Underneath Armor earnings are a possible pink flag for retailers’ income

under armor-Shares fell on Tuesday even after the athletic apparel and footwear retailer beat Wall Street’s quarterly sales and earnings expectations.

The reason for the drop can provide insights into the challenges other retailers are facing.

The company increased sales in part by offering lower prices. Under Armor missed guidance for the fiscal fourth quarter for gross margin as it relied more than expected on promotions.

Shares fell more than 6% in afternoon trade.

The company’s chief financial officer, David Bergman, attributed the margin decline to higher promotions as Under Armor reduced merchandise from previous seasons and sold them in off-price retail outlets.

Under Armor warned that the problems could persist. The company expects margins to remain under pressure as higher promotions outweigh lower freight costs. According to FactSet, diluted earnings per share for the first quarter are expected to be between a loss of 3 cents and a loss of 5 cents, below expected earnings of 6 cents per share. One assumes that the margins would improve in the course of the year.

Under Armor’s results could spell trouble for retailers reporting quarterly results in the coming weeks. The report could signal that companies may have to offer discounts and sacrifice more of their profits to move goods.

Retailers will be included in the coming weeks walmart, Goal, best buy And Macy’s, will shed light on consumer health and how much pricing power they have. It will also help clarify how many of Under Armor’s issues are company-specific rather than representative the broader industry and economic background.

The level of promotion has changed dramatically due to pandemic-related trends. In the early years of Covid, retailers had lower than usual discounts as they struggled to keep shelves stocked due to supply chain delays. They then benefited from huge consumer spending fueled by stimulus payments.

The pendulum swung, however, last spring. Goal, cabbage, gap and others suddenly had a plethora of additional stocks – including many popular pandemic categories like patio furniture and sporting goods that had fallen out of favor. The oversupply led to a wave of deep discounts.

Now retailers are dealing with a different dynamic. are consumers Think twice about discretionary spending when collecting larger grocery bills or booking trips instead of stocking their closets.

Simeon Siegel, a retail analyst at BMO Capital Markets, said the pandemic has given retailers an opportunity to hit the reset button. However, her resolve has faded.

“Very few companies have the strength to sacrifice volume for profits outside of a global pandemic,” he said. “It’s very easy to fall back on the promotional tool when the going gets tough.”

With higher transportation and supply chain costs eliminated, he expects many retailers won’t see the benefits as they “return to the cookie jars with promotions.”

The company’s results reflect company-specific challenges as well as consumer trends. The company recently brought in Stephanie Linnartz as its new CEO to lead efforts to grow its online business, refresh its brand and better compete with rivals Nike and Lululemon. She took on the role in late February.

Some of the company’s weakest sales last quarter came from North America. Net sales in the region increased 2.5% for the three-month period, compared to growth of 13.8% in Europe and growth of 23.6% in the Asia Pacific region.

On a conference call on the results, Linnartz said the company “continues to operate a legacy of higher-than-desired promotional activity in our home market.”

She said the apparel and footwear brand took some of the blame for the trend due to inconsistent marketing and underwhelming in-store presentation. She said the company will strengthen its brand in the coming year.

Inventory levels are also still a factor for some retailers. At the end of the quarter, Under Armor had nearly $1.2 billion in inventory, up 44% year over year.

Bergman said about half of that is inventory that Under Armor plans to package and store for future sales.

For the fiscal fourth quarter, Under Armor reported adjusted earnings per share of 18 cents, ahead of analysts’ expectations of 15 cents per share, according to Refinitiv.

The company’s net income for the three-month period ended March 31 was $170.5 million, or 38 cents a share, compared to a net loss of $59.6 million, or 13 cents a share, for the same period last year. Revenue rose 8% to $1.4 billion from $1.3 billion in the year-ago period. That beat analysts’ expectations of $1.36 billion, according to Refinitiv.

— Robert Hum contributed to this story.

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