Why 2017 Was a Year to Forget for Under Armour

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Under Armour (NYSE: UA) (NYSE: UAA) started 2017 on a down note when it reported that the company's 26-quarter streak of 20%-plus revenue growth came to an end. In May, Kevin Plank, founder and CEO, promised shareholders at the annual meeting that the company's management team was "committed to improving shareholder performance," but it didn't happen in 2017. Both shares of the performance apparel company's stock ended the year down over more than 45% while the S&P 500 marched to a 22% gain.

Read on to learn about what happened to Under Armour in 2017 and management's perspective on its turnaround progress.

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The biggest region is a big drag

The North American market made up 77% of Under Armour's revenue in the most recent quarter and has seen disappointing revenue trends for the last four quarters.

Period YOY Revenue Change, North America

YOY Revenue Change, All Regions

Q4 2016

6% 12%
Q1 2017 (1%) 7%
Q2 2017 0% 9%
Q3 2017 (12%) (5%)

Changing consumer tastes and slowing foot traffic in brick-and-mortar retail are certainly part of the problem. Dick's Sporting Goods, the company's largest retail partner, has seen negative same-store sales comps, even including online sales. Under Armour also brought on Kohl's as a retail partner at the end of 2016 to replace the bankrupt Sports Authority. While Kohl's has reported strong sales for Under Armour products, this hasn't seemed to stem the tide.

Under Armour's largest competitor, Nike, is also seeing sales declines in the region, but Adidas isn't experiencing the same challenges. It racked up an impressive 31% growth in North America for its most recent quarter. With Adidas surging, it leaves investors wondering if the retail issues are masking a deeper problem at Under Armour, a problem with its products.

Product growth engines stalling

Under Armour's apparel segment makes up more than two-thirds of the company's revenue and had been driving double-digit growth until recently. Management admitted it whiffed with its product selection and execution last holiday season, but the issues seemed to continue throughout 2017. Management attributed the most recent quarter's sales declines, in part, to its womens segment and footwear, both of which have become important billion-dollar businesses for the company. You can see in the chart below how revenue in apparel and footwear has been doing. Apparel notched an 8% year-over-year decline in the most recent quarter.

Period Apparel,
YOY Revenue Change
Footwear,
YOY Revenue Change
Q4 2016 7% 36%
Q1 2017 7% 2%
Q2 2017 11% (2%)
Q3 2017 (8%) 2%

The company is in the midst of transitioning its go-to-market team to one that is category-focused rather than product-focused in order to ignite growth. The primary categories that the company is focused on are men's training, women's, run, basketball, and lifestyle. In June, the company announced a 30-year industry veteran, Patrik Frisk, as its chief operating officer, saying he would lead the go-to-market strategy. Since then, there have been a number of executive changes.

The executive shuffle

While management changes are often necessary to bring a fresh perspective and energy, when there are numerous changes all at once, it can be disruptive. In the last three months, outgoing executives at Under Armour include the general manager of footwear, co-founder Kip Fulks (who is on sabbatical), the co-founders of MyFitnessPal, the chief marketing officer, and the general manager of the women's and youth categories. In addition to Frisk, recent new hires include a senior vice president of digital product, senior vice president of corporate communications, and vice president of European business.

It will take some time for these management changes to make an impact to the business, but Frisk is doing what he can to accelerate their transitions and plans to share a comprehensive growth plan with investors sometime in 2018.

Even though the company has significant headwinds, I'm heartened that management is dealing with the challenges head-on.

Looking ahead

Plank summed up the year in a meeting with his management team in near-freezing temperatures in a company parking garage, reportedly saying, "2017 sucked."

While I couldn't agree more, all is not gloom and doom for the company. It is investing heavily in its fast-growing direct-to-consumer and international businesses. Frisk's experience will be invaluable as the company retools its go-to-market engine from top to bottom. In the most recent earnings call, Frisk shared his perspective on the turnaround progress.

It seems investors will have to be patient as the company's turnaround efforts continue.

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Brian Withers owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.