Under Armour Inc (UA) 2006 Q3 法說會逐字稿

Good day and welcome everyone to the Under Armour third-quarter 2006 earnings results conference call and webcast. Today's call is being recorded.

At this time, I would like to turn the call over to Rick Anguilla, Investor Relations. Please go ahead, sir.

Thank you and good morning everyone. During the course of this conference call, we will be making projections or other forward-looking statements regarding future events and the future financial performance of the Company. The words estimate, 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 our webcast page, a number of images of the 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 and CEO, will address what drove our third-quarter results and our strategy for long-term growth. Wayne Marino, Executive Vice President and Chief Financial Officer, will then discuss the Company's third-quarter financial performance and discuss the Company's updated outlook for the balance of 2006 as well as the preliminary outlook for 2007. After that, we will have a Q&A session that will end by 9:30 AM.

With that, I will turn it over to Kevin Plank.

Thanks Rick, and Happy Halloween everyone. Under Armour is a growth company. That is both the first and the last thing you'll hear me say today. We're focused on growth.

Under Armour posted its greatest quarter in our 11-year history. Once again, we accomplished each and every goal we set and the scoreboard, as we like to call it, tells the story.

Our core apparel business accelerated from 31% growth in Q2 to 42% in the third quarter. Our net revenues grew 47% over the same period from 2005. Third-quarter net income increased 98% to $16 million. And we accomplished all this while implementing several key drivers for our long-term growth.

As we stand today looking at the fourth quarter of 2006 and our forecast for next year, I'm excited to outline how we plan to harness this momentum and continue to build top and bottom-line growth for our global business in 2007. Our business is strong. Our team is strong and our brand is strong. Here are just a few of the highlights from the third-quarter scoreboard, the brand's first-ever $100-plus million quarter.

The growth in our men's business is one of our brightest highlights. Men's grew 38% over the same quarter last year. A large part of that increase is our core compression business. We have previously talked about implementing a good, better, best strategy throughout our product lines.

A great example in our compression business is a program called Blitz. The Blitz collection features aggressive color block versions of our core heat gear compression in sleeveless, short sleeve and long-sleeved styles. This "better alternative" to our core offering raises ASPs for our retailers $10 in each silhouette, and the product is selling through on the retail floor.

Most importantly, we have not cannibalized our core business. Compression as a whole grew more than 30% in Q3. We're seeing similar performance around our ColdGear offering, which is on the floor right now.

Not to be outdone, our women's business once again posted outstanding growth as we saw an increase of 47% based on strong sales in the compression and training categories. The fact that compression is dictating so much of our growth in women's is further proof that our brand is resonating with the female athlete. She is wearing UA for sport, and we're changing the way that she dresses for competition.

Our youth business increased 62% this quarter, including our very first line for girls. Our youth business is an area that continues to reveal new growth opportunities for our brand, as our marketing reaches consumers even younger than the traditional 12 to 24-year-old demographic that we have historically targeted.

Footwear. In June, our marketing campaign entitled "Click Clack" sparked excitement around the launch of Under Armour football pleats, which materialized with the brand capturing upwards of 20% market share just four months into the footwear business.

Meanwhile, we expanded the selling season of cleated footwear four weeks for our retailers. We raised ASPs and saw exceptional sell-through at full retail price. Most importantly, our pleats have performed on field for our athletes. The result is that we launched into a new category of business, laid the groundwork for multiple future footwear extensions from our brand and accomplished all of this profitably in our first year.

Overall, the growth patterns have remained true to our strategy. We're growing our core business in two ways. First, we are expanding our product line and where it is placed in-store. Secondly, we are adding relevant specialty distribution across women's; mountain; outdoor, including hunt and fish; green grass golf shops and the bookstore businesses that most importantly does not impact our core sporting goods partners.

On the product expansion side, when we say cotton is the enemy, we back it up by offering performance alternatives to old standards. Take our fleece program. We tested our Armour Fleece product last fall and had great success. We came back this year with a comprehensive fleece program for men, women and youths.

Not only do we now have a great addition to our core business but think about the difference we've made for our sporting goods retailers. They are taking discounted $20 cotton sweatshirts off of the floor and replacing them with our performance Armour Fleece, which they are selling out at full price and full margin at $50 and $60. This is just one of the reasons we say we like our distribution and the opportunities we have there, and our distribution quite frankly likes us.

One of the key products that the consumer is looking for in specialty distribution is our ColdGear Mock, which is selling through full price at $50 in our traditional sporting goods accounts and now equally as well in some new mountain and outdoor retailers. We also introduced our good, better, best strategy this past quarter and two new versions of the mock -- the Color Block Chase, which retails for $60, and the Metal Series ColdGear Mock at $80.

Both of these new styles are showing up on some of our top collegiate and high school football teams, while continuing to sell on the mountain and in the lodges. Multiple consumers, multiple distribution points with effectively the same product found relevant for multiple end uses. The great news is the success of these new high-performance products in both current and new distribution has not cannibalized sales of the core $50 mock, where our business was up 60% in Q3.

You could tell we're proud of the numbers we posted on the scoreboard. But as we talk about growth, long-term profitable growth, we need to talk about the strength and momentum of the brand. The Under Armour brand has never been stronger. In August, we announced a six-year deal with the National Football League to be an official supplier of footwear to its players. Our footwear is now featured every Sunday in front of national television audiences.

Our official supplier deals with Auburn University, the University of Maryland and Texas Tech University football programs ensure that our performance apparel and footwear is featured prominently and authentically on national television every Saturday this fall. These broadcasts are supplemented each and every day across the country by the thousands of high school and amateur athletes, boys and girls who have made Under Armour a part of their training, practice and game time uniforms.

If you haven't had a chance to see our logo on display at a high school game or event, check the sports page of your local newspaper. The Under Armour brand is authentic at all levels of competition.

In addition to on-field exposure, our commercial campaigns and marketing initiatives tell the Under Armour store across all mainstream and new media as we continue to align our advertising consistently all the way through the point of purchase displays on the retail floor. Again, we thrive on converting our complex technology story into a succinct message that's bolstered with strong iconic branding.

Take for instance our Click Clack campaign. While Click Clack ushered in the era of Under Armour footwear, it is first and foremost a brand campaign that authentically connects with athletes by using a subtle nuance only a true player, male or female, could recognize. We will carry this campaign through in 2007, starting in spring training when we introduce our first cleated footwear for baseball. Expect also to see a women's campaign in the first half of 2007 as large in scope as Click Clack or our first brand campaign, Protect This House.

Our strategy for retail marketing remains focused on creating Under Armour concept shops within our partner stores, where we can tell relevant seasonal stories based on our thermographic technology and sports-specific end use. The incorporation of educational branding pieces alongside our signature life-size Big E and UA woman mannequins are becoming anchor points for our retail partners.

Executing a consistent marketing message has proven to succeed in our own virtual channel as well. This consists of our e-commerce website and catalog business, which grew 124% in the third quarter.

The brand's growth is not limited to sales and marketing. Our operations continue to strengthen as we maintain a nimble but solid back-end infrastructure. The new addition of a Chief Supply Chain Officer, Jim Calo, comes on the heels of our second-quarter SAP implementation. Jim brings nearly two decades of experience in running operations for brands like Nautica and Ralph Lauren and will play a key role in making our supply chain a driver of global growth for Under Armour.

Our international business continues to follow our domestic formula that is based on field first. The ColdGear Mock turtleneck logo shows above the kit on football, rugby and cricket players throughout Europe. The need for a performance apparel solution beneath the uniform has been realized in Europe. And where we have gone, we're winning as the brand of choice.

We have recently announced the signing of a Reading Football Club with the English Premiership League, and we will be the team's official base layer supplier. This authentic placement is changing the way even the most traditional players dress for competition. And it is gaining UA premium exposure in-stadium on television broadcasts and a next-day newspaper coverage.

We've already exceeded our 2006 goal of 500 retail doors in Western Europe. The UK has been very strong for us, headlined by JJB, who is now selling UA in 150 of their more than 400 doors, and the early reads are very positive.

We're conducting similar tests in Germany with retailers like [Sport Check] and [Car Shot Sport] in spring 2007. In addition, we have also targeted the buying groups of Intersport and Sport2000, who collectively have more than 8,000 doors of independent distribution throughout Europe.

We believe the success we posted on the scoreboard is outdone only by our continued assembly of an engine that is geared for future global growth of the Under Armour brand. Wayne will take you through the numbers in just a moment. But I will tell you now that we believe the pieces are in place for realizing our overarching goal of becoming the world's number one performance brand.

The growth drivers remain clear -- broaden our core business in men's and women's; develop our international opportunities; continue to focus primarily on Western Europe; and expanding our footwear offerings beyond the cleated category.

As for maintaining our brand's culture of continued success, we remain aggressive about our top-line growth and disciplined in our bottom-line opportunity. We will remain determined to hire talented teammates to help us realize our revenue goals, and we will continue to reinvest in our systems and infrastructure with the brand's long-term future success in mind.

Under Armour is a growth company. We are excited about our future. With that, let me turn it over to Wayne.

Great Kevin. Thank you. I'm going to take the next few minutes to provide some color on our third-quarter and nine-month financial and operational performance. Then, I will walk you through our outlook for the balance of this year and a preliminary outlook for 2007.

As Kevin mentioned, we saw very strong growth in our core apparel business in the third quarter. In fact, our apparel business accelerated, growing at 42% in the third quarter compared to 31% growth in the second quarter. This stronger growth on a larger base of business is further evidence that our core business remains very strong as we diversify into other growth areas, such as footwear and international.

In addition to accelerating growth in our core apparel business, this quarter, we recognized an additional $2 million of net revenues in the footwear business, primarily driven by remaining sales of football cleats. 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 261% to $3.8 million for the quarter, mostly driven by increased sales in football gloves.

Net sales for men's, women's, youth, accessories and footwear grew at a combined 47% in the quarter to $122.5 million and represented approximately 96% of our net revenues. The balance of our net revenues were derived from our licensing business, which increased 62% in the quarter to $5.2 million and 62% for the nine months to $11 million. For the first nine months, net revenues increased 53% to $295.4 million. Now moving to our gross margin.

For the quarter, gross margin increased 100 basis points to 50.6% compared to 49.6% in the same period last year. This increase was largely a result of improved sourcing initiatives and lower-cost sourcing driven by increased volumes. For the first nine months, gross margin increased 160 basis points to 49.8% versus 48.2% in the same period last year.

SG&A for the third quarter totaled $42.7 million, an increase of $14.2 million compared to the same period last year. SG&A as a percentage of net revenues for the quarter increased to 33.4% from 32.9% last year. For the nine months, SG&A as a percentage of net revenues increased to 36.4% from 36.3% in the same period last year.

This increase for both the quarter and nine-month reflects investments we're making in growth initiatives. In absolute dollars, over 30% of the year-over-year dollar growth in SG&A supported our new growth initiatives, such as international and footwear.

To expand, footwear is currently a seasonal business for us. Nearly 90% of the footwear revenues to date were recognized in the second quarter. To build this business successfully, we must continue to invest each and every quarter. This quarter's increase in SG&A however was not driven purely by our investments in growth initiatives. Public company costs associated with year 1 of our Sarbanes-Oxley compliance initiatives also made an impact.

Marketing costs for the quarter increased 27% to $12.8 million from $10.1 million last year. For the nine months, marketing costs increased 34% to $30.9 million. As a percentage of net revenues, marketing costs were 10% of net revenues in the quarter compared to 11.7% in the same period last year. And for the nine months, marketing costs were 10.5% of net revenues in 2006 compared to 11.9% in 2005. The good news is that we were able to support our big marketing initiatives, such as our Click Clack campaign, and still achieve leverage.

As Kevin mentioned, during the quarter, we entered into a six-year marketing deal with the NFL. As part of the agreement, we issued 480,000 warrants at market value. All amortization of promotional rights and other costs associated with this deal will flow through marketing expense and are included in our 10% to 12% annual range.

Our operating income for the quarter was $22 million compared to $14.5 million in the same period last year, an increase of 52%. Our operating margin showed improvements for both the quarter and the nine months compared to prior periods. For the quarter, our operating margin increased 50 basis points to 17.2% of net revenues and for the nine months increased 150 basis points to 13.4% of net revenue. As a result of our improved cash position, net interest income for the quarter increased to $1 million.

It is important to note that both the net income and EPS for the quarter and nine months benefited from a $2.3 million or $0.05 per diluted share state tax credit recorded this quarter. We're anticipating the balance of the allowable credit of $1 million or $0.02 per diluted share to be recognized in the fourth quarter. Eligibility for this credit was confirmed at the end of this September. It is based on tax credits earned as a result of qualified projects that the Company will complete by year-end. Our resulting net income for the quarter increased to $16 million from $8.4 million in the same period last year.

Now, I would like to take you through our balance sheet. Inventory at quarter-end was $75 million, a decrease of $5.2 million from the previous quarter and an increase of $24.7 million or 49% compared to the same period last year. Our strategy to take receipt of fall merchandise early paid off, as we were well-positioned to take advantage of the strong demand for our product this quarter.

Our retail outlet strategy remains the same -- to profitably sell our excess inventory. In the third quarter, we expanded our outlet base to 11 stores. We will continue to execute our inventory management initiatives in 2007 and will maintain our retail outlet strategy with the addition of five to six outlet stores during 2007.

Net accounts receivable increased 53%, or $31 million on a year-over-year basis, an increase largely in line with our 47.5% net revenue growth. However, the comparability of our net AR continues to be affected by the change in treatment of customer discounts and incentives from 2005 to 2006. Beginning in 2006, the majority of discounts earned by customers were recorded as a liability within accrued expenses as opposed to an offset to accounts receivable. This is simply a change in presentation.

Total cash and cash equivalents at the end of the quarter were $44.3 million and cash net of debt was $37 million, an increase of $3.3 million over the previous quarter. Our investment in CapEx for the quarter was $2.6 million. Over half of this investment went towards the build-out of new outlet stores and to additional in-store fixturing to support our brand presence at retail. As we stated previously, our CapEx budget for the year is $15 to $16 million, and we still expect to be within this range.

Now, I would like to turn to our outlook for the remainder of the year. As a result of the momentum that we have seen for the Under Armour brand at retail, we now expect annual net revenues in the range of $410 million to $420 million, an increase of 46% to 49% compared to last year. We expect net income for the year to be in the range of $38.5 million to $39.5 million. This includes a $1 million or $0.02 per diluted share state tax benefit expected to be earned in Q4.

As a result of the tax credits earned in the second half of 2006, we are anticipating an effective tax rate of approximately 33.6% for the full year. We expect fully diluted weighted average shares outstanding by approximately 50 million for 2006.

Our outlook for 2007. Now, I would like to take you through a preliminary outlook for 2007. While it is not our policy to provide quarterly guidance, I will provide you with our outlook for the full year as well as additional color on several key elements of our business.

First, I would like to remind you that our long-term growth targets remain at 20% to 25% for both our top and bottom line. However, due to the strength of the Under Armour brand and our ability to extend our product scope and distribution, we believe we can exceed 25% growth in both net revenues and income from operations for 2007.

Historically, a greater percentage of our revenues have been recognized in the third and fourth quarters. Therefore, we expect the quarterly breakdown of 2007 annual net revenues to mirror that which occurred in 2006. I also want to point out that similar to 2006, our second quarter of 2007 is expected to be our lowest volume quarter.

When we move to net income and EPS line, the recognition of state tax credits that I expanded upon earlier in the back half of 2006 and the corresponding effect on our effective tax rate will impact the year-over-year comparability of our net income and EPS in the second half of 2007. Now, I will provide you with some further color on the assumptions behind this top-level summary.

First, our gross margin. We anticipate continued improvement to our gross margin from our lower-cost sourcing initiatives driven by increased volumes. We also anticipate that our higher margin direct retail and licensing businesses will grow at a faster rate than our overall business.

A portion of these improvements will be offset by our anticipated growth in our cleated footwear business, both football and baseball, which will carry initial margins lower than our existing apparel margins. This will be most evident in the first quarter. Where in the prior year, we didn't have the impact of cleated footwear on gross margin. Taking all these factors into account, we are planning our full-year 2007 gross margin to improve by 20 to 30 basis points over the prior year.

Now, moving to SG&A. For 2007, we plan to continue to invest in marketing and our growth initiatives, such as footwear and international. For these reasons, we are planning our full-year operating expense to increase by 20 to 30 basis points as a percentage of net revenues for 2007. We also see the opportunity to leverage fixed costs if volumes should increase.

In terms of marketing costs, we will continue to invest between 10% to 12% of our annual top-line revenues on marketing to help fuel our growth. Based on preliminary growth targets, we are planning to invest at the high end of the 10% to 12% range for 2007. It is important to note that as our business becomes more diverse in terms of product mix, gender, and sport categories, we will adjust the timing of our marketing spend to reflect this more balanced mix. For example, we anticipate that the mix of our 2006 marketing dollars will be spent approximately 40% in the first half and 60% in the back half. For 2007, our preliminary outlook is that the mix of marketing will reflect a 50/50 first half/second half split with marketing dollars spread more evenly throughout the quarters.

We have always earned a greater portion of our income in the last two quarters of the year. With the shift of the (technical difficulty) more evenly throughout the year, an even greater percentage of our income in 2007 will be coming from the back half of the year.

Lastly, we expect our effective tax rate to increase to 40.5%, up from 33.6%, since most of the allowable state tax credit will have been earned and recognized in 2006. Weighted average diluted share count in 2007 is expected to be approximately 50.5 million.

With inventory, we will continue to drive our aggressive inventory management initiatives in 2007. With the addition of our new Chief Supply Chain Officer, Jim Calo, we believe we are better positioned to manage our global supply chain as we expand our product scope and region base. We will balance these inventory management initiatives with the ability to take advantage of strong consumer demand for our product as we did this quarter. We're therefore expecting inventory to keep pace with our sales growth in 2007.

At our year-end call, I plan to provide you with more color on our quarterly initiatives and investments. We are excited about our story and our accomplishments to date and look forward to a solid finish to 2006 and another year of strong results in 2007.

Now, Kevin and I would like to take your questions. Operator?

(Operator Instructions). Jeff Klinefelter, Piper Jaffray.

Congratulations guys on another great quarter. A couple of questions -- one on your international business and then a follow-up on footwear. First, on international, we heard a little bit more about that -- your focus on that at our conference here recently in London. And clearly, we see this as an opportunity -- a great opportunity for you. Could you share a little bit more in terms of how you see this rolling out next year, the seasonality of the international business versus that in the US?

And then also in terms of the structure of the business, do you see this being more of a country-by-county decision in terms of using distributors versus going direct? Lastly, on international, any color on the pricing environment or promotional environment in these markets? I understand it is a little bit more competitive. You've been very successful with your pricing. Here in the US, as you mentioned Kevin at the beginning, you're getting the premium pricing. Is that a similar experience in these international markets?

Sure. Let me take your international questions first. First of all, speaking of the seasonality, I think what we've seen is that it's somewhat consistent. But based on a few factors, it may help alleviate some of the pressure that we see as a business first half/second half. But I wouldn't anticipate any major impact for the business being that much different than what we see here in the US from how our season breaks or our year breaks.

The second part is -- as we think about it again, I think so many brands have made the mistake of going in and thinking of Europe as one place versus country by country. We've been pretty clear in the way that we're handling Europe. Again, we've got -- our headquarters is in Amsterdam. We're handling the UK directly. We have master agents in both France and Germany. Those three countries are really our priority right now.

And again, the terms that we have for those deals are -- you know, I think we're going to learn a lot. And we have relatively shorter deals. But we like the partners that we have, and the idea of getting the partnership with them was for the long-term. So, we're going to continue to invest there. But without question, it will be on a country-by-country basis.

I think one of the things when you think about European sporting goods is it's a tough question for a lot of people because I say, "My goodness, it's so promotional; it's so well priced." We have the same reaction. And the way that I respond to that is European sporting goods retail frankly is not all that different than the US market look; think about five years ago -- little differentiation either in product or brands that were available between the key sporting goods players here in the States versus what was offered in the mid-tier channel.

I think Under Armour, it takes great pride in how we've been able to affect and frankly change that that we've given sporting goods retailers a point of differentiation here in the States. And they are now again replacing $20 cotton sweatshirts with $50 full-priced Under Armour. Those kind of opportunities are what we see the ability to impact in Europe. I think that we felt that.

And again, as we went into the UK, JJB, they specifically called us out. We talked about the opportunity to do that because they are in that similar crunch of extremely competitive, extremely promotional over there. But their point of differentiation now is the fact that they have Under Armour.

That's great, very helpful. And just as a reminder in terms of the revenue contribution coming from this internationally, I know it's been very, very small to date or coming into this year. But approximately what kind of contribution in terms of revenue this year and kind of growth rates going into next year?

And then just as a quick footwear question, in terms of the kind of seasonality of that business, how you expect that, Kevin or Wayne, to flow into the model going into next year with the baseball and then football kind of by Q and any sense of that and how much of that growth next year is coming from footwear?

Jeff, it's Wayne. In terms of the international business, this year, it's a 2% to 3% add to our revenue. It's a small portion of our revenue. For next year, I'd see the business more than tripling but still representing slightly under 5% of our revenues in 2007. So I think the key takeaway with our international business is a long-term growth initiative, one that we will see results out 12, 18 months.

As far as our footwear contribution, when you look at our footwear this year, I think the one point is that football cleats in the second quarter being approximately 20% of the revenue and you look forward to 2007, I think you could expect football to mirror that which was in 2006. And we look at baseball cleats and I would say between the fourth quarter of 2006 and first quarter of 2007, probably evenly split but still a very small portion of our revenues. It's maybe 6% of our revenues in Q1 of next year and maybe the same for Q4 of this year.

Robby Ohmes, Banc of America Securities.

A couple of quick questions. I think the -- I guess the first question, if we could get a little more color on youth and how that performance broke out between girls and boys, I think you might have launched girls in the third quarter here.

The other question from a product standpoint, it sounds like compression is performing very well, maybe better than your expectations. Could you talk about the loose fitting part of your business, how that has been trending versus your plan?

Then, the third question would be the mix of your business customer base anyways in terms of Dick's/TSA as a percent of the business year-over-year and if they continue to take a larger percentage of what you're doing in the US.

It's Wayne. In terms of our youth business, I think one of the things we are proud of this year for the quarter grew at 62%. If you look at the breakout in the contribution, the girl's business which really launched was about 20% of that year-over-year increase as a new product initiative. The balance was from boy's. So, boy's continues to be very strong for us on a year-over-year basis.

In terms of our customer mix, right now, we have kind of disclosed this in our Qs, our two largest customers -- no surprise -- represent closer to 30%-plus. We like our customer base. Our customer base is still going to continue to grow and should represent about that same percentage going forward. I think we -- as we continue to grow with international, as we continue to grow with new channels of business -- and Kevin can talk about the mountain sport business -- we are broadening our customer base and have added a substantial amount of new doors as a result of that. But I think as a percentage mix, I think that it's a little over 30%; we should see that going forward as well.

Let me tackle the compression versus loose question. I think it's probably one of the most exciting things that we have recognized as we have expanded I think the definition of what people refer to as performance.

For us as a brand, compression versus loose I think three years ago, it was somewhere between 75/25. Today, that number is close to 50/50. I think it's actually closer to 53/47 in favor of compression. But, loose is closing in.

Probably the most exciting thing about that is that as compression becomes a smaller overall portion of our business, compression is still growing at a rate of more than 30% this quarter. Items that -- in a way, I think we've been able to really bolster that as the whole idea. And I mentioned it in the script -- good, better, best.

Our ColdGear business is doing terrific out of retail, which is something that we picked up a bit of that in the third quarter. But you know, we are excited about what ColdGear is doing out there. And mostly because it is bolstered by the addition of the $50 mock, which is sort of our wheelhouse product. And then, you've got the $60 version -- it is a color block version -- and then you've got the $80 premium piece.

So we've been very pleased with what we've done and I think the idea is continuing to enhance, reinvigorate, bolster that category. We're not sitting back on our laurels and saying, isn't it great that we sell $25-type T-shirts and $50 mocks, but we're really inventing that category at the same time.

That sounds great. Just one last follow-up on the channels. Can you give us an update on how well you are distributed in the shopping malls right now and what you see in that channel of distribution going forward and maybe specifically with a customer like Finish Line?

To be clear, we're not -- we're frankly not even in the malls today. I think number one, it represents a great opportunity not only for Under Armour but for Finish Line as well. We have tested there in the past, and we've been doing business. Really in their key and focus, they are better football doors, they're better baseball doors, etc., where our products have been successful in finish line. But it's something that we look at frankly as an opportunity.

And Alan Cohen and his team have been terrific to work with. And so, a partner that I think we see good opportunity. Again, you're not going to find Under Armour in 600 Finish Lines next year. We're going to take it slowly. We will make sure that we will do it successfully and that we find the Under Armour consumer and that they can find us.

Jim Duffy, Thomas Weisel Partners.

Kevin, maybe this is a good question for you. Could you speak to the opportunity to grow the apparel business with some of those key partners, like Dick's and TSAs? Is it a factor of expanding the footprint of the apparel pad or growing into new departments in those stores? Any light you can shed on that would be helpful.

I think the best way to do that when you think about our opportunity, really it's getting out to retail. I had the opportunity to spend some time in Pittsburgh last week and visit some stores with that stack where we had the opportunity to walk the floor and really get a chance to look and see what is our opportunity.

Between both Dick's and especially of course our key partner in TSA as well, I think the volume we're doing, we are effectively earning more space. These are the conversations we're having with our retailers, and this isn't an Under Armour push as much as they are frankly -- I think one of the managers we visited with, he said, "Got to do the business. Here's where another account is, but we've got to do the business." And that is where Under Armour should be.

So, I think one of the things that you will see is that over the next 8, 10 and 12 months is that the presence of Under Armour brand shops is something that it's in our marketing line, it's something we are investing in. When we talk about marketing, it is something that we believe we need to do. And that also includes the presence we are building and creating at at retail.

I think that retail again is -- if you're going to sell $40, $50, $60, $80 T-shirts and mock turtlenecks, you better tell a good story. That is one thing that we are committed to. And the volume we have been doing frankly with the way that were presented today, we think it just captures or scratches the surface of what the real opportunity is out there.

That's helpful. Then a question on the marketing balance between '06 and '07, does this reflect marketing spend in support of some specific programs, a shift in balance from first half to second half?

Well, I think I mentioned in the script the importance of women's is going to be to us. We feel it's important that we put our money where our mouth is there. We see a pretty big opportunity with what we can create with the women's component.

Looking back on '06 as well is that we also invested pretty heavily in the first half of the year in our pleat campaign in kicking off Click Clack. Announcing that, it was something we started in April for the NFL draft.

So, the timing of where our marketing is breaking today is coming much earlier. But I think as you've seen in the momentum that we've created with the third-quarter numbers is that it really carries through to the second half of the year. So, again the way that we view our business, the way we view our marketing expense, really it's a 12-month outlook. It's not a quarter-by-quarter outlook. I think the net result is a terrific year for Under Armour.

Great. One final question if I may. Factors driving the licensing component of the business and the opportunity for licensing as you look into '07?

One of the topics that I mentioned on the call was our expansion into the green grass category business and the bookstore business. I'm speaking from a distribution licensing standpoint, not as much from a product licensing standpoint.

But the opportunity that I think one of the things we saw was Dwayne Wade was being interviewed the other night at an LA Lakers basketball game, and he was wearing his Marquette Under Armour T-shirt. And that was something that he bought from the Marquette bookstore to wear.

Having the brand out there -- and again, this is product that is built by Under Armour, manufactured by us and simply embellished by our licensing partner. I think that we continue to see the opportunity that people want the brand. We want to be careful with where and how it's located and distributed. But we see the authenticity of things like college bookstores of places like the green grass golf shops, etc., as being the right fit for the Under Armour brand.

Very good. Keep it up.

Margaret Mager, Goldman Sachs.

Good quarter. So I have a couple of questions on the guidance actually. So, when I look at the guidance for the full year of '06 against the year-to-date performance and what it implies for 4Q, it would imply a pretty notable slowdown in growth. I'm just wondering if there is something that you would say about why that is coming out like that or maybe you're just being conservative to some extent.

I know last year, you kind of surprised us on the upside with your fleece program. And maybe there's going to be a reorder pop from that again this year in the fourth quarter. So that would be one question. Or is it just something about the fourth quarter that makes it grow slower than the rest of the year?

And then, looking out to 2007 and your guidance there that you expect to do better than your long-term target of 20% to 25%, can you just talk about some kind of magnitude on that forward look? Do you think that '07 can grow at as fast a rate as '06? And what do you think will be the big chunks that will drive the '07 outlook? And then lastly, just want to confirm that you expect the bottom line to grow at a slower pace than the top line because of the change in the tax rate.

It's Wayne. I will start with 2007. I think there are some points I want to take away. In 2007, we still are very confident in the top line continuing to accelerate. But the one point is of course, it's accelerating off a larger base, specifically in men's, which represents over 60% of our business. So, I am very confident in our top line continuing to grow very strong there.

In terms of the bottom line, I think the message that I want to be very clear on is we see both our top and our bottom line continuing to outpace our long-term range of 20% to 25%. The only thing with the bottom line is the shift in marketing would shift more of the bottom-line income toward Q3 and Q4. And in terms of men's, women's, youth, licensing accessories, we feel very good about the growth continuing.

In terms of 2006, again, once again, I feel very confident in what I have right now in terms of visibility that we will continue to accelerate in all the categories that we talked about today. So, again, increasing the top line again to that $410 million to $420 million for the full year. I do not see anything decelerating in Q4.

So, year-to-date, your revenue growth is 53%. And basically, your full-year guidance was in line with our estimates or implied estimate for 4Q, which would be something like a 40% top-line growth rate. So, in my math, that's not an acceleration. So, maybe we're just not talking about the same thing. So, if you want to help me understand what you mean by acceleration, that would be appreciated. And then, with regard to 2007, didn't you say that the tax rate is going to go back up to like 40% versus 33%?

Yes, when I look at the bottom line, I want to look at it without the impact of the state tax credits. So, when I referred to the bottom line growing, I want to exclude -- and that's why when I talked about the outlook, I did it with income from operations as not to confuse the benefit we received from the state tax credits. So, the income from operations is my focus here. We will continue to grow outside that 20% to 25% range.

I understood. Some sense of what you think is realistic for growth for '07? Do you think it's going to be 50% again or--?

Well, right now, it's early. I am giving a preliminary outlook. And I feel -- again, I think my key is, I feel very confident with exceeding that 25% based on the visibility we have. As I have more visibility, which I would expect to have at the next call and be able to give a little more color on that. But again, I think my takeaway is I would be very confident in our top-line growth for 2007.

Now in 2006, just to maybe put some color on that, when you look at -- again, I don't want to get into quarterly guidance. But, when you look at our fourth quarter, typically historically between third and fourth quarter, fourth quarter as a wholesale business continues to be very strong up until probably mid-December. And at that point in time, you don't get that full quarter. But, once again, still strong in men's -- base is a little bit bigger -- still strong in women's, youth.

So I think I'm probably being a little balanced with the fourth quarter, and that's the right way to be for me. But there is still upside opportunity for us out there. As the weather stays cold, as our consumer demand stays strong, there could be upside in that fourth quarter for us.

That is helpful, Wayne. One last question if you would. Factory outlet stores, I think you'll be approaching 20 by the end of '07. Can you just talk about how you think about those stores, what is the right number? Is it a number of stores relative to the total revenue that you generate? How do you think about the expansion of factory outlet stores? What is the right number? How much revenue do they do per store?

What we do with our outlet stores -- the initial reasons for the outlet stores was to sell our excess inventory profitably. So, we look at each season -- we have visibility into our inventory. We have visibility into our inventory that would be left over at the end of a season. Based on the growth in our business and what percentage of the inventory may be left over, we determine what an outlet store can handle. Typically, an outlet store, we would like an outlet store to be $1 million plus at least to be -- I think absorb our inventory.

But again, going back to the purpose of the outlet stores. The purpose of the outlet stores remains the same. It is to move excess inventory. And, that is our goal. When we look at 2007, we have 11 this year. We will open five to six. The basis for the five to six again, we are looking at our growth for next year, looking at within our growth what's core and what is seasonal, what could be excess and be able to move that excess and protect our brand.

When will the next category of footwear launch -- not baseball cleats, outside cleated products?

As soon as we are built and ready.

Omar Saad, Credit Suisse.

Wanted to, Kevin, get your thoughts on the European consumer -- how they relate to the category. And is there that same sort of acceptance the way you have had here with the team sport athlete really embracing the high-performance apparel? And I know the sport categories are a little bit different over there from here but wanted to kind of get your thoughts on how you think about that consumer and how you expect them to embrace the category.

I think frankly that the first thing we've realized and whether it has been our expansion to our business that we've had in Japan for I guess more than six years now or the success I think that we've seen primarily in the UK to date, beginning with sports marketing on the ground more than three years ago, is that the Under Armour brand translates. When we say the Under Armour brand translates, we're speaking for the entire category.

Performance is something that has just flat out become relevant. We've made tremendous inroads I think toward the consumer and I think most importantly to our model. And that means there is -- the ways that we're going to be successful in Europe, it's -- first and foremost, it's authenticating ourselves on-field. We've just found the acceptance.

Again, it's not translating into big dollars today. But I think it's similar to what we saw here in the States between the years of 1996 and the year 2000. The market is really being primed, and we're testing ourselves. We're putting ourselves in position.

I think with the right kind of distribution and the ability to tell our story the right way, JJB is a great example. They've got more than 400 doors. We've rolled out to 150 of them to ensure that we have the right brand shops to explain what is performance apparel, what is the technology? The response is the consumers. And there are so many anecdotal stories that we have of consumers that are the wearing the product or wanting to find out.

A great old one is a guy named Scott Parker, who is a forward for Newcastle. During a penalty kick, he's got somebody asking -- he's got one of the opposing players asking him where he got his mock turtleneck from. That's the kind of interest and buzz that I think we are generating over there. I think really creates and generates some of the opportunity we see for Europe going forward.

Are you seeing other brands out there doing the same thing in terms of shopping shops to kind of explain the category and the product and how it works? Or is it kind of the same way the market was in the US when you began kind of leading that category in that way?

Listen, in some cases, we're going to be first there. In other cases, we're just going to be authentic there. That's what the consumer is saying. I made a point in the script as well is that where we're going and where we are frankly going head-to-head, we're winning.

Under Armour isn't the only performance brand here in the States either. But when we put a side to side, the consumer gets it. And that's not a function of just how much are you spending, how much are you marketing. It's a function of the authenticity of the brand. That's the one thing that frankly does translate cleaner in any language that we've gone to is that the Under Armour brand represents the athlete. I think it's the point of view that we are attacking it as well.

Many of the other brands that are over there telling performance apparel stories, I think in many cases are talking through almost a fashion set of eyes. The way we are telling our story the point of view, it's sport. It's on-field. It's authenticity. And that is resonating with consumers.

Great, great. Wayne, if I quickly could ask a question of you. With some of the changes in your global supply chain team and your discussion about gross margin and some of the mix issues, how we should think about it going forward, could you talk a little bit about the opportunity on the gross margin line as you work to improve your global supply chain? How big could that opportunity be?

There's really two parts to it. The first opportunity for us is as we continue to grow our business and our volumes increase, we start to see lower costs from our suppliers. And equally important is to take that to footwear.

I think one of the things we talked about earlier was that footwear margins were typically lower than apparel margins. And the opportunities to improve that over time is important. So, I think that will be one of the initiatives of the global supply chain team.

Another initiative is our inventory. Typically, our inventory -- and I talk about a 2007 or a combination of seasonal products and core products. It's very important for us to take a position to be in stock with our core products to support the demand of our consumers. And with the global supply chain, I would expect that over time, we'll be able to shrink the lead-times and improve our working capital efficiencies.

So, there's really a balance sheet plus two to the global supply chain. And again, those are the two big pieces as well as with our programs, and Kevin talked about some of our large programs. I think we could take advantage of margin opportunities as we continue to build programs that are $1 million plus unit programs.

Operator, we have time for one more question I believe.

Sujata Shekar, CIBC World Markets.

Most of my questions have been answered, but I just had a couple left. Could you quantify the number of doors you are in currently in the US? And then second, I had a question on the baseball cleats for the fourth quarter.

This is Wayne. Typically, we have talked about door count. But let me give you where we are with door count. When we talked last time on the call, we had 9000 doors on a global basis. And since that time, we -- one of the things Kevin pointed out was that we have a licensee. Now licensee has expanded the distribution for us in terms of green grass golf pro shops as well as bookstores. And although that will add over 1000 doors in those channels -- 1200 to be exact -- the one thing I don't want to do is let you -- our door count and our sales per door varies so greatly. So, I think from the last time we had that are the 1200 doors in those channels.

In addition to that, our international business continues to expand as well. And with the one account that we have in the UK, JJB, which we're currently in 150 doors, we will have added that plus another several 100 small account doors international as well. But again, the point I want to make is that the doors that we are adding -- although very important for the brand and the distribution -- are smaller doors relative to the larger doors we have in the US.

Understood. But could you also quantify the increase in the number of doors in which women's apparel is now? Is that continuing to make good progress and as well as youth?

I think we have continued to give sort of our focus on specialty growth and specialty distribution there. But, for the most part, we are honed and we're focused on growing our core sporting goods partners and our presence within those doors. And I think that has attributed in large part to the reason why women's business is up 47% and more than 60% year-to-date.

We feel pretty good about that, and that's not to be overshadowed by the fact that we're still adding partners like Nordstrom, who -- we currently are around 50 doors and will have 75 doors in the spring of 2007 as well.

But, in terms of the total number of doors, I think on the last call again, we mentioned that women's was at about half of the men's doors, so about 4500 all together. And we anticipate that remaining for the most part pretty consistent. But again, improving our presence, improving our footprint, improving the number of impressions that we have actually in those doors is what we're really driving as important for us today.

This is Wayne. One of the things that you also have was footwear. What I want to be able to do is expand on our cleated launch for baseball cleats. In Q4, I would expect about 5% to 6% of our revenues in Q4 2006 to be related to baseball cleats and a similar percentage in Q1 of 2007.

And then just related to that, how would marketing and margins be impacted in fourth quarter and first quarter of '07? Could you give a little bit more detail on that if possible?

In terms of margins, one of the things that I've probably said quite a few times in the gross margin where cleated footwear is lower. So, it is a lower margin business. It is in that low 40s. And I think you have to factor that against the margins that we have let's say for example in our third quarter, which was without any footwear.

I think in terms of the first quarter of next year, we did say on an annual basis, our margins would increase 20 to 30 basis points. There's quite a few puts and takes. But again, the 5% to 6% of the revenues, factoring that in at closer to a 40% margin would be the appropriate view I would have.

Okay, that will wrap it up on our end. Thanks everybody and we will speak to you again in 90 days.

Happy Halloween.

That does conclude today's conference, ladies and gentlemen. Again, thank you for your participation and you may now disconnect.