Under Armour Inc (UA) 2006 Q2 法說會逐字稿

Good day everyone and welcome to the Under Armour second-quarter 2006 earnings results conference call and webcast. Today's call is being recorded. At this time I'd like to turn the call over to the Director of Investor Relations, Rick Anguilla. Please go ahead.

Thank you and good morning everyone. Welcome to Under Armour's second-quarter 2006 earnings call. 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 estimates, intend, expect, 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 in the risk factor section of our filings with the SEC. The Company assumes no obligation to update forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

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

Now I would like to introduce the speakers and topics for this morning's call. Kevin Plank our Chairman, CEO and President will address what drove our second-quarter results and our strategy for long-term growth. Then Wayne Marino, Executive Vice President and Chief Financial Officer will then discuss the Company's second-quarter financial performance and discuss the Company's updated outlook for the balance of 2006. After that we will have a short Q&A session that will end by 9:30 AM.

And with that, I will turn it over to Kevin Plank.

Thanks, Rick. Good morning everyone and thank you for joining us today. We posted another solid quarter of results and preformed well against the objectives we had previously identified as growth drivers. We continue to focus on growing our business first and foremost within our core apparel offerings and primary distribution. We delivered 31% growth this quarter in our apparel business led by strong performance in both the men's and women's categories.

We continued to execute our international strategy. Earlier this week we announced a number of new partnerships that will provide broader distribution for the Under Armour brand in key markets like Germany, France and Italy.

Finally, we had told you that we would make the debut of Under Armour football cleats the brand’s most successful launch to date. We did. More on that in a few minutes.

As you saw in this morning's press release, we accomplished these goals and delivered strong top and bottom line growth with revenue up 63% this quarter and net income up 33%. What I am most excited about is that we continued to demonstrate the ability to take the Under Armour brand into new categories and new markets and be successful. It comes back to our basic strategy for our brand. We go where we are authentic and we go where we can win.

Footwear, we proved this formula for brand extensions with our entry into footwear this past quarter. Our campaign for football cleats entitled Click Clack, was comprehensive, coordinated, and most importantly, authentic. We delivered product on time and we drove consumers into stores and to our website looking for Under Armour footwear. We even created buzz in the cleat category in the month of June, six weeks ahead of what is traditionally the strongest part of the selling season. The debut of Under Armour footwear shows exactly how we execute all major product launches with branded campaigns tied to all touch points of our customer base. From the very first Click Clack television commercial more than a year ago, all the way through to the branded Under Armour shoebox on the retail floor, we told a consistent message not only about our new product line but also about the spirit of our brand.

Click Clack strengthened our hold on the sport of football and this fall three major collegiate football programs, the University of Maryland, Auburn University and Texas Tech, will take the field wearing Under Armour cleats. And we believe based on the response from consumers that the door is now open to applying Under Armour technology to other athletic shoe categories.

On a side note about cleats, we recently game tested a few pairs of our new baseball spikes to some of our players in Major League Baseball. All-Star Lance Berkman tried on our cleats and hit two home runs in his first two official at bats to lead the Houston Astros over the Chicago Cubs on July 3. On Monday of last week Juan Rivera of the Los Angeles Angels had a similar outcome launching two home runs in his first game wearing Under Armour Click Clacks. Two days later, Pedro Feliz kept the streak alive by hitting a home run for the San Francisco Giants, his first time wearing Under Armour performance footwear. All totaled, five MLB position players have tried on Under Armour baseball cleats, three of them hit home runs in their first games. All this game proven authenticity contributes to the excitement we have internally for the footwear business.

Growing the core. In other new categories of business we've seen growth in applying Under Armour technology to new styles and new sports. Our success and sellthroughs for our performance golf polos have lead the majority of our key accounts to expand our golf offering to all doors. Golf is another natural extension of our brand and to a category that has seen little innovation in apparel despite growing consumer demand for new styles, new designs and moisture management alternatives to basic cotton. Again, we go where we can win.

On the women's side, we continue to post strong numbers with business up 37% this quarter and 77% year-to-date. We also saw over 100% growth in sales of bra silhouettes that were merchandised with our new sport bra fixture system. Additionally, our increased assortment has allowed us to give our female athlete more style, color and fit options.

For the training category as a whole, we have seen sales of loose fitting styles of Under Armour HeatGear surge among both the male and female team athlete and individuals serious about their workout and competition. In the first half of the year, sales across loose fit and compression fit apparel split all most 50-50 compared to 65-35 in favor of compression just a year ago.

We are not however cannibalizing compression as that category continues to grow particularly in women's where core items like our HeatGear T and our compression shorts are up over 30% from the second quarter of last year. This is proof that the demand for performance fabrics transcends just serious team athletes wearing compressions during competition.

We will continue to deliver the Under Armour story and the benefits of our performance products to new consumers and new product categories. The fact is we've only begun to scratch the surface in these categories which are natural authentic extensions of our brand. We are reaching new consumers and we are building new styles, new colors lists, and new categories for athletes to experience what we call the universal guarantee of performance.

So let me remind you, cotton is still the enemy of any athlete looking to improve his or her performance while training or competing. And we remain dedicated to providing the gear for them in all facets of their competitive and active lives.

Fortifying our operations, I'm proud to say that Under Armour is just as strong behind the scenes as it is in the market place. Our systems and infrastructure continue to grow along with our business. Wayne will take you through more detail in our SAP implementation, but we are pleased with what we have seen to date and believe that the SAP system will enable us to profitably scale our business both here in the U.S. and throughout the rest of the world. Our own internal team as well as the SAP corporate team deserve tremendous credit for implementing a full ERP system while allowing our business to continue growing more than 60% this quarter.

New hires from within our industry and outside have bolstered the back end of our business as we continue to join experienced veterans with our own brand experts. The addition of key new hires across our apparel and footwear teams, our supply chain, IT and eCommerce business headline our commitment to building a great team to both fuel and manage our growth.

International, we believe we can win outside of the U.S. and the early indicators -- while we began the year selling in just about 100 retail doors in all of Europe we feel confident that number will land somewhere between 400 and 500 by year's end. A great example of growing our doors in Europe through authentic distribution is JJB Sports in the UK. I mentioned on the last call that we were conducting a 20 store test with JJB for spring and we're now in the process at rolling to 150 of their more than 400 doors this fall.

Following the UA model means being authentic on field. We continue to make progress on the grass-roots efforts of our sports marketing departments in and around athletes and leagues. We are excited about our growing relationship with European football including the recent signings of Reading, the English Premiership, (indiscernible) in the German (indiscernible) who will both be wearing Under Armour as their official base layer this season.

Probably one of our most exciting athletes in the sports marketing front is our Ironman triathlete, Chris McCormack. On June 25, the Australian known as Macca, was crowned Germany's Ironman champion for the fourth year in a row. This came just a week after you he won the Half-Ironman in Sherborn, England. Back in April, he won his fifth consecutive Australian Ironman championship and we look forth to him competing for his first Ironman world title this fall in Hawaii at Kona.

The next leg of our European growth story is expanding into new markets. We announced earlier this week that we signed distribution agreements for markets throughout Europe including France, Germany, Italy, Benelux and the Nordic region. We also signed a distribution agreement that will establish the Under Armour brand in Australia.

Our business is strong. The second quarter presented big challenges for us with the launch of football cleats and the implementation of SAP. I'm proud of what our team accomplished in these two critical areas as we have laid important foundations for our growth. We believe we have a very strong product pipeline coming in the back half of this year with terrific new products around both our HeatGear and ColdGear offerings by implementing the good, better, best product and pricing strategy.

We are expanding our fleece offering which we tested during the 2005 holiday season and found that the demand was there for performance fleece from a new brand above $50. We're introducing girl's youth product this fall and we will also debut Under Armour baseball cleats to consumers late in 2006.

We're delivering against our three biggest opportunities, by growing our four apparel business, establishing ourselves as an authentic athletic footwear brand and laying the groundwork for international expansion. Most importantly, the Under Armour brand continues to gain strength and momentum as we introduce our performance products across the globe. In this respect our strategy remains simple. We are going where we are authentic and we are going where we can win.

With that, I will pass it over to Wayne.

Thank you, Kevin. I'm going to take the next few minutes to provide you with a recap of our second-quarter and six-month financial and operational performance then I will walk you through our outlook for the balance of the year.

Net revenues for the quarter increased 63% to $80 million. We had strong sales in the quarter for all of our existing product categories and added a new category with the launch of our footwear, which in its first reporting period contributed $15.6 million to our top line. For the first six months, net revenues increased 57% to $167.7 million. This strong sales performance helped generate a net income increase of 33% for the quarter or $2.4 million versus $1.8 million in the second quarter of 2005. For the six months, our net income increased 157% to $11.2 million versus $4.3 million for the same period last year.

Turning to EPS, as you saw in the press release, second-quarter diluted earnings per share was $0.05 compared to diluted earnings per share of $0.03 in the second quarter of the prior year despite a 32% increase in share base because of our IPO last November. For the first six months, diluted earnings per share was $0.23 versus $0.08 in the comparable period. 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.

Now let's take a look at our net revenues. Our net revenues consist of sales within five product categories and licensing. Our five product categories include men's, women's, youth, accessories and now footwear. Our men's business is our largest category and grew 30% during the quarter to $41.9 million and 31% for the six month to $94.4 million. We currently sell our men's product in over 9000 doors worldwide.

Our women's business increased 37% during the quarter to $12.1 million and 77% for the six months to $33.1 million. I would note that our second-quarter sales in the prior year included a higher percentage of closeouts and excluding the closeouts, the women's business would have increased 65% for the quarter. Women's is currently sold in over 4500 doors in North America.

Our youth business which currently targets boys ages 12 and under, grew 25% in the quarter to $4.1 million and 72% for the six months to $11.1 million. Youth product is currently offered in approximately 5000 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 increased 16% to $2.9 million for the quarter and 22% to $7.7 million for the six months.

As Kevin detailed, we had a very successful launch in footwear. Our new cleats and slides were sold through our existing distribution in over 1600 doors and generated $15.6 million in net revenues. This represented 19% of net revenues for the second quarter which has historically been our lowest revenue quarter.

Net revenues for these five categories combined, men's, women's, youth, accessories and footwear grew 64% in the quarter to $76.5 million and represented approximately 96% of our net revenues. The balance of our net revenues were derived from our licensing business which increased 58% during the quarter to $3.4 million.

Now moving to our gross margin. For the quarter, gross margin decreased to 47.8% compared to 50.1% in the same period last year, or a 230 basis point decrease. Changes to the gross margin included the launch of our cleated footwear which has lower margins than our apparel products and negatively impacted gross margin by 280 basis points. In addition, higher than anticipated sales allowances due in part to the initial implementation of our SAP system, which were partially offset by lower customer discounts, had a negative 70 basis points impact on margin. This decrease in margin was partially offset by growth in our higher margin businesses such as the Web, retail outlet and licensing as well as continued improvements in our apparel sourcing. Collectively these factors had a positive impact of 170 basis points on our gross margin.

It is also worth noting that in the prior year gross margins benefited from closeout sales on inventory that had previously been written down in other reserves. The impact to gross margin was a positive 50 basis points.

For the first six months, gross margin increased 220 basis points to 49.2% versus 47% in the same period last year. We are pleased that we achieved this year-over-year improvement while launching footwear and implementing a new ERP system.

SG&A for the quarter totaled $34.8 million, an increase of $13.9 million or 67% compared to the same period last year. SG&A as a percentage of net revenue increased 43.6% from 42.7% last year. This increase was attributable to our planned increase in marketing costs related to our footwear launch and additional operating costs associated with our strategic investment in Europe. Marketing costs are the primary component of our SG&A costs and were 13.2% of net revenues in the quarter compared to 12.8% in the same period last year. For the six months, marketing costs were 10.8% in 2006 compared to 12% in 2005.

As stated previously, we are committed to an annual marketing spend of 10% to 12% of net revenues to drive our top-line growth. For the six months, SG&A as a percentage of net revenues decreased to 38.7% from 39% in the same period last year driven mainly by higher sales volumes.

Our operating income for the quarter was $3.4 million compared to $3.6 million in the prior year. Net interest income for the quarter increased to $1.1 million as a result of our improved cash position. Our resulting net income for the quarter increased to $2.4 million from $1.8 million in the same period last year.

Now I'd like to take you through our balance sheet. Inventory at the quarter end was $80.2 million, an increase of $31.1 million or 63% compared to the same period last year. Approximately 10% of this increase represents planned inventory for new businesses such as our international initiative. The balance of this increase reflects our strategy to take receipt of fall merchandise earlier than we did in the prior year. This will allow us to support an increased number of product launches this July compared to the prior year. We anticipate a decrease in our inventory levels in the back half of the year and feel very positive about our inventory position.

I would also like to report that our retail outlet strategy, which is to profitably sell our excess inventory, is proving successful. We continue to expand our outlet base in the quarter and expect to have a total of 11 retail outlet stores of by year end.

Net accounts receivable increased by $32.1 million on a year-over-year basis and $10.1 million from prior year end. A majority of this increase relates to the increase in our sales. However, there are several other drivers that have impacted our net AR. Beginning in 2006, a majority of discounts earned by customers are recorded as a liability within accrued expenses as opposed to an offset to accounts receivable. This is simply a change in presentation and will impact the comparability of our year-over-year net AR for the balance of this year.

Our growing sales concentration in the U.S. and Canada with what we refer to as our key retailers is accelerating our growth. Sales to key retailers were 62% of total revenues for the quarter compared to 50% in the same period in the prior year. One of the benefits of growing our business with these accounts is lowering our accounts receivable risk. This is evidenced by our allowance for doubtful accounts which is less than one-half of 1% of our year-to-date sales.

Approximately $3.3 million was a result of timing of payments received in July and longer payment terms extended to smaller accounts on the initial launch of our football cleats. Total cash and cash equivalents at the end of the quarter were $41.9 million and cash net of debt was $33.7 million. Our investment in CapEx for the quarter was $3.8 million and consisted of $1.5 million for in-store fixtures; $800,000 for the buildout of new retail outlet stores; 700,000 related to information technology initiatives in the United States and Europe, mainly SAP; and the balance for improvements to our distribution house and other general corporate needs. As we stated at year end, our CapEx budget for the year is 15 to $16 million and we still expect to be within this range.

One of our most recent operational accomplishments has been the implementation of SAP's apparel and footwear solution. In our first quarter in operating in SAP we were able to grow our revenues by 63%. This is a real testament to the team we have in place here at Under Armour. We continue to work through anticipated implementation issues associated with the startup of an ERP system. However, one of the reasons we chose SAP is the ability to leverage functionality across our businesses. Most recently we implemented SAP for our European operations. We are pleased with our selection and implementation of SAP to date and expect to leverage this system as our business grows.

And finally I'd like to turn to our outlook for the remainder of the year. As a result of the momentum that we are seeing for the Under Armour brand at retail and our ability to service this business with the appropriate level of inventory in fall product, we now expect annual net revenues in the range of 400 to $410 million, an increase of 42% to 46% compared to last year.

Now let's turn to net income for the year. Taking into account the following factors, higher revenue expectations for the full year, gross margin for the back half to be comparable to the back half of 2005 as we begin to anniversary the benefits of improved sourcing, our continued investment in marketing our brand as revenues grow,continued investment in new growth initiatives such as Footwear International, higher costs relating to being a public company, and effective tax rate for the full year in the range of 39.5% to 40%. We expect net income for the year to be in the range of $34 million to $35 million, an increase of 72% to 78% compared to last year. We expect fully diluted weighted average shares outstanding of approximately $50 million for 2006.

In summary, we are very pleased with our results for the first half of 2006. Our apparel business grew 43% in the first half with strong revenue growth in men's, women's and youth. We introduced new categories like golf which performed very well at retail that positioned ourselves to service the demand in the back half of the year. We made significant progress on the ground in Europe in sports marketing and signed distribution agreements for Europe. We expanded our operational infrastructure with SAP both in the U.S. and in Europe. And most importantly, we established ourselves as an authentic footwear brand on the football field. We remain focused on growing our business profitably while investing in strategic initiatives that will drive our long-term growth.

This concludes our formal remarks. And now Kevin and I would like to take your questions. Steve?

(OPERATOR INSTRUCTIONS) John Rouleau, Wachovia Securities.

I want to focus in a little bit on the core business if I could, again, exceptional growth out of the men's business. And I'm wondering, Kevin, if you could just talk about maybe break it down between new products such as golf and some of the more older existing products such as compression and give us an idea of how much the new products are really driving growth? And what kind of growth you are getting out of the more older legacy compression products if you will?

Sure. I think there were too big categories that drove I think the growth in the men's business. Men's again was up just -- it was up over 30% for us on the quarter. Training was nearly half of that growth and training is consisted of our tech product as well as more of our team oriented products. So we're pleased about that. Golf was nearly one-third of the growth that we saw. And golf I think is a category again where we are just beginning to scratch the surface there. You know, it is affectively new business for us that we've just begun to classify it and again, our golf product was the evolution of a Coach's team polo.

So we're seeing that more and more. I think we are happy about the fact that compression continues to grow for us as a business but again, I think we've demonstrated that we're not sitting on our laurels there either. One program that just launched actually we just shipped it with our 625 release is our new Blitz product which is on at retail now and performing very well as we are hearing it. Again that is the color block version of our basic HeatGear product. So I think again building around the basics, building around the core and we've got good confidence I believe in what our compression business can do for us going forward.

Okay. And then kind of similarly, looking at the women's and the youth business, I know if you back out the clearance sales from last year, women's grew I think something closer to 65%, that decelerated a little bit from the first quarter where it was up I think 112%. Was the first quarter just a blowout type number or was there anything else that slowed that growth a little bit in the second quarter? Maybe you could just talk about that the deceleration in women's and youth.

Well, I think the most exciting thing from the women's side was the expansion that we had on the door count. Again, we grew from 3500 to 4500 doors and what that is saying I think is that the belief that the retailers are now finding in the brand. And again, of that 1000 doors, 400 of that expansion was across our key accounts. From a product side, I think we feel great again. Women's above 20% compression or 30% compression top and bottom growth that we saw in the women's business. So I think again, expanding and taking the performance message even beyond just the athletic field while still staying true to that core team athlete represents a lot of the upside. But training, fitness and compression were all the components that really led to growth on the women's side.

Okay and then last question. On the international side, can you give us a few more details about the announcement you guys put out yesterday maybe potential timing of when some of these distributors will start to sell or distribute product, potential contribution from on the revenue side next year and maybe the associated margins or expenses?

Sure. I guess the most important thing again is our belief in the fact that performance is applicable across the globe. We proved that out we believe through our Japanese business and again, the emphasis that we had in Europe is still in the Big Three of Germany, the UK and France. So we are currently servicing all three of those markets right now out of our [Tillberg] distribution house facility in the Netherlands. And you will see product in those markets immediately in the next few weeks if not already.

The other announcements that we made are things that you will see begin coming to fruition I think over the next three to six months when we will really begin to service and get after those account, get after those markets.

Great. And then I mean Germany, France, and UK is that a commission type sales force? Is what -- what is the associate's kind of margin and expense associated with those three big countries?

This is Wayne. As far as the UK, we have our force, our own internal people on the ground in the UK. And they have been there were I guess the last year. If we look at Germany and France, the operations that we will do there is a commission operation. We call it master agent I think in the agreements. And it is really a variable cost. We will pay people a percentage on the sales that they have that we collect. So for us it certainly is profitable both in the gross margin line as well as the operating margin line and gets an opportunity to be with people who are familiar with the country and again, keep the costs really pretty much a variable cost for us.

Great, thank you.

Margaret Mager, Goldman Sachs.

Hi. I just wanted to ask a little bit about the outlook for margins or gross margins as you look out to the second half of the year. I know that you had some concerns or wanted to keep expectations in check with regard to margins because of rising input costs on polyester prices and what not. So can you talk a little bit in more detail about the outlook for margins in the second half of this year and the impact of cleated footwear as well as rising product costs? Thanks.

Margaret, hi. This is Wayne. As far as the margins are concerned, the best view I could give you for margins is not to look at it on a quarterly basis. When you look at the back half of 2005 I think the back half of 2005 had the benefits that we received from our sourcing. And so if I looked at the back half of this year as those benefits anniversary, I think that would be a good benchmark to start with. Again, looking at it more on a six-month basis not necessarily on a quarterly basis.

The other component, the puts and takes with it, we would have some positives from our growing business, our direct business which includes our Web business, our retail outlet business will be a growing business. I'm also sensitive to the fact that we have more product in the marketplace and there always is an opportunity to have markdowns which we haven't seen to date but I would also call it out as an opportunity. So best view is last year back half combined.

As far as the cleated business, we essentially shipped in the second quarter our cleated business as it relates to football. And when we look at the back half, we will have a very small portion of our baseball cleats. For example, in the fourth quarter baseball cleats may represent 5 to 6% of revenues in the fourth quarter. So it will be a small portion which will carry into the first quarter of 2007. And obviously those margins on baseball cleats will be a lower margin business than our apparel business. So I'd factor that in slightly to the last quarter.

Okay. When will you expand the footwear initiative into non-cleated footwear? And one of the things you talked about was earlier receipt of fall merchandise because of increased product launches this year versus last year. What are the one or two key product launches besides footwear that you would outline that are impacting inventory? Thanks.

Sure. Margaret, it's Kevin. I think first of all again, we -- the brand is the story and let me give you the big picture thing real quick. It is in every product we build. Like a chapter in a book, it needs to make sense. The one before it needs to make sense for the one after it. I think entering the market we wanted to begin on field and authentic and we are representative of that. Virtually 100% of the people who buy football cleats are going to wear them to play football in. So I think that's something that speaks again to the authenticity of our brand. You know baseball cleats is the next natural extension and I'd really leave it dictated to the ability for us to number one, build out our team of experts and to give our Company the confidence that the product we put out there is the best in the marketplace.

You know we can look our customer in the eye and tell them that we believe we have the best football cleat in the market and I believe the success that we've seen even just through June, really speaks to that. So I think we're not ready to commit to the next category as much as telling you that we are committed to ensuring that football cleats finish as well as we have successful baseball cleats launch this fall and next spring.

The other component in terms of product is I think probably the biggest launch that we have is number one, building around our core. I think it is good, better, best strategy. I mentioned in the script of building around HeatGear and ColdGear. Our HeatGear, we're pretty excited about this new program called Blitz again, which is the color block version of our basic HeatGear which again a million plus unit program that we're building around the basics there. Out on the floor now and again doing very well at retail.

We're doing the same thing with our ColdGear offerings. And again, these were these franchise businesses that we've had, million plus units that we're building I think color blocking and also fabric enhancements into them, so we are adding that good, better, best strategy into both our HeatGear as well as into our ColdGear offering which you'll see out at retail this fall.

Probably the new category is fleece. You know we found out and we tested it last holiday that the consumer will pay $50 for performance fleece and fleece that does something. Our brand carries that and we effectively liquidated product at retail last holiday. And so we've actually -- we're coming back with that program in a bigger way than we did a year ago and I think really are going to find out what the consumer is looking for and give them and deliver on the promise that we've made to them. So we feel good about those two categories and again, the pipeline of product in the back half of the year is very, very strong.

Okay. I have two more quick questions. One is, Wayne, on the international distribution agreements, is that a wholesale sale at a discount to a direct wholesale sale that you would make yourself so that your distributors can make good decent margin? And when does that really start kicking in to your revenue line?

Yes, the two agreements we have, one is the master agent agreement that is a straight commission agreement and the distributor agreement you are correct, it ends up in the top-line. And typically the way the distributor agreement works is we would have -- the distributor we would charge them cost plus a certain percentage. So in effect our gross margins would be impacted with lower gross margins on a distributor agreement but our operating margins would be fine with it. So it does end up in the top-line. It is a cost plus a certain percentage that you'd come up with. The distributor would take inventory risk, the distributor would take receivable risk.

As far as when that starts to roll in, it's still early yet and the majority of these deals -- first of all I want to point out a majority of these deals are master agent deals. But the bigger countries and I think more dominate countries and higher volume will be master agents. But again, the majority of these deals start to kick in as Kevin said really in 2007 in terms of volume.

Okay. And then last question is, one of my observations in the stores is that the in-stock levels for your product could be much better than they are -- I can see a lot of stuff selling out. How can you manage that better from your end or is that really just your retailers and sort of deficiencies in their systems’ inability to anticipate proper reorder levels, etc.? Thanks.

First of all, I mean they are great problems to have but they are still problems nonetheless. I think we've seen it in a couple of places, with cleats for instance, is that just on the footwear side we built and allocated a limited number of product to put out in the marketplace. So effectively that is what we wanted to do. And we really peaked with our market share in the month of June before we began to see our product and the sizing get broken out there. So from a marketshare standpoint again, we targeted the high teen marketshare with cleats. And we'll effectively get there we believe with the bulk of the selling season really just beginning in the next week or two.

On the apparel side, it's something where I think we continue to strive to get better, just speaking for women in particular. And I mentioned the success that we've seen in compression product in women's. A lot of that is due to the fact that we've expanded our order replenishment capability around women's. For instance, our compression shorts, you know we've added a 2 inch, a 4 inch a 7 inch compression short. And business has responded by being upwards of 30%.

So I think it comes back to us making the prudent decisions of what products and what inventory we want to get behind and just the ability to service them. But again, that is another place where we see SAP helping us with capability like available to promise as well.

Okay, thank you and good luck in the second half.

Jim Duffy, Thomas Weisel Partners.

Thank you. Hi, everyone. A clarification question. Is the football cleat revenue over in Q2 or will that lingers some into Q3?

Jim, it's Wayne, yes. For the most part it is over in Q2.

You guys are pretty much out of stock and don't have more to ship in?

We made -- our strategy was to have the football cleat as an allocated program. And we serviced our accounts early which was a credit to the entire team to get that product out to the store in early June. And so we made sure it was on the floor and in the store. We certainly have some cleats which are available for reorder, but the majority of the football cleats that we've allocated has been shipped in Q2.

Okay. And then a follow-up I guess on Margaret's question on the gross margin. Why wouldn't Q1 be more a comparable number from a gross margin standpoint given a lot of the progress that you've stated you've made with the SAP system, outlet stores, etc.?

I think Q1 does reflect a lot of the sourcing benefits but when you start to look at Q1, we had year-over-year benefits in sourcing. When you start getting to the back half of the year you start to see the anniversary. And I think that the better indication is looking at 205, but Q1 definitely was a very positive quarter for us.

In terms of some of the other things that will be in the back half that are similar, you know you have a better product mix in the back half of the year relative to the front half of the year. You also have a small amount of the baseball cleats in Q4 which I think you have to factor in even though it will be about 5% to 6% of revenues.

Okay. Did you disclose the contribution of the international business? And are you comfortable sharing any objectives you have for that business over the foreseeable future?

This is Wayne again. No we haven't gone down to that level of detail. I think what Kevin and I have said in the past is that our intention is to have the international business be a profitable business. But one of the things that we want to stress with our international business is that it is a long-term investment. We're starting to see the benefits on field and we're starting to make investments in salaries, travel, recruiting, to build the infrastructure. And one of the benefits we have year this year, which I mentioned, was to expand our SAP initiative to Europe.

So it will be profitable but first and foremost is to establish ourselves on the field as an authentic brand and as we've just done in the last week or two is to engage in master agreements -- master agent agreements with the right partners so that we can start to build that business for 2007, 2008.

Okay. Kevin, a question for you. Direction on the advertising messaging going forward. Historically you've done a lot around the football. I know you have the women's campaign. Compression has declined as a percent of the mix. You have a lot of new sport specific product. What should we be looking for from you guys with your ad campaigns?

Well, I think the first thing I would say, Jim, is that I would probably argue with you and say that I don't believe we've ever run a product commercial in our career here. I think everything that you see especially our most recent campaign, Click Clack, it's about brand. And it's about telling a great branded story. For instance, the Click Clack commercial that we ran, it featured three of the six or five or six athletes that were in the spot were wearing our new Blitz product out there. Another one was wearing our new Metal ColdGear product.

So I think again it's selling the messaging of what Under Armour is. And we believe we are still in that point and that is what I think great branding and great marketing is, it's the selling the consumer on the emotion. And the product is almost a given that the quality is there.

Good, well clearly it has been effective. Thanks, guys.

Robbie Ohmes, Banc of America Securities.

Two quick questions. The first is if we could get an update on when or if you would really start expanding your U.S. stores and maybe getting into the malls more beyond Nordstrom? And the second question is can you talk a little bit about your outlook in your business in the U.S. in terms of AUR versus unit volume trends? Especially in the back half, do you see outerwear fleece launches pushing your AURs up and maybe supporting more revenue growth than the unit volume trends would imply? Thanks, guys.

Robbie, this is Kevin. Let me start with the first one. Again I think we stated over and over that number one, we like our distribution. I think we've been very successful with where we sell today and more importantly where we are heading. We organically added a few doors on the overall number as a brand going to 9000 doors from 8700. A lot of that growth that we saw there was frankly around the mountain specialty. REI is a good example of that. We're in a few of their doors. We continue to expand to more and more REI doors as well as the smaller versions of REI's, the independent guys that are out there.

From just a growth standpoint and I guess the best news about that mountain strategy is that when they are adding us they are not just adding the men's business, its men's and women's combined that they are bringing in their door, which again speaks to the power of the brand speaking across a much wider and broader consumer base.

So we are pushing there. Expanding our existing retail is expanding our space inside as well as their own organic growth. I think it is a big part of where we are going today. And the new products particularly things like football cleats, it's a product category that we are getting into that speaks to the distribution that we already have in place with relationships and we can continue to leverage that.

Robbie, it's Wayne. The other point I want to make with that is when we look at our back half of the year, one of the things we do see and it's again with our seasonal businesses, as Kevin mentioned some of the program such as the fleece program, we're going to have higher average selling prices in the back half of the year just in generally as part of our business. And that also helps drive the top-line growth.

And a significant mix shift would you say versus what you were doing for fall last year in terms of your shipments and average price per unit?

I think, Robbie, the one thing that we've done for the back half which is the expansion of the fleece program and the fleece program has ASPs similar to the ColdGear. And so, yes, if we expand that program, which we did, we will start to see higher ASPs in general in the back half of the year. And that is factored into the guidance that we put out.

Terrific. Thanks a lot, guys.

Jeff Klinefelter, Piper Jaffray.

Thank you and congratulations everyone on another great quarter. Just a quick update maybe Wayne, if you could go through those doors and if I missed those, I apologize, in the prepared comments. But going through those key categories again, men's, women's, youth, accessories and then in footwear the domestic doors total year-over-year that changed this quarter versus the same quarter last year? If you could just run through those for me?

Sure, Jeff, not a problem. In men's, what I said was we had 9000 doors worldwide; in women's, we currently are sold in 4500 doors in North America; youth, 5000 doors in North America; and as far as the footwear launch, we launched it in 1600 doors which have been pretty much a subset of our current account base.

Okay. In men's 9000? How many of those are international doors?

200 relate to the European initiative and we have about 1600 relate to our number of doors in Japan.

Okay, great. In terms of the footwear launch, if you could just share a little bit more in terms of what you have found to date, your sourcing for that product? Are you ramped to a level that you can start rolling out not only baseball but other versions of your footwear? Have you learned anything in terms of sourcing this product, you know challenges that you didn't face with the apparel? And any early reads from the retailers in terms of what you are seeing, has it been flawless across the board? Are you getting any sort of pushback or any sort of returns? Just share with us your learnings from this launch.

Sure. I think first and foremost when we decided to go after this category we picked a big partner, the largest athletic footwear manufacturer in the world. They definitely helped us get into the market number one. That is an area where we're in the process of expanding I think our sourcing base and that has already happened. So we are getting better there. As we launch we had the largest initial orders that I think any manufacturer has ever seen before which again speaks to the brand strength.

From a retail perspective, I don't think the retailers could really be any happier. First and foremost is that we extended the selling season for retailers by an additional four weeks. It is a business that typically didn't begin until July that we started June 3rd. And I'd tell you, the excitement of just going to a store in that Saturday morning of June 3rd and watching entire teams of kids lined up to buy our cleats was pretty neat to see.

In addition we've also driven higher ASPs I think close to 30% on average for our retailers. And the important thing is that we are not cannibalizing the business either, meaning we're not trading one brand -- another brand for the Under Armour brand. And that overall business is generally up. So the retailers couldn't be more excited.

I think our bevy of success was we wanted to get into the market; we wanted to get into with an allocated number of units; we wanted to sell through those units and build our authenticity. And that began with a great product. The products we delivered, we really couldn't be any happier with. And I think the consumer is voting for that fact.

Number one, the teams I think have authenticity that we will have out on the field this year. But just thinking again to the marketplace, our marketshare had peaked above 50% according to Sport Scan information after the third full week of selling. We ended the month of June with 40% of the market in terms of just pure dollars. We had the top four selling styles in the market by dollar positions 1, 2, 3 and 4. And again, I think we found that again we built enough product to finish the year with about a high teen marketshare. And we anticipate being there. So I mean we are broken out there in sizing right now and we will continue to decline a bit of it but I think the impact was made and successful cleat launch is something where we take that double-digit market growth and move on.

Great. Thank you, Kevin, that is helpful. And just one final on the footwear. It just seems like an opportunity to drive obviously the youth business, we've seen the same thing in our (indiscernible) [and great team] business particularly with your color assortment. Is this strategically -- you look at this as an opportunity to ramp up your youth business, your youth apparel business, now in the second half of the year and certainly into next year? And then also in terms of the doors you distributed into, in terms of the 1600 largely we've seen it in the chains, national chains, any strategy to get it into independents particularly some footwear independents that might not already carry your apparel product?

Well I think we started with the football specialty stores -- it really is. That was part of our decision of going into this category business to begin with was the fact that the sporting goods retailers we're already doing business with basically sell 60% to 70% of the market. The independents and the way that store broke down about 1300 of our key accounts had the product and the balance of the 300 was the independent, the local team dealer who is selling it.

The emphasis that we have toward youth is something that I think really plays out with the cleats as well. We've seen terrific results in the cleats from the youth side of the sellthrough that we found there. And again, I think that that is something that has a bit of a halo effect to our apparel business. Again youth is an area we continue to see strength in. Year-to-date in youth we are up more than 70%. We are committing I think to youth and taking a stamp on the women's side by launching girl's product in the back half of this year.

We still aggressively are targeting youth at about 10% of our apparel business. And I think as I stated in the past that I don't think we've done a great job there. I think we put great product out but I think just the attention needs to be felt more from the marketplace from Under Armour. I'm giving you our commitment that we will make that happen because we see it as a growth driver as well.

Congratulations. Thanks a lot.

Operator, we have time for one more question, please.

Omar Saad, Credit Suisse.

Thanks, good morning. One question. As you continue to do work in preparation for the international expansion, the inevitable international expansion, what are you learning about those markets in terms of competitive dynamics, the consumer's appetite for the type of performance apparel products and even to any extent like how your brand is recognized there?

I think first and foremost is humbly speaking I think you learn that number one, they are all very unique and very different. Number two though, I think we've learned that they have an appetite for performance. I think even a bigger statement is that I'd say Europe in particular is more educated than the U.S. consumer is about technical and performance product. It is a competitive landscape over there and frankly we need to be very good.

What gives us I think the biggest strength and confidence is that we believe we are going over there with a unique story, a unique point of view. Again focused on that team athlete; that is the roots of who we are. Our approach is very hard-core and it's very on field. And I would tell you is that I had the opportunity to go over and see the World Cup. And you can just see how sports crazy that whole side of the world is. It is something that we view as a tremendous opportunity.

But again, I think that consumer is extremely educated and its going to take a great approach from us and that is why I think going slow and controlling our path is important which is why we are controlling those relationships particularly again -- the UK, France, and Germany, I couldn't emphasize enough about our commitment there.

Thanks a lot, guys. Nice work.

Okay that will conclude it for today. We appreciate your time and we will talk to you again in 90 days. Thanks.

This does conclude today's conference. Thank you for your participation. You may now disconnect.