Under Armour's Soft North America Sales Continue To Hurt

Under Armour, Inc. (NYSE:UAA) , once considered as the arch rival of NIKE, Inc. (NYSE:NKE) , has been facing multiple challenges for quite some time now. The company has been grappling with weakness in North America business, decline in gross margin and rising interest expenses. Meanwhile, Under Armour’s sustained focus on brand development, expansion of direct-to-consumer and technology-based fitness business bode well.

Given this backdrop, let’s delve deeper to find out the factors likely to have a bearing on the company’s performance.

Hurdles to Cross

Sales decline in North America has been a major concern for investors in the past few quarters. In fact, the company has been reporting sluggish sales from the region since fourth-quarter 2016. In the fourth quarter 2017, sales from North America declined 4.5% and operating income slumped more than 100%. Notably, bankruptcies, store closures, decrease in productivity and demand along with change in fashion preference has been the major causes behind the dismal show.

Furthermore, gross margin — a key financial metric for determining a company’s basic financial health — has consistently declined in the past few quarters. In fourth-quarter 2017, the metric contracted 140 basis points to 45%, following a decline of 130, 190 and 70 basis points in the third, second and first quarter, respectively. The downside can be attributed to aggressive inventory management that overshadowed favorable channel mix. However, the company anticipates adjusted gross margin to increase by nearly of 50 basis points to 45.5% in 2018. This improvement is expected to be backed by lower promotional activity, product costs, channel mix and variation in foreign currency.

Meanwhile, higher interest expenses have been concerning for the company. In fourth-quarter 2017, the company’s interest and other expenses were up nearly $12 million in comparison with $10 million in the prior-year quarter. For 2018, the company anticipates interest and other expenses to increase roughly $45 million from $38.2 million last year.

Hidden Catalyst

Under Armour, which shares space with G-III Apparel Group (NASDAQ:GIII) , Delta Apparel (NYSE:DLA) and Lululemon Athletica (NASDAQ:LULU) , continues to seek opportunities for increasing its global footprint and market share. Though the company generates major portion of its revenues from the North America region, it intends to expand business operations to other parts of the world to mitigate the risks stemming from concentration in one geographic region. In the process, over the years the company has opened its factory and brand stores in Canada and China as well as given franchise licenses in many countries. Moreover, Under Armour is expanding its DTC business in the U.K., Germany and the Netherlands. It has also rolled out e-commerce platforms in countries like Mexico, Australia, New Zealand and Chile.

The company has undertaken restructuring efforts since 2017 and projects savings of at least $75 million annually in 2019 and thereafter.

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