Why Did Under Armour’s Margins Slump?



Lower margins

Under Armor (UA) (XLY) has maintained its gross margin in the upper 40s since fiscal 2007. Gross margin for the quarter was 47.7%, a dip of 70 basis points. This was mainly due to inventory management in North America and currency fluctuations.

Nike (NKE), Lululemon Athletica (LULU), and Columbia Sportswear (COLM) recorded margins of 45.9%, 48.3%, and 46.2%, respectively. Here and for the rest of the series, we are comparing Under Armour’s 2Q16 numbers with Nike’s (NKE) 4Q16, Lululemon Athletica’s (LULU) 1Q16, and Columbia Sportswear’s (COLM) 2Q16 numbers.

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Rising selling, general, and administrative expenses

Operating margin was hampered by selling, general, and administrative expenses (or SG&A), which came in at 32% of the income. This was due to the $23 million impairment concerning the liquidation of business partner Sports Authority, increased investments in the DTC businesses, rising personnel costs, and a 20% growth in marketing costs. Operating income dipped by 39% to $19.4 million for the quarter. Operating margin decreased by 52% to 1.9%.

Nike and Lululemon maintained their operating margins at ~12%. Nike and Lululemon Athletica’s SG&A formed 34% and 37% of their revenues, respectively. Columbia Sportswear (COLM) recorded a negative margin of 3%, as its SG&A formed 50% of its revenues.

Higher interest costs

The net margin was hampered by the 35% growth in interest costs and a loss of $3 million due to fluctuations in exchange rates. Net income fell by 58% to $6.3 million at the end of the quarter. Net margin for the quarter dropped by 66% to 0.6%.

Nike (NKE) and Lululemon recorded margins of 10% and 9%, respectively. Columbia Sportswear (COLM) recorded a negative margin of 2%.

Rising capital expenditure and debt levels

In 2Q16, the company recorded a decrease of 43% in its free cash flows to $143.8 million owing to the rising capex. The company’s capex for the quarter grew at a rate of 60% to $149 million due to the company’s expansion and tactical strategies. The capex growth rate as a percentage of sales shot up by 66% to 7.5% in fiscal 2015 and is expected to range between 9%–9.6% of sales during fiscal 2016.

Nike recorded a capex to sales growth rate of 12%. Growth for Lululemon and Columbia Sportswear dipped by 18% and 21%, respectively.

Under Armour’s debt spiked by 68% to $1.2 billion, followed by Nike, whose debt rose by 63% to $2.1 billion. Columbia Sportswear’s (COLM) debt rose by 8% to $17 million.


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