Image Shown: Under Armour Inc may face a serious liquidity crunch if its creditors don’t extend the maturity length of the borrowings under its revolving credit facility.

By Callum Turcan

On May 11, Under Armour Inc (UA) reported earnings for the first quarter of 2020 with its GAAP revenues declining by 23% year-over-year, and management attributed ~1500 basis points of that decline to the ongoing coronavirus (‘COVID-19’) pandemic. On the flip side, Under Armour’s GAAP gross margins improved by ~110 basis points year-over-year due to reduced pricing discounts, though COVID-19 weighed against the company’s performance in this area as well. Under Armour reported a GAAP net loss of $590 million in the first quarter of 2020 due to rising operating expenses (with an eye towards marketing spend) and major impairment and restructuring charges. Without the impairment and restructuring charges, Under Armour still reported a non-GAAP adjusted net loss of $152 million. All in all, it was a tough quarter, and it’s only going to get worse (at least in the short-term).

Tough Quarter, Harsh Outlook

The firm missed top- and bottom-line consensus estimates last quarter, and most importantly, the outlook communicated by management was quite negative which played a key role in sending shares of UA plummeting lower. Digital sales have provided some level of support, but that hasn’t been enough to offset the negative effect of store closures worldwide. Here’s what Under Armour’s management team had to say during the firm’s latest quarterly conference call (emphasis added):

“With respect to our 2020 outlook, the high level of uncertainty related to an inability to determine the duration and scope of the COVID-19 pandemic and its economic ramifications means that we cannot reasonably estimate impacts on our full year at this time. We do, however, expect these conditions to have a significant adverse impact on full year financial and operating results.

Now, moving on to some high-level color on our second quarter, with approximately 80% of our global business having been closed since April 1, we currently anticipate that revenue could be down as much as 50% to 60% in our second quarter. Although we do anticipate that our business will gradually reopen in the coming weeks and months, we believe there will be a number of challenges ahead for us and a greater global retail space, including the slow and progressive return to normalization, a highly promotional environment, and significant uncertainty in brick-and-mortar traffic and conversion as consumers return to stores.” --- David Bergman, CFO of Under Armour

Under Armour is fighting back through cost reduction initiatives (which aim to cut operating costs by $325 million versus previous assumptions in 2020), reducing capital expenditure expectations for 2020 (down to $100 million from $160 million previously) and drawing down its revolving credit line which has $1.25 billion in total borrowing capacity. Please note that while the revolving credit facility expires in March 2024, borrowings under the facility are due in less than one year, which is why this debt was classified as current at the end of March 2020 (we’ll cover this in detail in just a moment). The firm had $959 million in cash and cash equivalents on hand at the end of March 2020, though $600 million of that was due to the firm tapping its revolving credit line according to the earnings press release.

Serious Financial Concerns

Combined, the $600 million in short-term debt from its revolving credit line and the $593 million in long-term debt gave Under Armour a net debt load of ~$234 million as of the of the end March 2020. Management mentioned that negotiations for amending the agreement covering Under Armour’s revolving credit line were ongoing as of May 11 and those negotiations were expected to wrap up very soon according to commentary given during the firm’s latest quarterly conference call (emphasis added):

“Within cash and cash equivalents, we ended the first quarter with $959 million, of which approximately $600 million was related to borrowings under our revolving credit facility. In early April, we borrowed an additional $100 million and now have $700 million outstanding under this facility.

Additionally, we have negotiated an amendment to our credit facility that is on track to close tomorrow. Given the ongoing disruption throughout our industry, we expect this amendment will provide us with improved access to liquidity going forward.

Quarter-end inventory was up 7% to $940 million. Moving forward, in anticipation of significant changes in future demand, we are proactively reducing planned inventory receipts to continue to manage this asset as efficiently as possible given expected compounding global factors.

We have also been prudently balancing the negotiation of extended payment terms with our customers and our vendors to mitigate risks. We're also working with retail lease partners to defer or abate applicable rent during store closure periods.” --- CFO of Under Armour

The amendment Under Armour was/is pursuing may have been to increase the total borrowing capacity under its revolver and to extend the length of the maturities of the borrowings under the revolver. However, there hasn’t been an SEC filing yet to confirm the state of those negotiations as of this writing, and management noted that it may take a few days for that 8-K filling to become public (depending on how negotiations turn out). Given its growing inventory and expected reductions in near-term demand for its products, Under Armour is doing what it can to improve its liquidity position. Here’s a key excerpt from its latest 10-Q filing (emphasis added):

In March 2019, the Company entered into an amended and restated credit agreement… The credit agreement has a term of five years, maturing in March 2024, with permitted extensions under certain circumstances, and provides revolving credit commitments of up to $1.25 billion of borrowings, but no term loan borrowings, which were provided for under the prior credit agreement…

As of March 31, 2020, there was $600 million outstanding under the revolving credit facility. As of March 31, 2019, there were no amounts outstanding under the revolving credit facility. In April 2020, the Company borrowed an additional $100 million under the revolving credit facility….

Borrowings under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. There were $5.0 million, $5.0 million and $4.6 million of letters of credit outstanding as of March 31, 2020, December 31, 2019 and March 31, 2019, respectively.

We caution that Under Armour’s falling stock price might be due to concerns regarding whether the athleisure and sportswear company is able to secure longer term borrowings under its revolver, which could be made possible through a change in the agreement covering the revolving credit facility. The firm generated ~$0.4 billion in negative free cash flows during the first quarter of 2020, and going forward, if the revolver agreement isn’t amended in a favorable fashion for Under Armour, its liquidity position will likely become precarious. Here’s another key quote from management from the firm’s latest quarterly conference call (in response to a question from an analyst):

“And as we thought about relative to our credit facility, we closed 03/31 well within our covenants, but looking forward, we knew there could be pressure in the future with all the unknowns that are out there. So we've been working with our bank group and negotiating an amendment to our facility. We're literally on the goal line as of today to close. The amendment will favorably modify the financial covenants all the way through the end of next year, and you'll see the details of that when it comes out in the 8-K, which will probably come out in a few days.

But we believe the revised covenants will give us a lot more and sufficient liquidity to manage our business through the pandemic. And when I say that we're at the goal line, meaning we've literally got 11 out of 11 of our syndicate bank consents in as of this morning, so we're in a good spot to be able to close probably tomorrow.” --- CFO of Under Armour

Concluding Thoughts

Management desperately needs Under Armour’s creditors to work with the company in order to shore up the firm’s liquidity position during these challenging times so the company can ride out the storm. We’ll see what happens over the coming days, but as of this writing on May 13, the firm has yet to file the relevant 8-K filling noting any possible changes to the agreement covering the revolving credit facility.

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Luxury Goods (Established Brands Industry) – EL LULU NKE PVH REV SIG UA UAA VFC

Related: IYK, XLY, ADDYY, ADDDF, PMMAF, FL, VSTO, SPWH, DKS, AEO, ANF, VFC, COLM

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Callum Turcan does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.