What Could Be The Primary Factors To Drive Under Armour’s Revenue And Profitability In Q1 2019?

Under Armour (NYSE: UA) is set to release its Q1 2019 results on May 02, 2019, followed by a conference call with analysts. After being relatively flat in the first two quarters of 2018, total revenue of the company increased sharply in Q3 and remained high in Q4. Revenue growth in the second half of the year was driven by growth in wholesale and direct-to-consumer revenue, coupled with international business growth, higher apparel revenue with growth in the training category and flat accessory sales, partially offset by a slowdown in footwear sales, driven by lower sales to the off-price channel. Total revenue is expected to remain flat in Q1 2019 on a y-o-y basis. However, on a sequential basis, revenue is expected to witness a decline of 12% to 15% from Q4 2018, primarily due to the seasonality effect. A majority of the company’s revenue is realized in the last two quarters of the year, driven primarily by increased sales volume of products during the fall selling season, including the higher priced cold weather products, along with a larger proportion of higher margin direct to consumer (DTC) sales.

We have summarized the key expectations from the announcement in our interactive dashboard – How is Under Armour expected to fare in Q1 2019 and what is the outlook for the full year? In addition, here is more  Consumer Discretionary Services data.

A] Revenue Trend

Apparel Segment

• Revenue from Apparel increased in the second half of 2018, driven by unit sales growth in training, golf, and team sports categories.
• Additionally, higher priced cold weather products in the fall season led to segment revenue growth.
• Apparel revenue is expected to see a decline on a sequential basis due to the seasonality factor, partially offset by a  higher proportion of higher margin DTC sales.

Footwear Segment

• Footwear revenue has largely increased in the first three quarters of 2018, driven by growth in multiple categories led by training, running, and golf.
• However, in Q4 2018, segment revenue declined due to lower sales to the off-price channel.
• We expect footwear sales in Q1 2019 to be flat on a y-o-y basis

Accessories Segment

• Though accessories revenue has been increasing on a sequential basis in 3 quarters of 2018, on a y-o-y basis revenue has been declining, driven by unit sales decline in outdoor and training categories.
• We expect the segment to grow in 2019, primarily due to growth in most of the categories, led by men’s training

Licensing and Connected Fitness

• Segment revenue has largely trended higher over recent quarters.
• We expect the trend to continue in 2019 as well, driven by increase in new subscription revenue, being partially offset by lower revenue from licensing partners in North America due to softer demand conditions.

B] Expense and Profitability Trend

Total expenses have steadily increased throughout 2018 due to higher restructuring cost, interest expense and selling, general and administrative cost. However, the rate of increase has been going down due to cost reduction initiatives adopted during the year.

• Restructuring Cost: Restructuring cost has seen a lot of volatility over recent quarters, with it remaining higher than 2017 levels. We expect restructuring cost to be at elevated levels following an additional restructuring plan in 2018, which could put pressure on margins going forward.
• SG&A Expense: SG&A expense increased in the last quarter due to higher marketing cost and higher costs related to the continued expansion of the direct-to-consumer, footwear and international businesses. The new restructuring plan is expected to help the company reap benefits in the form of cost savings in 2019.
• Interest Expense: After increasing in Q3, interest expense decreased in Q4 2018 due to lower debt outstanding. With the company having paid off a large part of its debt outstanding under its credit facility, we expect the interest expense to be lower in 2019.

After remaining low, net income margin increased in Q3 2018, led by a decrease in SG&A and restructuring cost. However, margins saw a decline in Q4 2018 mainly due to fluctuation in major costs. We expect net income margin to increase going forward, mainly driven by lower interest and restructuring cost.

Full Year Outlook

• For the full year, we expect total revenues to increase by 3.6% to $5.38 billion in 2019.
• Higher revenue would mainly be driven by growth in the wholesale as well as direct-to-consumer categories, coupled with higher sales across apparel and footwear along with higher subscription and licensing revenue.
• Net income margin is expected to increase in 2019 to about 1% from -0.9% in 2018. Cost savings from the new restructuring plan and focus on high margin DTC business is expected to support growth in profitability going forward.

Trefis has a price estimate of $20 per share for UA’s stock.

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