Under Armour‘s problems are far from over.
The firm is still facing significant headwinds since introducing over a year ago an ambitious five-year turnaround plan: Its stock lingered in the red throughout Tuesday on the heels of disappointing fourth-quarter sales and a softened outlook due to the coronavirus’s potential to impact business.
Further, Wall Street has continued to show a lack of confidence in the brand’s ability to weather persistent challenges in North America. Some analysts expressed concerns over its announcement today that it might need to restructure this year — a plan that would cost the company hundreds of millions of dollars.
“To thoroughly execute a strategic, operational and cultural transformation of this magnitude takes time,” President and CEO Patrik Frisk said in the company’s fourth-quarter earnings call. “And, quite simply, the realization of milestones and progress within certain areas of our business is taking longer than we anticipated.”
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Here are the hurdles in Under Armour’s path.
Ongoing challenges in North America
In its home turf, Under Armour has consistently faced heavy competition from athletic rivals Nike and Adidas, and it heavily depends on wholesale partners such as Kohl’s — and Sports Authority, which went bankrupt in 2016 — that have seen challenges amid a changing retail environment. The Baltimore-based company continued to see lagging demand in North America during the fourth quarter despite expectations of “stabilization” by the end of last year and a “pivot back to growth” this year.
“Operationally, we continue to make positive strides, managing the marketplace and driving better operational discipline,” Frisk said. “However, a combination of demand challenges and distribution dynamics is materially impacting our business.”
The brand said that such issues were most evident in its full-price wholesale and e-commerce businesses. For the full year, it predicted declines in the medium to high single-digit percentages for its North American arm.
Potential restructuring
During the call, Under Armour revealed that it was embarking on a restructuring plan that could add about $325 million to $425 million of pre-tax charges this year, with approximately $225 million to $250 million of that amount related to giving up plans to open a flagship store in New York City.
“The Fifth Avenue location is obviously a premier retail location, but we’re considering whether it may be better suited for someone else at this time,” CFO David Bergman said. “Regardless of whatever decision we make there, our lease obligation will remain in place, and we begin paying rent on that later this year. But we’re continuing to evaluate that.”
Under Armour made headlines back in July 2016 when it announced a move to take over the roughly 53,000-square-foot space on Fifth Avenue formerly occupied by toy store FAO Schwarz — a high-traffic area only steps away from the Apple store on Fifth Avenue and across the street from Central Park.
Impact of the coronavirus
For the three-month period ended Dec. 31, Under Armour’s adjusted earnings per share were in line with analysts’ expectations of 10 cents on losses of $15.3 million, compared with profits of $4.2 million a year ago. However, revenues came in lower than consensus bets of $1.47 billion, growing 4% to $1.44 billion.
The company issued softened guidance, forecasting a sales hit of roughly $50 million to $60 million in the first quarter due to the coronavirus, with nearly 600 Under Armour stores in China currently closed. The death toll has already surpassed 1,000 in mainland China, where the illness originated, and the virus has infected more than 43,000 around the world.
“Along with all companies that do business there, our primary concern is for the health and well-being of the Chinese citizens, our teammates and partners and those affected around the world,” Frisk said. “Given the ongoing uncertainty, it is possible that this situation could have a significant material impact, both financially and operationally on our full year.”
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