Why Under Armour’s Plummeting Sneaker Sales Are Worrisome

It’s been a rough 48 hours for Under Armour Inc., which has been making headlines amid a federal probe into its accounting practices and a downgrade in its sales forecast for the year.

But one subject that has largely remained out of the spotlight is the sportswear giant’s footwear sales. The category — one that Under Armour has been banking on as a major source of long-term growth — plummeted 12% to $250.6 million, marking the first quarterly decline since a 4% loss in Q4 2018.

“[The number was] slightly lower than what we had planned,” President and COO Patrik Frisk explained in the firm’s third-quarter earnings call with analysts on Monday. “This result was driven by softer demand, lower sales to the off-price channel and improving service levels that are enabling us to meet customer demand in a timely manner.”

Although footwear accounts for less than a quarter of Under Armour’s overall revenues, which dropped 1% to $1.43 billion for the period, the fact that the company is looking to the category to boost long-term success is cause for concern among analysts.  (The company also posted adjusted earnings per share of 23 cents, versus forecasts of 18 cents, on profits that were up 7.2% to $102.32 million.)

In a note this week, Wedbush Securities analyst Christopher Svezia said pressures in the brand’s direct-to-consumer channel in North America were worse than expected and that footwear was no exception to those headwinds.

“Consumers [are] likely turning to Nike, Adidas and Hoka [One One], among others,” he added.

This quarter, the Baltimore-based brand’s sales in the region dipped 4% to $1 billion. Comparatively, Nike’s revenues in North America rose 4% to $4.3 billion for the first quarter ended Aug. 31, while Adidas noted a 5.8% gain to 1.2 billion euros ($1.3 billion) for the second quarter ended June 30.

John Kernan, an analyst and managing director at Cowen & Co., pointed to weakness in the brand’s product resonation among wholesale customers as on the consumer side.

“Poor reception of new styles — both in apparel and footwear, both among retail and wholesale customers — [as well as] quality issues and competition from other athletic apparel and footwear companies may significantly impact [Under Armour’s] financial performance,” Kernan wrote.

But it’s not just heavy competition that’s hampering growth in Under Armour’s footwear business. The company is still in the preliminary stages of implementing the five-year turnaround plan introduced at its investor day in December, where it doubled down on its performance-first approach — a strategy that has put much of Wall Street on the fence.

For one, Susquehanna Financial Group analyst Sam Poser cautions UA’s performance focus could put it a serious disadvantage as the fashion athletic market continues to pick up the pace.

“The Under Armour brand image is not improving in the manner management expects — or perhaps believes it is,” Poser wrote. “The obsessive focus on performance products limits the customer base… Under Armour views performance and fashion/lifestyle as mutually exclusive, which they are not — just ask some of the largest athletic retailers out there. Performance product, positioned properly, becomes a fashion item.”

According to a report published two weeks ago by market research firm The NPD Group Inc., the leisure segment, which includes the popular sport-lifestyle group, showed solid improvement with footwear sales collectively rising 7% to $3.9 billion. The performance segment, on the other hand, fell 4% to $2 billion, with running, basketball and training shoes logging negative sales results.

Despite the category’s weakness, Under Armour expects its footwear sales to climb this year. As it leans on the performance of its run and women’s training sneakers, the company said the shift in its portfolio would include more full-price selling, more frequent product drops and stronger cross-channel messaging.

“We are playing the long game,” Frisk said. “The work we’ve done to recalibrate the business, reduce inefficient volume and improving segmentation across price points are enabling us to drive greater focus on prioritization into the categories where we believe we can win.”

For what it’s worth, Under Armour has seen success in its Hovr franchise — it continues to highlight the Hovr Infinite sneaker as a top seller — as well as its brand partnerships with NBA star Stephen Curry and professional wrestler-turned-actor Dwayne “The Rock” Johnson.

“Watching the evolution, the sophistication, really begin to build in our footwear capability is something that’s frankly taken us 15 years to get to this point,” said founder Kevin Plank, who hands over the CEO reins to Frisk at the start of next year. “But we’re ready to run, and we understand what it can mean as we continue to unlock footwear — having the right product at the right time, the right price. We believe that we are truly going to be a player there and take this $1 billion-plus business and build something really important.”

For the full year, Under Armour predicts earnings per share to reach the high end of the previously given range of 33 cents to 34 cents. The company lowered its sales expectations for the year, forecasting growth of 2% compared with the previous range of 3% to 4%. It cited lower-than-planned excess inventory for the off-price channel, ongoing direct-to-consumer challenges and negative impacts from foreign currency changes.

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