Under Armour, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2024 third quarter and nine months ended December 31, 2023; comparisons are to the corresponding periods ended December 31, 2022. Under Armour develops, markets and distributes branded athletic apparel, footwear and accessories.
Financial performance and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Net revenue | $1,486.1 million, down 6.0% | $4,369.8 million, down 3.0% |
| Gross profit / margin | $671.2 million / 45.2%, versus 44.2% | $2,030.9 million / 46.5%, versus 45.3% |
| Operating income / margin | $69.5 million / 4.7%, versus $94.7 million / 6.0% | $236.2 million / 5.4%, versus $248.6 million / 5.5% |
| Net income | $114.1 million, versus $121.6 million | $232.3 million, versus $216.2 million |
| Diluted earnings per share | $0.26, versus $0.27 | $0.52, versus $0.47 |
| Operating cash flow | Not presented by quarter in the supplied filing text | $493.1 million, versus $74.4 million |
- Revenue mix: Third-quarter wholesale revenue fell 13.2% to $711.7 million, while direct-to-consumer revenue rose 3.5% to $740.5 million. Apparel declined 5.5%, footwear 6.6%, and accessories 0.3%.
- Regions: Third-quarter North America revenue decreased 11.8%; EMEA and Asia-Pacific each increased 7.1%, and Latin America increased 9.4%.
- Margins and costs: Gross margin improved 100 basis points in the quarter, principally from lower freight costs, partly offset by promotional pricing and deeper off-price discounts. SG&A was nearly flat in dollars, but increased to 40.5% of revenue from 38.2%. Operating income declined 26.6%.
- Cash generation: Nine-month operating cash flow improved by $418.7 million year over year, largely reflecting working-capital changes, including a $473.0 million favorable inventory-related inflow in the MD&A comparison. Capital expenditures were $132.8 million, versus $147.6 million. Cash flow from investing was negative $87.8 million; financing cash flow was negative $75.0 million.
- Balance sheet: Cash and cash equivalents were $1,040.1 million at December 31, up from $711.9 million at March 31, 2023. Inventory was $1,104.0 million, down from $1,190.3 million. Current assets were $3,122.8 million and current liabilities $1,466.2 million.
- Debt and liquidity: Debt principal totaled $680.9 million; balance-sheet debt, net of discounts and issuance costs, was $676.0 million, including $80.9 million classified as current. The $1.1 billion revolving facility had no borrowings outstanding; $4.2 million of letters of credit were issued. The company reported compliance with its credit-facility covenants and believes available liquidity is sufficient for at least 12 months.
Material changes and management commentary
- Management described a challenging retail environment, particularly in North America, with higher promotions and discounting and lower wholesale demand. North America’s quarterly revenue fell $122.3 million; its operating income declined 18.7%.
- International regions grew in the quarter, while the wholesale channel contracted. Management attributed apparel weakness mainly to lower unit sales and footwear weakness to lower unit sales and average selling prices.
- For the nine-month period, gross margin increased 120 basis points, but SG&A rose to 41.1% of revenue from 39.8%. Operating income declined 5.0%.
- Other income was $49.6 million in the quarter and $36.8 million for nine months. It included MyFitnessPal sale earn-out income and foreign-exchange effects; consequently, reported net income and pre-tax income include these non-core items.
- The company completed its authorized $500 million Class C share-repurchase program. Nine-month repurchases were $75 million; the quarter included a $25 million accelerated repurchase.
Outlook, risks and unusual items
- The filing provides no clear updated numerical revenue, earnings or margin guidance. Management expects promotional and discounting activity to continue to pressure gross margin in the near term.
- Management cites inflation, consumer spending and demand, foreign exchange, product and freight costs, supply-chain disruption, competition, inventory forecasting, and execution of strategic initiatives among the risks to results. It also notes potential impacts from global events and capital-market conditions.
- Legal contingencies: The company recorded a $42.5 million accrual for legal proceeding contingencies, including a $22.5 million reserve recorded during the quarter. It states that an ultimate loss could be substantially higher than the accrual and that insurance coverage is disputed in part. The securities litigation remained pending, with trial scheduled to begin July 15, 2024; the company said it intended to defend the claims vigorously.
- Debt maturity: $80.9 million of 1.50% convertible senior notes mature June 1, 2024. Holders may convert at their option from January 1, 2024 through shortly before maturity, subject to the note terms.
- Taxes: Management maintains valuation allowances on certain U.S. state and foreign deferred tax assets. A potential release of some U.S. state valuation allowance could materially benefit tax expense, but timing and amount depend on future earnings and management judgment.
- Capital investment: Nine-month capital expenditures included $63.0 million for the new global headquarters. Management’s stated long-term capital-expenditure principle is 3%–5% of annual net revenue.
Important facts for investors to verify
- Whether North American demand and wholesale sales stabilize, and whether DTC growth can offset wholesale declines.
- Whether discounting persists and erodes the gross-margin benefit from lower freight and other supply-chain costs.
- The durability of operating cash flow improvement, particularly as inventory and other working-capital movements normalize.
- The outcome, timing, insurance recovery and potential cash impact of the legal proceedings, including the securities litigation.
- Repayment or conversion treatment of the $80.9 million convertible notes due June 2024, and continued covenant compliance.
- Whether forecast U.S. earnings support release of deferred-tax valuation allowances; any resulting tax benefit is uncertain.