Shares of Under Armour slid more than 10 percent yesterday after the Baltimore sports apparel company said plans to get rid of excess merchandise by reducing prices at its outlet stores would force it to lower year-end earnings and gross margins.
The company said it expected year-end income from operations of $103.5 million to $104.5 million, down from its previous estimate of $108.5 million to $110.5 million. Gross margins are expected to fall 30 basis points to 50 percent. Under Armour had previously expected gross margin improvements of 40 to 50 basis points. Under Armour shares declined $3.96, or 10.26 percent, to close at $34.62 on the New York Stock Exchange yesterday.
The company blamed the expected declines on a strategy it is implementing to move more apparel through its outlet stores. Under Armour will cut prices and open nine additional outlet stores this year, up from the five it had initially planned to open. Outlet stores are used to sell excess seasonal merchandise or slightly defective products, such as a shirt with a seam that isn't straight. Seasonal merchandise is a style that is meant to be on shelves three months or less, like a shade of pink.
The company said it expects leftover inventory because its retail partners bought less than it had anticipated. Under Armour often makes its shorts, shirts and other sports gear 90 to 100 days before shipment to stores, basing the amount on estimates of what retailers will buy. But retailers have been buying less this year as consumers cut back on spending. Under Armour's inventory levels in the first quarter more than doubled to $167.9 million, compared with $80.1 million a year ago.
"We're taking into account the current environment and the fact that our retail partners are managing their inventories a little tighter this year," Wayne Marino, Under Armour chief operating officer, said during a conference call with analysts. Marino said the company has changed its process of ordering - bringing sales and operations people in the same room - to better predict what retailers will buy.
Analysts lauded the company for addressing the inventory problem.
"We are encouraged that management decided to more aggressively work down inventories, which is a major overhang on the stock," Credit Suisse analyst Omar Saad wrote in a research note.
"In our view, the company got caught ramping up inventories to meet high demand heading into a major consumer recession," Saad said.
First-quarter earnings also fell for Under Armour, which manufactures sports gear that wicks sweat from the body.
Net income for the quarter ended March 31 was $2.9 million, or 6 cents per share, compared with $9.9 million, or 20 cents per share a year ago. That beat Thomson Financial estimates of 3 cents per share.
The drop didn't come as a surprise. Under Armour had announced in January that it expected weaker-than-normal earnings in the first part of the year because of increased spending to promote a performance trainer sneaker it will launch Saturday. It spent millions to run its first-ever Super Bowl commercial for the shoe. Marketing expenses were 17.8 percent of first-quarter revenue, compared with 11.1 percent a year ago.
Wall Street hammered the company at the time, questioning whether the marketing costs would be worth the hit on earnings. Dubious investors sent its stock price plummeting nearly $15 in two days to about $28, erasing nearly 35 percent of the company's market value.
First-quarter revenue increased 27 percent to $157.3 million, compared with $124.3 million in the corresponding period last year. Sales were helped by a 36 percent increase in women's apparel. Gross margins were lower than expected because the company produced more baseball, softball and golf gloves than retailers ordered.
"I would tell you the first quarter, certainly from an earnings standpoint, was decent considering what they said in January," said Reed Anderson, an analyst with D.A. Davidson & Co.
But Anderson added in a research note that the company needs to improve revenue.
"With areas like footwear, direct-to-consumer and international still requiring significant future investment, we see little opportunity for margin expansion over the next couple of years unless revenue growth picks up," he wrote.