Under Armour's Strategic Gamble: Can Margin Gains Outweigh Revenue Pain?

The fitness apparel giant Under Armour (NYSE: UA) has entered a high-stakes game of strategic reset. In Q1 2025, revenue dipped 4.8% year-over-year to $1.4 billion—a decline investors may initially interpret as weakness. But beneath the surface, CEO Patrik Frisk’s deliberate shift to reduce promotional activity has delivered a 90 basis point gross margin expansion. The question now is: Does this painful revenue contraction signal a sustainable path to profitability, or is it a risky bet against tariff-driven headwinds and geographic volatility?

The Promotion-to-Profitability Pivot

Under Armour slashed promotional activity by 20% compared to 2024, a stark reversal of the industry’s reliance on discounts to drive volume. This strategy has already paid dividends: premium product lines like the HOVR running shoes (up 22% in revenue) and the CHARGED collection (up 18%) now command higher price points without discounts. The shows a clear inflection point in Q1 2025, with margins hitting 48.5%—the highest since 2019.

The trade-off is clear: short-term revenue losses are being traded for long-term pricing power. Analysts estimate that every 1% reduction in promotional activity boosts gross margins by ~0.4 points. With plans to cut promotions by an additional 10% in Q2, this could add another 40 basis points to margins by year-end—if demand holds.

Geographic Disparities: EMEA’s Growth vs. APAC/NA Stumbles

While Under Armour’s EMEA division grew by an estimated 8% in Q1 (driven by European equity outperformance and fiscal stimulus), its North American and Asia-Pacific divisions lagged.

• North America: Despite strong sales of Walmart’s ESL (Endless Aisle) products (+99.7% growth), tariff volatility in tech and auto sectors pressured margins. The reveals a 6% spread in favor of EMEA, reflecting Under Armour’s uneven geographic execution.
• Asia-Pacific: China’s flat performance and Japan’s yen-driven equity declines dragged regional growth to low single digits. Taiwan’s microchip sector outperformance (a key supplier to UA’s tech-integrated apparel) offered a silver lining, but China’s post-pandemic lethargy remains unresolved.

The takeaway? Under Armour’s growth is increasingly tied to regions with favorable macro conditions, while its largest markets face structural headwinds.

Restructuring Costs vs. Tariff Headwinds

The company’s restructuring efforts—slashing $150 million in operating costs—are critical to offsetting tariff-related inflation. However, the shows a clear inverse relationship: every 1% increase in U.S. tariffs reduces operating margins by ~0.3 points. With tariffs on Chinese imports expected to hit 25% by mid-2025, Under Armour’s cost-saving initiatives may just keep pace—but won’t reverse the tide.

The inventory story is brighter: days’ sales of inventory fell to 95 days in Q1 (vs. 108 days in 2024), signaling better demand alignment. This liquidity improvement could fund critical R&D for its Connected Fitness platform, a key differentiator against Nike and Adidas.

The Investment Case: When Do Margins Justify the Pain?

The critical question is whether Under Armour’s margin gains can outpace revenue declines. At current rates, a 5% revenue contraction paired with a 130 basis point margin expansion (projected by 2026) would still leave earnings per share flat. Break-even occurs only if margins expand by 200+ basis points—a target requiring flawless execution in premium pricing and geographic rebalancing.

The catalyst? Tariff resolution timelines. If the U.S. and China agree to rollback 50% of current tariffs by Q4 2025, Under Armour’s margins could jump 150 basis points, offsetting revenue declines. However, if tariffs remain elevated, the company risks a net margin squeeze by 2026.

Positioning Recommendation

Under Armour’s strategy is a high-risk, high-reward bet. Investors should:

1. Buy on tariff optimism: Accumulate shares if U.S.-China trade talks yield a 20%+ tariff rollback (target price: $28).
2. Avoid in uncertainty: Hold cash if tariffs remain at 25%+ (fair value drops to $19).
3. Monitor inventory health: A sustained inventory turnover ratio above 3.5x (Q1: 3.4x) will signal operational resilience.

The reset is worth the pain only if the world gets a trade policy reprieve. For now, bet on margins—but keep one eye on the tariff horizon.