Under Armour Inc (UA) 2006 Q1 法說會逐字稿

Good day and welcome, everyone, to the Under Armour first-quarter 2006 earnings results conference call and webcast. This conference is being recorded. At this time, I'd like to turn the conference over to Mr. Rick Anguilla. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Welcome to Under Armour's first-quarter 2006 earnings call. 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 see making projections or other forward-looking statements regarding future events or the future financial performance of the Company. The words estimates, intends, expects, plan, outlook 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 changes in assumptions or other factors.

Before we begin, I would like to direct you to our website, investor.underarmour.com. There, you'll find this morning's press release, and on our webcast page, images of a number of the products initiatives that we will be addressing on the call.

Now I'd like to introduce the speakers and topics for this morning's call. Kevin Plank, our Chairman, Chief Executive Officer and President, will address what drove our strong first-quarter results and our plans for long-term growth. And then Wayne Marino, Executive Vice President and Chief Financial Officer, will then discuss the Company's first-quarter financial performance and discuss this Company's updated 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 will turn it over to Kevin Plank.

Thanks, Rick. Good morning, everyone, and thank you for joining us today. We are here to discuss the results of our first full reporting quarter as a public company. The scoreboard, as we call it, shows we had a solid quarter on all fronts.

When we look beyond the numbers, we take great pride in the fact that we've beat our sales goals while implementing new systems, strengthening our team and securing our infrastructure for long-term future growth. Our brand is strong, our business is strong and our team is strong.

As you have already seen in this morning's press release, we grew revenues by over 50% this quarter and leveraged our business, resulting in net income growing 248% to $0.18 per share. As a result of the strength that we see in our business, evidenced by first-quarter performance, we are raising both our top-line and bottom-line outlook for the balance of 2006. Wayne will take you through this in just a few minutes.

I would like to take just a moment to discuss our business drivers for the past quarter and our areas for growth in the future. The Under Armour name is synonymous with performance. We define the category and have demonstrated the multiple applications of and demand for performance apparel, expanding far beyond the tight compression shirts we started with just over a decade ago. We don't make cotton shirts. In fact, we like to say, cotton is the enemy! It also represents our largest opportunity.

Our logo is our promise to the consumer that Under Armour is working to make you better -- tight or loose, HeatGear or ColdGear, apparel, and in just 38 days, the launch of our shoe business, starting with football cleats. Under Armour means performance, and that is our guarantee.

We are demonstrating that our growth prospects reside in the creation of new categories and the reinvigoration of old standards. This is evident in the first quarter's results by the continued extension and performance innovation through men's, women's, youth, accessories and now footwear.

There are a number of key drivers behind our first-quarter results. Most prominent is the men's category, our largest business, where growth accelerated to 32%. We did this by, again, surrounding our core with new top-of-the-pyramid product in categories like baseball, running and training.

We also defined new potential categories like golf, highlighted by our successful introduction of performance polos offered in several styles and price points. This warm welcome to the golf market at both specialty and big-box retail further illustrates the potential of our brand outside the core compression category.

We gained new space within our existing distribution. We sold the product through at retail. We delivered higher margins for our retailers. And we gave our consumer a new alternative to cotton in a traditional sport like golf.

Growth in our women's business accelerated to 112%, representing 24% of our sales compared to 17% in Q1 of 2005. Here again, we've based our success in telling a comprehensive story -- great innovative product in a variety of styles and new seasonal colors, branded fixturing and merchandising on the retail floor, and strong marketing support with our Goodbye Girl television campaigns. We also continue to add depth and experienced to our women's team across the sales, design and marketing departments to support our women's business.

Bolstering the success in both the men's and women's categories is the organic portion of our growth strategy, which is to increase and diversify our floorspace within our current distribution channel. Dick's Sporting Goods is a great example of how we can tell a complete and consistent story to entirely different sets of consumers inside a single store.

Our strategy here is best illustrated at Dick's new Dulles, Virginia store, where we have created branded men's and women's shops alongside the power aisles in addition to outposts throughout the store. Custom fixtures and point-of-purchase displays stake our territory in the accessories, running, team and equipment sections, as well as Dick's golf pro shops, hunting and fishing lodges, and now the footwear pad.

We anticipate additional growth as our partners grow their doors. Dick's, for example, is opening 40 new stores this year alone, and we will have strong presence in all of these new stores, including branded UA shops in the best locations.

As we plan for growth beyond fiscal 2006, we will continue to focus on four key drivers to our business -- growing the core men's business, continuing to expand new consumer segments like women's, growing our international presence, initially focusing on Western Europe, and broadening our product portfolio with our entry into footwear.

In growing our core business in men's, we have broadened our product assortment on both ends of the pricing spectrum. We continue to innovate with high-performance lines like our UA Metal and Streaker running collections, as well as introductory product like the Tech T, our 20 and $25 version of the typical 10 or $12 basic cotton T-shirt.

Tech T is a synthetic performance piece that looks and feels like cotton but performs like Under Armour. This program continues to grow following its first year of success in 2005, when we sold more than a million units of a single style in multiple colors. This is emblematic of the growth prospects available by reinvigorating old standards. By bringing performance to the basic T-shirt, we are able to establish higher ASPs and create new standards in a sluggish category.

The second growth area is our women's category. Again, it starts with being authentic on field. We are proud to say that hundreds of Division I women's team purchase our products for competition and training. At retail, our sales growth is well-documented, but we can attribute our success to communicating our story to the female athlete.

For example, in Q1 we shipped our newly expanded sport bra offering with a unique modular bra fixture which educated the consumer on coverage, fits, support and style. One of these new styles, the Premier II, was easily selected by Shape magazine as a winner in their fashion and function column after product testing by their staffers and editors.

Our women's business has grown from 17 to 24% of net rev in Q1 2006 versus the same period in 2005. We believe our women's business could be as large as our men's business at some point.

We are also very excited about growing our international presence, beginning in Western Europe. The next phase of our growth strategy is concentrated specifically on the countries of France, Germany and the UK, and we intend to mirror the formula that was successful for us in the U.S.

First, we will be patient in developing our organization and brand, ensuring that we have the right team of people to tell our story abroad. Secondly, we are building our brand through authenticity by being relevant on field. Our brand is gaining increased exposure in the top-division European football, rugby and cricket leagues this past year. And finally, we will be partner-driven -- find the right distribution for the Under Armour brand.

A great example of our increased exposure in Europe happened unexpectedly at the Winter Olympics in February, when the French skier Antoine Deneriaz captured gold in the men's downhill. Antoine discovered Under Armour much the way the first athletes found our brand here in the U.S., before we had a marketing budget -- word-of-mouth from another athlete. This time, it was a professional rugby player from Antoine's hometown who swore by our ColdGear and gave him one of his own pieces to try. The rest is Olympic history.

We are still in an investment mode in Europe and we are in it for the long haul. Currently, we are selling at retail in England and Ireland with partners like JJB, and will continue to ramp our retail efforts in Germany, France and the BeNeLux countries in the back half of the year. Ryan Wood, one of my original partners here in the States and now our President of Under Armour Europe, has our European subsidiary up and running in Amsterdam. Ryan is putting together the right team of industry, local and brand experts to grow our business the Under Armour way.

The fourth driver for major growth is broadening our product portfolio. And this is currently most evident in footwear. This Saturday, we will unveil Under Armour football cleats on national television during the broadcast of the NFL draft on ESPN. Our campaign titled Click-Clack features several marquee athletes, including projected top 10 picks like AJ Hawk of The Ohio State University and Vernon Davis of the University of Maryland. Julius Jones of the Dallas Cowboys and Jonathan Vilma of the New York Jets are also featured in the campaign.

These commercials will serve as a culmination of a campaign that started last July with just a glimpse of the shoes and the sound of cleats coming down the stadium tunnel toward the field. Click-Clack, I think you hear us coming, reads the tagline. And it is meant to be the last sound that an athlete hears before stepping on the field. From this ominous voiceover to the technical story behind the lighter, drier, faster line of cleats, the campaign is as much about our brand's momentum as it is about our entry into footwear.

Some of our key partners like Dick's, The Sports Authority and Eastbay are already in the midst of a special preorder period and the first in-store on-sale date of our cleats will be June 3.

All three of our division-wide collegiate programs -- the University of Maryland of the ACC, SEC powerhouse Auburn University and Texas Tech of the Big 12 -- will wear the cleats when they take the field this fall. We are also very excited to say that baseball cleats will follow in the spring of 2007.

All footwear will of course uphold our universal guarantee of performance, offering typical Under Armour advantages found in our apparel, including moisture management and increased breathability, as well as dual-plate technology and progressive traction.

Consistent with our performance apparel strategy, the offering of our football cleats is structured with good-better-best pricewise, beginning with our youth [molded] hammer all the way through our high-end metal products. This creates a new pricing paradigm in cleated footwear for our retailers and provides the consumer the opportunity for an Under Armour-branded experience at all levels.

These four areas represent the next leg of the Under Armour growth story and we look forward to updating you on their progress through the next several quarters.

Before turning it over to Wayne for the detail on the numbers, I would like to congratulate our entire Company and especially our SAP team for the recently completed apparel and footwear solutions implementation. On that note, I'd like to turn it over to Wayne.

Thanks, Kevin. I'm going to take the next few minutes to provide you with a recap of our first-quarter financial performance. I will talk about our operational improvements during the quarter, then I will walk you through our updated outlook for the balance of the year.

Net revenues for the quarter increased 51% to 87.7 million. We had strong sales in the quarter in all of our product categories. In fact, we were particularly pleased with the contribution of new performance products introduced in spring '06, which accounted for over 45% of our year-over-year growth.

This strong sales performance helped generate a net income increase of 248% for the period or 8.7 million versus 2.5 million in the first quarter of 2005. We believe our strong results are a testament to the growth opportunities for the Under Armour brand and our ability to profitably manage that growth.

Turning to EPS, as you saw in the press release, on a reported basis, first-quarter diluted earnings per share was $0.18, compared to diluted earnings per share of $0.05 in the first quarter of the prior year. And this increase was on a share base that was 31% higher than in 2005 because of our IPO in last November.

Now let's take a look at our net revenue during the first quarter. As we discussed at year end, our net sales are represented by four categories -- men's, women's, youth and accessories. The remaining portion is our license revenues, which are the royalties we receive from our licensees.

Our men's business is our largest category and accounted for approximately 61% of net sales for the quarter. Men's grew 32% during the period to 52.5 million. We currently sell our men's product in over 8700 doors worldwide, including almost 7000 doors in North America, 150 doors in Europe and over 1700 doors in Japan through our licensee.

Our second-largest category is our women's business, which represented approximately 25% of our net sales in the first quarter and increased 112% to 21 million. Women's is currently sold in over 3500 doors in North America.

Our youth business, which targets both boys and girls ages 12 and under, represented approximately 8% of net sales for the quarter. While this is still a relatively small business for Under Armour, it grew 120% in the first quarter to 7 million. The product is currently offered in approximately 5300 doors in North America.

Our accessories category includes, among other items, football, lineman and receiver gloves and baseball batting gloves sold through our wholesale channel and accessory products sold through our website. This category, which increased 25% to 4.8 million, represented approximately 6% of net sales for the quarter.

These four categories combined grew 50% in the quarter to 85.3 million and represented approximately 97% of our net revenue. The remaining 3% of net revenue was derived from our licensing business, which increased 66% during the quarter to 2.4 million.

Now moving to our gross margin, for the quarter, gross margin improved to 50.5%, compared to 44.4% last year, or a 610 basis point improvement. First, let me begin with 2005's gross margin of 44.4%. This included a 160 basis point reduction in gross margin relating to inventory write-down in the first quarter of 2005.

Our 2006 gross margin includes a year-over-year improvement of approximately 300 basis points relating to improved sourcing, mainly as a result of shifting production to Asia and other regions. In addition, we recognized a benefit of 60 basis points relating to shifting certain customer incentives from sales discounts to marketing spends within SG&A, along with a nonrecurring benefit relating to customer incentives. The balance of the improvement primarily relates to increased licensing income and increased margin contribution from our retail outlet business.

SG&A for the first quarter totaled 30.1 million, an increase of 9.2 million or 43.9% compared to last year. SG&A as a percentage of net revenue decreased to 34.3% from 36% last year. This improvement for the quarter was primarily driven by the timing of our marketing expenditures and leveraged gain from higher sales volumes.

It is important to note that marketing, which we believe is 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 on an annual basis target a range between 10 and 12%. Our marketing costs include production and advertising costs, marketing personnel, team and league sponsorships, and in-store displays. Marketing costs for the first quarter were 8.6% of net revenues. This will increase substantially in the second quarter as we support our first-ever footwear launch. I will review this in more detail when I discuss our outlook for the remainder of the year.

Reflecting our strong top-line growth and disciplined approach to running our business, our operating income for the quarter was 14.2 million, representing a 16.2% operating margin compared to 4.9 million or an operating margin of 8.4% in the prior 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 was to continue to improve our inventory management as we began to expand our product offerings. We have developed a more disciplined buying process and took steps to improve our sales forecasting, which has provided us with better visibility before we make purchase commitments.

In late March, we opened our sixth retail outlet store and are planning to open an additional four to five stores for the remainder of the year. I am proud to report that these initiatives have worked. While our net sales for the quarter increased by 50%, our inventory increased by only 22% to 53.5 million on a year-over-year basis and was flat on a sequential basis.

Net accounts receivable increased by 29.4 million or 87% on a year-over-year basis and 10.1 million or 19% from the prior year end. If we exclude reserves for allowances, returns and customer incentives, then our year-over-year gross AR balance increased by 25.5 million or 60%. This increase in gross AR is a direct result of higher sales volumes and the timing of payments from certain large customers. Historically, our bad debt write-offs have been less than 1% of average accounts receivable balance.

Total cash and cash equivalents at the end of the quarter were 58.3 million and cash net of debt was 49.8 million. Our investment in capital expenditures for the quarter was 4.6 million and consisted of 2.8 million for in-store fixtures, 600,000 for the setup of our European office, 500,000 related to our SAP initiatives and the balance for improvement in store distribution house, buildout of our new retail outlet store and other general corporate needs. As stated at year end, our CapEx budget for the year is 15 to 16 million and we'll expect to be within that range.

One of our most recent operational successes has been the implementation of SAP's apparels and footwear solution. Our ability to implement SAP in eight months and prepare to go live in a quarter where we grew our revenues at 50% is a real testament to the team we have in place here at Under Armour.

This new system, which is now operational, is designed to provide us with greater visibility into production, order process and order planning processes with key customers. We will continue to evaluate other SAP modules as we look to support our growing business.

And finally, I would like to turn to our outlook for the remainder of the year. As a result of the momentum that we are seeing at retail for the Under Armour brand and the higher than originally projected demand for our cleated footwear, we now expect net revenue for the full year in the range of 380 to 390 million, an increase of 35% to 39% compared to last year.

It is important to note that of the additional 30 to 40 million in revenue from our original outlook, approximately 16 million has already been reflected in our first quarter. The remaining portion of this increase is comprised of increased demand for our apparel products and cleated footwear, mainly football cleats, which will launch in the second quarter, and baseball cleats that will launch for spring '07, with a portion planned to ship in the fourth quarter of 2006. Taking this into account, we're projecting second-quarter net revenue in the range of 70 to 75 million.

Now moving to net income, our gross margin percentage for the second quarter is expected to be lower than in previous quarters due to the fact that cleated footwear margins are inherently lower than apparel margins. As previously stated, our marketing budget for the full year remains on track to be between 10 and 12% of net revenue.

However, we are always opportunistic with our marketing spend and as a result, we are planning to spend a higher percentage, greater than 10 to 12%, of our second-quarter net revenue on key marketing initiatives relating to the brand, as well as the footwear launch. In addition, we will continue to invest in our growth initiatives and incur higher costs in Q2 related to being a public company. Taking all this into account, net income for the second quarter is expected to be in the range of 250,000 to 750,000.

Now let's turn to net income for the full year. Factoring in our high revenue expectations for the full year, our continued investment in marketing our brand as revenues grow, improved margins on apparel, lower margins in footwear, continued investment in our growth initiatives such as footwear and international, and higher costs related to being a public company, we expect net income for the year to be in a range of 31 to 32 million, an increase of 57% to 62% compared to last year.

Summing up, I think we have put ourselves in a position to have another year of outstanding growth from both a top-line and bottom-line perspective.

As CFO, my focus is to work with Kevin on continuing to build an organization that is focused on profitable growth. We have done that by investing in initiatives that position the Company to leverage our growth. For example, we understood the benefit to our gross margin of shifting our sourcing to Asia and other regions. We also designed our distribution house here in Maryland with the capacity to support our growth for the next several years. And most recently, we implemented SAP which is designed to improve our visibility into the production and order process.

This concludes our formal remarks and now Kevin and I would like to open the call for questions. Operator?

(OPERATOR INSTRUCTIONS). Robbie Ohmes, Banc of America.

First, congrats on a great quarter. I actually have a question for Kevin. I was hoping, Kevin, we could get you to speak a little more about the footwear business. First, maybe talk about how fast you are getting into it here. And have the retailers been behind that, or is it the marketing that is supporting that, and how you lined up your capability to do this so fast?

And then related to that, I know you've got baseball cleats coming out next spring. Can you talk about how you are going to market that versus how you are doing the football cleat business? And then finally, what happens after baseball cleats next spring? Should we be looking at a sneaker launch in '07?

First of all, and again, I think just some strategy around why footwear is that first of all, it was the most requested item from our customer. We heard about it over and over for probably the last three, four and five years. It seemed like the right time for us to get into the business. And being I think an authentic brand first and foremost, the most relevant or the only entry point for us would be on field. That's why we went with football cleats to start it. And I think we also recognized the fact that it is a relatively stagnant business that we could be successful with to begin with.

What we are seeing in the support that we are getting out at retail right now I think is evident in the fact that in April, you've got footwear walls at retail right now. You've got Under Armour museum pieces as we call them, these shoe towers, that are out there. We've got people talking about football cleats, which is typically an eight- to 12-week season that doesn't occur for usually another two or three months, in the month of April. I think the retail support has been phenomenal, and most importantly, I think the customer support in reaction to the cleats that we have had out there has been terrific.

As I mentioned, we are getting into the baseball cleat business. And we will be doing that in the spring of 2007. And with that, we've also got a line that's probably a little broader than that, because we also have some silhouettes that we see the ability to leverage some of our molds in football cleats and baseball cleats and getting into complementary sports like lacrosse, for instance, and we will have a specific lacrosse cleat, as well as a line of softball cleats, particularly a line of softball cleats for women, that will be a part of that launch as well.

I think our intent is to take it one step at a time as we get into the market. Or goal was to be focused in building a great football cleat to start with, to follow that up with some great baseball cleats. But without question, we will have established ourselves with authenticity, and I think the ability to leverage ourselves into being a legitimate footwear brand. So I do believe that opportunity is there for us. But it's something that would be dictated by, number one, our own personnel that we have here and as quick as we can build that team, and as well as the ability to do it the right way.

And just a quick follow-up to that on the international side. The way you went about growing the brand in the U.S. has already been just amazingly successful. Is there -- because of the structure of the markets in Europe, is there a different approach you're going to have to take in terms of how you partner with retailers? Or if you could just comment a little on how it might be a different rollout over there.

What I think again is that we've built a pretty good formula here in the U.S. And the one thing that we're not going to do is try and drop the exact same thing over there. But I think that we can use the same outline that we had here in the States, which was begin authentic. Start on field with authenticity, which we have been doing. We've had three years on the ground over there with our sports marketing team, not giving product away, but selling product to teams -- a differentiated product story and a positioning in sport. And I think also having the appropriate authentic sport distribution.

I mentioned JJB in the script as well. We actually had their Chairman and CEO in the office yesterday talking about our rollout there. Particularly in the UK, where we are probably most penetrated from a sports marketing standpoint, retail has been a pretty tough place, and I think what the excitement that we are hearing from accounts, whether it is JJB or a group like [Elvereese] in Ireland, is that they are looking for something that will differentiate their stores. And what we are seeing right now is that they are willing to get behind a brand. And they really like the way that Under Armour is positioned and believe that we can be enormously successful.

Sounds great. Congrats again.

Omar Saad, Credit Suisse.

Great quarter. Great quarter, great outlook. A couple quick questions for you, Kevin. Wanted to know, I mean, if we say -- let's say the cotton, if you think about active apparel or athletic apparel, if you think that cotton is the majority of the market, I wanted to kind of see how you thought about the opportunity for synthetic high-performance apparel. How much of the market do you think it could be longer term? How do you think about that opportunity and the consumer shift from one to the other?

Well, again, we judge it as -- we've got this pie chart that we look at, which is basically this $400 million compression core in the center. Beyond that is the $12 billion active sports apparel market. And beyond that is the $39 billion U.S. apparel market for sportswear.

And I think what we've done again is authenticating ourselves and staying true to sport is so important to our brand. We have done a good job of leveraging ourselves, of being the dominant player within compression, without question.

But what we're seeing now is that we are not a compression brand, but we are truly a performance brand. And that is I think what gives us the opportunity to take the Under Armour brand into new categories like golf, with the success that we have seen there in the early results so far, on expanding just beyond just solid polos into things that are a little more aggressive. We are seeing that hardcore golf consumer accept our brand, and more importantly, demand performance in what they wear. It's not okay to just wear a basic cotton piquet golf shirt.

No, that is true. Given a lot of the success you have, could you comment on some of the competitive response you've seen out there, competitor products? How do you think about that if there is any difference -- how with what the competitive response has been in the U.S. versus internationally?

Well, I think there is a heightened awareness, without question, through performance, and again, so much of what Under Armour is, it is telling a story, it is communicating to somebody that they should spend 20 or 30 or 40% more on a similar silhouette because of the fabrication, because it is technical.

And as we say is that -- before Under Armour, consumers would simply wear a short-sleeved cotton T-shirt in the summer and a long-sleeved cotton T-shirt in the winter. And if we can convince them to make that decision, to try a performance, based on our market share and compression alone, it is 70 or 80%-plus, if they do make that decision, seven or eight times out of 10 they are going to wind up buying our brand anyway.

So the more people that we can help convince the marketplace, get out of cotton, try performance, the better off our brand is going to be long term. And I think the pie, as much as our market share -- we believe we are in a great position -- I believe the pie will continue to expand at even a much quicker rate than we have seen.

That's helpful. Lastly, can you give us an update on the patent status? Do you have any patents outstanding, or in application? I thought there might have been something with the Tech T technology?

Where we focused is, number one, from a new patent standpoint is on our Metal series product, which we do have patents on those products. Our HeatGear and long-sleeved version of that are actually out in the marketplace today. Our AllSeasonGear version of that is out in the marketplace today. And this fall, we will actually be launching our new ColdGear Metal product. And this is, again, building upon the idea of good-better-best. We've got the $50 mock turtleneck ColdGear, which has just been an absolute horse for our Company.

And what we are doing this year -- we're offering two additional price points above it in our $60 chasse mock, which is a color block version, effectively, of that basic ColdGear mock, as well as our premium Metal product at $80. And that is a patented shirt that is just out of this world in terms of what the shirt will do for you.

So we are really excited about, I think, number one, entering the market and being able to trade consumers up again, trade ASPs up, but more importantly, deliver terrific product to the marketplace.

Thanks. Again, great job.

Margaret Mager, Goldman Sachs.

Congratulations on a great first quarter as a public company -- second quarter, but first first quarter, so congrats on that.

I have a few questions. First of all, on the doors, the 5300 women's doors or 3500 women's stores compared to 8700 men's doors -- can you just outline what is the difference in the door count between the two segments of the business? What accounts for that?

This is Wayne. The big difference is really that in the -- we call it our independent channels -- smaller stores, mom-and-pop retail and specialty stores. There is not necessarily all those doors carry women's products. So we have approximately 1800 accounts, maybe 2000 doors of what I call the specialty stores. And in that group is where you would see the differential.

And does the women's product have the same door opportunity? Or do those accounts just simply not carry women's?

Within our current distribution, though, Margaret, there's just some places that, frankly, aren't right for women's distribution right now for our women's product. Probably a great example of that is what we did with Nordstrom in being opportunistic. And that is the way we are viewing our women's business, is finding the right distribution and the right place to find that UA woman consumer.

That's a program that we started with 10 stores in 2005. It has since gone to just under 50 doors, is where we have it, Nordstrom has today, and they have committed to virtually an all-store test by the end of 2006.

So when you look for door growth -- again, I'm not sure you are necessarily going to find it in the more than 8000 doors that we have globally today. It'll probably be a little bit different and much more catered toward specifically that women's consumer that we want to get to.

Makes sense. I have a question on your sales guidance. With regard to the second quarter, as well as the full year of 2006, how much visibility do you have on the sales numbers that you provided to us today? And what would it take to exceed those numbers -- like, if you were to exceed them, what would be the drivers?

Let me start with that, Margaret. This is Wayne. As far as the drivers for sales growth, one, and I mention this, is football cleats. That is a big component of sales, and I think that we've indicated through our second-quarter outlook that that is going to be stronger than we expected. It is a great program for us. Second would be baseball cleats, and I mention that in Q4. A small portion of that would help with the top line.

The other components really would be how we perform. And so far in the first quarter, our visibility -- we are very proud of how we performed in the first quarter and how we continue to perform at retail. And in the back half of the year, it really relates to how programs such as fleece perform in the back half of the year. And probably the last component would be the timing of when consumer needs pick up for ColdGear. When consumers decide and when it's right to increase that ColdGear, whether it is going to be September, October that is a factor in it as well.

So even though you already incorporated some better expectations into your footwear numbers, you could still do even better that that?

Well, again, like every one of these pieces that you look at that I just went through, if everything aligns perfectly, there's always opportunity to have more puts than takes.

Understood. Just remind me, what percent of the business is on a replenishment model versus a forward order?

It's close to -- on replenishment close to 50%.

Two more quick questions. On your gross margins, I know you had been concerned about potential for price increases, giving polyester prices rising. Can you talk about how that has played out? And can you sustain margins at 50%? How do you feel about that?

Well, the good news in our gross margins for us has been that we now have visibility. We are making commitments for at least the back half of the year. So because our leadtime is about 120 to 130 days, we have that visibility. And based on our business and the strength of our business and the increase in volume, we have not seen any price increases passed on to us as a result of increases in oil prices. So that is a real positive.

When I look at gross margin -- again, strong sourcing initiatives I would expect to continue on. The ability to leverage the volume that we have in our business. And also want to mention that we have increases in for SKUs in the market. And as such, there's always the potential to have additional markdowns associated with that.

And the other point to makes is that football cleats, which we've commented will be a strong business for us in Q2, and baseball cleats -- both of those programs have lower margins compared to apparel.

Makes sense. Then the SAP rollout -- it is done and nothing could sort of pop its head up and become a problem with regard to those new systems? That would be one question.

And then on the military side, I had a few questions come in about the military not allowing the use of noncotton products. Can you talk about that and put it in the context of your AAFES business? Thanks.

Margaret, this is Wayne. On the SAP implementation, the project was an eight-month project. And the go-live date was planned for the quarter with our lowest volume. We resumed shipping at full capacity within about two weeks.

The SAP is a platform that will help us with our business globally. And the system is such that when you put any new system in, you are going to continue to make improvements, continued to use the system to its full capacity, continue to improve its efficiency. So there is going to be ongoing improvements to the system. But I think the key takeaway here is that we were able to resume shipping at full capacity.

As far as the military?

Let me jump on the military one. AAFES Force -- that is the Army and Air Force's exchanges, which basically dominates that number for us -- I think we have been talking all along about the fact that we weren't really looking to aggressively grow our military business, and we have been saying that for the last several months.

And what we do want to do is we do have a pretty good partner in AAFES. But I think to understand that mix, it is important look at the fact that more than half of the business that we do with AAFES is basic sporting goods. For instance, these are the exchanges that are on the local Navy bases where it's not just the soldier in the field, but it's his wife and it's his kids and everybody else who -- they are playing baseball and football and hockey. And that's really in [team color], the Under Armour consumer there.

So we don't necessarily anticipate much push or decline there. So again, we have been very conservative with what our growth in the military business is going to be. And we have effectively called it a flat business. But we see it as a very nice profitable business for us that we will continue to go after.

Congrats again.

John Rouleau, Wachovia Securities.

Nice quarter. A couple of questions. I want to start maybe with the footwear. On the preorder side, I know that you have generated a lot of energy around footwear here. But preorders -- are they actually running kind of ahead of where you thought they would? Do you have some sort of a plan for the preorders, because really, we haven't seen those products go for sale yet?

And the next part of that question is -- how quickly can you get back into the allocation side? Or how quickly can you increase inventory on the footwear side?

I don't know if a cleat has ever been sold to begin with in the month of April. So after we sold the first cleat, I think we were pretty much ahead of where most people begin with.

We have seen I think, again, just a tremendous amount of buzz leading up to this. And again, we haven't even launched our first commercial. And just about that, it's the campaign called Click-Clack, which we have been teasing since July of last year. We kicked off at the ESPN and ESPY awards.

I think there's a lot of momentum from the consumer. And what we are going to do this Saturday when we unveil on ESPN is really close that loop as to what the consumer is going to see.

So I think that's probably going to be the best barometer for us. But without question, I think we've seen very positive results. There's not necessarily one style that dominates over another. We have seen the balance that we're looking for. So based on the way that we have built the line, the good-better-best strategy that we have, the premium statement, the trading the consumers up into better product and higher ASPs I think has really come to fruition. We are anticipating a pretty positive launch from this.

So just following on with that, has it been the initial buy-in by the retailer that has got you raising expectations? Or is it just the way that they have kind of generally embraced the program? And I'm just trying to garner what is driving the higher expectations in footwear, given the fact that we haven't really started to sell these things yet.

John, this is Wayne. What we have been able to do is, again, show it to the retailer, get their initial read on it. And as a result of that, the demand by the retailer continued to increase. So we have been able to increase our production along the way. I think the takeaway is that, yes, they are all on a preorder basis, so that we did take the orders and we did match them with what the retailer's anticipations were. And so we will fill that. And that is part of the increase in our outlook and our excitement.

As far as getting back into them, I think with this program, we are going to be disciplined with our inventory. We are going to be disciplined with our launch. And what we did was we worked with our retailer to selected a number that we thought worked for them and for us. But we are not going to try to do a quick -- let's get back into it. So what we have out there we feel good about.

Sure. Smart. And then I'm assuming at the professional levels that the professional football players won't be able to wear the cleats. And I'm assuming maybe that's the case for baseball. But I just wanted to check. But they will be worn at the collegiate level -- is that correct?

No. They will absolutely be wearing the cleats out on the field. Now exposing the logo is the other thing that comes down to a license standpoint. But we've got these guys branded in these cleats. And frankly, the feedback from the professionals down -- all the way down -- has just been terrific. So people are looking forward to the performance attributes in addition to the look and style. So some of our NFL guys may have to sacrifice the look and style, but they will definitely be wearing the cleats out there.

So they will have them, you just won't recognize the UA on the side of the shoe, then?

With the NFL. With Major League Baseball, though, what you'll begin to see in the second half of the year -- and we've got more to come from a marketing standpoint there that we'd like to roll than program out -- but you will see Major League Baseball players with Under Armour cleats on in the second half of this year, after the All-Star break.

That goes hand-in-hand with more than 30-some baseball players we have out there currently wearing our gloves and our wristbands. And we've got people like Lance Berkman of the Houston Astros is a perennial MVP that will be wearing cleats. Kevin Millar, formerly of the Red Sox, now with the Orioles, will be wearing the cleats. And AJ Burnett, just to name a few guys.

Terrific. And then last question -- growth in the new performance products has been spectacular. Wondering if you can just kind of comment on the growth in the traditional compression products, whether that's kind of trending where you thought it would be? Maybe that's making up less of the mix these days, or how should we think about the core compression versus the new performance products?

Well, first of all, I think it is growing, is the safest thing to say. We have done -- through the good-better-best strategy we've I think really been able to add a lot of value, not only to the product, but as well as trading consumers up from an ASP standpoint.

A couple of examples in the spring -- we introduced the Diamond Mock, which is a baseball, which effectively complemented our long-sleeve HeatGear product. And our long-sleeve HeatGear is a $35 product. The Diamond Mock with a mock turtleneck with the logo on the collar is a $45 product. It is cut a little more specific for a baseball player, as well as has a couple more enhancements to it. Trading consumers up there and adding growth -- so we haven't necessarily cannibalized, but we've just complemented it.

Probably one of the most exciting areas that you're going to see, and it really dominates the Click-Clack campaign and commercial you will see this weekend, is around the Blitz 40 program that we are launching. Again, our wheelhouse product is our style 39 and 32, the short-sleeved and long-sleeved compression products, which are perennial top three or four styles in our line, and at 25 and $35, respectively.

We will be offering our new Blitz 40 program, which the short-sleeved version will be $35 and the long-sleeved version will be $45. And within those programs, it is color-block product. It is exciting, it is new, it is fresh. And our retailers have really got behind it and booked it in very, very strong. And we are anticipating, again, being able to bolster that category.

So leaving the same product out there isn't necessarily going to grow it. But the way that we I think bolstered it through a good-better-best strategy -- we're still seeing compression going in a positive direction.

And is that kind of low-double-digit type growth where the way it had been trending -- is that more or less what we're looking at going forward?

I think it is probably early to try to give an indication on a number right now. But without question, compression is still growing. And it is our job to continue to innovate, and tell the consumer where they need to go next in that category.

Thanks, Kevin, great job.

Jim Duffy, Thomas Weisel Partners.

My congratulations as well. On the footwear business, you had previously given some expectations for about 8 million in 2006 from footwear. What are your expectations at this point, given the feedback you have gotten from retailers, etc.?

Jim, it is Wayne. I think when you look at where footwear is going to be, football cleats, it is going to be in the second quarter. And the one thing that we've got is that business in the second quarter, from the initial outlook, we can be, as a total in the second quarter, we could be anywhere from 15 to 20% in the second quarter relating to football cleats.

Of total revenue?

Yes, in the second quarter. So it is a big component. And also with that, you take into account the other points that I made regarding margin. Margin on apparel is a little higher; margin on football cleats would be lower.

Sure. How many percentage points lower are we talking about, Wayne?

I think it is probably best for people who are kind of in that football cleat business. I want to point out -- this is important -- I think football cleats have a lower margin. I think footwear itself I can't comment on. But I'm not going to say that for the entire category. But it is significantly lower than some of the margins that we have been able to achieve currently and report currently.

So we should see some seasonality in the margins, then, over the course of the year. As we look to your current EPS guidance, you came out of Q1 with very strong gross margins. You beat the Street number by about $0.11. And maybe we had modeled seasonality inappropriately, but if you look over the remainder of the year, you're guiding to another $0.02 to $0.04 of upside from the amount of upside that you delivered to the Street number in Q1. Had we modeled the seasonality wrong? Or from all perceptions here, it looks as if you are being conservative over the second half of the year.

Jim, I think one is we provided -- I think this is important -- we provided the outlook for the entire year. And we look at our business on an annual basis. But when you look at it in pieces and -- what could impact -- what could impact the quarter's net income?

Well one, one of the things that we mentioned earlier was marketing. And the marketing spend for the full year is 10 to 12%. But in the first quarter, the marketing was 8.6%. And I want to point out that in the second quarter in support of the launch, that marketing spend will be higher than the 10 to 12%. So timing of marketing spend plays a factor in this when you start to look at quarters. But also, again, the takeaway here is that marketing for the full year is a disciplined 10 to 12%. So it is an important driver for us.

The second piece, when you look at it, again, looking at the full year, the pluses -- the pluses are football cleats being good, small portion of baseball cleats in Q4 and the better visibility we have into our business with the fact that our apparel business, as Kevin has been talking about, is very strong. So taking all those factors into account, I think that is how we're looking at our full-year business.

So thinking about the seasonality, increased marketing spend and some impact from the gross margins in Q2 from footwear, where will we see the marketing spend concentrated thereafter? Will it be fairly evenly distributed in Q3 and Q4?

I think the one thing that we have always maintained, and particularly when we were even smaller than we are now, and frankly, we are still somewhat a small company, is that we like getting as much bang for our buck as possible. We do all of our marketing ourselves. Our job is to make $1 spend like 3. And when we do that, our marketing approach is basically a cluster approach.

And when we are out there, this weekend, you are going to notice our commercial on television if you are a 12- to 24-year-old athlete. And that is our goal and intent. It won't be evenly drawn out, and it will be a two- or three-week burst or cluster. And then we will come back and we will hit the consumer again before they go off to their camps. Then we will come back and hit them again before they begin the season.

So the one thing I don't think you can count on is that there's anything consistent about our marketing spend. When we come after it, you can probably look for five or six major bursts across men's apparel, across footwear, across women's. But I think the one thing you'll find is evident is that all our campaigns, whether it is a cleated ad or whether it is an apparel ad, are first and foremost branded ads.

Let's try to squeeze in two more questions, if we can.

Dan Wewer, Raymond James Investment.

Just following up on footwear, will this business be profitable during the second quarter?

Well, we have said our footwear business would be profitable in its first year. So the answer to that is yes.

Thinking back on the original guidance for the second quarter, you guys effectively laid out the fact that you'd have extra marketing expenditures. You have the inherent lower margin rate on footwear. What has changed between now and let's say three months ago in the second-quarter outlook, particularly given the sales growth is so robust?

This is Wayne. I will start off with we always provided the full-year outlook. So we never really provided anything by quarter. So our full year changed in this respect. We definitely had a greater demand for our football cleats, which have been on that preorder business. And that is an impact in the second quarter. We are also throughout the second quarter and the remainder of the year seeing stronger demand at retail for our products. That's another big factor to it.

In terms of the gross margin, as we have increased our footwear, we have a lower-margin business with footwear. And also, the other point to make is, again, marketing. Although 10 to 12% for the full year, and that is our discipline, as Kevin mentioned, we can't necessarily say that every quarter is that 10 to 12%. We use it when we think we need to put it behind an initiative. And I think the second quarter is a great initiative to put it behind. So I think those are the factors that have impacted our view from maybe three months ago.

You had mentioned 8.6% marketing spend in the first quarter this year. You may have mentioned what the year-ago marketing budget was. But can you can remind us what that was in Q1 of '05?

Actually, the marketing budget in Q1 '05 was right in the middle of that 10 to 12%.

And then a second question. I know that we're seeing a tremendous amount of the new product, particularly in golf, at the different full-line stores. Have you had any feedback yet as to the sell-through on that product and whether or not the clearance activity will be greater or less than you had originally expected?

Without question, particularly about our new Striper polos that we have out there in the marketplace. There's been a tremendous buzz. I was in stores this past weekend can again and having a very difficult time finding the Stripers and talking to associates. And our reports in Edifice backed that up as well. Our golf program is something that has created an enormous amount of demand, particularly in our big-box guys.

I thought what was interesting, Kevin, is that typically, Under Armour is the highest ASP in the category. In golf shirts, a lot of your competitors would be at 80 or $100. And so there, you really have a lot of upside on your ASP.

Well, I think that probably speaks to the fact that we took a product that was -- our first golf shirt started as a coach's polo, which was out there at $40. And again, it is a profitable product for us. We can deliver a better product to the consumer. So we don't have an issue with that.

But it is a great entry point into Under Armour golf. So from there, we are now trading consumers up into 50, $60-plus Striper shirts as well. So I think we have won that consumer and we have built it with a basic, and that's always great to have in any category, to say that you can be meaningful.

And then the last question I have for Wayne, you had talked about how the clearance centers are helping your gross margin rate. If you could just kind of walk me through as to how that helps your margin rate and discuss how the accounting on that works. Thanks.

Well, I guess the starting point is our retail outlet stores, which have been set up and established and continue to be there to liquidate excess inventory. So I think it is an important takeaway, is that the purpose is liquidating excess inventory.

And the benefits of retail in terms of how the margin works -- when you move product to your retail outlets, you move it at your standard costs. So you now have a product in your retail outlets at your standard cost, and the market is going to bear a selling price. And I think retail outlets for most companies, if you brand is very strong and your service is good and your location is right, is that you can have a very profitable store.

And I think what we have been able to do with our retail team and our retail outlet team is that we have excess product, which is a very strong brand in good locations, and as a result of that, both top-line gross margins and operating margins have been very strong. So the impact of the gross margin has been positive, again, because you're able to sell at retail.

Another component is our direct to consumer business, the same with that. Whenever you sell direct to consumer, you typically would have higher margins.

We'll take one last question, please.

Jeff Klinefelter, Piper Jaffray.

Congratulations as well, guys, off to a great start on the year. Just to very quick questions. Everything -- a lot has been asked. But the question is on youth -- the youth market. I know the growth rates are very strong. The base is relatively small. It is in a fairly significant number of doors. Any thoughts there on how productivity starts to ramp up in that market? It seems like that could be a really big opportunity going forward, considering the popularity of the brand with the young consumers.

No question about it. Our youth mix actually grew from 6% to 8% of the overall Under Armour mix. So when you look at -- women's has increased, youth increased. And it's taken at the benefit of the ability to grow those categories.

So I think we view youth should be roughly about 10% of our business, is where we would like to get it to. We haven't done a great job to this point, I think, of focusing. We have done -- all we have done for the most part is just shrinking our men's styles down. We have changed that really in the last eight months in bringing on an expert to run that business and manage that business for us and to really put the resources around across all the different categories to focus on building a great youth business.

So I think when you walk into some of our new stores out there, particularly I mentioned that Dick's Dulles store -- there's an unbelievable youth section in the back of that store as well. So you will really see an emphasis from us, and I think you will see the product to support it.

One last thing on your golf product -- I don't know if I missed this during your prepared comments, but is that -- in terms of the distribution of that product currently, the number of doors it is in, the number of doors that it could go into, and how much of that could be unique distribution to the rest of the UA product?

I think, again, we have proved that product out within our existing distribution. We do things a little differently. We started in our core distribution, which is sporting goods. And just like we did I think in the outdoor space, we first -- we took our HeatGear and ColdGear products that were in sporting goods and we tested them out in the outdoor lodge section of the stores of Dick's or Sports Authority.

We found they had a consumer there. They were being successful. So we then took that product to the specialty guys in Cabela's and Bass Pro Shops. And today, those are two major additional retailers for us.

So we see I think the opportunity with golf being no different. It has been supported really across the board from our customers, because one guy's golf polo is another guy's coach's shirt. And I think we have been able to leverage that ambiguity of our product line and to just the consumer who wants to wear Under Armour.

And the more we can find that loose-fitting Under Armour becomes more and more of an opportunity for us as we see those numbers skew away from Under Armour being a compression brand to, again, being about performance. And we can speak to that customer.

So do you have a golf pro shop distribution strategy?

Well, a new licensee, for instance, Gear for Sports is somebody who -- to go after. They've got two components to their business. One component is the bookstore business. The second component is the green grass and going after those local pro shops.

And what they give us in obviously in both those distribution channels, it is important on a college campus to have the school name on product. We did not have that capability. And we found a partner who effectively buys Under Armour product from us directly from our factories and then embellishes, holds them in their warehouse, embellishes the products and gets them out there. So that is a competency of theirs. And we're excited for the branding opportunities, as well as what it's going to mean on the licensing line for us.

Okay. We are going to cut it off there. Thanks, everybody. We appreciate your time this morning and look forward to talking to you again soon. Thank you.

That does conclude today's teleconference. Thank you all for your participation and have a great day.