While investors are clearly enthused by the naming of Under Armour's (UAA) new CEO, the new chief already has his first challenge ahead, and tackling it won't be easy.
Under Armour shares rose 4.98% to $21.09 a share Tuesday after the company announced current President Patrick Frisk will step in as CEO, replacing founder and current CEO Kevin Plank. Plank will serve as executive chairman.
But "a return to "strong growth in North America will take time" may also give caution," Wedbush Securities analyst Christopher Svezia wrote in a Tuesday note, in which he quoted Frisk's comments to media.
Frisk has already been a driving force behind Under Armour's recent inventory clean up and margin expansion. In the fourth quarter of 2017, Under Armour saw its inventory increase 22% year-over-year. Meanwhile, Nike (NKE) was gaining popularity with consumers. Under Armour, desperate to clean house, had to drastically mark prices down, significantly hurting its gross margin. Frisk, who had been an executive for decades with Timberland (TSBK) and North Face (owned by VF Corp. (VFC) ), is an expert in inventory management.
Frisk instituted programs to better manage inventory, and margins have since improved slightly. Under Armour's gross margin for 2019 is expected to be 46.4%, better than 2018 and 2017's 45%.
Now, Frisk's immediate task is to revive the North America business, as the company's broader America's segment represents 77% of the company's total revenue. North America revenue has declined more than 1% for each of the past few years. It's expected to contract slightly less than 1% in 2019, but total revenue is expected to grow about 9% for the year, as international revenue is still in its early stages.
But Under Armour hasn't said it plans to become more of an international brand rather than an American one, and investors have been hungry for growth at home. "Near-term, there is some investor concern as to whether Under Armour can attain the implied fourth quarter 2019 outlook of mid-teens revenue growth (sales should be essentially flat over the first three quarters of fiscal year 2019 if including the third quarter 2019 guide)," Svezia said, just before commenting on the North America agenda. "The pathway toward successfully executing the next chapter will take time and deft management."
Under Armour shares are down 57% from their all-time high in September 2015.
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