The COVID-19 pandemic has altered the way consumers shop, making them more inclined toward online shopping. Even with the resumption of physical store operations, most retailers are witnessing slowed traffic turn-up. Under Armour, Inc. UAA is one such player, as evident from its second-quarter 2020 results, with the top and bottom lines declining from the year-ago period.
We note that this Zacks Rank #4 (Sell) company’s shares have plunged 48.3% in the year-to-date period compared with the industry’s decline of 14.5%.
Nevertheless, this athletic footwear, apparel and accessories company is striving to revive on the back of its digital offerings and better capital allocation strategy.
Soft Traffic a Concern
The coronavirus pandemic has gravely impacted Under Armour’s operations, as witnessed in second-quarter 2020. Net revenues plunged 40.6% year over year, as the company witnessed sharp declines across all markets. About 80% of locations where its merchandise could be purchased worldwide were closed through mid-May.
Although as of Jul 31, most of the company’s locations have started operations, traffic trends continue to remain sluggish. In fact, management expects traffic to remain soft for the rest of the year. Management also informed that the company reduced inventory purchases by nearly 30% for the latter half of the year in response to COVID-impacted demand expectation. Under Armour expects revenues to decline as much as 20-25% in the back half of the year with a sharp fall expected in the final quarter of 2020.
Margin Picture Appears Gloomy
Management expects gross margin to remain under pressure throughout the year, thanks to highly promotional environment and uncertainty related consumer shopping dynamics. In the second quarter, gross margin was adversely impacted by approximately 280 basis points owing to COVID-19 related pricing and discounting impacts and 70 basis points related to changes in foreign currency.
Management also expects SG&A expenses to be little higher in the second half of 2020 compared to the first half owing to increased marketing investments and variable expenses associated with direct-to-consumer business. This may put pressure on operating margin.
Can Efforts Aid a Revival?
We note that Under Armour is focusing on strengthening brand through enhanced customer connections and effective innovations. It is fast-tracking digitization of go-to-market process in order to attain greater efficiency and speed. To harness benefits from growth areas, it intends to consistently invest in direct-to-consumer, international, women's and footwear businesses. With at home training and fitness gaining prominence, the company is focusing on enhancing its Connected Fitness business. Markedly, the Connected Fitness business had improved 3% during the second quarter.
Additionally, Under Armour is undertaking every step to address challenges tied to the pandemic. These include curbing of non-essential operating expenses and postponing planned capital expenditures. Additionally, the company is actively managing inventory receipts and negotiating payment terms with vendors.
Under Armour is taking noteworthy steps to mitigate the impact of the pandemic. However, sluggish traffic trend, margin pressure owing to heightened promotional environment and rising competition from other prominent players are concerns for now.
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