Under Armour shares plunge on sales and earnings miss

Under Armour's long streak of eye-popping gains in sales ended abruptly during the all-important holiday season, the company reported Tuesday, sending its stock down 26 percent.

The Baltimore-based athletic apparel brand blamed a sluggish holiday season, a shifting retail landscape and merchandise miscalculations for its October-to-December sales of $1.3 billion, which, while up 12 percent from a year earlier, fell short of the quarterly gains of 20 percent and more it had reported for nearly seven years.


Wall Street pummeled Under Armour's stock after its results fell short of expectations and it cut its sales growth target in half for 2017. Its Class A voting shares plunged $7.45 each to close at $21.49. Under Armour shares haven't been this low since 2009, when the company reported just $856 million in sales for the year.

The plunge took a huge bite out of the net worth of Under Armour founder Kevin Plank, who is its largest shareholder and controls the company through a special class of stock with 10 times the voting power of the Class A shares. Forbes estimated that the Baltimore billionaire's fortune fell 19 percent Tuesday to $1.93 billion.


Plank is using some of his personal fortune to embark on a massive redevelopment of Port Covington, with offices, residences, retail, parks and a new Under Armour headquarters. His private development company owns the property where The Baltimore Sun is printed.

"Having the right product for the right consumer at the right time is the price of admission," Plank acknowledged Tuesday during a conference call with analysts.

The Under Armour CEO said lessons from the disappointing quarter would help keep the company's long-term growth strategy intact.

Under Armour blamed the slowing sales growth on a competitive environment of deep discounting as consumers chose online shopping over the mall and sporting goods stores that account for much of the brand's business.

Analysts had expected the company to report sales of $1.4 billion.

The company also reported disappointing earnings, saying its profit slipped to $104.9 million from $105.6 million in the same period last year. Per-share earnings dipped a penny to 23 cents each, two cents below analyst projections.

Under Armour also lowered its outlook for sales growth this year, to 11 percent to 12 percent from the low-20 percent range. While the company reached a record $4.8 billion in sales in 2016, up 22 percent from the prior year, it said it is on track to reach sales of nearly $5.4 billion in 2017.

Analysts said this lowering of expectations took investors by surprise and called into question its $7.5 billion sales target for 2018.


Jason Moser, an analyst with the Motley Fool's Million Dollar Portfolio, said the sales slowdown showed Under Armour is a company in transition.

"You have a company that has been performing so well for so long and constantly recording these 20-plus percent growth rates, quarter in and quarter out," Moser said. "It's set a standard of expectation."

Under Armour also announced a key management change, saying that its chief financial officer, Chip Molloy, will resign after just over a year with the company. Molloy, who had come from the same position at PetSmart, is the latest in a string of executive departures, which included a chief merchandising officer, a chief digital officer and a senior vice president of footwear last year.

David Bergman, senior vice president of corporate finance, will step in as acting CFO effective Feb. 3.

Tuna Amobi, an equity analyst at CRFA Research, called Molloy's departure "somewhat abrupt."

Amobi downgraded Under Armour's stock from "hold" to "sell," citing pressure on profit margins, a "relatively tempered" revenue target of 12 percent growth this year and Molloy's departure. He slashed his 12-month stock price target by $16 to $20 a share.


In the United States, which accounts for nearly 85 percent of sales, the apparel maker faced the fallout of bankruptcies of key retailers that sold the brand, including Sports Authority, and a slowdown in consumer buying that forced the company to resort to more discounting, on a broader assortment of merchandise, earlier than ever, Plank said.

The brand's merchandise assortment at the end of the year was "out of balance," Plank said, with a growing demand for lifestyle sports apparel, leading to lost sales.

"Performance is not dead. Performance is something that's a requirement," he said. "We need to become more fashionable with the products we have out there."

Under Armour isn't standing still as its traditional sales channels erode.

The company is shifting toward less reliance on retail partners by building out its branded stores and websites and moving more into a largely untapped global market.

"We will be better positioned to deal with imbalances like this going forward," Plank told analysts. "We're working to evolve our selling strategy to better align with what consumers want, with what consumers need."


International sales jumped 55 percent during the fourth quarter and made up 16 percent of total revenues. Footwear and women's merchandise each hit the $1 billion mark last year, the company said.

He said he remained confident in the underlying strength of the Under Armour brand as the company makes continued investments in the fastest-growing parts of the business, footwear, international sales and sales through its stores and websites.

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The company is committed to investing in talent and systems that will create the backbone for its growth, which will cut into operating income in the near term, Plank said.

"It's a near-term cost to ensure the path to becoming a $10 billion brand," he said. "It's important to pay the price now."

Moser praised that approach, saying it requires that investment.

"If they don't do it now, they risk having to pay more for it later and possibly losing that opportunity and market share on an international level," he said. "On the one hand, I understand Wall Street falling out of love with the stock today, but by the same token for investors who can see farther down the road, we understand the business is going to grow, and this is what he has to do to accomplish that."


In a report Tuesday, Andrew Burns, a senior research analyst with D.A. Davidson & Co., said Under Armour's brand recognition and long-term focus on international and footwear market share make its goals viable.

Under Armour "is highly exposed to the maturing performance market and must quickly adapt its product mix," said Davidson. "Ultimately, we believe management's earnest assessment of these issues and commitment to pivot the strategy can restore [Under Armour] to its prior growth trajectory."