Under Armour warns of margin hit as excess stock spurs discounts

© Reuters. FILE PHOTO: A signage is seen at an Under Armour store in Manhattan, New York City, U.S., February 7, 2022. REUTERS/Andrew Kelly/File Photo

By Uday Sampath Kumar

(Reuters) -Under Armour Inc's margins are set to face a squeeze as the sportswear maker increases discounts to shore up waning demand and clear a build-up of excess inventory.

The company slashed its annual forecasts for margins and profit on Wednesday, underscoring the troubles American retailers are facing in reducing a glut of goods that are finding fewer buyers due to this year's inflation surge.

The build-up marks a stark contrast to the supply shortfalls retailers suffered last year when COVID-19 curbs in major Asian manufacturing hubs prevented them from meeting robust demand.

But with those restrictions easing, a flood of product is about to hit the market at a time when demand for discretionary goods, especially apparel, is declining, said interim Chief Executive Officer Colin Browne.

"Accordingly, we assume the market will be very promotional. And we will need to participate in many of these promotions," Browne said on a post-earnings call. He did not give details on the planned spending for discounts.

Under Armour (NYSE:UA) now expects fiscal 2023 gross margins to drop by up to 425 basis points, compared with as much as 200 basis points previously.

Annual adjusted profit is expected to be between $0.47 and $0.53 per share, compared with a previous forecast of $0.63 to $0.68 per share.

Still, the easing of supply issues helped Under Armour beat first-quarter revenue estimates, sending its battered share price up 4%. The stock has more than halved in value this year.

Some analysts said the forecast cut was also not entirely unexpected.

"The large cut to the FY23 EPS outlook is disappointing, but not surprising given similar actions by other consumer companies and retailers," said Telsey Advisory Group analyst Cristina Fernandez.

German rival Adidas (OTC:ADDYY) made a similar move last week.