleisure company has seen its shares rise 16.8% in 2019 thus far, outperforming the broader apparel market’s 11.7% run.

The apparel giant is in the middle of a restructuring plan that was implemented to help the company stimulate its stagnant growth as well as cut costs and reduce inventory levels. The company also recently announced that founder and CEO, Kevin Plank, would be stepping down from the chief executive position and Patrik Frisk would be taking his place on January 1, 2020.

Under Armour’s Issues Mount

The shakeup on the executive level comes as Under Armour has been struggling to compete with athleisure rivals like Nike NKE, Adidas ADDYY, and Lululemon LULU. Patrik Frisk spent nearly three decades working in the apparel, footwear, and retail industries, and has been Under Armour's president and chief operating officer since 2017. Prior to joining UAA, Frisk held various positions at VF Corp VFC, where he oversaw outdoor brands like North Face, Timberland, JanSport, Lucy, and SmartWool.

When Frisk joined Under Armour, the company’s growth had decelerated, so he helped launch a multi-year restructuring plan that is now in its third year. The company faces an uphill battle to get its business in a position to better compete with the industry titans. Revenue at its core North American market, which accounted for 69% of its top line last quarter, has fallen annually for four straight quarters. It expects that dismal performance to continue with a "slight decline" in revenue for the full year.

The company is also spending an alarming amount on endorsement deals for high profile athletes. Under Armour had originally thought that greater scale and better brand awareness should reduce reliance on celebrity spokespeople and big spending but they haven't. Under Armour's selling and administrative expenses amounted for 42% of the brand's total revenue, versus Nike's comparable figure of 32%.

Outlook

Apart from Under Armour’s mounting selling expenses, Frisk is also tasked with rebuilding the apparel giant’s corporate culture. Under Armour’s corporate culture was accused of culminating a male dominant and misogynistic work environment. The company has also had many executives step down for unknown reasons, which is another worrying sign coming from the firm’s corporate level.

Kevin Plank’s refusal to compete with Lululemon in the booming athleisure market reflects the potential lack of confidence in the business’ ability to compete for market share in the athleisure space. The refusal to diversify its business away from the saturated footwear and athletic apparel market left many people confused considering the rate at which the athleisure market is growing. Plank stated that they would rather focus on its performance products, but many investors believe that Under Armour just isn’t in a position to even attempt to compete against Lulu’s pricing power and brand loyalty.

Our Q3 consensus estimates forecast Under Armour to see a 28% drop in earnings to $0.18 per share while sales slip 2.43% to $1.41 billion. North American revenue is projected to come in at $1.04 billion for a 2.17% decline. Apparel sales are expected to grow 9.75% to $1.07 billion and footwear sales are estimated to fall 7.23% to $264.2 million. Fiscal 2019 figures estimate the firm’s bottom-line to see a 25.93% hike to $0.34 per share on the back of a 3.14% pop in net sales to $5.36 billion.

Takeaway 

The company was in need of a rebuilding effort as it has seen its revenue growth decelerate dramatically over the past five years. Frisk is tasked with reshaping the company and fixing its current image problems.

Declining revenue in the North American market is a major headwind that Frisk must also address as well as sustaining the business’ international growth, which will be vital if the company truly wants to focus on its performance products. A new CEO at the helm is a step in the right direction, but Frisk will have his work cut out for him for years to come. Under Armour sits at a Zacks Rank #3 (Hold).

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