Dive Brief:
- Under Armour is still wrestling with heavy stock levels and promotions as it navigates a sector that executives said is still shedding inventory.
- At $1.3 billion, inventories were up 38% from last year in the quarter that ended June 30, according to a release. Despite lower freight costs, gross margin fell by 60 basis points YoY to 46.1% as the brand discounted product.
- “There's still inflated levels of inventory that are leading to more promotional activity,” CEO Stephanie Linnartz told analysts earlier in August. “But as we see the year going on and as we head into next year, [we] anticipate that things will get better and there will be less need for so much promotional activity.”
Dive Insight:
Stock levels at Under Armour and in the athletic apparel space are still eating into the company’s profitability as it tries to ride out a wave of inventory that has lasted more than a year at this point.
Some of the brand’s surge in inventory is due to the comparison against the prior year. “As a reminder, we ran leaner inventory levels through the summer of 2022 due to our constraint model and proactive cancellations of orders due to COVID-related supply challenges, so this comp is elevated accordingly,” CFO David Bergman said on the earnings call.
Nonetheless, the decline in margins and profit — with operating income falling by more than 39% — is a problem for the company. Adding to its woes are sales declines, with revenue down 2% in the quarter. The sales issues add pressure to the company’s inventory flows and profitability.
In emailed comments, Neil Saunders, managing director with GlobalData, pointed to Under Armour’s brand position, which he said “hasn’t fully worked out its point of differentiation or uniqueness in the market.” Saunders went on to note, “This position forces Under Armour into a promotional stance to drive sales and prevent inventory buildup.”
One bright spot for the company is the financial benefit from falling ocean and air freight costs, which added by more than 3 percentage points to its gross margin. Unfortunately those tailwinds were overwhelmed by the costs of promotions to the company’s bottom line as well as unfavorable currency rates.
As Under Armour navigates its inventory struggles, it is searching for a new chief supply chain officer, a role the company doesn’t currently have. It does so as it prepares for the departure of COO Coline Browne, who joined in 2016. The company said in a June release that the CSCO spot will be in lieu of a new operating chief.
