For Under Armour, connected fitness a rare bright spot amid digital, e-commerce issues

The big question is whether Under Armour's larger issues derail its overall digital transformation efforts and hamper connected fitness investments.

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Under Armour is restructuring, facing brand issues in the US, navigating the coronavirus in China and trying to gain its e-commerce footing but its connected fitness business has been a bet that has paid off.

The big question is whether Under Armour's larger issues derail its overall digital transformation efforts and hamper connected fitness investments. The athletic apparel and performance company outlined a bevy of issues ahead and disappointed with its outlook. One takeaway: Connected fitness operating income in the fourth quarter matched what Under Armour had in EMEA, which struggled.

For connected fitness, Under Armour delivered fourth quarter operating income of $9.04 million on sales of $34.99 million. EMEA matched that operating income in the fourth quarter on sales of $180.7 million. Needless to say, margins on digital apps such as MyFitnessPal, Mapmyfitness and UA Record are way better than clothing.

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As for 2019, Under Armour's connected fitness unit delivered operating income of $17.14 million on revenue of $136.39 million, up 13.3%. For 2019, connected fitness delivered sales growth of 13.3%, behind only Asia-Pacific. Patrik Frisk, CEO of Under Armour, said the connected fitness business saw "continued strength in subscription revenue."

It's unlikely you'll hear much about Under Armour's digital app bets given the other issues at the company. Under Armour's digital transformation has lagged relative to rival Nike

Indeed, Under Armour's 2020 outlook was well below expectations with adjusted projected earnings of 10 cents a share to 13 cents a share relative to estimates of 47 cents a share. In addition, US demand is down as Under Armour focuses on performance instead of fashion and sales will be down in the low-single digits percentage for 2020.

Frisk said the company is "operationally better," but has challenges and must restructure and prioritize investments. Under Armour reported fourth quarter revenue of $1.4 billion, up 4%, with a net loss of $15 million, or 3 cents a share. For the year, Under Armour reported revenue of $5.3 billion, up 1%, with net income of $92 million, or 20 cents a share.

Jefferies analyst Randal Konik noted:

It's clear that the UA brand has lost ground and share to competitors in the US market, which we attribute to a primary design focus on performance in a fashion athletic trend. We also believe the company's pricing architecture appears at odds with consumer perception (e.g., products are priced higher than what consumers believe the brand should command). As a result, changes in price and style need to take place in order to stop the share losses.

E-commerce challenges

Assuming Under Armour can gain momentum for its core business, the company will have to develop its e-commerce and direct-to-consumer game. Frisk noted that the company's e-commerce efforts aren't where they should be. He said:

When it comes to our own-controlled channels, our e-commerce platform is an ailing and old one and we had planned to move on to a new platform in 2020. And we've worked hard to make sure that, that is the more state of the art platform. But not only that, we're also supporting that with loyalty, with CRM, with personalization. So, you have both the new site and platform and all the other things that you need to drive that coming online for us in the second half of the year. We believe that is incredibly important because, ultimately, we would want to tell the right stories around our beautiful product and our marketing in a coordinated manner, better that we are able to do it today.

Frisk said the plan is to launch an enhanced e-commerce site in North America and invest more in personalization and customer relationship management software. Those upgrades should help Under Armour court digital customers and navigate a consumer base that won't pay full price and expects promotions.

"To wrap up North America, our transformation is taking longer than we had originally expected," said Frisk.

HERE'S A QUICK UNDER ARMOUR CONNECTED FITNESS HISTORY LESSON: