Under Armor's second-quarter results were better than retailers expected thanks to an e-commerce boom, but the company warned that pressure from the coronavirus pandemic will continue to depress results in the second half of the year.
The company's stock initially rose by over 13% in premarket trading when the results were first released. However, these gains have largely been wiped out after Under Armor said that depleted stocks could also impact sales during the holiday season. The shares fell more than 4% after the market opened.
The maker of sneakers and sportswear said he was "encouraged" by the dynamic in June and July as his stores reopened after being temporarily closed. However, during a call for profits, it was said that sales could fall between 20% and 25% in the second half of 2020. Within this window, an even larger decline is expected for the fourth quarter, including major holidays.
CFO David Bergman said that as the company tightened its inventory, there was a possibility that it would not have "sufficient supply to meet higher demand" later this year.
And although Under Armor does not offer a full outlook for 2020, he said, "We expect these conditions to continue to have a significant impact on the full year financial and operating results."
Under Armor also said that gross margins in 2020 could decrease year-on-year due to extremely increased retail advertising activity.
This is how the retailer behaved in the quarter ended June 30, compared to the analysts surveyed by Refinitiv:
Loss per share: 31 cents, adjusted for a loss of 41 cents, expected sales: $ 707.6 million vs. $ 543.8 million expected
"We remain reasonably cautious about the 2020 balance given the uncertainty surrounding consumer buying dynamics, the potential for a strong advertising environment, and proactive decisions to reduce inventory purchases to meet expected demand related to the ongoing COVID-19 – Impacts are adjusted, "Chief Executive Patrik Frisk said in a statement on Friday.
Under Armor, the second quarter net loss increased from a loss of $ 17.3 million, or 4 cents a share, last year to $ 182.9 million, or 40 cents a share.
Without a restructuring fee of $ 39 million, the retailer lost 31 cents per share. That was less than the 41-cent loss analysts forecast by Refinitive.
Revenue decreased 41% from $ 1.19 billion in the previous year to $ 707.6 million. Analysts expect sales of $ 543.8 million.
Apparel sales decreased 42% to $ 426 million, footwear sales decreased 35% to $ 185 million and accessories sales 47% to $ 56 million.
The company estimated that around 80% of the stores where its goods can be purchased, including its own stores, were closed until mid-May due to the coronavirus pandemic.
During this period, selling more directly to customers made sales more profitable, so items sold through off-price channels were less burdened. As a result, gross margins increased 280 basis points to 49.3%.
"Although sales were understandably declining, the company showed an incredible ability to increase gross margins," said Simeon Siegel, analyst at BMO Capital Markets, in an interview. "You effectively capture more with less."
Under Armor announced that the quarter ended the quarter with $ 1.1 billion in cash.
Inventories rose 24% to $ 1.2 billion.
Earlier this week, the Baltimore-based company announced that it had received a possible enforcement measure from the Securities and Exchange Commission related to sales that it booked between the third quarter of 2015 and the fourth quarter of 2016.
On July 22, Under Armor received two Wells executives – Kevin Plank, its former CEO and current chief executive officer, and David Bergman, its current CFO – the Wells announcements related to a previously disclosed 8K filing by the SEC.
A Wells announcement does not necessarily mean that the company or its managers have violated the law. However, this indicates that the agency is considering an enforcement action. Under Armor said Monday that it claims its actions are "appropriate" and intends "to work to resolve the issue."
The company did not discuss the matter during its Friday morning conference call.
Under Armor faces a competitive landscape, increasingly during the pandemic, as consumers are more selective when it comes to buying clothes and shoes. Rivals include Nike, Adidas and Lululemon.
"Adopting a digital first approach in Under Armor is critical to this development," CEO Frisk told analysts, emphasizing the retailer's renewed focus on e-commerce during the pandemic.
"We are working to restore our ability to be profitable in the long term," he added. "As global markets stabilize, however the new normal is defined, we believe that the efforts we are undertaking to build the Under Armor brand will put us in a better position to benefit from changes in consumer behavior and [ an] increasingly demanding sporty consumer. "
At the close on Thursday, Under Armor shares fell 47% this year. The company has a market cap of around $ 5.2 billion.
The full press release on Under Armor's earnings can be found here.