A surge in global sales offset a dismaying drop in North American sales, and helped Under Armour Inc. beat analysts' estimates for revenue and profit in the fourth quarter of 2018. Analysts also said the cheery news was helped by severe cost-cutting while avoiding discounts and selling more sneakers at full price during the holiday shopping season.
The performance sportswear maker reported a net income of $4.2 million in the fourth quarter ended Dec. 31. This compares to a loss of $87.9 million in 2017 when it absorbed a one-time charge related to changes in the U.S. tax law. Net revenue rose 1.5 percent to $1.39 billion, inching slightly past analysts' estimates of $1.38 billion.
Under Armour earned 9 cents per share (excluding one-time items), beating analysts' average estimate of 4 cents, according to Refinitiv. Adjusted gross margins rose 160 basis points to 45.1 percent, beating analysts' expectations of 44.8 percent.
Class A common shares rose 3.8 percent to $21.58, indicating investors were not too concerned about the disappointing current-quarter revenue forecast for North America, its biggest region.
Excessive inventories plagued Under Armour for most of 2018, forcing the company to turn to discount chains to boost sales but at much reduced prices. This move hammered margins while boosting costs, however.
These twin whammies forced Under Armour to shutter underperforming stores, fire employees and slash product sourcing costs. The reduction in inventory levels plus higher demand for sportswear during the holiday season gave Under Armour enough room to scale back discounts and hike margins.
In addition, online markdowns during the peak holiday period were about 10 percent to 20 percent lower compared to 2017, said analysts.
Under Armour's travails in the U.S. and Canada continued in 2018. North America sales plummeted 6 percent in the face of much stiffer competition from rival Nike Inc., which lit up its holiday sales with hot product launches.
In contrast, Under Armour forecast a single-digit percentage drop in first-quarter North America sales. The absence of any major product launches in the next few months leaves analysts skeptical the company can produce a sales recovery in North America any time soon.
"It would appear that Under Armour has hit a ceiling domestically," according to Nomura Instinet.
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