What Drove Under Armour To Beat Consensus In Q1 2019?

Under Armour (NYSE: UA) released its Q1 2019 financial results on May 02, 2019, followed by a conference call with analysts. The company reported revenue of $1.20 billion in Q1 2019, marking a y-o-y growth of 1.6% over $1.19 billion in Q1 2018. Higher revenue was driven by an increase in wholesale revenue, strong performance in apparel and footwear segments, partially offset by lower sales of accessories. On a sequential basis, revenue declined by 13.3% from Q4 2018 level due to the seasonality factor. 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. Earnings came in at $0.05 per share, much higher compared to the previous year period and analysts’ expectations. Higher earnings were mainly a reflection of higher revenue, lower interest cost, and the absence of any restructuring charges.

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

A Quick Look at UA’s Revenue Sources

UA reported $5.19 billion in total revenues in FY 2018. This included 4 revenue streams:

• Apparel: $3.46 billion revenue in FY 2018 (67% of total revenues). This includes sales of apparel in a variety of styles and fits intended to enhance comfort and mobility, engineered to replace traditional non-performance fabrics.
• Footwear: $1.06 billion revenue in FY 2018 (20% of total revenue). This includes sale of performance training footwear, running footwear, basketball footwear, and the latest in hunting boots.
• Accessories: $0.42 billion revenue in FY 2018 (8% of total revenue). This includes sale of hats, bags, baseball, football, golf gloves, etc. Its accessories include the HEATGEAR and COLDGEAR technologies, and are designed with advanced moisture-wicking fabrics.
• Licensing and Connected Fitness: $0.25 billion revenue in FY 2018 (5% of total revenue). This includes fee and subscription revenue received from licensees that are permitted to manufacture and distribute Under Armour’s brands for a fee.

Key Takeaways From Q1 Results

A] Revenue Trend

Apparel

• Apparel sales increased 1% (y-o-y) to $775 million in Q1 2019, driven by a higher proportion of high margin DTC sales.
• On a sequential basis, revenue was much lower during the quarter, mainly due to the seasonality factor.

Footwear

• Footwear revenue increased 8% (y-o-y) in Q1 2019, primarily driven by strength in the running wear category.
• On a sequential basis also segment revenue registered impressive growth over Q4 2018, due to higher sales to the off-price channel.

Accessories

• Accessories revenue declined by 11% (y-o-y) in Q1 2019, primarily driven by planned lower sales of backpacks and bags related to a strategic relaunch of key product.
• However, we expect the segment to grow going forward, primarily due to growth in most of the categories, led by men’s training.

Licensing and Connected Fitness

• Segment revenue increased 5.8% (y-o-y) in Q1 2019, mainly driven by increase in new subscription revenue, partially offset by lower revenue from licensing partners in North America due to softer demand conditions.

B] Expense and Profitability

Total expenses declined on y-o-y as well as sequential basis in Q1 2019, mainly driven by lower interest cost, absence of any impairment charges, and cost savings from the new restructuring plan.

• Restructuring Cost: The company did not report any restructuring or impairment charges in Q1 2019, unlike all the quarters of FY 2018. This was the primary driver of better profitability.
• SG&A Expense: SG&A expenses remained elevated over recent quarters due to higher marketing cost and higher costs related to the continued expansion of the direct-to-consumer, footwear, and international businesses. However, cost savings from the new restructuring plan of the company has led to a drop in marketing and other administrative costs in Q1 2019.
• Interest Expense: With the company having paid off a large part of its debt outstanding under its credit facility, interest expense was much lower in Q1 2019 compared to the previous four quarters.

Lower total expenses led to higher net income margin of 1.9% in Q1 2019, compared to -2.6% in Q1 2018 and 0.3% in Q4 2018.

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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