Under Armour sends potential warning sign about retailers’ profits

Under Armour sends potential warning sign about retailers’ profits

People walks past a Under Armour clothing store in Siam Center, Bangkok.

Guillaume Payen | SOPA Images | LightRocket | Getty Images

Under Armour‘s shares sank Tuesday, even after the athletic apparel and footwear retailer beat Wall Street’s quarterly revenue and earnings expectations.

The reason for the drop may offer insights into challenges faced by other retailers.

The company drove higher sales, in part, by offering lower prices. Under Armour missed fiscal fourth-quarter expectations on gross margin as it leaned more on promotions than expected.

The company’s Chief Financial Officer David Bergman chalked up the margin decline to higher promotions as Under Armour marked down merchandise from prior seasons and sold it through off-price retail.

Under Armour warned the issues could persist. The company said it expects margins will still be under pressure as higher promotions outweigh lower freight costs. Diluted earnings per share are expected to range between a loss of 3 cents to a loss of 5 cents in the first quarter, below expected earnings of 6 cents per share, according to FactSet. It said it expects margins to improve as the year goes on.

Under Armour’s results could spell trouble for retailers that report quarterly results in the coming weeks. The report could signal that to move merchandise, companies may have to offer discounts and sacrifice more of their profits.

In the coming weeks, retailers including Walmart, Target, Best Buy and Macy’s, will shine a light on consumer health and reveal how much pricing power they have. It will also help illustrate how much of Under Armour’s issues are specific to the company, rather than representative of the broader industry and economic backdrop.

Promotion levels have swung dramatically due to pandemic-related trends. During the early years of Covid, retailers had lower-than-usual markdowns as they struggled to keep shelves stocked due to supply-chain delays. They then benefitted from huge consumer spending fueled by stimulus payments.

The pendulum swung last spring, however. Target, Kohl’s, Gap and others suddenly had a glut of extra inventory — including a lot of popular pandemic categories like patio furniture and athleisure that had fallen out of favor. The excess supply ushered in a wave of deep discounts.

Now, retailers are dealing with another dynamic. Consumers are thinking twice about discretionary spending as they rack up bigger bills at the grocery store or book trips instead of filling up the closet.

Simeon Siegel, a retail analyst for BMO Capital Markets, said the pandemic gave retailers a chance to press the reset button. Their resolve, however, has faded.

“Very few companies have the fortitude to forgo volume for the sake of profits outside of a global pandemic,” he said. “It’s very easy to fall back to the promotional drug when push comes to shove.”

As higher transportation and supply chain costs roll off, he expects many retailers won’t see the benefit because they are “returning to the promotions cookie jar.”

Under Armour’s results reflect company-specific challenges along with consumer trends. The company recently tapped Stephanie Linnartz as its new CEO to lead efforts to grow its online business, refresh its brand and better compete with rivals Nike and Lululemon. She stepped into the role in late February.

Some of the company’s weakest sales in the recent quarter came from North America. Net sales in the region grew 2.5% in the three-month period compared with 13.8% growth in Europe and the 23.6% growth in the Asia-Pacific region.

On an earnings call, Linnartz said the company is “continuing to navigate a legacy of higher than desired promotional activities in our home market.”

She said the apparel and footwear brand bears part of the blame for the trend due to inconsistent marketing and underwhelming presentation in stores. She said the company will strengthen its brand in the coming year.

Inventory levels are still a factor for some retailers, too. As of the end of the quarter, Under Armour had nearly $1.2 billion in inventory, up 44% year over year.

Bergman said about half of that is inventory that Under Armour has chosen to pack and hold for future sales.

Robert Hum contributed to this story.

(With inputs from CNBC)