Under Armour forecasts up to $60M revenue hit from coronavirus disruptions

Under Armour executives expect to take a $50 million to $60 million hit to revenue in the first quarter as a result of COVID-19, CEO Patrik Frisk said on the company's fourth-quarter earnings call Tuesday. The virus also risks throwing a wrench in the company's effort to get its inventory under control.

COVID-19 is the disease caused by a member of the coronavirus family, which is currently shutting down much of Wuhan, China.

Supply chain effort

Supply chain impacts from the virus will likely hit later in the year, said Frisk.

Raw material supply impacts are possible related to fabric trim and packaging, though the full scope of sourcing disruption is not yet fully understood. The company expects a tight supply of affected items in the second half of the year, Frisk said on his first earnings call as CEO.

"We think it's reasonable to expect industry-wide delays in terms of delivery around the world, including potentially missed shipment and service windows and the need for increased air freight and additional measures at ports that could create unforeseen congestion," he said.

The outbreak creates the most uncertainty around the element Under Armour has been working hardest to get under control: inventory.

Under Armour is in the midst of a long supply chain simplification process in which it cut inventory by 23% in the third quarter and 12% in the fourth in order to ween itself off the off-price sales channels the company had leaned on to absorb excess inventory for years.

"There's a lot of great progress we've made on gross margin in the last few years and a lot of that's come from the supply chain side with all the consolidation of vendors and skew rationalization costing transparency and everything else," said CFO Dave Bergman.

Solid fourth quarter

Looking back to the fourth quarter, the company boosted margins by 230 basis points with 20% of the improvement due to supply chain initiatives. But progress in the rest of the world will not insulate the company's bottom line from a disruption in a key region for sales and production.

"Looking at the greater marketplace and how consumption, consumer behavior, and overall economic shifts could potentially play out is where it gets even more unclear with respect to duration and the possible levels of elevated inventories and promotional activities later in the year," said Frisk.

The National Retail Federation (NRF) predicts U.S. ports could see a 13% drop in imported containers in February as a result of the outbreak and executives' comments indicate supply chain disruptions will affect companies with interests across China and not just in Wuhan where the outbreak is centered.

Companies in Hubei province can't return to work until Feb. 21 unless they are involved in the production of medical supplies or food, according to The Wall Street Journal.

Eighty-seven percent of U.S. companies with operations in China expect the outbreak to negatively affect revenue, according to a survey conducted by The American Chamber of Commerce in Shanghai. Of that number, 24% expect declines of 16% or more. Under Armour is so far forecasting revenue to be low single digits in 2020.