After a couple of weaker periods, Under Armour has posted some better numbers for the third quarter. Revenue rose by 3.4 per cent, which is the best performance of the fiscal year so far.
On the bottom line, net income rose by a solid 10.9 per cent. Although a long way from the stellar performances of 2021, the figures provide some relief and suggest that trading over the holiday period was reasonably good. That noted, the drivers of the business have clearly changed.
North America, which has been the engine of growth for the company over the past couple of years, posted a much more sluggish performance with revenue down by 2.4 per cent. Admittedly, this comes against a tough prior year comparative, but it’s also a modest deterioration on the slip recorded last quarter. This largely reflects the pull-back by the American consumer due to both the cost-of-living crisis and a somewhat reduced interest in sporting apparel.
While these factors are mostly outside of Under Armour’s control, we believe that the deterioration in demand has hit it a little harder than it has hit some other sporting and athleisure brands. This view is backed by the growth rate compared to the pre-pandemic period of 2019, which shows Under Armour’s North American sales up by a relatively modest 5.6 per cent. This is not a market-beating performance.
The problem here is one of brand relevance and loyalty. While Under Armour’s brand is certainly not terrible, it still lacks the clarity and desirability of stronger brands like Lululemon. During difficult times, this makes it easier for consumers to avoid buying it or to switch to cheaper alternatives. The company has already corrected some of the worst missteps and is still refining the brand and how it goes to market, but we feel more effort is needed during these more constrained times.
Most of the above apply to the apparel offer, where sales fell by 2.1 per cent. Fortunately, footwear is a much more disciplined and compelling part of the business and, here, the company has a much stronger pipeline of product innovations. Over the third quarter, this was aided by relatively strong consumer interest in sneakers for both holiday gifting and self-purchasing. All of this shows up in the numbers for footwear revenue which grew by 25.3 per cent over the last year.
While North America has softened, other regions have picked up the slack, especially EMEA where sales rose by a very robust 32.5 per cent over the prior year. Much of this shift is about the phasing of the pandemic. A lot of Europe was in lockdown or under restrictions at this point last year which suppressed sales, so the positive numbers this year represent something of a bounce back. Aside from this helpful dynamic, many of the same issues around brand apply to Europe as they do to the American market, and this could act as a drag on performance going forward.
Due to the slower demand, inventory levels are up by around 50 per cent to $1.2 billion. This has necessitated some sharper discounting to try and clear the overage, which resulted in a 650 basis points slip in margin. Unfortunately, we do not see the demand picture picking up sufficiently to resolve the inventory issue automatically so Under Armour will need to work harder – and take more of a financial hit – to clear down stock.
Overall, Under Armour is in a reasonable place. But things are getting more challenging, and the company, under its new CEO Stephanie Linnartz, will need to work harder on defining the brand and connecting with customers to make future gains.
