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Under Armour Q4 tops estimates amid global growth; North American sales fall

BY Marianne Wilson

Under Armour released fourth quarter results that show it still has a ways to go in reviving its business here at home.

The athletic goods giant reported a net loss of $87.9 million, or 20 cents a share, in the quarter ended Dec. 31, compared with net income of $103 million, or 23 cents per share, in the year-ago period. The results included a one-time charge of $39 million due to the new U.S. tax law and restructuring charges. Excluding one-time items, the company met Street estimates that it would break even for the quarter.

Total revenue rose 5% to $1.37 billion, better than the $1.31 billion analysts were expecting. Direct-to-consumer revenue was up 11% to $575 million.

Sales in international markets surged 47% and represented 23% of total sales. Sales in North America, however, continued to decline and were down 4%.

For the full year, sales increased 3% to $5 billion. North America revenue fell 5%.

Neil Saunders, managing director of GlobalData Retail, commented that while Under Armour’s overseas growth is to be applauded, the brand is reliant on its North American operation to drive performance on both the top and bottom lines. As to why Under Armour is lagging domestically, Saunders cited several factors, including that its expansion into retailers like Kohl’s has weakened exclusivity and made the brand feel commoditized and ubiquitous.

“Consumers are unsure of what it (Under Armour) stands for, what it specializes in, and why they should use it,” Saunders said. “For many, it has become something of an also-ran.” (For more, click here.)

Under Armour has been working to transform its business amid fierce competition by such rivals as Nike and Adidas and online players. The company said on Tuesday it would expand its restructuring efforts, including closing facilities and terminating leases, resulting in a pre-tax charge between $110 million and $130 million this year.

“2017 was a catalyst for us to begin strategically transforming Under Armour into an operationally excellent company,” stated CEO Kevin Plank. “Our fourth quarter and full year results demonstrate that the tough decisions we’re making are generating the stability necessary to create a more consistent and predictable path to deliver long-term value to our shareholders.”

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Analysis: Under Armour has lost its way in U.S.; needs to rethink strategy

Although Under Armour’s results are better than the last quarter, they still show signs of a company in difficulty. This is most evident in terms of disparities in regional revenue growth and the losses posted to the bottom line.

There is some comfort to be taken in the 4.6% revenue growth, which represents a marked improvement on last quarter’s 4.5% decline. However, this headline figure is driven entirely by international operations, where sales rose by 46.5%.

While overseas growth is to be applauded, it carries investment costs and also accounts for just 25% of group revenue. As such, Under Armour is reliant on its North American operation to drive performance on both the top and bottom lines. Unfortunately, the North American division had a lamentable quarter and is the main source of Under Armour’s woes.

North American revenue fell by 4.5% over the prior year. Admittedly this is better than the 12.1% dip posted last quarter, but it also coincided with a period of robust consumer spending growth. As such, we believe there has been little improvement in Under Armour’s relative underperformance. On top of this, the region made an operating loss of almost $44 million; something that compares unfavorably to the $157 million profit posted in the prior year.

So what went wrong in North America? There are a few specific things we would highlight.

The first of these is the brand seems to have lost power. Compared to last year, Under Armour was firmly off the radar for holiday gifting. Far fewer people thought of or requested the brand for gifts, and consequently fewer people bought into it. In our view, Under Armour has spent too much time trying to expand its footprint and product coverage, and too little time building connections with customers.

We would also call Under Armour out on customer experience. Customer service at some of its own stores leaves a lot to be desired. Meanwhile, expansion into retailers like Kohl’s has weakened exclusivity and made the brand feel commoditized and ubiquitous.

These actions show in our consumer data, which reveals Under Armour has lost its way. Consumers are unsure of what it stands for, what it specializes in, and why they should use it. For many, it has become something of an also-ran. These shallow roots are dangerous: they leave Under Armour vulnerable to competition and the vagaries of changing market conditions.

A brand like Lululemon is an interesting counterpoint to Under Armour. It has a very clear sense of identity, and its approach is more disciplined and focused. This has helped it to maintain price integrity and remain a destination of choice for many consumers. While we do not believe that Under Armour should simply emulate Lulu, we do think it can learn some lessons from its playbook.

Looking ahead, it is clear that 2018 will not be a year when growth resumes. Indeed, the company has penciled in a further full-year revenue decline in North America. Operating profit will also be weak thanks to restructuring and impairment costs.

For all of this, Under Armour still has potential; but it needs to use the year ahead to regroup and rethink its strategy. The company that once believed it could challenge Nike has come down to earth with a bump. Humble reflection is now the order of the day.

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Walgreens, AmerisourceBergen reportedly in acquisition talks

BY Marianne Wilson

Walgreens Boots Alliance reportedly is in talks to buy AmerisourceBergen, one of the biggest drug distributors in the U.S.

Representatives of Walgreens CEO Stefano Pessina reached out recently to representatives of AmerisourceBergen CEO Steve Collis about acquiring the roughly three-quarters of the distributor that Walgreens doesn’t already own, according to the Wall Street Journal, which cited people familiar with the matter.

According to the WSJ report, the companies are in early talks to combine, though sources reportedly stressed the uncertainty as to whether there would be a deal. Both companies declined to comment to the Journal.

As of its Monday close, Walgreens had market value of approximately $67.8 billion. AmerisourceBergen had a value of about $19.6 billion.

News of the potential acquisition comes as Walgreens rival CVS Health is in the midst of its $69 billion acquisition of health insurer Aetna. Most recently, Amazon, Berkshire Hathaway and JPMorgan Chase announced they are forming independent company to address health care for the U.S. employees of their respective companies.

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