Analysis: Under Armour’s bottom line is a mess
The good news from Under Armour this quarter is that revenue growth has increased, including in the problematic North American division. The bad news is that the uplift comes off the back of a very soft prior year outcome and even with the uplift, performance remains relatively weak.
If the top line is a problem, the bottom line is in even more of a mess. This quarter, Under Armour made a painful operating loss of just under $105 million. Admittedly, $79 million of this is attributed to restructuring costs, but even when these are stripped out the company still lost $26 million on a straight operating basis. Net losses are even higher at almost $96 million.
We also have concerns about Under Armour's debt load and its various financial obligations. Total liabilities are up by 24% over the prior year, including an increase in current liabilities. Looking ahead the burden from sponsorship arrangements, which is far higher for Under Armour than for most sporting brands, and an increase in store rent costs will put further pressure on both profits and the balance sheet.
The dynamic of a poor top line performance and a deteriorating financial position squeezes working capital and cash and means the company has less room for maneuver going forward. This is an uncomfortable position to be in as demand moderates and competitive forces become sharper.
The solution to much of this would be to boost revenue growth. However, the extent to which Under Armour can currently do this is very limited. In our view, the company is suffering from both an unfavorable shift in distribution channels and a serious lack of brand clarity.
The latter problem is the most difficult to solve. Our data show that Under Armour continues to suffer from an erosion of customers, many of which are migrating to other brands. More and more consumers are confused about Under Armour's proposition. Given the rather fragmented range, a lack of focus on any particular sport, and a scattergun approach to product development, this is hardly surprising. In our view, the brand needs to have a much clearer identity - possibly by using sub-brands -- to gain wider acceptance and grow customer numbers.
The brand issues are exacerbated by the distribution strategy. While Under Armour professes to be a higher-end performance brand, its shift from the specialist, full-price channels into mid-range retailers like Kohl's suggests otherwise. In our view, for a relatively immature brand, this undermines attempts to build credibility and has also partly damaged relationships with specialist sports retailers. It also makes attempts to become more of a lifestyle label more challenging.
Admittedly, the restructuring program is designed to address many of these issues, with initiatives like SKU reduction and more customer-centric product development supposed to get Under Armour back on track. While we do not doubt that progress is being made operationally, this is not yet filtering through to the shop-floor. As a result, customer perception of the brand and the offer remains largely unchanged. It is clear that Under Armour has a lot more work to do -- and perhaps has to spend more money -- to drive a step shift in shopper opinion.
If the top line is a problem, the bottom line is in even more of a mess. This quarter, Under Armour made a painful operating loss of just under $105 million. Admittedly, $79 million of this is attributed to restructuring costs, but even when these are stripped out the company still lost $26 million on a straight operating basis. Net losses are even higher at almost $96 million.
We also have concerns about Under Armour's debt load and its various financial obligations. Total liabilities are up by 24% over the prior year, including an increase in current liabilities. Looking ahead the burden from sponsorship arrangements, which is far higher for Under Armour than for most sporting brands, and an increase in store rent costs will put further pressure on both profits and the balance sheet.
The dynamic of a poor top line performance and a deteriorating financial position squeezes working capital and cash and means the company has less room for maneuver going forward. This is an uncomfortable position to be in as demand moderates and competitive forces become sharper.
The solution to much of this would be to boost revenue growth. However, the extent to which Under Armour can currently do this is very limited. In our view, the company is suffering from both an unfavorable shift in distribution channels and a serious lack of brand clarity.
The latter problem is the most difficult to solve. Our data show that Under Armour continues to suffer from an erosion of customers, many of which are migrating to other brands. More and more consumers are confused about Under Armour's proposition. Given the rather fragmented range, a lack of focus on any particular sport, and a scattergun approach to product development, this is hardly surprising. In our view, the brand needs to have a much clearer identity - possibly by using sub-brands -- to gain wider acceptance and grow customer numbers.
The brand issues are exacerbated by the distribution strategy. While Under Armour professes to be a higher-end performance brand, its shift from the specialist, full-price channels into mid-range retailers like Kohl's suggests otherwise. In our view, for a relatively immature brand, this undermines attempts to build credibility and has also partly damaged relationships with specialist sports retailers. It also makes attempts to become more of a lifestyle label more challenging.
Admittedly, the restructuring program is designed to address many of these issues, with initiatives like SKU reduction and more customer-centric product development supposed to get Under Armour back on track. While we do not doubt that progress is being made operationally, this is not yet filtering through to the shop-floor. As a result, customer perception of the brand and the offer remains largely unchanged. It is clear that Under Armour has a lot more work to do -- and perhaps has to spend more money -- to drive a step shift in shopper opinion.