Under Armour Inc (UA) 2005 Q4 法說會逐字稿

Good day everyone, and welcome to the Under Armour fourth quarter 2005 earnings results conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Rick [Inguilla].

Good morning, everyone. Welcome to Under Armour's first earnings call as a public company. Joining me today to discuss our results are the Company's Chairman, chief executive Officer and President, Kevin Plank, and the Senior Vice President and Chief Financial Officer, Wayne Marino.

Before we begin, I'd like to remind you that our earnings release and this call may include certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release, and posted on our website in the investor relations section.

During the course of this conference call, we will be making projections or other forward-looking statements regarding future events or the future financial performance of the company. The words estimate, intend, expect, plan or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our press release and our filings with the SEC.

The Company assumes no obligation to update forward-looking statements to reflect actual results or changed assumptions or other factors.

Now I'd like to outline the speakers and topics for this morning's call. Kevin Plank is going to lay out the Under Armour growth strategy and provide some detail on how the Company performed against its 2005 goals. After that, he will discuss Under Armour's strategy for continued growth in 2006 and beyond, focusing on the four key drivers of top- and bottom-line growth for the Under Armour brand.

Wayne Marino will then discuss our fourth quarter and full-year results, highlighting key components of the P&L and balance sheet. He will also discuss the adjusted EPS calculation, including the impact of preferred dividend and the additional shares, both resulting from our November IPO. Wayne will then discuss the Company's outlook for the balance of 2006.

After that, we will have a Q&A session that will end by 9:30 AM at the latest. And with that, I would like to introduce Kevin Plank.

Thanks, Rick. Good morning everyone, and thank you for joining us today. I'd like to start by spending a little time doing what I enjoy most -- talking about the Under Armour brand, why we think it is so special, and why we feel like the opportunity ahead is so significant.

I'm going to focus on three areas -- the Under Armour growth strategy, our performance in 2005, and the strategy for continued growth in 2006 and beyond.

We believe there's an important shift taking place within the athletic apparel market -- a shift away from basic cotton products to performance fabrications. That shift is real and Under Armour is the brand that's leading the way. In fact, the Under Armour name is the way consumers refer to and define the entire category, even regardless of brand.

We believe the athletic apparel business is in a similar position to where the athletic footwear market was some 30 years ago. In the 1970s, there was no real technology in athletic footwear. But as companies begin to roll out the many technologies that now define the market, consumers began to understand how product innovations could improve their performance and make their athletic experience better. We believe that Under Armour today is leading a similar shift within apparel, from cotton basics to performance product.

Cotton is the enemy. You'll hear that a lot around our office -- cotton is the enemy. But as I will detail for you now, cotton also represents our long-term opportunity. We only make performance products. Every product that we manufacture does something. That's why we call our logo the Universal Guarantee of Performance. If our logo is on the product, you know it's doing something for you; it's making you better. It embodies performance. And while this Universal Guarantee is based around complex fabric technologies, the key to our marketing is a very simple merchandising message, driven by our gear lines. You wear HeatGear when it's hot, you wear ColdGear when it's cold, and all-season gear between the extremes. And it's an easy concept to understand at retail. A complex technology, told simply.

If you've watched a sporting event over the past few years, you've probably seen evidence -- either by our logo or our signature tight sleeves -- that athletes from professional levels down to Little Leagues understand the shift to performance and especially the simplistic Under Armour marketing message. More importantly, they rely on the advantage that we provide. Under Armour keeps you cool, dry and light; an advantage we believe can make the difference between winning and losing.

Performance product defines our brand. Performance is the category we created, and performance is something we take very seriously as a business. Our retailers see us as not only a strong brand, but a powerful new partner that is delivering high-margin product and steadily building a new category of business for them that generates very profitable growth. Based on our dominant share in the performance market, the powerful brand equity that we've built, and our ability to lead our market in product innovation, we believe we are the best-positioned brand to take advantage of this long-term consumer shift away from cotton and to performance.

Last year was good proof of this by virtually any set of metrics -- top line growth, operating margins, brand strength, or the strengthening of our executive team. 2005 was an outstanding year for Under Armour. As a company, we began the year with five goals -- number one, innovating and improving our product line; number two, establishing a great platform for growth in our women's business; number 3, improving our footprint and presentation at retail; number 4, improving our balance sheet; and number 5, building out our executive team.

First off, innovating and improving our product line. The UA brand is effectively full price product at retail, led by our core stable of products. We continue to innovate the fabrications on these core styles, such as our $25 men's HeatGear full T-shirt and our $50 ColdGear mock turtleneck, while at the same time, we've been able to evolve our offerings above and below our core items to include more loose-fitting product to broaden our customer base and bring performance into new categories of business for Under Armour.

A great example is our UA Tech program, which we launched based on the following retail story. It looks like cotton, it feels like cotton, but it performs like Under Armour. The strategy with UA Tech was to create a more gradual progression from cotton to synthetic performance, both in look and feel of the product and price point. In the launch year of 2005, we sold in excess of 1 million units of that product. The best part of this story is that we enjoyed the success of the UA Tech program without cannibalizing our core or premium product offerings. They continue to grow.

Secondly, establishing a great platform for growth in our women's business. UA Woman was another key initiative to grow revenues in 2005 by continuing to evolve our women's offering. We did that the same way we established our brand with the core male athlete -- by providing women's product that delivers against our Universal Guarantee of Performance, but with a heightened performance focus on fit, style and color. We challenged our retail partners to give us more of their women's space, and for the year, revenues grew 87% to more than $50 million.

Women's represented almost 20% of net revenues in the fourth quarter, providing us with a better-balanced overall business and a strong platform for growth in women's for the foreseeable future.

Despite our early success, we're going to continue to aggressively spend in the women's category to help drive growth in sales and brand awareness among active females. A year ago, we launched our first-ever women's marketing campaign, called Goodbye Girl. The advertising was targeted at the core female athlete, and I think we were able to speak effectively to the Under Armour woman and significantly grow our business and presence on the retail floor. All the while and just as importantly, we effectively branded the UA Woman and did not alienate our core male consumer. Same performance strategy, same marketing message, two very different consumers.

Number three -- improving our footprint and presentation at retail. We believe that because of the performance we achieved in 2005 within our distribution, highlighted by high ASPs and high maintained margins for our accounts, we have earned better and larger retail selling space with many of our key partners. Now that we have in many cases achieved viable selling space within key doors, our goal is to refine our presence, tell our simple story and continue to innovate and elevate the overall look and feel of the brand.

From the fixtures and point of purchase advertising that draws our consumers, to the Under Armour space at retail, to the education we provide once they are there, it all comes back to a complex technology told through a simple marketing message.

Number 4 -- improving the balance sheet. Coming into 2005, we had the goal of improving our balance sheet and plan to execute that goal to the following two initiatives. The first piece was inventory. The short story is that revenues increased 37% of the company, and our inventory increased only 12% at year-end. The other big impact on the balance sheet came toward the end of '05 when we completed our IPO. We used some of the proceeds to redeem the Series A preferred stock owned by Rosewood Capital, and paid down our credit facility. The net result is that we ended the year with $54.6 million in cash and cash equivalents, net of debt.

Number 5 -- building out our management team. An area we prioritized in 2005 and will continue to focus on in 2006 is the strengthening of our management team. We've already assembled a great mix of Under Armour brand experts combined with recently hired functional experts in sales, IP, finance and legal, to form a management team that I'm confident can take this company through its next level of growth. Probably the best example is bringing in Matt Merchant, a former president of sales for our industry with strong relationships to take over our sales function. With Matt overseeing sales in U.S., we were able to send Ryan Wood, one of my original partners and a person who helped develop our relationships with independent and key retailers here in the U.S., to Europe to accelerate the Under Armour brand presence there.

Summing up our year on 2005, I think we made great strides as a company, and delivered against what we promised ourselves and against our Universal Guarantee of Performance. But I think what's most impressive is that we accomplished all this in a year where we improved our balance sheet, aligned our infrastructure to become a public company, and laid substantial groundwork for the long-term growth of our brand.

And that brings me to the final topic this morning -- our strategy for 2006 and beyond. I'm going to talk about the four areas that we believe will provide the foundation for Under Armour to grow long-term. They're four areas that you as investors can look at to gauge how we're doing against the expectations that we've laid out for ourselves. Those four areas are -- growing the core business, new consumer segments, broadening our product portfolio, and international markets.

Number one, growing the core business. We believe we can achieve our goals here by expanding through new product with our key partners, and taking advantage of growth opportunities within our current distribution. We feel we can do this through larger footprints within our men's retail selling space, and by scaling our existing doors with our retailers as they grow. We will continue to add innovative product that complements what we have already been successful with, as well as attacking new product categories that are relevant to our message. For instance, golf is an area where we will continue to be aggressive. We've had success in this area over the past year and our strong retail sell-through makes us feel great about the opportunity going forward.

We talk a lot about the shift going on among consumers to performance, and the opportunity we have to take business away from cotton. Our Tech T is a great example of how we can bring the consumer who might otherwise purchase a cotton T-shirt, into the Under Armour brand. As I said before, we feel that we are the best-positioned company in the apparel business to take advantage of this long-term shift in the way people view their athletic apparel. Remember, cotton is the enemy.

The next area of growth for us is new consumer segments, and clearly our focus here is on the women's business. Our strategy is relatively simple but critical to our ongoing success in this important and exciting area of the go-forward Under Armour growth strategy. Let me give you a few samples of what we're doing to invest in the UA women's business.

Number one, we will grow our floor space at retailers where women shop. Second, we will have a greater presence within women's collegiate sports teams. Third, we will expand our marketing efforts to the woman athlete and continue to spend aggressively in that market. Fourth, we will continue to add experts to our women's team across all functions of our business, including sales, marketing and product. And finally but most importantly, we will put all of our energy into building great women's performance products.

An additional category and one that will continue to play a major role in our growth, is the outdoor business, which includes both the mountain sport and hunt and fish channels. Here again, we've adapted our core sports performance story to create category-specific product for the end-user. The results so far in both sales and brand awareness are very encouraging, as we have been able to grow this business on two fronts. First, we've greeted Under Armour outdoor shops within our relevant existing sporting goods retailers; and secondly, we've opened new outdoor-specific accounts, such as Cabela's, REI, Bass Pro Shops, as well as Authentic Ski specialty distribution.

We support both categories through our marketing efforts such as grass-roots sponsorships, advertising, product placement, and we are the official supplier of performance apparel to the United States Ski Team.

The third piece of our long-term growth strategy is broadening the Under Armour product portfolio. We have been building out our offerings above and below our core items with a good/better/best strategy. This allows us to flex our muscle with cutting-edge statement product at premium price points like our Metal Collection, while selling higher volume entry-level items like the UA Tech T, a good alternative for an athlete's first foray into the world of performance.

We also believe that based on our consumer research, we can combine our understanding of the needs of athletes with the benefits of performance fabrications to create an authentic footwear brand on the field. In June of this year, we will launch Under Armour football cleats. We believe this is the next natural progression for our on-field program, not to mention a category that we can invigorate with a moisture-wicking, lighter/faster performance story. Like our apparel offering, this line will also be structured with good/better/best price points, appealing to athletes at all levels. We are supporting it with a year-long multi-platform marketing campaign entitled Click Clack, which began last summer with teaser advertisements on ESPN and has been picking up steam as we heads towards the June launch date.

The last piece of the growth story is international. We currently have strong and growing businesses in both Canada and Japan, and we've now added Europe as a priority that we believe offer us the most immediate opportunity to grow the Under Armour brand. We've been on the ground in Europe quietly for the past 2.5 years seating our product with athletes and building relationships, much like the way we started here in the states more than 10 years ago. We've targeted athletes and teams in key sports like rugby, cricket, and of course European football. The goal is the same as always -- be authentic and start at the top in each sport with the best players in the best leagues.

We also recently opened our European headquarters in Amsterdam, and placed Ryan Wood on the ground as our Vice President of Europe, and as the one charged with growing the Under Armour brand across the continent. We are aware that building our business in Europe will take time, but we believe that the language of sports and the Universal Message of Performance told with a great product and a great brand will be relevant to consumers all over the world.

And there it is. Grow the core business, new consumer segments, broaden our product portfolio and international markets. That's a small synopsis of what we think is a pretty big story. We are excited about the opportunity and we believe the Under Armour brand is well-positioned to do great things.

With that, I will pass it over to our CFO, Wayne Marino.

Thanks, Kevin. I'm going to take the next few minutes to provide you with a significant amount of detail around our fourth quarter and year-end performance. In addition, I will provide you with our outlook for 2006.

I'd like to start out by addressing our net income. For the fourth quarter, net income increased 14% to 7 million, from 6.2 million in the same period of 2004.

For the full year, net income increased 21% to 19.7 million from 16.3 million in the prior year. We believe our strong results are a testament to the growth opportunities for the Under Armour brand and our ability to profitably manage our growth.

Turning to EPS, as you saw in the press release, on a reported basis fourth quarter diluted earnings per share was $0.08 compared to diluted earnings per share of $0.15 in the fourth quarter of the prior year. On a reported basis, diluted earnings per share for the year was $0.36 compared to diluted earnings per share of $0.39 in 2004. We believe that there are two important factors that may be helpful in assessing the comparability of diluted earnings per share between 2005 and 2004.

First, the fourth quarter and full-year diluted earnings per share in 2005 includes a onetime charge of 3.5 million associated with the redemption of our Series A preferred stock, in connection with our IPO. The impact of this charge on our fully diluted earnings per share was $0.08 for the quarter and $0.09 for the full year.

Second, we issued an additional 9.5 million shares in connection with our IPO, which increased the weighted average diluted shares outstanding by 4.4 million for the quarter and 1.1 million for the full year.

Taking these two factors into account, our pro forma diluted earnings per share would have been $0.16 for the quarter of 2005, compared to $0.14 for the fourth quarter of 2004, and $0.45 for the full year of 2005 compared to $0.38 for the full year of 2004. We included with our press release a table that reconciles GAAP EPS to pro forma EPS on a diluted basis.

Separately, and I think it's worth mentioning, that since becoming a taxable corporation in 2002, Under Armour has benefited from certain state tax credits which reduced our provision for income taxes. In 2005, the Company's remaining tax credits were fully earned, which resulted in an increased effective tax rate compared to 2004. As a result, our fourth quarter net income includes a provision for income tax resulting in a 42.1% tax rate versus a 32.6% tax rate for the same period of 2004.

Full year net income includes a provision for income tax resulting in a 40.2% tax rate versus a 32.3% tax rate for the same period in 2004.

With that, I'd like to turn to our operating results for the quarter and the year. I'd like to begin by defining our net revenue, which consists of two components. First is net sales, which consists of Under Armour products sold globally through all channels of distribution, including large national and regional sporting goods chains, small independent retailers, our website and our retail outlet stores.

Net sales are represented by four primary categories -- men's, women's, youth, and accessories. And this makes up the bulk of our net revenues.

The second component is license income, or revenues received from our licensees, which represent a small portion of the overall total.

Net revenues for the quarter increased 25% to 87.3 million, making it the highest single revenue quarter in our history. Net revenues for the year increased 37% to 281.1 million.

Net sales for the quarter increased 24% to 84.4 million, and net sales for the year increased 35% to 271.3 million.

Now let me walk you through sales by category. Our men's business is our largest category and accounted for approximately 70% of net sales for both the quarter and full year. Men's is sold in over 8700 doors worldwide, including almost 7000 doors in North America and over 1700 doors in Japan through our licensee. Net sales for men's, which contributed more than half of our dollar increase for the quarter, grew 15% to 60.1 million. Men's sales for the year increased 25% to 189.6 million.

Sales growth in the fourth quarter was largely a result of new and diversified product offerings, like our hooded fleece and our existing ColdGear program. It is worth noting that for the fourth quarter of 2004, we shipped approximately $6 million of military product above our normal flow, in anticipation of troop deployment. Although we see our military business as a consistent and profitable business, it is not one of our strategic growth initiatives going forward.

Our men's strategy is to offer new and innovative performance products within our existing channels of distribution and expand our penetration in all doors. Further, we look forward to growing our door base in conjunction with the expansion of our major customers.

As the fourth quarter validated for us, delivering fresh and diversified product enables us to command a larger footprint within our existing retail channels. Not only will new products enable us to gain more space within retailers, but we will add outposts of our products throughout the stores as we expand the performance offering.

Our second largest category is our women's business, which represented approximately 20% of our net sales, both in the fourth quarter and for the full year. Women's is currently sold in approximately 3500 doors in North America. Performance in women's continues to outpace our expectations. For the quarter, net sales increased 59% to 16.7 million, and for the full year, net sales grew 87% to 53.5 million.

Our strategy for growing the women's business is twofold -- to further penetrate existing doors by offering new and innovative performance products, and to grow the number of doors. We plan to gain market share and retail space by expanding our seasonal color offerings and delivering products, such as performance, sports bras, and bottoms.

Lastly, in 2006, we will continue to add resources to our women's product development team and increase our marketing support for this category. We believe there is a significant unmet demand for women's performance apparel; we are focused on continuing to bring new consumers into the performance category through the Under Armour brand.

Our youth business, which targets both boys and girls ages 12 and under, represented approximately 7% of net sales for the quarter and full year. Our youth product is currently offered in approximately 5000 doors in North America. Youth sales increased 70% to 5.5 million for the quarter, and 48% to 18.8 million for the full year. Our strategy for developing this business is similar to our women's strategy -- further penetrate existing doors by offering new and innovative performance products, and grow the number of doors overall. Importantly, we believe the rapid growth we're seeing in our youth business is indicative of the broadening strength of the Under Armour brand.

Similar to the launch of our women's business, we have proven that the brand is transferable to many categories, and is not bound by age or gender.

Our accessories category includes football, lineman and receiver gloves, and baseball batting gloves, sold through our wholesale channel, and accessory products sold through our website. This category represented 2.4% of net sales for the quarter, and 3.5% for the full year. Net sales increased approximately 25% to 9.4 million for the full year, and decreased 11% to 2.1 million for the quarter. As noted in our release, the decrease for the quarter was due to us shifting certain product previously sold within our accessories business, to our licensees.

That brings us to our licensing business, which represents 3.5% of our net revenues for the quarter and full year. For the quarter, licensing revenue increased 111% to 2.9 million, and for the full year, licensing revenue increased 127% to 9.8 million.

Our licensing business is currently made up of two domestic licensee partners and one international licensee. Our domestic licensees manufacture, sell and distribute Under Armour socks, hats and bags through our current channel of distribution. Our international licensee manufactures, sells and distributes the entire line in Japan.

We recently added a third domestic licensee to sell and distribute a limited assortment of our product to college bookstores and green grass golf accounts beginning in spring, 2006. Our strategy for the licensing business is to maintain our current discipline and deliberate approach.

First and foremost, we are vigilant in our focus on protecting the Under Armour brand. We carefully select partners and only enter into arrangements that broaden our category offerings in a way that provides product, consistency and fit with the Under Armour promise to the marketplace. In short, we view our licensing business as an important way to generate incremental revenue, and strategically broaden the reach of the Under Armour brand. At this point, however, licensing will not be a significant growth driver for our overall business.

Now, moving to our gross margin. For the quarter, gross margin improved to 48.7% compared to 48.6% last year. For the full year, gross margin increased 180 basis points to 48.3% from 46.5% in 2004. Gross margin improvement reflects leverage from increased volume, improved sourcing, disciplined inventory management, and increased licensing revenue.

SG&A for the quarter totaled 29.6 million, an increase of 5.5 million, or 22.7%, compared to last year. SG&A as a percentage of revenue decreased to 34% from 34.7% last year. This decrease was primarily driven by the timing of our marketing spend as we shifted costs from the back half of 2005 to the first half of 2005, to support the women's media campaign. This decrease in SG&A margin, however, was partially offset by higher selling and payroll costs to support our footwear and international initiatives, as well as increased costs of being a public company.

For the full year, SG&A totaled 100 million, versus 70.1 million last year. As a percentage of net revenue, SG&A increased to 35.6% from 34.1% last year. This increase was primarily driven by an increase in selling expenses and payroll, and related costs to support our new growth initiatives in footwear and our planned expansion in Europe, as well as the personnel needed to operate as a public company.

It is important to note that marketing, which we believe an effective driver of Under Armour's growth, is a primary component of our SG&A. We manage marketing costs as a percentage of net revenues, and target a range between 10 and 12%. Our marketing costs for 2005 were 10.8% of net revenues and consisted of production and advertising costs, marketing personnel, team and league sponsorships, and in-store displays. Taking into account our strong topline growth and disciplined approach to running our business, our operating income for the quarter was 12.9 million, or 14.7% of net revenue, compared to 9.7 million, or 13.9% of net revenue in the prior year.

For the full year, our operating income was 35.9 million, or 12.7% of net revenue, versus 25.4 million, or 12.4% of net revenue last year.

Now I'd like to take you through our balance sheet. First, I will start with our inventory. One of our major areas of focus in 2005 was to improve our inventory management, as we began to expand our product offerings. We developed a more disciplined buying process and took steps to improve our sales forecasting, which has provided us with a better visibility before we make purchase commitments.

Additionally, we opened three retail outlet stores in 2005, bringing the total to five at the end of the year. Our outlet strategy remains the same -- liquidate excess inventory while increasing profits. For 2006, we're planning to open an additional three to five stores based on opportunities that we have to secure key locations.

I'm proud to report that these initiatives have worked. While our net sales for the year increased by 35.1%, our inventory increased by only 12% to 53.6 million. Accounts receivable increased 38% to 53.1 million, and our bad debt write-offs have been less than 1% of our average accounts receivable balance.

Total cash and cash equivalents at the end of the year were 63 million, reflecting the net proceeds from the public offering, and cash net of debt was 54.6 million.

Our investment in capital expenditures were 13 million for the year, and consisted of 4 million in our new systems initiatives, 6 million for our in-store fixtures, 2 million for improvements to our distribution house, and the balance for general corporate needs. We believe that in-store fixtures and point-of-sale communications have been a critical element of our ability to tell the Under Armour brand story, and we will continue to invest in this area as our brand gains a larger footprint within our existing retailers.

Currently, we are in the process of implementing SAPs apparel and footwear solution to support our growth, both domestically as well as internationally. We began this project in July of 2005, and it includes sales, production planning and finance. Based on our testing to date, we feel confident that we are on track to have a successful implementation in the second quarter of 2006. Once this portion of the project is complete, we will begin to evaluate other SAP modules that will improve our business.

And now, I'd like to take you through our outlook for 2006. With respect to the topline, we currently expect revenues to increase 20 to 25% in 2006. We expect seasonality in the business during 2006 to mirror that which occurred in 2005, and it should also be noted that historically, our second quarter is our lowest-volume quarter.

In terms of the bottom line, we currently anticipate net income growth to be in the range of 20 to 25%, excluding the $3.5 million charge in 2005. To provide some further color on these assumptions beyond this top-level summary, let me provide a bit of detail.

First, gross margin. We anticipate continued gross margin improvement from our sourcing initiatives, and continued leverage in our strong volume, offset by anticipated increases from raw material suppliers. In addition, the second quarter launch of our football cleats, which will carry initial margins lower than our existing apparel margins, will reduce our consolidated gross margin as well. Taking all these factors into account, we are planning our 2006 gross margin to decrease by 50 to 70 basis points.

SG&A -- we are planning our operating expense to increase by 20 to 30 basis points, reflecting our investment in footwear and our European expansion, partially offset by leverage in personnel costs. In terms of marketing costs going forward, we plan to continue to invest between 10 and 12% of our topline revenues. We believe that marketing is an effective driver of Under Armour's growth, and will continue to directly impact our top line. We will continue to drive our aggressive inventory management initiatives in 2006, and we are therefore expecting inventory to grow at a slower rate than our anticipated sales growth.

Capital expenditures are expected to be in the range of 15 to 16 million, with approximately 50%, or 8 million, to be invested in our in-store fixture program, 4 million for SAP modules and other IT initiatives, 1.5 million for improvements to our distribution house to support our growth and -- our growth in footwear initiative, and the balance for general corporate improvements.

Interest income, net of interest expense associated with capital leases, is planned at 500 to 600,000. We expect our effective tax rate to be 41.5%. And finally, we are projecting our weighted average number of shares outstanding in 2006 to be approximately 50 million.

This concludes our outlook for 2006, and now Kevin and I would like to open floor for questions. Operator?

(OPERATOR INSTRUCTIONS). Joe Teklits, Wachovia.

Thanks, good morning, everybody; very nice conference call rookie performance today. Kevin, I've got a question for you, kind of how you are addressing a certain kind of growth, and then just one question for Wayne, I guess, too. You certainly laid out great long-term plans here.

When you're looking at something like the Tech T or even kind of the fleece hoodie, is there an element of kind of nonparticipant, non athlete -- somebody that just wants to wear the brand, lifestyle kind of person, buying that product? And are you necessarily going after that customer now, or are you strictly still going after let's say the athlete or the weekend warrior? And is there an opportunity down the road to go after, just call it a streetwear business, where it's just all about the brand?

Thanks, Joe. I think probably the best way to think about our product growth strategy is that, first and foremost, our product began on field. And I think what you see now is one of the goals that we've always had as a company is to finish team sports. And so that means rounding out our product assortment to be able to outfit an athlete on the field. And where you see our product broadening is really expanding into getting to and from the field, getting to and from the gym, getting to and from the workout. And those are things which are more lifestyle-driven products.

However, the one thing we do not do is, we don't compromise on the performance component within all of our products. For instance, you know, you mentioned our fleece program. We have two versions of our fleece, a microfleece, which is an ultralightweight four-way stretch product, and then we have an Armour fleece, which is your more traditional sweatshirt-looking product. And the performance that they had at retail is something I encourage you to check with our accounts, but it was basically a blowout in Q4, which is one of the things that really helped add to the benefits that we had with our earnings in Q4.

I think most the important thing that you're seeing, though, is we are really making performance a priority around getting beyond compression. We don't want to be viewed or seen as just a compression company. And I think it's evident most probably in what we've been able to do by expanding our product line to the amount of loose-fitting product that we now have. Loose-fitting product, for instance year ending '04 was 19% of our mix, year ending '05 was 34% of our mix, and going forward, we anticipate loose-fitting product to be in excess of 40-plus% of our overall mix.

That's a good answer, okay, I appreciate that. Wayne, a couple of things -- your guidance and your outlook I think was pretty plain and simple. I know you probably don't want to break down projections for the different segments -- sales segments, youth, women's, men's. But is it safe to say that if you rank them by percentage growth this year, that's how you see it playing out in 2006 as well?

Joe, what we did was, in the press release, we've got the pieces broken down. But I think we can safely say that the growth strategies that Kevin spoke about in terms of the accelerated growth in women's, the accelerated growth in youth; I think those will continue on. And then we will also be looking at a pretty substantial men's growth, but that's of course on a bigger number.

Right, and one more question, Wayne. You know obviously also looking for operating margin compression a little bit in 2006 -- how many years of an investment does it take for you guys until gross margins stabilizes and you start to leverage SG&A and we start to see operating margin improvement?

I think as far the gross margin, we've continued to make strides in our sourcing base as we start to shift our base from Central and South America into Asia, and also we begin to improve our margins with volume increases that we have in our business.

I think on the other side of it, we have to be sensitive to a potential increase in raw materials. So taken as a balance, I think our margins will continue to have pluses and minuses in it. But over time as our volume increases and we get better, we should see some pluses in margin in the next 12, 18 months out.

As far as SG&A, we're going to continue to invest in new initiatives. New initiatives definitely support our topline growth, and Europe for us is going to be an investment in 2006. But Kevin and I are pretty clear that in 2007, we would expect our European business to be profitable.

Okay, thanks, guys. Great -- good luck.

Peter Benedict of CIBC.

I was hoping if Kevin maybe could talk about the competitive environment right now, just what the response has been to your success -- how it has maybe evolved over the last year or two and where you see that going over the next couple of years. Thanks.

Thank you. I think probably the best way to frame that is I think a pretty consistent message with what we told on the road -- is that, you know, I think the number one concern we have as a company is always ourselves. You know, again, dealing with the growth, managing what we're going to right now, I think we've done a great job -- again, we've laid out some of the highlights in 2005 surrounding building our management team. But I really believe that we do control our own destiny, and in large part because of the way that I think our brand defines the category we are in of performance.

You know, I look to where we are going. I think a lot of the others, some really good competitors out there obviously, that do a really good job. But frankly more than anything it enables us to leverage off of the brand spending that they are doing in telling a performance story. Again, if you can convince a consumer to simply get out of a cotton T-shirt and buy a piece of performance product, based on an 80-plus or 70%-plus market share that have within the categories of business where we do business -- if you can convince them to make that transition from cotton to performance, seven or eight times out of 10, they're going to end up buying our product anyway.

That doesn't discount, I think, the way that we do view competition. Of course we like to win; we are competitors. And frankly, we feel pretty good about the outlook and the plan and the road map that we have in place to continue I think the streak of dominance that we've shown, not only on our own category, but frankly some of the new initiatives we have going after looser-fitting product, more traditional products, like what we did with the fleece program. I think some of the market share numbers that we picked up within sporting goods where we do have distribution, were really overwhelming in our favor.

Thanks, Kevin, just one more follow-up if I could. What is, though, some of the differences in the European market versus the U.S. market where you've had so much success? What are some of the differences in terms of what you're going to face when you really accelerate Europe here are over the next couple of years?

Well, I think the primary difference right now is probably time. You know, and you look back -- is that, we started our business in really 1996, and it was the first two to five years of the company where we simply [seated] not giving away, but we sold product to teams. We spent time with the elite athletes, charging and getting the best of the best to wear our product, to wear our brand. It's really no different in Europe. And as I mentioned, we've got a little bit of a head start over there. We've been on the ground for about the last 2-1/2 years, and again, not seating but selling our product -- there's a different perception from giving product to a group of athletes versus selling product into a team. Some of the examples that we had of acceptance with our brand have really been very, very similar to what we sought the US.

Now granted, there's a lot more people out there and I'll tell you, Europe is the heck of a technical continent. They understand performance, they understand the message. I would say they are probably in front of the US in terms of the amount of acceptance to wearing technical product. But I think what we'll deliver is probably something much more unique. The way in which we tell our story -- again, we are a product company, first and foremost, but probably the best product we manufacture is our story. And it's the one thing -- I was just over in at ISPO a few weeks ago, and there's probably nothing more impactful for me than walking around and seeing the opportunity that we have, because I knew they were technical, but realizing the way in which we convey our story, I feel confident about our message that Ryan Wood -- one of my original partners here -- is going to be driving that message for us.

And you know, just a neat sidebar is, you know when I was at ISPO, I was in Munich and I was in the gym in the evening one day. And all of a sudden on the television, a German Cup match comes on between Mainz and Bayern Munich. And it was as cold as it could be over in Germany, and 10 of the 11 players from Mainz were actually wearing our Under Armour Black ColdGear mock turtlenecks that they had bought from our people. Those kind of one-offs, just the acceptance is that, yes, there's other brands over there, yes, there are sports marketing deals, but there were sports marketing deals when we started here in 1996, too. Again, we continue to be optimistic about our opportunities over there.

Okay, thanks for the data point, Kevin, excellent, good luck.

Margaret Mager, Goldman Sachs.

Hi, a great start to a new life, Kevin. So congrats on great results for '05. You can hear me, right?

Yes, we can hear you good, Margaret.

I have a question on the marketing -- expense and in terms of looking at 2006 specifically, some of the timing of using marketing, especially for women's. Can you just outline what your expectations are on that front, vis-a-vis the first quarter? And you know, Wayne, your guidance for 2006 was quite good and very clear, the whole conference call was clear. But if you could give anything about the upcoming first quarter, any specifics we should be keeping in mind as we think about the quarterly progression, besides just the seasonality that you mentioned.

Let me start, then, Margaret and I will turn it over to Wayne.

I think you'll probably see something pretty similar to what laid out in 2005. In fact, Wayne has to a lot of explaining as to why our (indiscernible) expense line comes up different around women's. We'll do something again with the same idea. We're going to use the Oscars as really a launch pad for us, again. In 2005, again we launched Goodbye Girl, and the reality is that we put -- we have a great product and we put a great effort behind it, but I think in looking back on it, I'm not sure actually how many people saw that campaign. It's actually a campaign that we look to continue into 2006 and we're just going to put a lot more eyeballs to be able to tell people about the UA woman, tell people about that brand story of what we're going to have out there.

So leading up with the women's side, and then of course cleats are going to be a big launch for us in -- getting away from women's for a second -- and we're going to roll right into our Click Clack campaign. So typically what we've done in the past from a marketing standpoint, it's much more of a clustered approach. You'll see three or four times in a given year with major blasts of media. That will be pretty similar in 2006, but I think you'll see it's spaced out pretty well from launching women's of really having an emphasis there, into our cleated program, and then as we get into back-to-school and the football season, that will continue to be a driver for us.

Okay, Wayne?

Margaret, this is Wayne. Just to follow-up what Kevin said. I mean, translating that into how it spreads out, in 2005, you know we shifted our marketing dollars a little more to the front half. So spent maybe 40 to 45% of our marketing advertising dollars in the first half and the balance in the back calf. We see that trend continuing for '06.

Are there any other onetime items that should be considered in either the first or second quarter?

No. The only -- as far as 2006, no, it's a fairly clean year I think. Obviously, when we compare it to 2005, there is that one time which we talked about, the 3.5 million.

Great. Wasn't there an inventory reversal in Q2 '05 that helped gross margin, that we should maybe be thinking about for comparison purposes?

We drilled into that, Margaret, and looked at it. It was under 20 basis points, and as far as the margin, maybe even less. So there's a lot of puts and takes in the gross margin -- so we didn't feel that was a high contributor to that.

Okay, I just wanted to make sure all these nuances are understood by everybody.

Last question on -- regarding personnel at this point, are there any notable openings or anything to talk about there?

I think probably the best thing to do is, if you look at our growth strategies of where are we going to grow and what are the things that are important to us, you'll see us to continue to put resources around those initiatives. You know, I think we've done again a good job of building out our team, but I'll tell you, where we envision this company at some point in the future, we still have a long way to go in terms of building -- bringing on great talent and bringing on smart people to help take this company to the next level.

Are there any notable openings at the moment that -- priority positions that really need to be filled?

Again, it's that we've got a great structure, and the same people that are building our categories -- for instance, we've been in the footwear business for more than the last 2.5 years at this point, but we continue to look for expertise there. Women's continues to be a place where we continue to add and build on our team and build expertise. But you know again, it's a lot of role players at this point, but I think we are never afraid to hire very smart people.

Okay, great -- well, good start to your life as a public company. Talk to you soon.

Thanks very much, Margaret.

Jeff Kleinfelter, Piper Jaffray.

-- to everyone on the great '05. A couple of quick questions. First of all, it's on door counts. Wayne, maybe you could just reconcile this for us. You listed in great detail, which is very helpful, the doors you're in by each category for North America. And I'm just trying to reconcile this with sort of what your door growth was for each of those categories in '05, and then tie that back to kind of what we're looking forward to 06, in terms of door growth, to get a sense for how to look at that relative to the comp growth in those doors.

I think on the big picture, in the door count, in men's, I will start off with men's. We talked about that door count in North America I think being close to 7000 doors. That stayed relatively consistent. I think our strategy is the same -- is, we will grow as our customers grow. So, as they begin to add doors, 40 or 50 a year, we will see that -- our men's business will take advantage of that. And secondly, we will grow within each door by taking additional space.

So men's business, I think comparable growth, maybe 10%, maybe less than 10%, in doors, year-over-year.

Our women's growth, 3500 doors in North America. Again, the strategy there has been to increase our doors. We've probably increased that door count by anywhere from 20 to 30%. Our goal there is to get up to the number of doors in men's.

One point worth noting is that we did have a new customer this year, Nordstrom's; we did a test with 10 doors. The test was very successful, so we expanded that to 43 doors for spring. So that's plus business for us.

And again, our youth door count, again, similar to men's, it's in actually 5000 doors in North America. Once again, we see the opportunity there that both men's, women's and youth could hit that 7000-plus mark in North America.

Okay, and a follow-up on the youth market. Seems to be a great opportunity for you in addition to women's. I know you're highlighting women's right now as one of your primary opportunities in '06. But maybe Kevin and/or Wayne, just touch a little bit more on the youth market. How many doors potentially are there? Are you approaching that differently, or how else can you approach that market just to test the upside, given what seems to be very strong traction with those under-12 age groups right now?

Let me let Wayne give you that actual door count, but I think more importantly is that we've identified youth as an opportunity -- it's that youth has every right to be 10%-plus of our business, what we're doing in men's.

You know, we've probably limited ourselves a little bit with the number of takedowns that we actually had for youth. But the fact of the matter in what we've found is that, little brother wants to be just like big brother. We've added a sizing to address that. And so before we had two sizes within our youth offering, and we've expanded that now to I think we have four sizes within youth.

In addition to what we're doing on the boy's side, we've also added a girl's line for the fall of 2006, with appropriate colors, with things that really speak I think to that little girl consumer. So without question, I think we're putting a roadmap in place to be able to build on a pretty successful already youth business.

Okay, great. Just one last point, Kevin; what's your belief in terms of the size of the European business today for compression apparel and the related and growing product category? Is it about the same size as U.S., or do you think it's bigger at this point, and an opportunity for you to take share?

Well, I think they are wearing it, and unfortunately it took us I guess four or five years in the states to try to get somebody to classify this category called performance apparel. Fortunately or unfortunately, I think in Europe is that tighter-fitting product is something that's a way of life over there, and something that the consumer is much more open to it. Now again, the one thing that we didn't see in our market that's -- and that's when we are out walking, [Sport Check] and [Car Shop Sport] and a few [Intersports] and some [Sport 2000s], et cetera, is that there's not a true sports story told there. It's told as fashion, it's told as underwear, it's told as all these other things, but it's not necessarily told from a performance standpoint. And again, I think that there's probably some secret sauce there that I will keep from you right now, but we feel good about the message that we'll be able to take over there. And I would say that there's an extremely viable market for our product, and specifically the Under Armour brand in Europe.

Great, thanks a lot, guys. Good luck.

Operator, we have time for one more question.

Jim Duffy, Thomas Weisel Partners.

Thank you, good morning. Making it in right before the 9:30 cutoff here. I guess a follow-up to Margaret's question (technical difficulty) would you expect that the seasonality holds true for the earnings as well as the revenue in your business?

Yes, we would expect that trend to continue -- '06 to be comparable to '05, top and bottom line. You know, there's a couple of factors. We mentioned one is that we do have the launch of our football cleat in the second quarter, but in addition to that, the football cleat has a lower-margin business as far as gross margins. So we think the seasonality is going to be similar.

Okay. As you look at the components of your growth in Q4, what was the mix of contribution between channels? Did your key accounts continue to grow as a percent of the mix, or did we see more contribution from new accounts? And how do you expect that to work going forward?

Jim, this is Wayne. You know, the key accounts, the larger accounts played a big part, but overall, all of our channels of distribution grew. I think the strength of the brand was evident in our fourth quarter; it was above our expectations. And I guess what we saw as across the board -- now, the key accounts happened to be the largest channels, so they posted some big numbers. But again, across the board, we saw positive results.

And you mentioned Nordstrom; any other new accounts that you've penetrated of note?

I think probably -- again, we want to go in -- like the comment that I made with respect to our women's growth opportunities, we want to go to places where women shop. We want to go to the places that make sense. So you know, when we can continue to drive being authentic, I think bottom of the mountain opportunities around ski -- I think what we're doing in the green grass component, again, as golf becomes important to us, is that we want to go where we can be authentic. Again, we like our distribution very much, we've got terrific partners who have supported the heck out of us and have just been terrific in helping everyone be patient with us, but more importantly, giving us the opportunity. And frankly, we've produced.

So, from a growth standpoint, I think we've made the point tirelessly today, that we like our distribution, we like where we are sold. We will continue to be opportunistic if we see retail expansion that makes sense. But for the most part you know, we feel good that by simply focusing on the doors that we are already in, doing a better job and adding a wider breadth of product to the stores that are relevant to our brand, that's the most reasonable way for this company to continue to grow.

Yes, certainly those retailers are happy with you. Final question. Very nice improvement in the inventories. How much more room, Wayne, do you think there is here, and is positive free cash flow a reasonable target for 2006?

I think as far as the inventory, you know there's always opportunity in the inventory. I've learned that over time. And I think as we continue to manage our inventory, we're going to become more efficient. But the one thing we have to do is, we have to be in stock. Part of our business is really core business, it's replenishment business. And to maintain that growth we're going to have to add obviously inventory. But because it's a balanced approach, I would expect our inventory to grow, but not the same as our top line growth.

Okay, is positive free cash flow a reasonable target (multiple speakers)?

As far as cash flow, I think for 2006, you know, we would be more in the cash-neutral position.

Thanks very much; nice quarter, guys.

Thanks a lot, Jim. Thanks, everybody. We are going to have to wrap it up here. I hope you got all the information you needed. I think we've provided a lot of detail on where our business is heading for '06 and beyond, and we look forward to talking to you again soon. Thank you.

That concludes today's conference; you may now disconnect.