Under Armour (UAA) stock fell on Wednesday as executives warned the current promotional environment in retail could linger longer than expected.
“We definitely have seen that the promotional environment went a little bit deeper and we believe is going to a little bit longer, and a lot of that has to do with some of the building inventories that are out there with all the brands,” Under Armour CFO Dave Bergman said on Wednesday’s earnings call. “And that is something that all the retailers are going to need to work through in the coming quarters.”
Under Armour shares initially rose as much as 7% in early trading on Wednesday after the company boosted its full-year earnings forecast above Wall Street estimates and bested revenue estimates ($1.58B vs. $1.55B). But as executives answered questions from Wall Street analysts on the earnings call, price action in the stock shifted to the downside.
As of 1:45pm ET on Wednesday, the stock was off by more than 10%.
The sports retailer noted its positive holiday season was driven by markdowns and its inventory, which has risen for the last three quarters, likely won’t peak until the end of the next quarter. Under Armour’s gross margin also fell to 44.2%, short of Street estimates, primarily due to higher promotions.
“Consumers are out there, the traffic is reasonable but conversion is a little bit challenged,” Bergman said. “Folks are being a little bit more cautious here for awhile so we expect that pressure to continue as we move through this calendar year.”
Under Armour’s report showed several bright spots beyond the headline beats on earnings per share and revenue, including a 25% yearly increase in footwear sales. Executives noted that part of that boost came from improved production in the product category after having issues last year but argued the footwear segment's small position amid overall revenue could lead to further growth.
Direct-to-consumer sales fell 1% for Under Armour compared to last year. Management reiterated that is still a place of over-investment for the company.
Under Armour also expects incoming president and CEO Stephanie Linnartz, who helped enhance Marriott International's digital strategy, to push Under Armour’s growth in key digital and direct-to-consumer areas. The company teased out a new store opening in Manhattan as part of its continued investment in DTC.
"We've been continuing to make oversized investments in our own omnichannel and DTC parts of our business and certainly thinking about how we show up at retail,” Under Armour Interim President & CEO Colin Browne said on the earnings call. “The plateau and store in Manhattan is a great example on a first step on that journey, but at the same time, continuing to invest in our loyalty programs, which again we rolled that out last year. We're looking to roll that out more broadly here in the U.S. later this year, and we're seeing great results from that.”
Wall Street analysts remained positive on Under Armour after Wednesday’s results with no analyst Sell ratings, according to Bloomberg consensus data. BMO’s Simeon Siegel labeled the quarter a “bright spot” amid a tough earnings-per-share backdrop and maintained his Outperform rating and $15 price target on Under Armour.
“We continue to see brand re-elevation as a self-help lever for improvement and believe GM expansion lies in management’s hands, even (or perhaps specifically) if it comes by containing revenues," Siegel wrote in a note to clients on Wednesday prior to the earnings call.
Josh is a reporter and producer for Yahoo Finance.