Note: I’m not an analyst or certified to discuss whether you should invest in a company. This information is based on my own analysis (which is often right) but should not be used to build your decisions in investing.
That’s out of the way so let’s get to an analysis of what happened last quarter and how Q3 will play out for UA and I will take the time as usual to say whether the brand is in a good place.
Q2 2017
- Revenue was up 9 percent to $1.1 billion, up 8 percent currency neutral.
- Revenue to wholesale customers rose 3 percent to $655 million and direct-to-consumer revenue was up 20 percent to $386 million.
- A dynamic and promotional retail environment in North America continued to temper results with revenue in line with last year’s same period. Outside North America, the strong momentum continued with international revenue up 57 percent (up 54 percent currency neutral), representing 22 percent of total revenue. Within our international business, revenue in EMEA was up 57 percent (up 53 percent currency neutral), up 89 percent in Asia-Pacific (up 87 percent currency neutral) and up 10 percent in Latin America (up 9 percent currency neutral).
- Apparel revenue increased 11 percent to $681 million including strength in men’s and women’s training, and golf. Footwear revenue was down 2 percent to $237 million, against last year’s same period which was up 58 percent due to significant strength in basketball sales. Accessories revenue increased 22 percent to $123 million with strength in men’s and women’s training, and youth performance.
- Gross margin declined 190 basis points to 45.8 percent as benefits from channel and product mix were offset by inventory management initiatives, changes in foreign currency rates, and higher air freight in connection with our enterprise resource planning (ERP) system implementation, which impacted the timing of shipments to certain key customers.
- Selling, general and administrative expenses increased 10 percent to $503 million, or 46.2 percent of revenue (up 40 basis points), due to continued investments in the direct-to-consumer, footwear and international businesses.
- Operating loss was $5 million. Including other interest and expense, there was a net loss of $12 millionin the second quarter and a $0.03 loss in diluted earnings per share.
- Inventory increased 8 percent to $1.2 billion.
- Cash and cash equivalents increased 37 percent to $166 million.
My Q3 2017 Predictions and justifications
Negatives
Revenue: UA revenue will be down to 7% which means that UA will hover right under 1 billion for Q3. The drop will continue to reflect the promotional environment and a considerable increase in inventory as UA had to take on considerable RTVs from the Curry 3 and Curry 3Zero. The brand will remain flat in international growth except in China where Curry’s tour and success with the Warriors in a championship season had more of an effect on the Chinese market than it did in the US. While the promotional environment has hurt UA in the US, I continue to fault a lack of responsiveness to Curry’s championship after considerable interest in the Curry 4 during Q2. It was a great chance to capitalize and regain momentum.
Note: I have explained that the lack of movement was strategic and the perceived lack of movement was out of necessity as UA had to clear inventory to prepare for a greater push to DTC. During Q2 DTC saw considerable growth and in Q3 there was a noticeable uptick in website investment and marketing via e-mail. I have also blamed a lot of UA’s inability to move like a startup on their failure to utilize their athletes. While casual is the trend, the signing of A$AP Rocky did not generate brand interest and will not pay off. More important UA seemed to lose their way during the first half of this year. Footwear will see a considerable drop; even more than Q2. The 2% drop in revenue from footwear will add an additional 3% and footwear for UA will be at about 200,000.
Margins: another decline is expected as the lingering effects of the air freight remain, but primarily due to the promotional environment.
The Layoffs from earlier this year will not shape Q3.
The footwear department needs to really consider cutting many of the styles being created.
The brand still hasn’t figured out how to present UAS.
Marketing imagery is not flattering and marketing has failed to take advantage of the niche athletic markets like boxing and training (parkour/ninja) that UA has incredible stories to share.
Positives
In the last month and half Under Armour has been taking care of business. The movement hasn’t been enough to move the needle and help with the losses during the quarter, but I’m extremely excited about UA as a brand. I know they aren’t considered cool, or on trend and they don’t have any retros to drop to grab the fashion minded market, but what UA has is Curry and that’s important and valuable.
Why the Curry 4 Is Releasing In Asia First: 2017 Curry Asia Tour
What is more valuable is the failure of Curry 3 and Curry 3Zero. In June stores were cancelling Under Armour orders. This cancellation has forced Under Armour to become more active in driving DTC growth. Basically the brands failure to move footwear at retail may have been a negative during Q3, but it is one of the reasons everyone should bet on UA to rebound in a big way. The brand has created considerable interest via their #UNLIKEANY campaign which connected to women and men in major way. Utilizing American Ninja Warrior athlete Jessie Graf opened Under Armour fitness up to a new group of people and branded the company in a different segment allowing Under Armour to return to the core of its business which is fitness.
While many analysts think fitness and performance aren’t worth the effort, for Under Armour it is the only path to casual. The Rock Delta shoe was not a commercial launch but it was successful and The Rock has driven brand awareness via his “Ballers” show where almost every episode appeared to be sponsored by UA. From featuring Steph Curry on the show to using the personal jet of Under Armour it was excellent branding. Unlike Any continues to inspire and connect to the tune of over 12 Million Views on YouTube in less than 2 months, and considerable impressions on IG and FB. Under Armour’s launch of the ICON program has seen its performance footwear sell out a few times!
It appears that UA has figured out how to place the logo on footwear to diminish the distracting lines in design. The website update still needs more work and the company is one of the few who hasn’t figured out content creation from the website to drive traffic, but the new layout featuring a Pinterest/IG styled focus on sportswear and footwear on the homepage is a welcomed feature. The focus on Connected Fitness seems to have taken a backseat and that’s a good thing. The launch of ArmourBox is a great way to build DTC. If the brand figures out how to get people excited about the program it could bode well. If Under Armour does a good job of promoting the positives of the company the stock should bounce back to the 20s and begin to rebound higher to the mid 20s by the end of Q4. I expect UA to invest heavily in tech that benefits DTC (Content Creation primarily) to engage the consumer where they are. I also expect smarter campaigns than the 2Chainz x Cam Newton launch of the C1N. I expect an integration of UAS into the mainstream as opposed to trying to create an independent lifestyle brand. If this integration doesn’t happen the brand is not being smart. International growth will continue to improve especially if UA gets to work on establishing the importance of other athletes not named Curry and Brady and the company begins to work on the underdog narrative of Dennis Smith (boring name, but incredible player with a great story.)
