Under Armour Fiscal Q2'27 Earnings Conference Call - UNDER ARMOUR INC

Financial Performance:

• Q2 Fiscal 2027 revenue declined 7% to $1.2 billion; North America (-6%), EMEA (-9%), APAC (-9%), Latin America (+3% driven by FX, -4% constant currency).
• Direct-to-consumer revenue fell 8% (owned stores -7%, e-commerce -12%) due to traffic pressure; wholesale revenue dropped 6%.
• Gross margin was 47%, down 30 bps YoY, impacted by unfavorable FX (-40 bps), channel mix (-35 bps), and pricing (-20 bps), partially offset by supply chain benefits (+55 bps).
• Adjusted SG&A decreased 3% to $559 million; operating income was breakeven ($15M reported, $25M adjusted).
• Inventory ended at $1.1 billion (up 4% YoY), identified as elevated due to prior revenue guidance cuts; cash balance $285 million with $190 million borrowings against a $1.1 billion revolver.
• Restructuring costs incurred $13 million in Q2; total costs to date $280 million against a $305 million target, with completion expected by Dec 31, 2026.

Guidance and Future Outlook:

• Full-year FY27 revenue expected to decline at a mid-single-digit rate; gross margin expansion guidance lowered to 170-220 bps (from 220-270 bps) reflecting supply chain headwinds and inventory actions.
• Full-year adjusted operating income maintained at $140-160 million; adjusted diluted EPS projected at $0.08-$0.12.
• Q3 revenue guidance lowered to an 8-9% decline; Q3 adjusted operating income expected between a $5M loss and $4M profit.
• Q4 outlook emphasizes recovery driven by youth licensing transition, wholesale inventory initiatives, and timing shifts (EMEA distributor shipments moving from Q3), targeting stronger year-over-year profitability.
• FY27 capital expenditures expected to be modestly below prior year levels.

Business Segments and Product Lines:

• Cleated football business grew double digits with market share gains, making Under Armour the #2 football cleat brand in the U.S.
• Apparel franchises HeatGear and Core Vanish grew double digits; fleece and women's bottoms faced challenges.
• Footwear declined 11% overall but showed resilience in cleats and running (Velocity franchise); planning commercial expressions of elite footwear at accessible price points in Spring 2027.
• Launching "Tech Helix" ($35) as a multi-million unit program and "Armour Short" (Dec launch) with new Shield Form technology; targeting $35 ASP to drive volume at full price.
• Strategic shift to an asset-light model for youth apparel, transitioning to an expanded licensing agreement with Centric Brands starting Fall 2027 to reduce inventory and complexity.
• SKU reduction initiative is 50% complete, aiming to cut SKUs by nearly 50% from 2024 levels to increase global product commonality and focus on high-value items.

Market and Competitive Landscape:

• Market remains in an "inventory clearing" phase with competitors engaging in heavy discounting, creating a promotional environment that pressures sell-through.
• Under Armour is countering by focusing on "selling so much of so much less at full retail price" and premiumizing the brand through innovation storytelling.
• EMEA growth concentrated in France and Spain, while the U.K. faces traffic challenges; APAC stabilizing in China with improved e-commerce execution.
• Social engagement metrics show significant growth: Instagram impressions up 55% and video views up 126% YoY; TikTok followers crossed 1 million.

Risks and Challenges:

• Elevated inventory levels ($1.1B) resulting from previous revenue cuts, requiring targeted sell-through actions and buy reductions.
• Ongoing supply chain headwinds including elevated fuel and freight costs, which negatively impacted gross margin.
• Geopolitical instability (Middle East conflict) projected to create ~$45 million in headwinds for the full year, up from prior estimates.
• Macroeconomic pressure and soft consumer traffic in key markets (North America and U.K.) affecting DTC conversion and wholesale sell-through.
• Execution risk in translating product innovation into revenue and margin growth amidst a highly promotional retail environment.

Management Commentary and Tone:

• Tone is confident yet realistic, emphasizing a "simpler company" structure and deliberate resource allocation to proven franchises.
• CEO Kevin Plank highlighted an "embarrassment of riches" in product innovation, attributing past revenue misses to a lack of competent storytelling rather than product capability.
• Management is focused on "calendar compression," using AI in supply chain and merchandising to speed time-to-market (e.g., 10 months for Armour Short concept to market).
• Emphasis on shifting from brand storytelling to specific "product storytelling" with a singular global product launch strategy per month.

Analyst Questions and Answers:

• Storytelling & Margins: Management clarified that the disconnect between product excitement and consumer pricing power stems from communication; they are pivoting to clear, singular product stories (e.g., Tech Helix) to justify full-price sales and drive margin expansion.
• Marketing Metrics: Marketing success is measured by consumer consideration (up 19% YoY) and brand perception (up 24% YoY); shifting spend from performance marketing to story-driven content.
• Inventory Management: To avoid repeating inventory excess with new launches, UA is utilizing "test and learn" approaches, athlete wear testing, and AI for demand forecasting to calibrate initial buys more accurately.
• Youth Licensing Economics: The youth transition is strategic; revenue will be replaced by royalties, aiming for net positive contribution while reducing asset heavy inventory and working capital.
• North America Rebound: Confidence in Q4 rebound is driven by the youth licensing transition, wholesale inventory reduction initiatives, and EMEA shipment timing shifts, with a focus on full-price sell-through in factory stores.

Other Key Points:

• Introduction of a globally consistent creative platform titled "This is Your Armor" to unify brand identity across markets.
• Appointment of Simon Pestridge as CMO and Carol Chen as APAC leader to drive unified marketing and commercial execution.
• Asset-light evaluation continues; the youth licensing deal is a pilot for potentially moving other non-strategic product lines to licensing models.
• Retail concept evolution includes key city showrooms for premium products, refined full-price stores, and reworked factory stores that now carry select full-price innovations (e.g., Stealthform caps) to boost ASPs.
• Management aims to achieve a "good, better, best" product architecture to clarify value propositions across all price points.