Under Armour’s Turnaround Story Is Still Missing Something

(Bloomberg Opinion) -- If you’re a believer that Under Armour Inc. has put a challenging era behind it, then its first-quarter earnings report Thursday gave you some credible support for your optimism: The athletic apparel company raised its full-year guidance for earnings per share and gross margin.

One of Under Armour’s most urgent priorities recently has been revamping and streamlining its supply chain, and these updated figures suggest that work is continuing apace and starting to bear fruit. Also, I was pleasantly surprised to see that inventory decreased 24 percent in the quarter from a year earlier to $875 million. That’s a bigger dent than the “mid-teen” percentage-rate decline the company had predicted for the period back in February, and it is an important marker of progress given how bloated stockpiles had become and how much focus the company has had unloading it.

Under Armour’s Turnaround Story Is Still Missing Something

And yet, I still think caution is warranted about Under Armour’s ambitious turnaround effort.

In the company’s most crucial market, North America, revenue fell 3 percent in the quarter from a year earlier. Now, that is not at all a surprise; Under Armour had guided for that and has laid out reasons for it. Executives are strategically pulling back on promotions at their own stores and website, and that can dampen sales. Also, it is planning a relaunch of its backpacks and bags in the second quarter, so the first quarter was expected to be something of lull before a big push in this category.

Under Armour’s Turnaround Story Is Still Missing Something

So, yes, the decline is explainable — but I still don’t think it should be dismissed. Under Armour will only return to health when shoppers in its home market are responding more enthusiastically to its products, and when its wholesale relationships have recovered after last year’s troubles. Until we see a return to sales growth in North America, I struggle to have confidence that these changes have happened. Right now, faith in the prospects of this key part of its business has to be grounded in management promises. The company bumped up full-year profit guidance Thursday, but not revenue guidance, so we don’t have much reason to believe the company has seen any meaningful difference in its sales momentum in recent months.

I’ve written before that Under Armour has a sensible-sounding medium-term strategy for returning to health. It plans to focus on product development, and the recent appointment of a new chief design officer should help bring that vision to life. Under Armour expects to tap international markets for growth and lean more on its own website and stores for sales, a model that can help with profitability and make them less dependent on unstable legacy retailers. But as I noted at the time they rolled out that plan, the leadership team needs to demonstrate that it can pull all this off before we give it the win. Thursday’s results reminded me that it hasn’t done that yet.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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