Under Armor sees a tough year ahead, wracked by global supply chain challenges and another round of Covid shutdowns in China denting demand.
The athletic footwear and apparel maker on Friday released a disappointing outlook for the 2023 fiscal year, after reporting an unexpected loss for the three months ending March 31 and sales that missed Wall Street estimates.
The news prompted investors to flee, as shares of Under Armor tumbled nearly 18% in pre-market trading.
Also on Friday, rival Adidas said its growth in 2022 will come at the lower end of the expected range due to the “heavy impact” of the coronavirus-related lockdowns in China. Adidas is now seeing a significant drop in its sales in the Greater China region this year.
Patrick Frisk, CEO of Under Armor, described the headwinds as temporary and said underlying demand for the brand remains strong. Frisk told analysts the retailer remains disciplined to make sure it doesn’t order too much inventory. The risk is that Under Armor may subsequently have to discount excess merchandise that does not sell, affecting its profitability.
Here’s what Under Armor did in the three months ending March 31, compared to what Wall Street was expecting, based on a Refinitiv poll of analysts:
- share loss: 1 cent adjusted against expected 6 cent profit
- Revenues: $1.3 billion vs. $1.32 billion projected
Under Armor reported a net loss for the quarter of $59.6 million, or 13 cents a share, compared to net income of $77.8 million, or 17 cents a share, a year earlier.
Excluding non-recurring items, he lost 1 penny per share. Analysts were looking for adjusted earnings per share of 6 cents.
Chief Financial Officer David Bergman said profit margins were under pressure due to higher freight costs, particularly ocean freight costs, which came in higher than the company had expected. He said Under Armor also used more air freight to bring in goods from abroad.
Sales grew to $1.3 billion from $1.26 billion in the previous year. That missed estimates of $1.32 billion.
In North America, sales grew 4% to $841 million. However, its international business grew by just 1%, to $456 million, impacted by a 14% decline in the Asia Pacific region, including China.
China is not only a growing market for Under Armor trying to win new customers, it is also a major manufacturing center for much of the sportswear industry. A number of international companies, including Apple and Estee Lauder, have warned in recent days that withdrawing from China’s Covid controls will hit their businesses.
In the twelve months ending December 31, Under Armor produced approximately 67% of its apparel and accessories in China, Vietnam, Jordan, Malaysia and Cambodia. And all of its shoes are made in China, Vietnam, and Indonesia, and it’s an annual record show.
In the first quarter of fiscal year 2023, which runs from April 1 through March 31 of next year, Under Armor sees sales flat to a slight decrease from the same period a year earlier.
Bergman said the first half of the year will be hardest hit by order cancellations and supply chain delays. He said Under Armor also expects the effects of Covid-19 in China to diminish as the year goes on.
For the full year, Under Armor expects to earn between 63 cents and 68 cents per share on an adjusted basis, which is lower than analysts’ expectations of 86 cents.
She sees sales growth of 5% to 7% over the previous year. Analysts were looking for a 5.4% increase.
Under Armor said the forecast takes into account three percentage points of headwinds due to its decision to cancel some orders for sellers due to capacity issues and supply chain delays.
CEO Frisk said the brand should return to providing “sustainable and profitable returns” as global supply chain challenges and complications related to the coronavirus normalize in China.
He’s also teased future projects to increase demand, including a resale platform and loyalty program that Under Armor plans to pilot in North America by the end of 2022.
Find the full financial statement from Under Armor here.