Under Armour beat revenue expectations with its Q4 2017 earnings report on Tuesday. Its shares responded, popping 11% in pre-market trading.
This was despite the fact that the Baltimore sportswear label saw a net loss of $88 million in the quarter (compared to a profitable fourth quarter one year before) and a net loss of $48 million for the full year.
It’s a reminder that on earnings days, all that matters is beating Wall Street. Under Armour’s fourth-quarter revenue grew 5% to $1.37 billion, edging out expectations of $1.31 billion, and it earned less than 1 cent per share, meeting expectations.
Despite sales falling 4% in the quarter (and 5% for the year) in Under Armour’s home market of North America, international sales grew 47% and footwear grew 9%, positive indicators that Under Armour can point to as signs that the brand still resonates around the world, and that it can succeed in sneakers.
It was a slightly sunnier ending to a brutal 2017 for the company.
Hitting both performance and fashion
Why was 2017 so unkind to Under Armour, and how will it hit reset in 2018? One of the biggest causes was the current trend in sports apparel: fashion and lifestyle. (Yes, many call it “athleisure,” and it isn’t going away.) Adidas, which had a stellar 2017, makes apparel and footwear that is on-trend right now: “casual sportswear” that people wear all day long, not just for athletic activity. Under Armour, since its inception in 1996 on a football field at the University of Maryland, is known for “performance,” meaning gear worn for sports.
Under Armour President and COO Patrik Frisk, who joined the company less than one year ago, acknowledges that the recent trend toward fashion has hurt Under Armour. But he says the brand doesn’t want to move away from what it’s known for, especially since trends come and go.
“The marketplace itself, from a trend perspective, has over the last two years moved in a little bit different direction than what the Under Armour brand stands for,” Frisk tells Yahoo Finance. “What might be perceived as a little bit of a weakness for us today, being in the ‘performance’ bucket so to speak, we believe long-term will be our greatest strength down the line. That doesn’t mean we’re not focused on style and making sure that we’re trend-right. But I think owning performance is going to be important for us moving forward.”
So how can Under Armour embrace fashion without losing its position as a strong performance brand? It all starts with HOVR, its new line of running shoes that come equipped with sensors that track your steps and distance and send the data to your phone.
“You’ve just seen the first glimpse of Under Armour going forward in this HOVR campaign we just launched,” Frisk says. “It was a combination of a great-looking shoe, with fantastic performance, and a great fit. it delivers on all those touch points. And our sell-throughs were similar across the world, whether it was China, Europe, North America or Latin America. We were almost taken aback because it sold out much quicker than we thought.”
Frisk believes HOVR is an example of “adding style to performance — not just style for style’s sake, but actually making sure that we’re delivering performance and an unbelievable fit. When we do that and execute across the globe, our brand is still incredibly strong.”
The HOVR marketing rollout was timed to the same day all around the world (Feb. 2), something Under Armour had never done with a new product. The response, Frisk argues, speaks to the success Under Armour is having outside the U.S., something it also saw in a recent comprehensive segmentation study. “What’s really fascinating to me is how consistent the brand comes across around the globe, whether it’s China, Germany, North America or the UK,” he says. “The consistency in terms of the perception: Under Armour as the professional performance brand, which gives me great confidence that if we do this right, there’s a tremendous runway for the brand going forward.”
Beefing up e-commerce
Just as Under Armour is seeing declines in North America but big gains abroad, it is also seeing waning wholesale growth (down 1% in the fourth quarter, down 3% for the full year) offset by big growth in direct-to-consumer (DTC) business (up 11% for the quarter, up 14% for the year), which represents shoppers ordering directly from Under Armour’s website or going to its own branded stores.
The wholesale slump is part of a macro trend affecting the entire industry (exacerbated by the closings of many sporting goods chains in the last two years), so Under Armour is “being diligent with our SKU choices” in big-box stores, Frisk says, and combating it with innovation in e-commerce.
How to handle the wholesale declines, and beef up DTC, is “the question everybody’s asking themselves,” Frisk says. “We believe in retail going forward. We don’t think brick-and-mortar is going away any time soon, but it’s going to change and evolve. What we’re seeing is that consumer journey has, over the last two years, really evolved dramatically in terms of the choice the consumer makes when they’re shopping.” DTC represented 35% of Under Armour’s global revenue in 2017. In 2018, Under Armour forecasts low double-digit sales growth in its own stores.
If Under Armour can keep boosting its footwear business, and make its apparel more on-trend, it can wipe out much of the current doom and gloom about its brand. But it can’t keep touting international growth as a distraction from North American declines forever: it needs to clean things up in its home market.
“We see you, and we hear you,” CEO Kevin Plank said on the company’s earnings call. “Know that we’re heads down, stabilizing, prioritizing, executing… We have the patience, plan, and fortitude to see this through.”
Daniel Roberts is the sports business writer at Yahoo Finance. Follow him on Twitter at @readDanwrite.