What Kohl’s Latest Earnings Report Reveals About Under Armour’s New Sweet Spot

The announcement of a new partnership between Kohl’s Corp. and rising athletic brand Under Armour might have left some scratching their heads last year, but Kohl’s has served up evidence that the duo could be onto something.

Kohl’s said today that its Q1 profits climbed triple digits year-over-year, thanks in no small part to a solid response to its rollout of Under Armour merchandise.

The launch of Under Armour exceeded our expectations, and the launch accelerated our rate of growth in the important active category,” Kohl’s chairman, president and CEO, Kevin Mansell, said during a call with investors today. “With the help of the Under Armour launch, national brand penetration climbed to 55 percent of total sales.”

He added that Under Armour outdid a “very aggressive launch sales plan,” with strong results across all categories, including men’s, women’s and children’s apparel, as well as footwear.

Overall, Kohl’s said its first-quarter profits rose nearly 300 percent year-over-year, to $66 million, or 39 cents per diluted share, topping forecasts of 29 cents for diluted earnings per share.

Revenues slipped 3.2 percent year-over-year, to $3.8 billion, missing forecasts of $3.9 billion. Comparable store sales fell 2.7 percent during the period.

“We are encouraged by the significant improvement in sales and traffic for the March and April period, after a weak February start to the first quarter,” Mansell said. “Continued strong inventory management led to a major improvement in gross margin, and our teams managed expenses exceptionally well. I am pleased to say that, combined together, these efforts led to an increase in income for the period.”

The Right Moves?

When Under Armour announced the Kohl’s deal last summer, some analysts suggested that a move to Kohl’s would take the label down-market, but Under Armour CEO Kevin Plank assured investors that the brand would “continue to have elevated product there.”

We think Kohl’s is a great evolution for us — we think that the female consumer’s there, she’s shopping and she’s buying. … This is a consumer decision, not really a channel decision,” Plank said during a conference call with investors last year. “We believe that there’s a massive opportunity with the consumer that’s walking into those stores and looking for the Under Armour brand, and frankly, they haven’t been able to find it.”

Since Kohl’s unveiled its Under Armour assortment in March, analysts have continued to offer up mixed feedback on the partnership. Following store checks in March, Susquehanna Financial Group LLLP analyst Sam Poser said he found that Under Armour was already experiencing challenges with its segmentation of men’s and women’s apparel. “Fifty percent, maybe a bit more, of the styles [selling in Kohl’s] are also available at Dick’s [Sporting Goods],” he wrote in a memo.

Poser further stated that he found minimal advantages to the Kohl’s-Under Armour partnership: “Selling Kohl’s does little to enhance the Under Armour brand, especially when there’s the need to build a lifestyle business,” he wrote.

Off-price retailer DSW Inc. also announced in March that it would roll out Under Armour product “in time for back-to-school,” causing familiar worries about Under Armour’s distribution strategy to resurface — particularly for the brand’s footwear business, which is in its infancy.

“Under Armour’s footwear business is smaller and still developing, so they need to be careful there,” Poser said in March. “I would argue that athletic is not a core competency of DSW. … The [results will hinge on] how Under Armour manifests itself in DSW stores and how they segment the brand [across retailers].”

B. Riley & Co. LLC analyst Jeff Van Sinderen made similar observations regarding a need, on the part of Under Armour, to execute crafty product segmentation, noting that the brand’s need to drive volume could come at a cost.

“I think for Under Armour, it’s tough because they need to find new points of distribution,” explained Van Sinderen. “It is a bit of a double-edged sword: They need to grow, but in doing so, they may risk compromising brand image.”

When Under Armour reported earnings in April, it swung to a net loss of $2.3 million for the first quarter of 2017, a marked downturn from a $19.2 million profit in the same period last year. Still, sales rose 7 percent, to $1.12 billion, driven by increases in its wholesale and direct-to-consumer businesses. Footwear sales, in particular, rose 2 percent, to $270 million, due to “strength in basketball sales and the timing of liquidations,” the company said.

Access exclusive content