Under Armour cuts inventory 23%, sees lower excess product levels

Dive Brief:

Under Armour reduced its inventory by 23% year-over-year in the third quarter. This is a better than expected result after years of streamlining efforts, COO Patrik Frisk reported on the company's third-quarter earnings call.
Somewhat ironically, the decrease in product going to off-price channels (along with weaker direct-to-consumer sales) led CFO David Bergman to lower revenue growth projections for the full year from 3%-4% to 2%, but with a 90-110 basis point improvement in gross margin year-over-year. This trend was present on the company's August call too, suggesting it has intensified.
"Improving service levels and much tighter buys to customer demand, coupled with products selling through at a rate higher than we had anticipated means we've had lower returns and, therefore, don't have as much excess product to sell in the off-price channel," Frisk explained.

Dive Insight:

Under Armour has been in supply chain simplification mode for several years now and that work has put the company in a better position to withstand shrinking sales since there is less excess product in the system.

"Cleaner inventory positions and improving service levels around the world are enabling us to more efficiently meet our wholesale demand closer to need," Bergman said.

By all accounts, the company's supply chain has performed better than expected, fine-tuning orders and improving service to customers — but there have been consequences too. The company's revenue was clearly dependent on off-price channel sales to an extent. Though these sales may have been the result of excess product and a slushy supply chain, the company's topline couldn't tell the difference. Now Under Armour is faced with making up those sales in full-price product and that channel has yet to see a similar resurgence.

North American revenue was down 4% for the quarter year-over-year but Frisk said, "within our wholesale business, excluding sales to the off-price channel, year-to-date we've seen a slight increase in full price revenue, a good sign that the underlying business is trending healthier." Frisk will take over as CEO in January as current CEO Kevin Plank has announced his plans to resign.

Encouraging signs notwithstanding, trouble may be looming for Under Armour. The company is under investigation by the Securities and Exchange Commission and the Justice Department — both looking into its accounting practices, which may have sought to make the company "appear healthier," The Wall Street Journal reported in advance of the Monday earnings call. On the call, Bergman said the company has been cooperating with the investigation since 2017.

"We firmly believe that our accounting practices and disclosures were appropriate," Bergman said.