Under Armour, Inc. (UAA) Earnings Call Transcript & Summary

Thank you. Hello, everyone. Thank you for your participation in the Stifel Cross Sector Insights Conference. Different times. I hope you're all finding the virtual conference experience to be productive. This is Jim Duffy, analyst following sports and lifestyle brands for Stifel. For this session, we're very pleased to be hosting Under Armour. Joining us from Under Armour are Patrik Frisk, CEO of the company as of this past January; Dave Bergman, the Chief Financial Officer; and Lance Allega, SVP of Investor Relations and Corporate Development. Thanks to the Under Armour team for making time to be with Stifel for this session. It's a 30-minute session. The format is a fireside chat hosted by yours truly. We'll also be collecting questions from the audience digitally. For the last 5 to 10 minutes of the call, I'll be relaying these questions to the management team for response.

Just to kick things off, guys, let's start by talking about some of the recent history, just to establish a baseline for the business entering 2020 and ahead of the pandemic. Patrik, you joined as President and COO in 2017, succeeded Kevin as CEO in January. Since '17, Under Armour's made a lot of progress. One of the most noticeable improvements has been focused in the strategic direction. Can you speak to some of the changes in these areas and the big picture strategic focus for the business looking forward?

Yes. Sure, Jim. Hi, everybody, and thanks for having me today. As we are in the -- still in the midst of this pandemic and as we've seen the effects of this around the world, we believe that the trajectory or the focus that we started to drive as we really did a lot of work on the brand back in '17 through '18 to really truly understand a couple of different things. One, the space where we compete in athletic performance; who we were going to be focusing around inside of that space; and then ultimately, our brand positioning. All of that work led us to double down on athletic performance. And there's been some questions for sure around whether that has been the right choice or not because of the strong trend that was and has been with us for some time around athleisure, if you like, in a more casual athletic approach. We've always felt that, that's been really important to us because of our origin, our heritage and all the work that we did with the consumers, and we've talked to over 40,000 consumers around the world, really led us to believe that, that was the right way to think about our business. Now as we're in this pandemic and as we've seen the effects on the consumer in terms of their activity during this pandemic, we believe that there is a good chance that the trend around athletic and more specifically around personal fitness, wellness, health is going to continue to be important as we exit this time frame at some point here in the future. So for Under Armour, that strong positioning and that we kicked off early this year, and it actually took us almost 2 years to get ready to kick off because of all of the work that we had to do, not just around the brand, but also around our product, around our go-to-market, around our supply chain, around our inventories and all of the various components of our business. And we launched back in January of this year with The Only Way is Through campaign. We felt that we had found the right platform, if you like, to start driving this thing really hard through 2020 and beyond. And we saw some early indications as we roll through January into February that this was the right way to think about it and that the consumer was responding. And then of course, we ran into the pandemic. And what our team was able to do was to quickly refocus the brand campaign or the brand platform into more of a manifesto, Through This Together, and I can tell you that we've had good response from the consumer. We had a lot of our athletes and influencers also engage with us in various workout at home videos, in terms of events happening online. And we'd like to think of this time, this period as the time of the great equalizer because Under Armour has had an opportunity to compete head on with all of our competitors in an equal way to some extent because of the -- everybody having to be more or less online. And it's also shown us that when we have that opportunity, we can certainly compete and the consumer is responding. So as we stand here right now, still in the middle of this thing, and as we think about what comes next, we're going to be turning the corner here midyear into a new brand e-commerce platform, a new e-commerce site, enhanced CRM capabilities and as we turn the corner into 2021, with a new loyalty platform as well. And having been able to accelerate all our learnings during this period, we feel that all the work we've been doing over the last 2.5, 3 years on the brand, our consumer and our positioning, together with the learnings that we've gotten over this last low period now is going to really help us drive the brand and our business going forward in a decisively positive way.

That's great. Having clarity on the identity of the brand is really important to coming out of this pandemic in a stronger position. Let's talk for a moment about some of the operational progress that you've made in the past 2.5 to 3 years or so. Can you speak at a high level about some of the steps you've taken since '17 to rationalize inventory in the marketplace, streamline the expenses and set the stage for a return to growth and margin improvement?

Sure. I'll talk a little bit about the operational stuff, and then Dave can weigh in on some of the financials. I'm very proud of the work we've done around SKU rationalization, around how many different types of materials we use when we make our product, how many trims and sippers and things that we use to complement the materials, the number of vendors that we have to actually make us -- our products, which is also helping us now as we go through the pandemic as we've had our demand shift so dramatically. Having strong partners has been absolutely essential. In all those areas, we've made a tremendous amount of progress. We've about halved our SKUs. We've decreased our materials by over 80%, our trims as well. And we've taken down the number of vendors we use by about 30%. But not only that, we've also balanced our sourcing model across the world. We have less than 8% of our product being made in China today, and we have even less than that actually coming into the U.S. from China. But not only that aspect of it. We also have only about 60% of our products being made in Asia and the remainder being done equally between the Middle East and South America. So we feel that we have a -- we have achieved 2 things with that. We've derisked our sourcing and supply. And we've also built into a faster to market model for the future as we believe the world is driving to a faster supply model as we think about what's coming next. Certainly, all of the digital focus that we've seen over the last 3 to 4 months is also pointing in that direction. So there's been a lot of work that we've been able to do in terms of driving a better machine. But also in terms of the front end, in terms of our go-to-market, actually being able to deliver the right stuff to the right place at the right time. Before COVID-19 hit, we were delivering product better than we ever have in terms of on time in full as a brand. And I think that's another leading indicator for us that we're doing better there as well. So I can certainly talk a little bit about product as well, but I'll let Dave talk a little bit about the financial position and how that has actually helped us as we've gone into COVID-19 as well. Dave, do you want to say a few words?

Yes. Dave, maybe if you could highlight some of the KPIs you watch as it relates to organizational progress and then speak to the financial position?

Is Dave there?

Apologies, I was on mute. No, I'm here. I was on mute. I apologize. Obviously, there was a lot of different initiatives that we've been driving forward over the last 2 years, and Patrik hit on a lot of those. But I think also taking it further through with the supply chain and linkage with sales and just a much, much tighter understanding of demand and lining up supply with demand. And so that's been able to help us as we went into the back half of '19 to really make sure that we were staying on top of our inventory position, getting ourselves into a much healthier mix of inventory, much fresher inventory and really cleaning things up significantly as we went through '18, '19 and the end of '19, which set us up in a much better position from a cash flow perspective, a capital presentation perspective. And then as we came into 2020, obviously, there's going to be some challenges with COVID-19 kicking in so hard in the back part of March and what that means to some spring/summer '20 excess product. But because of all the great work we've done before, the inventory in general is a lot cleaner. It's a lot healthier. It's a lot more current. And so we feel good about being able to utilize the combination of our outlet stores in addition to leveraging a little bit with the off-price channel. Even though we've been meaningfully stepping off of that channel, we continue on that journey. And so a lot of that has translated between what Patrik mentioned on all of the supply chain efforts and sourcing and costing efforts to meaningful improvements in gross margin that we experienced up through '19. And as we sit here today and we look at 2020, a lot of those items are still moving forward. We're still seeing those cost improvements. We're still seeing those relationships reaping some rewards and some of the scale that we've been able to drive. But unfortunately, this year, that is going to be a little bit offset by what we imagine is going to be a pretty prolonged promotional environment as we go through the back half of the year. So there's definitely a little bit of balance going on there. And from a KPIs perspective, there's a lot of different things that we're doing to manage and keep an eye on the health of the brand. There's also a lot that we're doing relative to productivity, a lot that we monitor relative to all the key balance sheet metrics, especially in this time of capital preservation around DIO and DSO. So we regularly are monitoring those. We have targets that we're driving against. We've had to make a few adjustments relative to COVID-19. But the teams are very aligned in driving forward, so we're going to keep pushing through.

Great.

Yes. And if I...

Go ahead, please, Patrik.

No, I was just saying that in terms of how we think about the brand KPIs, I think for us, we've been publicly talking about how for us in North America, the entire brand platform that we currently have is really there to drive consideration, which is a little bit lower down in the funnel versus -- where in the rest of the world, we're still driving brand awareness because of the maturity simply of the marketplaces. But in both those cases, both from a brand awareness perspective as well as a consideration perspective, we're making progress right now. So, so far, so good in terms of how to think about the initiation that we've had of putting all of the learnings over the past 2 years to work.

Great. And Under Armour was in a unique situation entering the pandemic. Coming into 2020, there was a restructuring plan put before the Board given disruption from COVID-19. Can you talk about how the scope of that has changed, how you're thinking about SG&A for -- you've talked about it down $325 million versus your prior outlook, but how much of that should we think of as sustainable as we look out into '21? And can you talk about some of the different areas, which are targeted for expense savings?

Yes, Jim, this is Dave. Yes, the restructuring plan that we laid out, we have been digging in very, very deep there. And the good thing is, is that, that work had already started prior to COVID-19, and so we were able to leverage the project management and all the expertise that we are building to drive through that restructuring plan and really focused it to go even further and really make sure that we're setting ourselves up for the long term here. And so that restructuring plan is -- we have a range of $475 million to $525 million in charges. A lot of that is noncash, which is good from a capital preservation perspective as we drive through kind of this pandemic period. But we're definitely getting rid of a lot of backpacks. We're definitely digging in into as many areas as possible to be able to run more efficiently, definitely attacking nonprofitable brand house stores, running leaner and more efficient within our facilities, addressing some of the lower-performing sports marketing arrangements. There's a lot of different things in that front. We also, as we mentioned on the first quarter, are moving to sublease the New York City flagship location that we just don't think would be a smart play for us right now to be able to win in that space from a profitability perspective. So we are pushing hard. We are going deeper on that restructuring plan than we originally had intended but for all the right reasons now, and there's a lot of executive alignment on that and a lot of momentum, which is good. When you step into just the overall expense reductions this year, we did mention about driving about $325 million or more out of what was our originally planned 2020 SG&A. And that's in a lot of fronts. There's some of that that's going to be marketing reductions, obviously, with expected revenue and demand decreases from COVID. Some of that is restructuring benefits but also addressing a lot of other areas relative to incentive comp reductions, the U.S. retail and BH temporary layoffs, which we're now starting to bring employees back as we're opening stores back up, but targeting a lot of the variable areas as well. So we are going deep there, really trying to make sure that we're setting ourselves up for the long term. And at the same time, a lot of that is helping us with the continued capital preservation efforts and putting us in really a position of strength now relative to cash and liquidity, availability because for us, it's not just about how we drive through kind of this COVID-19 period, but also really thinking about what do we want Under Armour to be when we come out of this and making sure that we're protecting as much of the right brand marketing and brand storytelling as we can, making sure that we're protecting the investments in digital and e-comm, where we know that we're going to continue to shift and continue to want to emphasize and really protecting those long-term investment areas of international growth, women's business, footwear business. So it is a balance there, but we're going to keep driving, keep trying to drive out those inefficiencies and making sure that we can also fuel the areas that matter most for the long term.

Patrik, let's talk about some of those multiyear go-to-market considerations. With COVID-19 and dislocation and channel landscape, are you thinking about the long-run channel strategy any differently?

Well, I think, first of all, if you think about the near term, the back half of this year is going to be all about rebalancing and then making sure that, that rebalancing takes into consideration what happens in early 2021. So one of the things that we've been doing as it relates to the product initiatives and the go-to-market initiatives that we have is we have not wanted to let off on any of our innovation and newness in terms of what we want to be known for, if you'd like, in the back half of this year or even in early 2021. So we've chosen to actually drive through newness and innovation into the marketplace. And we've made a call on the other side of the equation in terms of actually taking some of the carryover products and maybe make less of that. So it's a balance, of course. So I think from a go-to-market perspective, I think it's going to be really important to still make the consumer interested in wanting to come in and engage with the brand and create excitement. From a distribution perspective, one of the things that we've done over the last 3 years has been a lot of work around our segmentation. And we've certainly, we believe, become a lot better at segmenting the right product in the right place at the right time. We're going to continue to do that going forward. However, we believe the landscape is going to change somewhat. What I mean by that is there will be winners and losers. And I think if you did not have a great business coming into this period, you're certainly not going to have a better business coming out of it. So we see contraction in most areas. Whether it's department store, sporting goods, it doesn't really matter. I think most channels will contract. We're trying to think through this from a "win with the winners" perspective. We think that we might benefit from this to some extent because we're a smaller brand, so just automatically, we're not in as many doors as our competition. So we're going to be continuing to double down where we believe we can win and gain shelf space. And potentially, yes, there might be some exits, too, right, because we don't see necessarily an opportunity to either for ourselves win in a channel with a customer or maybe not that customer winning either. So ultimately for us, it's all about where the consumer chooses to go. So being consumer-centric is what we are doing these days. And by doing that and really truly understanding the expectation of our consumer, we can ensure that we do our segmentation right and that we're in the right place for the consumer where they choose to engage with us as a brand. But we believe it's going to change. It's going to be different out there for sure, and it's going to be a difficult time for retail in general. I do believe that short term being off-mall is probably a little easier, of course, than being in-mall and we do not have a lot of mall distribution. So in the short-term perspective, we're certainly being helped by our partners being able to open up more rapidly perhaps than people that are more heavily skewed towards the mall.

That's great. And Patrik, you're making a number of investments in digital and scaling your digital business in 2020 and into '21. Can you talk about some of those, where you stand with those and some of the strategic benefits you hope to realize?

Absolutely. We went on to Salesforce Demandware in Europe a little over 2 years ago. And actually, we're viewing out our, what I would call, almost our team platform in the U.S. It was a homegrown platform. It served us well. And make no mistake, it served us well through the years. But about 2 years ago, it was really getting urgent for us to start to think about what was going to be next for us here in the U.S. And the -- Europe had already made decision to go onto Salesforce. And as we evaluate the various opportunities for us, that became the one platform of choice for us because then we could basically have the same platform everywhere in the world apart from China. So that's where we're going on to. And we've been working for about 14 months to get ready for a July or back-to-school launch this year here in North America. And it isn't just a platform. It's also a whole new redesign of the front end of the machine, mobile first, of course. And in combination with that new platform, a new site, we also have worked in parallel to build up a full CRM personalization and loyalty play, if you like. And the first one to come on board and something that we already now actually is the CRM initiative that is already live, but it's going to go full force when we go on to the new platform. And then towards the end of the year, early next year, the loyalty will layer on top of that. So we made investments into the hardware, if you like, and the software capabilities, but we've also hired a lot of great people that are going to be able to take us to the next level there. The good news here is that we're really going from clearer to clarity in Europe on the Demandware platform currently. And so that gives us a lot of hope that the switchover is going to be relatively good for us here in terms of not too disruptive. And that then brings us onto 2 of our 4 regions being on the same platform, which also, again, helps us accelerate any kind of learnings between the 2 regions. So that's what we're doing as it relates to APAC to the, sort of, EMEA and North America. In APAC, we've continued to build out our digital capabilities throughout this year as well. And we're excited about what the future shows there for us as well. And of course, it's all about China there, and that's our focus and will be for the foreseeable future.

Great. We've got about 5 minutes left. I'm going to start taking some of the questions here submitted from the audience. First question, probably best directed to you, Dave. Question relates to EBITDA margins. And what's an appropriate objective for the EBITDA business -- or excuse me, for the EBITDA for a business like Under Armour?

Yes. I mean at this point, we're obviously looking at 2020 a little differently than how we'd be looking at '21 and beyond and there are absolutely a lot of opportunities for us. As you work your way down, from a gross margin perspective, we're going to continue to drive the costing improvements that the supply chain team is driving. But as we lead a little bit more with DTC from a mix perspective, that will help gross margin but then also continuing to see APAC being the fastest-growing region, which is our highest gross profit region as well. So there's some good opportunities to keep driving forward on gross margin as we get into '21 and beyond. And then from an SG&A perspective, we are doing such deep work this year and taking this unfortunate pandemic as an opportunity to really look at things differently and gain momentum with the leadership to really, really go deep and reprioritize, rebalance and address everything that we can possibly address. And so we're excited about the opportunity that, that should be able to provide us as we go into '21 and '22. So there are definitely significant opportunities. We've talked before when we went through our 5-year plan about being able to get operating income up to that 10-plus percentage level, and there's absolutely nothing that should be able to stop us from doing that. The timing is what we'll be ready to talk about at some point in the future but not for today.

Okay. And then I have a question specific to the footwear business. It's about 20% of the revenue. Patrik, can you speak to the strategic role of the footwear business in the portfolio, the growth opportunities and how the margin fits relative to the apparel business?

From a -- let's start -- from a margin perspective, we still believe we have opportunity to improve our footwear margins going forward. It might sound a little strange, but the way I think about it, Under Armour has been in the footwear business since 2006 or so. I still believe that we're at the very early days of our ability, capability and size and scale to be able to truly drive or optimize, if you like, margins in our footwear. But we are getting to a scale now because our footwear business is growing, that we are becoming meaningful and we're becoming a player. And it's very critical, of course, that we are successful in footwear. We've been calling out our 3 areas of women, international and footwear as our 3 largest opportunities as a brand in the future. And of course, that is important for a number of different reasons. I think the ability for any company to be successful in footwear depends on how well you can grow franchises in footwear. And I'm saying that coming from a background of Vans and Timberland and other brands where that, of course, is the core of the backbone of what they do. And that's also the case of our competition. So that's an important aspect of -- the fact that we're moving into more and more of a direct-to-consumer world also becomes -- it becomes critical from that aspect as well. So the approach that we've taken from an Under Armour perspective has been to reclaim our rightful place in our cleated business. And it was really encouraging to see, right before we went into the pandemic, the fact that the best-selling product actually at DICK'S for a few weeks running was the new Bryce Harper cleat from Under Armour. So that was a milestone for us. The second thing that happened this spring was our ability to launch our Machina, our running shoe on our HOVR platform, at $150. And that's a shoe that's been selling through for both men and women across all of our regions, actually even better so than our Infinite, which was at $120 last year. So we now have proven that we can actually sell a $150 running shoe. If you would have told me that 3 years ago, I think I would have had -- I would have been skeptical, let's put it that way, when I first came into Under Armour. So the ability, capability and the ability we've really shown here over the last 3 years to grow not just our footwear business, but to actually do it in the right way through real segmentation, where today, you have running shoes from $80, $90, $100, $110, $120, all the way up to $150, is absolutely fundamental to our future and we are now able to compete. One of the things we saw here also during the pandemic in April, for example, was that we had over 200% more shoes connected to our MapMyRun app than we had in the same month last year on our Infinite platform alone. So for us, there's every indication that consumer does not have a problem with accepting Under Armour as a running brand. And that, of course, is everything for the future as you think about global expansion across the world. So we have the legacy business of cleated footwear that we're doing a better job in. We're forging ahead and really driving a wedge into running, which is critical for both men and women. And with that comes also some encouraging sales of apparel to add to that. And on top of that, we've now shown that we can also sell the training shoes on the HOVR platform, both with -- through the Rock and our own Apex and TriBase series. So you have at least 3 footwear profiles there in men's that are working really well in training as well on that footwear platform. So very encouraged by where we're at right now in that. And we've also built up the capability and the right vendor base to be able to build quality footwear at scale going forward. That's been one of the other projects that's been going on in the background. And that's everything in footwear. To be able to scale footwear and to have the right vendor base is absolutely essential. And the reality of the world that we live in today is that there aren't very many new footwear factories being built today. Not a lot of people want to get into footwear manufacturing. So your ability to actually get production becomes critical, and we've been able to do that at Under Armour. That gives me great confidence that we're going to continue to go from clearer to clarity in footwear as we look into the future. We've also got a number of incredibly exciting innovations coming in footwear in the next 12 months that we feel excited about. So we're going to add to what we already have with newness, freshness, innovation. And with the kind of track record that we now have over the last 2, 3 years, that makes us feel confident that we can continue to fuel the fire.

That's great. Quite a good evidence of traction in footwear. Women's business seems to be building some momentum and a lot of good international opportunity as well, those being your 3 largest opportunities. We are unfortunately running out of time, however, so I'm going to have to leave it at that. My thanks to Under Armour, Lance, Dave and Patrik for being with us. We really appreciate your perspective, guys.

Thank you, Jim.

Thank you very much, Jim.

Thanks. Bye-bye.