A day after Under Armour reported disappointing fourth-quarter earnings and saw its CFO resign after only one year on the job, Standard & Poor’s cut the sports apparel company’s credit rating one notch to “junk” status. It also downgraded the company’s $600 million in senior unsecured bonds to the same speculative-grade level, “BB+.”
S&P said Under Armour’s revenue growth has “slowed as a result of [a] challenging industry outlook.” The credit ratings agency blamed the company’s subpar fourth-quarter performance on “strong competition leading to pricing pressure and a weak retail environment in [Under Armour’s] core North American market and weak operational execution by the company.”
Perhaps most importantly, S&P said the company’s margins would weaken over the next year or two due to “intense competition in North America, a shift in growth toward less-profitable international markets and the athletic footwear segment, and high operational spending to support the company’s growth plans.”
On Tuesday, Under Armour reported that its net income fell 0.7%, to $104.9 million in the all-important fourth quarter, and that sales had increased 11.7%, to $1.31 billion. The company admitted that in 2017 it expects gross margins to be “slightly down … as the footwear and international businesses continue to outpace the growth of the higher margin apparel and North American businesses.”
S&P said it now believes the company “will generate about 10% sales growth annually and margins will be in the 12% range, which results in leverage slightly below 3.0x.”
S&P tagged the company with a negative outlook due to “the risk of continued underperformance, … which could stem from an increasingly promotional industry environment in North America leading to further margin erosion; slower growth than expected as a result of stiff competition from industry leaders Nike and Adidas or slower category growth; or higher than expected spending to fund growth.”
On Tuesday, Under Armour announced that CFO Chip Molloy would be resigning on February 3 for personal reasons. Molloy was formerly CFO of Petsmart from 2007 to 2013. Prior to joining Under Armour, he was a senior adviser at private equity firm Roark Capital Group.
When Molloy joined Under Armour on December 22, 2015, CEO Kevin Plank said, “we are excited for Chip Molloy to help drive the business on the road to $7.5 billion in revenue by 2018.” In the 12 months ending December 31, 2016, the company recorded revenue of $4.8 billion, putting it about 56% shy of next year’s goal.