In early Friday trading, Under Armour’s shares dropped as much as 21 percent to $5.25 after the sportswear manufacturer warned that the company would see a further decline in sales this quarter. The firm also said that the tariff-related cost for fiscal year will be 100 million dollars higher than anticipated.
According to LSEG, the company predicted a drop in revenue between 6%-7% during the second quarter. This is significantly higher than analyst expectations of a 2.9% decrease.
The company also predicted a decline in gross margin of between 340 and 360 basis points, due primarily to disruptions to the supply chain linked to tariffs.
Analysts suggested that while Under Armour attributes much of the difficulties to tariffs imposed by President Donald Trump, they may not be enough to explain Under Armour’s current challenges.
The main issue is the weak demand from consumers, not tariffs,” stated Seaport Research Partners’ analyst Joseph Civello. He rated Seaport Research Partners stock as Neutral.
The first quarter results of Under Armour for the period ending June 30 were mostly in line with predictions. Revenue was down by 4% at $1.13 Billion and profit adjusted per share came to 2 cents. This missed estimates by one penny.
Weak demand, “fragile branding” overshadows tariff explanation
Under Armour has made tariffs a frequent theme of their recent comments. The company notes that 30 percent (30%) of the merchandise it sells comes from Vietnam, and 15 percent (15%) from Indonesia. Both countries are subject to US import duty rates.
Trump announced tariffs of 20% on Vietnamese imports and 19% for Indonesian goods.
Several US firms have reported recently that their impact on the bottom line will be less than expected. This raises questions as to whether the tariffs alone are responsible for Under Armour’s margin compression.
Citi analysts say the weak guidance for the second quarter highlights the “fragile positioning of brands” in North America where retailers prioritize stronger brands over weaker ones in the market.
North America is responsible for 59% (or the total revenue) of Under Armour, so its underperformance in this region has a major impact.
The company’s growth was stronger in Europe, Middle East and Africa (EMEA) than North America.
Struggles persist despite leadership return
Kevin Plank, the founder of the company, returned to his role as CEO in March 2012 to help lead a turnaround. However, there are no clear signs that progress has been made.
Sky Canaves, an analyst at Emarketer, said: “It is concerning that a year after its restructuring plan was implemented, it shows no signs of improvement in the revenue and profitability declines.”
Analysts warned, however, that the company’s plans to increase prices in order to counteract tariff pressures could weaken demand even further.
Stifel analysts maintained their Buy rating with a $10.00 price goal, citing Under Armour’s global brand equity as a potential foundation for long-term growth.
Stifel acknowledges that the visibility of revenue stabilization is still limited.
Analysts noted that Under Armour’s projected revenue for the fiscal second quarter was $50 Million below their estimates, while adjusted earnings guidance at midpoint came in $0.25 under expectations.
The prospects for a turnaround are clouded
Under Armour’s near-term prospects remain uncertain due to the impact of tariffs as well as a weakened consumer market.
Inability to gain brand momentum and dependence on North America pose a major challenge for the company in its restructuring efforts.
Canaves stated that “the looming effects of tariffs, and the weakening of US consumer demand during the second half year do not bode well for the company’s turnaround prospects near term.”
Investors are now watching to see if the company is able to leverage international growth in order offset the decline in its biggest market, or if the slide in demand continues before restructuring benefits take effect.
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