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What Hampered Under Armour’s 4Q16 Profitability?

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Feb. 6 2017, Updated 7:37 a.m. ET

Under Armour’s 4Q16 margins

Under Armour (UAA) had a tough 4Q16, missing both its top-line and bottom-line estimates. We’ve discussed the reasons behind the company’s top-line miss in the previous parts of this series. Now let’s focus on the company’s margins and profitability.

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What drove the 4Q16 earnings miss?

In 4Q16, Under Armour’s adjusted earnings per diluted share stood at $0.23, which was $0.02 lower than what analysts were expecting. EPS fell 4% YoY (year-over-year), primarily driven by lower revenues, a fall in gross margin, and higher SG&A (selling, general, and administrative) rates.

Rival Nike (NKE), however, delivered a strong most recent quarter, with EPS rising 11% YoY, beating the consensus by $0.07. Competitor Lululemon Athletica (LULU) also posted a solid bottom-line performance. LULU’s EPS rose 34% YoY to $0.47 per share, beating the consensus by $0.04.

Inside UAA’s gross margins

UAA’s 4Q16 gross margin fell ~320 basis points to 44.8%, with gains from more favorable product costs offset by aggressive inventory management, foreign exchange effects, and a higher mix of footwear and international businesses, which typically have lower margins than apparel and North America segments.

Operating margin

A lower gross margin, along with a 9% rise in SG&A expenses, led to a 6% fall in UAA’s operating profit, which came in at $167 million. Higher SG&A expenses resulted from continued investments in the company’s footwear, international, and DTC segments. Its net income fell 1% YoY to $105 million in 4Q16.

ETF investors seeking exposure to UAA can consider the iShares Russell Mid-Cap Growth ETF (IWP), which invests 0.20% of its portfolio in the company.

For more on Under Armour’s revised guidance, continue to the next article of this series.

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