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Under Armour's New CEO Makes an Ugly Start

Andrea Felsted
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Under Armour's New CEO Makes an Ugly Start

(Bloomberg Opinion) -- Any new chief executive likes to make their own mark. For Patrik Frisk, who took the helm of Under Armour Inc. last month, there’s even more reason than most. While founder Kevin Plank has ceded the role of CEO, he’s staying around as chairman and brand chief at the maker of athletic apparel.

At first glance, the surprise sales and profit warning that Frisk, who spent two-and-a-half years as chief operating officer, announced on Tuesday, looks like the last thing he would have wanted to unleash on investors during his first update. And that’s not all: Under Armour is also considering another restructuring,

To be fair, some of the cut to revenue guidance is down to the coronavirus –  a risk shared with rivals Nike Inc. and Adidas AG. But it is also due to a decline in sales in North America, where efforts to rein in discounting and concentrate on the style, fit and performance of apparel have taken longer to bear fruit. Profit estimates were also lowered: The mid-point of the $105 million to $125 million range would imply a halving of operating earnings from 2019, according analysts at Bernstein.

The big downgrade is clearly unwelcome to investors, who may be forgiven for thinking they have been here before. The group has been restructuring, including cutting jobs, for the past three years. However, such a dramatic lowering of guidance does provides more leeway to try to fix the U.S. business, where more work is clearly needed, and potentially scope to outperform later on.  

There were some bright spots. Under Armour’s gross margin, which expanded by 1.8 percentage points in 2019, is forecast to widen by another 0.3 to 0.5 percentage point this year. Inventories are also falling, and the wholesale market is showing signs of stabilizing.

Under Armour’s reduced outlook also paves the way for more cost-cutting. Taking an ax to expenditure could lead to savings of $30 million to $50 million in 2020, even though this could cost as much as $425 million in pre-tax charges. Of this, $225 million to $250 million relates to the possibility of foregoing opening a flagship store in New York. Pausing this project looks wise given the outlook. So Frisk may be erring on the side of caution as he takes the reins.

But there’s still considerable uncertainty as to whether Under Armour’s strategy  —  focused foremost on performance rather than fashion —  will pay off. Meanwhile, competition from Nike and Adidas isn’t getting any easier, with the latter pushing ahead with its collaboration with Beyonce. Add in a federal investigation into Under Armour’s accounting practices, and whether Plank will be able to relinquish some control and the outlook remains highly uncertain.

After under-promising, Frisk has little choice but to over-deliver.

To contact the author of this story: Andrea Felsted at afelsted@bloomberg.net

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

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

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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