Under Armour stock sinks 18% as challenges include a North American turnaround and coronavirus

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Under Armour Inc.’s new Chief Executive Patrik Frisk spent a fair amount of time on the Tuesday earnings call discussing the impact of the coronavirus, but other challenges are having just as much, if not more, of an effect on the business going forward.

Under Armour UA, -16.42% UAA, -18.73%  said it expects $50 million to $60 million in sales impact from the coronavirus. Moreover, the company is prepared for the possibility of supply chain disruptions, and hundreds of stores that sell Under Armour gear are closed in the Asia-Pacific region.

Read: Coronavirus could drive up out-of-stocks at stores by April: Wells Fargo

The ongoing struggle to turn around the North America business is also taking longer than the company expected. According to Frisk, Under Armour anticipated stabilization in the region by the end of 2019, with a return to growth in 2020.

“As a brand, we see a paradox of two challenges in front of us: continued softer demand in North America as we work through our elevated inventory in multiple years of discounting, and a highly committed cost structure which is taking longer to unpack and is limiting us from being able to spend as aggressively as we would like to increase brand consideration,” said Frisk on the Tuesday earnings call, according to a FactSet transcript.

Under Armour announced a 2020 restructuring initiative that has a potential for $325 million to $425 million in pretax charges. This includes about $225 million to $250 million to potentially forego a New York City flagship as it looks at options to sublet.

Under Armour reported fourth-quarter earnings and revenue that missed expectations during Tuesday premarket hours and gave weak guidance. Revenue for the fourth quarter was $1.44 billion.

All of the news sent shares plummeting 18% in Tuesday trading.

Read: Nike’s coronavirus-related store closures in China could result in an earnings miss, analysts say

Under Armour has been focused on reducing the number of sales on discount and in the off-price channel. The effort has been a positive for brand health and a rebalance of supply and demand, Frisk said, but it’s also a 2020 revenue headwind.

“In the first half of this year, wholesale orders came in lower than expected, driven we believe in part by tempered demand against last year’s spring/summer season,” he said, adding that third-quarter orders are trending flat.

Direct-to-consumer sales at the company’s Factory House stores are expected to be flat-to-slightly-up from 2019, though “difficult traffic conditions persist.”

And the e-commerce channel is suffering from consumer unwillingness to now pay full price for items coupled with a need to improve the digital platform, Frisk said. A new e-commerce channel is scheduled to launch in North America in the summer.

Also: Michael Kors, Versace parent Capro lowers revenue guidance by $100 million due to coronavirus

For the full-year, Under Armour expects revenue to be down at a low-single digit percentage and earnings per share in the range of 10 cents to 13 cents. The revenue outlook doesn’t include benefits or costs from a restructuring.

“While investors were braced for a cautious 2020 guide, the magnitude of the sales/margin shortfall will challenge confidence prior to 2023 plans,” said Baird analysts wrote in a note prior to the call.

Baird rates Under Armour stock neutral with a $20 price target.

BMO Capital Markets is even more downbeat, rating the stock underperform with an $18 price target.

“With fiscal 2020 sales expected down low-single digits, it is growing increasingly clear Under Armour is no longer a growth story,” Simeon Siegel wrote in a note.

“And although ‘shrink to grow’ stories generally drive better margins, that is predicated on deep revenue resets. But with sales only guided down low-single digits, we worry this may not be a sufficient reset and Under Armour may see the worst of both worlds: revenue reductions without margin lifts from a deep cut.”

See: Ralph Lauren has closed half of its stores in China due to the coronavirus

Other companies that have taken the “shrink to grow approach” to improve brand health and full-price sales are Coach, part of the Tapestry Inc. TPR, +1.07%   portfolio, and Michael Kors, now part of Capri Holdings Ltd. CPRI, +1.96%  

Under Armour stock has tumbled 19.5% over the past year, the Consumer Discretionary Select Sector SPDR ETF XLY, +0.89%   is up 22% for the period, and the S&P 500 index SPX, +0.40%   has gained 24.3%.

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