Under Armor revenue sends potential warning sign over retailer profits

under protectionWall Street shares fell on Tuesday, even after the sportswear and footwear retailer beat Wall Street’s quarterly revenue and profit forecasts.

The reason for the drop may provide insight into the challenges faced by other retailers.

The company increased its sales, in part by offering lower prices. Under Armor missed fiscal fourth-quarter gross margin expectations as it relied more on promotions than expected.

Shares fell more than 6% in afternoon trading.

The company’s chief financial officer, David Bergman, attributed the lower margin to higher promotions, as Under Armor reduced merchandise from previous seasons and sold them at low prices at retail.

Under Armor warned that the problems could persist. The company said it expects margins to still be under pressure as higher promotions outweigh lower transportation costs. Diluted earnings per share are expected to be between a loss of 3 cents and a loss of 5 cents in the first quarter, below expected earnings of 6 cents per share, according to FactSet. He said he expects margins to improve as the year progresses.

Under Armor’s results could spell trouble for retailers releasing quarterly results in the coming weeks. The report could signal that to move goods, companies may have to offer discounts and sacrifice more of their profits.

In the coming weeks, retailers including walmart, Target, best buy And Macy’s, will shed light on consumer health and reveal their pricing power. It will also help illustrate how Under Armor’s issues are company-specific, rather than representative of the general context of the industry and the economy.

Promotion levels have increased significantly due to pandemic-related trends. In the early years of Covid, retailers had lower than normal markdowns as they struggled to keep shelves stocked due to supply chain delays. They then benefited from huge consumer spending fueled by stimulus payments.

However, the pendulum swung last spring. Target, Kohls, Gap and others suddenly had a glut of additional inventory — including many popular pandemic categories like patio furniture and sports hobbies that had fallen out of favor. The oversupply ushered in a wave of deep discounts.

Now, retailers face another dynamic. Consumers are thinking twice about discretionary spending as they rack up bigger grocery bills or book trips instead of filling their closets.

Simeon Siegel, retail analyst for BMO Capital Markets, said the pandemic has given retailers a chance to hit the reset button. However, their resolve faded.

“Very few companies have the courage to give up volume for profit reasons outside of a global pandemic,” he said. “It’s very easy to fall back on the promotional drug when the going gets tough.”

As transportation and supply chain costs rise, he expects many retailers won’t see the benefit as they “go back to cookie jar promotions.”

The company’s results reflect unique business challenges as well as consumer trends. The company recently tapped Stephanie Linnartz as its new CEO to lead efforts to grow its online business, refresh its brand and better compete with rivals Nike and Lululemon. She stepped into the role at the end of February.

Some of the company’s weakest sales in the last quarter came from North America. Net sales in the region increased by 2.5% in the three-month period, compared to growth of 13.8% in Europe and growth of 23.6% in the Asia-Pacific region.

On an earnings call, Linnartz said the company “continues to run a legacy of higher than desired promotional activity in our home market.”

She said the clothing and footwear brand was partly to blame for the trend due to inconsistent marketing and disappointing presentation in stores. She said the company will strengthen its brand in the coming year.

Inventory levels are also a factor for some retailers. At the end of the quarter, Under Armor had nearly $1.2 billion in inventory, up 44% year over year.

Bergman said about half of that stock was inventory that Under Armor chose to package and hold for future sales.

For its fiscal fourth quarter, Under Armor reported adjusted earnings per share of 18 cents, beating analysts’ expectations of 15 cents per share, according to Refinitiv.

The company’s net profit for the three-month period ended March 31 was $170.5 million, or 38 cents per share, compared with a net loss of $59.6 million, or 13 cents per share, during the prior year period. Sales jumped 8% to $1.4 billion from $1.3 billion a year ago. That beat analysts’ expectations of $1.36 billion, according to Refinitiv.

Robert Hum contributed to this story.


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