Under Armour’s robust margin forecast blurs weak North America

By Aatrayee Chatterjee and Ananya Mariam Rajesh

(Reuters) -Under Armour on Wednesday raised its annual gross margin expectations as the sportswear maker benefits from abating cost pressures even as it struggles with tepid demand in its biggest market of North America.

The company’s shares, down about 29% so far this year, were last up 5% in early trading as second-quarter profit topped analysts’ estimates.

Freight and raw material costs are moderating for global companies from the spikes caused by disruptions to the supply chain during the pandemic and compounded by the Russia-Ukraine war.

The athletic wear brand now expects annual gross margin to be up 100-125 basis points, compared with its previous expectation of up 25-75 basis points.

The company also expects its selling, general & administrative expenses to be flat to down slightly versus the previous forecast of flat to up slightly.

This has helped Under Armour (NYSE:) soften the blow from deep discounts rolled out to entice customers struggling with higher interest rates and sticky inflation, as well as U.S. wholesalers trimming orders, an issue flagged by rivals Nike (NYSE:) and Adidas (OTC:).

Under Armour is “not seeing significant cancellations” in the wholesale business but “do not anticipate as many at once or automatic replenishment orders as initially planned,” Chief Financial Officer David Bergman said on an earnings call.

Wholesale revenues declined 1% in the second-quarter, while North America sales fell 2%.

“North American wholesale environment has been challenging and will likely continue to do so,” BMO Capital Markets analyst Simeon Siegel.

Still, the results suggest “a healthy flow through of sales rather than one riddled with discounts”, he added, pointing to the direct-to-consumer segment holding steady with a 3% rise in revenue.

Under Armour now expects annual revenue to fall between 2% and 4%, compared with its earlier outlook of flat to up slightly.

The company’s second-quarter profit of 24 cents per share topped analysts’ estimates of 21 cents, according to LSEG data.