Under Armour predicts slump in 'challenged' sportswear sales

Under Armour (UA, UAA) posted third-quarter earnings with mixed results as the apparel company just missed out on top-line expectations, but beat bottom-line estimates with an adjusted EPS of $0.19 per share. In the company's filing, Under Armour is projecting sales to fall by 3-4% for the full fiscal year, highlighting the slump in sportswear.

Morningstar Equity Analyst David Swartz joins Yahoo Finance to discuss the challenges that Under Armour faces with sales, full-year guidance, and more.

Swartz comments on the sportswear industry at large: "Now, this is not entirely Under Armour's fault, of course, because right now the sportswear market is pretty challenged. In just the last few weeks, we've heard pretty dim outlooks from Puma (PUMSY), Adidas (ADDYY), and Nike (NKE). Right now, it's kind of a tough market, and so Under Armour is trying to really drive growth in a period that's pretty tough for the industry."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

BRAD SMITH: Tracking shares of Under Armor here. They are climbing after better than expected earnings and a strong outlook overshadowing its steady decline in revenue. Weak sales across the US and a slowdown in its wholesale business among the biggest challenges for the retailer. We've got David Swartz who is the Morningstar Equity analyst here with us.

David, great to see you. Just take us into what does that play more long term for this outlook from Under Armor and where they're sitting right now within this mix of athletic apparel and footwear companies?

DAVID SWARTZ: Right now Under Armor is struggling for the most part. The company has no sales growth. Its sales were down more in the quarter from last year than I expected. And really if you listen to the conference call, the company didn't really explain that anything's going to change in the near term. It's really going to take several quarters before we see a lot of new product and a lot of new strategies that are really going to drive any top-line growth.

Now, this is not entirely Under Armor's fault, of course, because right now the sportswear market is pretty challenged. In just the last few weeks, we've heard pretty dim outlooks from Puma, Adidas, and Nike. So right now it's kind of a tough market. And so Under Armor is trying to really drive growth in a period that's pretty tough for the industry.

SEANA SMITH: So David where does that leave Under Armor then from here? Because when you take a look at those inventory levels, yes, there was some improvement in the most recent quarter but still not to the degree as maybe we were hoping to see. Some of that improvement-- obviously, going back to your previous point, Under Armor not alone in this. But in terms of what that inventory level looks like over the coming quarters, do you expect more material improvement there?

DAVID SWARTZ: I think we will see improvement, but the problem is that wholesale orders right now are very low. The wholesale orders, especially in the US are way below normal. And so it's very difficult to actually manage your inventory when stuff is not selling through, and it's not being sold to your retail customers.

One of Under Armor's biggest problems is that it's too dependent on the wholesale market. It's dependent on department stores like Kohl's. It's dependent on also sporting goods stores too. And a lot of it depends on how healthy they are. And right now, their orders and sales are not that strong, and so that's affecting Under Armor's ability to manage its inventory.

BRAD SMITH: You know, David, we've been tracking some of the announcements from athletic footwear specific companies and the innovation that some of them are trying to put forward this year and take to market, whether that's new entrants like Lululemon finally getting into men's footwear, and then you've got Nike with Airmax DNn, which that comes ahead of Air Max Day. You've also got the chunky soles at HOKA on running. We could go down the list. What is innovation from Under Armor look like this year, and is that something that investors can hang their hat on?

DAVID SWARTZ: I don't see a lot of innovation from Under Armor right now. And to be honest, it doesn't look like the company is really planning that much this year. A lot of the real product development cycle is really geared towards 2025 it seems like at Under Armor. We've been warned about this. The company is going into more casual sports rather than its traditional performance sportswear.

But it has explained to us that it's going to take some time for that to happen. The company has a designer. John Varvatos used to be a pretty well-known fashion designer on his own who's now the lead designer for Under Armor.

But we've been told that it's going to take some time for his products to actually reach the market given the long lead times in this industry, which can be as easily 18 months from the time that a product is designed to the time that it actually reaches consumers. So I don't think we're going to see a lot of innovation really in the short term for Under Armor, and I think that's part of the reason why the stock is depressed.

SEANA SMITH: David, do you think it's time for a brand reevaluation? I bring this up just because we're in the midst of a turnaround. You're saying it's going to take longer than maybe initially anticipated here to play out. Should Under Armor be further adjusting its business given the shift that we're seeing in consumer spending?

DAVID SWARTZ: Under Armor really has been in a turnaround situation for about seven or eight years now. So there have been a lot of changes, and I think some of them have been positive. I don't think it's the situation where the company needs to panic in any way. Under Armor does have a strong cash flow this year. Its inventories are much better. Its balance sheet is very good. The company has minimal debt.

So Under Armor really is not under any great pressure to turn things around right now. The stock price is clearly low. You're in the single digits, and that's a concern. But the company itself is not in any risk of distress. It's really just a matter of trying to generate top line growth again which has been Under Armor's problem for years.