Under Armour Inc. Sales Keep Improving, but Restructuring Gets More Expensive
The performance apparel and footwear maker returned to sales growth in North America, but also said its restructuring would cost more than originally expected.
Jason Hall
(TMFVelvetHammer)
Jul 27, 2018 at 6:02AM
Born and raised in the Deep South of Georgia, Jason now calls Southern California home. A Fool since 2006, he began contributing to Fool.com in 2012. Trying to invest better? Like learning about companies with great (or really bad) stories? Jason can usually be found there, cutting through the noise and trying to get to the heart of the story. Follow @TMFVelvetHammer
One step forward and a half-step back might be the best way to describe Under Armour Inc.'s (NYSE:UA)(NYSE:UAA) second-quarter results, released before market open on July 26. On one hand, the company took a decidedly positive move upfield reporting $1.2 billion in sales, up 8% and ahead of investor projections.
And it wasn't just that sales increased at a solid rate: For the first time in three quarters, Under Armour's sales in North America grew, rising by 2% after falling in each of the prior three quarters. The company also reported an adjusted loss of $0.08 per share, which wasn't exactly pretty, but in line with expectations.
Unfortunately, management also said that its restructuring plan was going to take longer and cost more, the second time the company has revised the restructuring plan since it was first rolled out about a year ago. There's your "half-step back," though investors are hopeful that it's only a temporary setback that will lead to a long-term boost.
Let's take a closer look at Under Armour's results and how its restructuring plan is playing out so far.
North America helping improve the top line, but restructuring weighs on profits again
After falling 1% in the first quarter, 4% in the fourth quarter of 2017, and a scary 11% drop in last year's third quarter, Under Armour's North America segment, which accounts for 72% of sales, finally returned to growth. Sales in North America increased 1.6%, to $843 million, 1% higher when adjusting for currency exchange. International sales growth remained a bright spot. Sales increased 31% in Europe, the Middle East, and Africa (EMEA), 34% in Asia-Pacific, and 7.3% in Latin America.
Higher operating expenses weighed heavily on profits in the quarter, particularly in North America. The company reported a $93 million operating loss in North America compared to a $5 million operating loss year over year. It also reported larger operating losses in its EMEA and Latin America segments, which more than offset the 22% growth in operating income from its Asia-Pacific segment.
With all this combined, Under Armour's GAAP operating loss was $104.9 million, more than $100 million more than last year as the company spent heavily on restructuring across several segments. Adjusted operating loss -- which removes the non-recurring expenses related to restructuring -- was $20 million. Under Armour reported a $96 million net loss in the quarter, which included $62 million from restructuring.
Apparel and footwear sales have both improved, as well. Apparel sales increased 9.8%, up from 7.1% growth in the first quarter and 1.8% in 2017. Footwear sales rebounded even more, up 14.5% after less than 1% growth in the first quarter and only 2.7% growth last year. Accessory sales were the lone underwhelming spot, falling 14% on weak demand.
Another update to restructuring plan
About one year into its restructuring plan, Under Armour increased the amount it expects to invest for a second time. In October 2017, the company said it expected to take between $140 million and $150 million in charges and that it would be "substantially completed in 2017." In February of 2018, management announced a further restructuring that would cost an additional $110 million to $130 million. Fast-forward to the second-quarter release, and management has increased its expected restructuring costs for a second time, by $80 million this go-round.
Add it all together, and Under Armour is on track to spend as much as $360 million on its restructuring, barring any future updates, divided about equally between non-cash and cash charges. What's it worth? The company said in February that its restructuring would result in "at least $75 million in savings annually" beginning in 2019, but did not offer any additional savings estimates in its second-quarter press release.
Under Armour's ongoing efforts to right the ship and return to profitable growth are costing more than anticipated. But at the same time, there are signs that business is getting better all around. Competitor Nike (NYSE:NKE) reported 12.8% sales growth this quarter, with its North America sales up 3%. Both results were better than the company had originally forecast.
Nike also reported higher margins year over year and 12.8% earnings growth, as well. Nike's results can offer some indication about the overall health of the market, as well as Under Armour's prospects to grow its profits once it completes its restructuring -- whenever that actually happens.
In terms of guidance for 2018, Under Armour management made a few adjustments. The company still isn't offering full-year sales guidance, but the phrasing is a little more optimistic, based on improved sales in North America this quarter.
However, the guidance for its financial results was lowered, based on the increased cost of its restructuring plan. The company had been forecasting a $20 million to $30 million operating profit, but now expects an operating loss between $50 million and $60 million, while its adjusted operating income target remains unchanged at $130 million to $160 million.
Guidance for adjusted earnings of $0.14-$0.19 per share and interest expense were also unchanged, while capital expenditures are now expected to be $200 million, down from $225 million to $275 million last quarter.
But on the back of improved results in the quarter -- not just its own, but competitors like Nike -- there's some optimism that a yearlong freeze of demand in North America finally might be thawing. If that proves to be the case, a sales boost could help Under Armour pay for its restructuring and potentially right the ship even sooner.
It's been nearly a year -- and two cost increases -- into Under Armour's restructuring plan, so one wouldn't fault investors who seasoned their optimism with a grain of salt.