Retail

Under Armour warns sales will decline as much as 25% in second half of 2020

Key Points
  • Under Armour said Friday that it was "encouraged" by the momentum it has seen in June and July, as its stores are reopening after temporarily being shut. 
  • During an earnings call, however, it said revenue could fall anywhere between 20% and 25% in the back half of 2020. 
  • Within this window, it expects an even larger decline in the fourth quarter, which includes the holidays. 
Products are displayed in an Under Armour store in New York City, November 4, 2019.
Brendan McDermid | Reuters

Under Armour's second-quarter results were better than the retailer was expecting thanks to an e-commerce boost, but the company warned pressures from the coronavirus pandemic will continue to squeeze its results in the second half of the year. 

The company's stock initially soared over 13% in premarket trading when the earnings results were first released. But those gains were largely wiped out after Under Armour said depleted inventories could hurt sales, even into the holiday season. The shares were down more than 7% after the market opened. 

The sneaker and athletic apparel maker said it was "encouraged" by the momentum it has seen in June and July, as its stores are reopening after temporarily being shut. During an earnings call, however, it said revenue could fall anywhere between 20% and 25% in the back half of 2020. Within this window, it expects an even larger decline in the fourth quarter, which includes the all-important holidays. 

Chief Financial Officer David Bergman said that because the company has been tightening its inventories, there is the possibility it does not have "adequate supply to meet higher demand" later this year. 

And though Under Armour is not offering a complete 2020 outlook, he said: "We do ... expect these conditions to continue to have a material impact on full-year financial and operating results." 

Under Armour also said its gross margins could end up being down in 2020, on a year-over-year basis, due to extremely heightened promotional activity in the retail industry. 

Here's how the retailer did during the quarter ended June 30 compared with what analysts surveyed by Refinitiv were expecting: 

  • Loss per share: 31 cents, adjusted, versus a loss of 41 cents, expected 
  • Revenue: $707.6 million versus $543.8 million, expected 

"We are taking a more conservative outlook around the back half of the year," Chief Executive Patrik Frisk said in an interview with CNBC. "We don't know how the consumer is going to be navigating the back half of this year … how back-to-school is going to play out." 

Under Armour's second-quarter net loss widened to $182.9 million, or 40 cents per share, from a loss of $17.3 million, or 4 cents a share, a year earlier. 

Excluding a restructuring charge of $39 million, the retailer lost 31 cents a share. That was less than the 41-cent loss analysts were predicting, according to Refinitiv. 

Revenue fell 41% to $707.6 million from $1.19 billion a year ago. Analysts expected revenue of $543.8 million. 

Within that, apparel sales were down 42%, amounting to $426 million, while footwear revenue dropped 35% to $185 million and accessories revenue fell 47% to $56 million. 

The company estimated roughly 80% of stores where its merchandise can be purchased, including its own shops, were closed due to the coronavirus pandemic through mid-May. 

During that time frame, selling more directly to customers made its sales more profitable, and so there was less of a drag from items being sold at off-price channels. As a result, its gross margins strengthened 280 basis points to 49.3%. 

"Although revenues were understandably down, the company showed an incredible ability to raise gross margins," BMO Capital Markets analyst Simeon Siegel said in an interview. "They're effectively capturing more on less." 

Under Armour said it ended the quarter with cash and cash equivalents on hand of $1.1 billion. 

It said inventories were up 24% to $1.2 billion. 

Meanwhile, earlier this week, the Baltimore-based company said it received notice of a possible enforcement action from the Securities and Exchange Commission related to the accounting treatment of sales it booked between the third quarter of 2015 and the fourth quarter of 2016. 

On July 22, Under Armour in addition to two executives — Kevin Plank, its former CEO and current executive chairman, and David Bergman, its current CFO — received the Wells notices related to a previously disclosed probe by the SEC, the company said in an 8-K filing. 

A Wells notice doesn't necessarily mean the company or the executives violated the law. However, it does indicate the agency is considering an enforcement action. Under Armour said Monday that it maintains its actions were "appropriate," and it intends "to work toward a resolution of this matter." 

The company did not discuss this matter during its conference call Friday morning. 

Under Armour faces a competitive landscape and increasingly so during the pandemic, as consumers are being more selective when they look to purchase apparel and shoes. Its rivals include Nike, Adidas and Lululemon

"Assuming a digital-first approach throughout Under Armour is critical to this evolution," CEO Frisk told analysts, emphasizing the retailer's renewed focus on e-commerce during the pandemic. 

"We're working to reconstitute our ability to be profitable over the long term," he added. "When the global markets stabilize, however the new normal is defined, we believe that the efforts we're putting into building the Under Armour brand ... puts us in a better position to benefit from shifts in consumer behavior and [an] increasingly more discerning athletic consumer." 

As of Thursday's market close, Under Armour shares are down about 47% this year. The company has a market cap of about $5.2 billion. 

Find the full earnings press release from Under Armour here. 

VIDEO2:3302:33
Crocs CEO on earnings beat: Pandemic giveback campaign drove a lot traffic