Under Armour’s inventory reduction leaves the brand in a stronger position

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Under Armour Inc. shares jumped 7% in Tuesday trading after the athletic gear company reported earnings and sales that beat expectations, and inventory levels that fell 12%.

Under Armour UA, +4.54% UAA, +6.40%   said that better inventory management helped it control pricing and promotions.

“As we continue into 2019 we believe that our assortments, product flow and cleaner inventory positions will create greater opportunities for clear differentiation and therefore improved segmentation amongst our retail partners,” said Patrik Frisk, Under Armour’s chief operating officer, on the earnings call, according to a FactSet transcript.

Under Armour is undergoing a transformation program that Chief Executive Kevin Plank said is “focused on running a smarter, faster and stronger business.”

That showed up in part as revenue for the year rose 4% to $5.2 billion.

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“From our investor calls, it appears many see the path of least resistance upward and meaningfully lower inventory will help the previously raised margin expectations,” wrote Instinet analysts led by Simeon Siegel in a note after the Tuesday morning fourth-quarter earnings release. “However we worry the burden of proof lies on management to inflect its North American, direct-to-consumer and footwear trends.”

Instinet rates Under Armour shares reduce with a $14 price target.

For the fourth quarter North American revenue fell 6% to $965 million. For the year, revenue in the region fell 2% to $3.7 billion. Under Armour’s Chief Financial Officer David Bergman attributed the decline to “contraction in our wholesale business, coupled with lower sales to our off-price channel.”

This could raise concerns with investors, according to UBS.

“[T]he market probably continues to question the strength of Under Armour’s North America business,” wrote analysts led by Jay Sole in note issued before the earnings call. “We think the market probably wonders how the company will generate North America sales growth rate improvement.”

UBS rates Under Armour shares neutral with a $21 price target.

Data from Celect, a cloud-based inventory management platform, found that U.S. non-grocery retailers lost $300 billion in revenue in 2018, largely due to “inventory misjudgments.

See: Amazon will spend more money in 2019 and that’s a good thing

“Turning to our regional perspective protecting our brand remains our key focus as we manage the marketplace appropriately with the right level of discipline to drive balanced growth,” said Frisk. “From North America that means we are at a point of stabilization.”

The company will use innovative merchandise like its HOVR running shoes and the NBA star Steph Curry franchise to differentiate the brand, along with “strategic operation priorities,” including better understanding the target customer through more precise marketing efforts, Frisk said.

Under Armour shares have gained nearly 57% over the past year while the S&P 500 index SPX, +1.39%   is up 3.3% for the period.

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