Under Armour Inc (UA) 2006 Q4 法說會逐字稿

Good day and welcome, everyone, to the Under Armour fourth quarter 2006 earnings results conference call and webcast. This call is being recorded. At this time, I would like to turn the call over to Ms. Alex Miyamoto of Investor Relations. Please go ahead, ma'am.

Thank you and good morning, everyone. I would like to start by welcoming you to Under Armour's fourth 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 estimate, intend, express, plan, outlook or similar expressions are intended to identify forward-looking statements. We wish to caution that such statement 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 sections 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 continue I would like to direct you to our web site investor.UnderArmour.com. There you'll find this morning's press release and on our webcast page images of a number of the products and initiatives we will address on the call. Now I'd like to introduce the speakers and topics for this morning's call.

Kevin Plank, Chairman and CEO, will address the drivers of our 2006 results and our strategy for continued growth in 2007 and beyond. Brad Dickerson, Vice President of Accounting and Finance will then discuss the Company's financial performance for the fourth quarter and the full year. Wayne Marino, Executive Vice President and Chief Financial Officer, will conclude the prepared remarks with an updated outlook for 2007. After that we will have a Q&A session that will end by 9:30.

So with that I will turn it over to Kevin Plank.

Thank you Alex, and thanks, everyone, for joining us is morning.

You have heard me say many times that Under Armour is a growth company. That is something we remain passionate about. We are investing aggressively in our business and in our brand with long-term profitable growth and sustainable competitive advantages as our objectives, while remaining committed to top and bottom line growth.

To accomplish this, we remain steadfast in our mission to build the best performance product in the world and back it with superior service, marketing, and sales support.

In 2006, Under Armour posted another record-breaking year highlighted by nearly 98% net income growth. Fourth quarter net revenues increased 55% to $135.3 million and our full year net revenue accelerated from 37% in 2005 to more than 53% in 2006, resulting in net revenues of $430.7 million. We also improved our gross margin by more than 180 basis points topping 50% in 2006.

In 2005 we announced that we would enter the footwear market and that we have been investing in its infrastructure since 2004. We shared that we had launched cleated footwear in 2006 and we did so profitably with our Click Clack campaign around football cleats, and captured more than 20% market share, raised AST's floor retailers, extended the selling season by some three weeks, and proved that Under Armour could succeed as a performance footwear brand.

Riding that momentum, Under Armour baseball and softball cleats saw similar excitement this past holiday season during (indiscernible) of some of our best retail partners. This success of course is coming two months or more before the biggest selling season for baseball cleats in most parts of the country. And we are excited for this new footwear category.

In the beginning of 2006, we said that we would expand our core offering for men and women and we did. Our top 20 styles in the compression and training categories comprised of 20 tight and 20 loose styles accounted for 60% of our revenue in men's apparel, a category that was up 35% year over year.

For women's, that same metric of compression and training style accounted for 70% of our business. The overall women's business was up 60% year over year.

Finally we said that we would improve our back end systems and we did. Following the successful implementation of SAP in the first half of 2006 we brought Jim [Kaylo] onboard as our Chief Supply Chain Officer with more than 20 years' experience in the apparel industry. We also added Melissa Wallace, another industry veteran, to head up our Human Resources and Recruiting efforts.

With constant upgrades in systems, expansion of our distribution house capacity, and the addition of key personnel we look to improve margins, lower costs and add efficiency to our delivery of product.

In addition to the strengthening of our infrastructure, we also made significant strides in the front end of our business. We entered into a six-year deal to become an official footwear supplier to the National Football League. We grew our global direct business some 87% year over year. We grew compression sales 58% in the fourth quarter as a company. We launched our first line of girls apparel which helped our overall youth apparel business some 70%. And we grew our global door count to nearly 12,000.

As we talk about 2007, we must first note the belief that the shift away from cotton towards performance is gaining momentum. And Under Armour continues to lead the way. We are focused on our four strategic growth drivers as a company. Expanding our core men's business, building our women's business, developing our footwear business, and building out our international business. We remain dedicated to supporting these categories through [bleeding-edge] technical products and relevant land-based marketing.

These growth drivers for 2007 and beyond have already provided encouraging returns. In the case of footwear, sizable market share in a short period of time with tightly allocated product on the shelves. We also bolstered our design and sourcing teams in this area, opened a footwear office in China and put the infrastructure in place to grow our business and expand our offering beyond cleats through our expanded manufacturing base.

The opportunity is now available to us for larger, broader categories of non-cleated footwear as soon as the product is field tested to our performance standards. Based on the early testing this could happen as early as 2008.

Our women's business is an engine of growth that we are extremely excited about. Sales revenues continue to grow, moving from 13% of overall apparel sales in 2004 to 20% in 2006. This week, we announced the signing of two high-profile Olympic athletes to marketing contracts. Kimmie Meissner, who just won the U.S. National Figure Skating Championship, and Cat Osterman, a gold medal pitcher on the U.S. Softball Team.

The investment in our women's business this year will include the largest comprehensive marketing and media campaign in our Company's history. As we continue to see the returns both from a sales and brand perspective we grow more confident that our women's business can be larger than our men's business one day.

While [vaunting] our men's and women's offerings we have also been able to build new categories of business. A great example is the outdoor category which features outerwear engineered for the ski and snowboard athlete as well as the hunt and fish categories. Our launch for outerwear began last month with media showcases and channel-specific events like ESPN's Winter X Games targeting the authentic mountain athlete.

This campaign lays a groundwork for our fall '07 debut within the outdoor and mountain categories. This outerwear launch will be coupled with a packaged base layer program featuring exclusive Under Armour fabric in light, mid, and heavyweights. A performance alternative to old-fashioned long underwear. Overall, the launch was 100 new styles in the outdoor category over the next 12 months through strategic specialty distribution.

Another trendy high potential growth driver is our international business. In 2006, we made substantial investments in this business starting with the opening of our headquarters in Amsterdam. For now we remain concentrated on Western Europe including the UK, France and Germany. Our 20 store [Cash and JJB] stores last April expanded to 150 doors this past October and will roll out to 300 of their more than 450 doors in 2007.

These types of retail relationships and core sporting goods distribution merit the same formula we put in place domestically. At the end of 2006 we had 600+ stores in Europe and we expect to double that by the second half of 2007. Our investment here will now begin to manifest itself as we expect the business to triple for Under Armour Europe by the end of this year.

As always, the most important part of telling any of our story, particularly in new markets, is maintaining our authentic status on field and among the athletes. By selling gear directly to more than 100 professional football teams throughout Europe in 2006, we have established ourselves as an authentic brand on the pitch. We have also signed three official base layer supplier deals with English Premier Shirt Teams, [Fullum, Wiggin and Reading] football clubs. Plus 1860 Munich of Germany's First Division and [Knochbrakhoff] of Holland.

In addition we have established an authentic presence in the sport of rugby for summer deals with teams like the [sales sharks] of the Guinness Premiership and through exposure on stars such as [Mike Kendall] of England's National Team.

Here in the U.S. our partnerships on field have provided both a perfect laboratory for field product testing as well as a national showcase for our on-field apparel and footwear. The National Football League provided the most prominent platform for us to debut pleated footwear this past fall. While all three Under Armour Division I18s -- University of Maryland, Auburn University and Texas Tech posted winning seasons and emerge victorious from their ballgames.

At retail we believe Under Armour has been an important element in the stabilization of the sporting good channel over the past several years, and that the continued expansion of our retail square footage in these doors will help drive our revenue growth. We will continue to focus on athletes ranging from eight to 24 years old and we believe that the halo effect of this focus broadens our overall demographic appeal to drive the continued growth in our distribution channel.

We are also continuing to expand our presence at retail with branded concept shops and the prime real estate of our top retailers while developing larger outpost in their footwear, outdoor, mountain and golf shops. Our retail relationships can be further utilized in cobranded advertising like the commercial we produced for Dick's Sporting Goods this past holiday season. The commercial made in-house like all of our creative was shot in store and featured one of our actual concept shops. The campaign was a success to both Under Armour and Dicks and there's confirmation that we can better leverage our co-op marketing spend with retailers.

We believe our brand momentum is stronger than ever and that the growth drivers are in place for us to continue on our top and bottom line growth. Again, our investments remain in four key areas of growth. Expanding the core men's business, growing the core women's business, ramping up our footwear business, and continuing to build out our international business.

We are a growth company that is focused on long-term profitability. This is where our D&A as a fast-paced competitive brand demands that our business leaders and their organizations uphold a culture of accountability. Simply put, we don't see investing in the brand as a trade-off to bottom line profitability. We firmly believe and expect this Company to grow on the top and bottom line while continuing to invest in our brand awareness and to support new businesses.

We thrive on being opportunistic with our marketing and categories that we attack. The road map is in place to accomplish all of this. More importantly, we believe that we are in perfect position to reach our long-term goals while profitably growing our business in 2007, 2008 and beyond. We will do so with equal parts passion and discipline. Our corporate culture will accept nothing less.

In closing, we are proud of our accomplishments in 2006. We are confident in the investments we have made for the growth of the brand and we are excited about the opportunities we have created for the future long-term success of Under Armour.

With that Brad and Wayne will take the fourth quarter and full year numbers before we take your questions. Thank you.

Thanks, Kevin, and hello everybody. I would like to take you through our income statement for the fourth quarter and full year 2006 and instinct to a few points on our balance sheet at year-end. First our income statement. As Kevin mentioned, we saw very strong growth in our core apparel business in the fourth quarter. The acceleration we saw from the second quarter to the third quarter continued in the fourth quarter as apparel net sales -- growing more than 43% driving our total net review growth 55% for the quarter to $135.3 million from $87.3 million in the prior year.

In addition to the accelerating growth in our core apparel business, in the fourth quarter we launched baseball and softball cleats which helped drive an additional $9.3 million of net revenues in our footwear business. For the full year, net revenues increased 53% to $430.7 million, exceeding our previously provided outlook of $410 million to $420 million.

Now moving to our gross margin. For the quarter gross margin increased 190 basis points to 50.6% compared to 48.7% in the same period last year. This increase was largely driven by our continued efforts to drive efficiencies in our sourcing, achieve greater supplier discounts from increased volume as well as favorable changes in the product mix that shifted a larger portion of our sales to higher margin products.

Net sales from our direct to consumer business, which includes our website and retail outlet stores, grew 118% for the quarter also having a positive impact on our gross margin. These items contributed to our total gross margin improvement which helped offset the lower gross margins associated with footwear. For the full year, gross margin increased 180 basis points to 50.1% versus 48.3% in the prior year.

SG&A for the fourth quarter totaled $50.7 million, an increase of $21 million compared to the same period last year. SG&A as a percentage of net revenues for the quarter increased to 37.5% from 34% in the prior year. Increased investments in our growth initiatives which include international and footwear accounted for nearly one-third of the year-over-year dollar increase in SG&A. We also recognized additional expenses related to our Sarbanes-Oxley compliance initiative. In addition SG&A reflects lower bonus expense based on our actual results and Kevin Plank's decision to not accept a bonus for 2006.

Within SG&A, most importantly, we continue to invest in our brand during the quarter by increasing investments in marketing. Marketing costs represented 12.6% of net revenues in the quarter compared to 8.6% in the prior year. However, for the full year, marketing costs remained within our target range of 10 to 12% of net revenues, representing 11.2% of net revenues in 2006 compared to 10.8% in the prior year.

With these increased investments over the course of the year, we were able to launch footwear with our multiplatform Click Clack marketing campaign and back it by authentic exposure as an official supplier to the NFL. We also outfitted several high school and top college teams as official head to toe Under Armour teams. We followed a similar formula abroad by selling official base layer deals with five professional European football teams.

Instore, we branded our expanding footprint and broaden consumer education on the benefits of performance by increasing the number of Under Armour concept shops within our key retail doors. We continue to believe in the positive impact that these and other marketing-related initiatives have in our top line.

For the full year SG&A as a percentage of net revenues increased 36.8% from 35.6% in the same period last year, again being driven by our increased investments in marketing and our growth initiatives.

Our operating income for the quarter was $17.7 million compared to $12.9 million the prior year, an increase of 38%. For the full year our operating income increased 60% to $57.3 million.

13.1% operating margin for the fourth quarter reflects the increased marketing and investment spending during the quarter. For the full year we showed improvements in our operating margin as it increased 60 basis points to 13.3% of net revenues, compared to 12.7% in the prior year, driven by our strong top line and improvements in gross margin.

Other income for the quarter increased $1.5 million which was primarily driven by increased interest income as a result of our improved cash position. It is important to note that both net income and EPS for the quarter benefited from a $1 million or a $0.02 per diluted share state tax credit reported in the quarter. This represents the balance of the expected full year benefit of the $3.3 million or $0.07 per diluted share state tax credit. It is worth noting that we do not anticipate earning any new state tax credits in 2007.

Our resulting net income for the quarter increased to $11.9 million from $7 million in the same period last year. Full year net income increased to $39 million from $19.7 million in the prior year within the range of the outlook we provided at the end of third quarter.

Now I'd like to move on to the balance sheet where we saw positive developments across several key metrics. Inventory at quarter end increased 51% to $81 million compared to the prior year-end, in line with our net revenue growth for the quarter. We continue to use our existing retail outlet strategy to profitably sell our excess inventory.

In the fourth quarter our outlet base remained at 11 stores. However in 2007 we plan to expand our retail outlet strategy with the addition of five to six outlet stores during the year. We believe this investment has been and will continue to be successful in protecting the brand, improving our liquidity and raising gross margins and operating margins. Net accounts receivables increased 35% or $18.7 million on a year-over-year basis and grew at a slower rate than net revenues fourth quarter. Total cash and cash equivalents at the end of the quarter were $70.7 million and cash, net of debt increased $9.8 million during the year to $64.4 million.

Our investment in capital expenditures for the quarter was approximately $7 million which brought the total to $18 million for the year. This increase over our previously stated CapEx outlook of $15 to $16 million was related to a late year initial investment of $3 million made in a warehouse management system projected to be implemented in 2007.

Wayne will discuss this and other expected 2007 capital expenditures shortly.

Of the remaining investments in CapEx for 2006, half went towards the buildout of new outlet stores and additional in-store fixtures to support our brand presence at retail. We also made a sizable investment in IT during 2006 with a successful implementation of SAP.

Now I will turn it over to Wayne Marino who will take you through our outlook for 2007.

Thanks, Brad. Great job.

I am going to take the next few minutes to provide our outlook for 2007 as well as several key elements of our strategy going forward. 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 grow both net revenues and income from operations between 30 and 35% for 2007.

We plan to accomplish this by executing our strategic growth drivers, expanding our men's and women's business, ramping up our footwear, continuing to build our international business.

Kevin talked earlier about some of the product in marketing stories that will help us drive our core apparel business in 2007. In addition to the new categories that he mentioned, we believe our core growth in men's with a broader product offering in golf, baseball and running, and women's specifically our ColdGear compression and tech tee programs will benefit from the continued growth in our footprint within our existing distribution.

We also expect to see continued progress with our Good, Better, Best merchandising strategy. New door growth in specific channels including outdoor and mountain sport, growth in our direct business, and continued square footage growth among our key accounts. We will also be investing in our core men's, women's businesses by adding capacity and efficiencies on our distribution house as well as increasing the number of Under Armour concept shops in our key accounts.

As Kevin mentioned, we will continue to invest in our footwear international businesses by building the infrastructure to support the long-term profitability in these two businesses. A portion of the investment we are planning to make in [DH] for 2007 will be to expand our capacity to warehouse footwear including expanded lines in both football and baseball and new categories such as Lacrosse.

We are also investing in both people and R&D as we plan our expansion into non-cleated athletic footwear.

On the international front, we will continue to focus on western Europe, with particular emphasis on the UK, France and Germany. We finished 2006 with approximately 600 doors in Europe and are planning to more than double that number in 2007. We continue to believe that the opportunity for the Under Armour brand internationally is as large as the opportunity in the U.S., and we will make appropriate investments in 2007 and beyond to reach that goal.

In 2007, we expect our men's business to grow at a greater base than our long-term growth target of 20 to 25% with our other businesses growing at and even faster pace. I also want to point out that although footwear and international businesses will be investments in 2007, combined they are projected to contribute almost 20% of the year-over-year dollar growth in 2007.

As far as the timing of our revenues, historically, a greater percentage of our revenues have been recognized in the third and fourth quarters. We expect 2007 revenues to reflect a similar pattern to 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 moved the net income EPS line, the recognition of state tax credits in 2006 will impact the year-over-year comparability of our net income and EPS in both the second half of 2007 and fourth full year.

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 global direct to consumer 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 pleated 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 did not have the impact of cleated footwear on the gross margin.

Additionally for 2007, we will improve our in-store marketing by shifting dollars previously given as discounts to fund in-store marketing efforts thereby creating an exciting environment for people to experience the Under Armour brands. This shift in spending from discounts to in-store marketing will have a positive impact of approximately 60 to 70 basis points on gross margin for 2007, offset by an increase in marketing costs. This change will enhance the brand's presentation at retail.

Taking all these factors into account, we are planning our full year 2007 gross margin to improve by 80 to 100 basis points over the prior year.

Now moving to our SG&A. For 2007 we plan to continue to invest in our growth initiatives, such as footwear international. putting the infrastructure in place to build large scalable businesses and to market the Under Armour brand globally. For 2007, the move away from discounts and towards in-store marketing efforts that I mentioned previously will push our marketing to the high end of the annual 10 to 12% range.

Our fixed costs, specifically other costs, are expected to leverage in 2007. For these reasons, we are planning our full year operating expense to increase by 80 to 90 basis points as a percentage of net revenues for (technical difficulties) 2007. We also see the opportunity to further average fixed costs if volumes should increase.

Taking all of this into account, we believe our income from operations for 2007 will be in the range of $74.5 million to $77.5 million. 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 the first half of 2006 we invested in marketing at the low end of our 10 to 12% range. For the first half of 2007 we expect to be closer to the high end of the 10 to 12% range.

We have always earned a greater portion of our operating income in the last two quarters of the year. With the shift of the marketing spend we expect an even greater percentage of our 2007 operating income to come from the back half of the year. We are forecasting our net interest income to be approximately $2 million for the full year and our effective tax rate to increase to 40.5% for the impact if any of then 48 up from 34% since the allowable state tax credits that were earned in 2006. We are not anticipating any new state tax credits in 2007.

Weighted average diluted share account for 2007 is expected to be approximately $50.5 million. Now turning to our balance sheet for 2007.

With inventory, our core items such as ColdGear, [Trektea] compression tops and bottoms drive over 50% of our business.

In 2006 we took receipt of fall merchandise earlier than we did in the prior year to support an increased number of product launches in the third quarter. And this strategy paid off with over 40% growth in apparel for the third quarter in 2006. For 2007, we are planning a similar strategy where we will invest in core inventory, specifically fleece and ColdGear, in the second quarter to position ourselves for strong consumer demand in the back half of the year.

Our fundamentals around the inventory are strong. We will balance this strategy with our aggressive inventory management initiatives. Now moving to CapEx.

2007 is still an investment year for Under Armour as we implement the infrastructure to support large scalable businesses. We are planning to invest between $20 and $22 million to accomplish this goal. Over one-half of our CapEx investment will be in our distribution house, where we will add new equipment to improve our shipping velocity and expand our warehouse capacity, in anticipation of future growth in our apparel and footwear businesses.

This is in addition to the $3 million invested in Q4 of 2006 for a warehouse management system projected to be implemented in 2007. On a scale similar to 2006, we plan to invest approximately $6.5 million in our in-store [fixture] program and the balance of our capital will be invested in IT initiatives, expansion of our global direct business to include Canada and Europe, retail outlet store expansion. and the balance for general corporate improvements.

Taking all this into account, we are expecting to be cash-positive for the full year with fluctuations on a seasonal basis as we make investments in working capital -- specifically inventory -- in the first half of the year.

In closing we are proud of our accomplishments in 2006. We are confident in the investments that we have made with the growth of the brand; and we are excited about the opportunities we have created for the future long-term success of Under Armour.

Now Kevin, Brad, and I will take your questions and before that, I will ask that each of you please limit yourself to one or two questions so we can hear from as many of you as possible. Operator.

(OPERATOR INSTRUCTIONS) Omar Saad. Credit Suisse.

Wayne, I wanted to follow up on some of your inventory comments. Looks like inventories are up 50, 51% or something like that. How do you -- are you comfortable with that inventory level, given your 30 to 35% topline growth projections for the year?

Yes one of the things that we look at inventory with is first and foremost is 50% of our products are core products. They are available 12 months out of the year so I feel very comfortable about the inventory. The second part of that is, we really do have to plan for the future. Last year we took a position at the end of the second quarter and it paid off in our third quarter with our apparel revenues growing over 40%.

I probably think the best metric I could give you when I look at inventory and I evaluated it and our team evaluates it, at the end of 2006 90% of our inventory was current and future inventory. And the balance in our inventory is earmarked 100% for our retail outlet stores.

So I think it's a very clean story and I think it is important that we have to position ourselves for our future growth to take advantage of opportunities.

Then, Kevin, if I could get you to elaborate a little bit on some of your marketing strategies and the strategy to invest in the presentation at retail as opposed to discounting? If you could talk about where you see the brand going around some of these initiatives that you've talked about?

I think that we've made some pretty big shots in 2006 and more importantly I think we are better positioned in 2004. First of all on the growth initiatives, I think that we continue to have some marketing around there. Click Clack was a great example with what we did around footwear in April and May and June of last year.

The neat thing is, also on our website, we invested our website in 2006 and the results of that were 87% growth which is something we are pretty proud of. Probably another component, too, is what we did with Dick's Sporting Goods. Not only are our own marketing dollars but how are we becoming creative with some of our retail partners' marketing dollars as well? That was a cofunded spot that we did together.

Again built and designed and concepted by the Under Armour department and executed by Under Armour, with I think the power of one of our largest partners' dollars behind it to. So with that we believe in marketing. Again we call it discipline with that 10 to 12% metric that we continue to refer back to. Because we think it is important that we continue to invest at that rate. And at the same time we are going to (technical difficulty).

We spent 12.8% in the fourth quarter on marketing and we did that, that's compared to 8.6% in 2005.

This is Wayne. I just want to elaborate. One of the greatest financial things that we have been able to accomplish is that shift of discounts to retail in-store marketing besides having the benefit to the presentation at retail has no impact on our operating income. And still we are going to have the same discipline of the 10 to 12%. So I look at it financially as real positive for us.

With the sales velocity, with the marketing kind of a lot of your kind of SG&A type expenses in there. Do you feel you can get leverage on them? Should sales growth come in ahead of expectations or how should we think about that?

When I look at SG&A, first is the marketing component which is about a third of our SG&A. That is a valuable cost and we believe that has to the variable because we need to invest in our brand. So that would be my first take away.

Secondly if you look at this year approximately, and Brad said this, approximately one-third of the year over year increase in our SG&A was to support our growth initiates. So we are building long-term scalable businesses and that is going to require investments. The good news is that we do have leverage. We have leverage in some of our fixed cost.

So going forward in 2007, I do see our fixed costs specifically our Other cost beginning to leverage. And as we continue to expand our topline there will be an opportunity to leverage our fixed cost. They are going to grow a lot slower than our variable cost. But our big variable cost is marketing. It is important to us to stay within our 10 to 12% range.

Great. I will move on. Keep up the good work.

Robbie Ohms. Banc of America Securities.

Two questions for you. The first question was given there was a lot of commentary out there about the warm winter, especially on the East Coast. When you look at what your Retail partners were doing was there -- would you say there was an impact on the salesroom rates for any of your ColdGear product or any of your offerings related to whether that might set up for an easier comparison for next year?

And the second question I think is for Kevin which is, there is a lot of talk about Nike potentially getting more aggressive in doing their own retail stores. And, Kevin, if you could talk about the pluses and minuses of you taking that strategy and if something like that is on the table? Thanks.

This is Kevin. First of all, I think we have a pretty good cold snap at the end of the third quarter that we saw some benefit from. The beautiful thing about our model business at this time and I think Wayne spoke to it with regard to inventory is that we really have -- we have got 10-, 12-month product out there. Our ColdGear is something that it is relevant this year and, frankly, we expect the same product, the same SKUs to be relevant in 2007 as well.

When you look at that, it's a lousy place to try to blame weather for anything and I'd think with the accelerating revenues that we saw particularly in the fourth quarter, we didn't feel a lot of that. It was definitely a challenging environment out there at retail, but with products like our core basics, you know we still saw them continue to grow, particularly our full compression. We watched full compression grow some 24% for us as a company.

In addition we saw consumers accepting our brand beyond just compression products where we watched the balance between compression and loose product, changed from a mix of 65% compression 35% lose in 2005 to 45% lose and 55% compression in 2006. So I think we are evolving our brand. We are evolving expectations the consumer has but more importantly I think it just goes back to reiterate that point that the consumer making this decision in one of two directions. You're either heading for price and cheap or you're heading for quality and Under Armour performance. So that has been a plus.

With respect to the retail store strategy. You know again I think we said over and over that we like our distribution. Our distribution likes us very much. We have definitely found success and I think we are seeing and I mention it in my script as well was we are still growing floor space within our retail accounts and within big box sporting goods in the particular, they're growing floor space as well.

So one, when you look at where are we going to find growth well the first place I think you look is just the organic book we are going to see from the strength of our partners. They are growing at a healthy and a relevant rate. We will continue to invest there. I think it is important that the idea of a retail store and the reason you do it is so that you can control your own destiny. Control your brand's presentation.

I think the feedback that we are getting from our Retail partners right now is something that gives us a lot of confidence with the presentation that we are better be seeing a much improved presentation -- particularly in the second half of 2007. And of course moving forward to 2008, but consumers are going and we are driving I believe consumers into sporting good retail stores and they are choosing our brand.

Terrific. Thanks and keep up the good work.

Eric Tracy with BB&T Capital Markets.

Just wanted to follow up on the branded in-store concepts. Kevin, maybe you could walk us through, again, exactly how that layout is going to work in terms of the pads, men's and women's as well as obviously the new category extensions you all are going into. What is the format of that and how many doors can we expect to see that in?

The first part is that, again, I used one of our public company references in Dick's Sporting Goods. I think they are a great example. First of all it doesn't only begin I think on the retail floor. When we think about campaigns, we think about brand campaigns that carry through to every level and not only on the retail floor but print, book, media. The cobranded spot we did with Dicks is a great example of that.

We shot that in their new Dicks Dollar Store that featured the biggie manikin our Under Armour woman coming to life and staying up all look like night and the activities that happen in a sporting good store after the lights go out.

I think that a lot of the benefits that we have seen have watched that carry over from the sell through we've seen by implementing a store and a branded store concept. That continues to get stronger. So obviously both of our management teams have noticed the fact that the more of these shots we can implement obviously the more it will drive revenues. And I think we have felt and we've seen the impact of that happening.

So we are looking for a concept that I think you could say someone somewhere in the neighborhood of -- and it is hard to give numbers because a lot of these things are with the number of stores that Dicks is opening now which is in excess of 40 stores in 2007, we see the opportunity to benefit from that as well. So I would say new stores as well as targeting A and B stores as well in the short term.

Just to follow-up on that, is there any or how do you balance the growth within that particular channel without getting too saturated or too reliant upon that? Again realizing that there is some significant opportunity be it at Dicks or [TSA]. But still thought to diversifying beyond that into athletic specialty. Not necessarily the Foot Locker, Finish Lines of the world but the mountain kind of core technical type specialty retailers.

I think that we continue to do that and again our door count, again, we are nearing globally to a 12,000 store door count. A lot of the way that we think about growth is, again, organic growth from our retailers. I hear you about diversifying and I think we are doing that in things like the outdoor category, the addition of the REIs, the Cabelas, the Bass Pros of the world where we are driving businesses that are growing at high double-digit rates with these guys.

Again on the mountainside particularly in the specialty shops, we continue to add distribution there and. It is also other specialty channels that we have got involved with. It's people I think like some of the golf specialty with Golf Smith and Golf Galaxy. We had 160 of their doors for this spring.

So I think we will continue to diversify and frankly I think we've got a terrific partnership with these guys and if you are going to bet on somebody, the Sporting Goods channel very healthy right now and we feel great about the upside there. We will continue to add doors where it makes sense and where it is relevant. We are not just going to add doors just that way.

Sure. Last real quick, Wayne, in terms of leveraging again the fixed costs and certainly the investment you've made this year in both footwear and international so by kind of my math and numbers that looks like again 30 to 35% topline expectation but roughly 15% bottom-line growth at least in the guidance provided. So is it more of an '08 type event we start to see that 25%?

Let me take you to what you just said. The topline 30 to 35 and the income from operations 30 or 35. If there is any year over year change you have to look at the effective tax rate and that is probably the biggest change from what we had this year as Brad talked about the same state tax credits. So we are looking at our business as the top and income from operating line growing at 30, 35%.

With that said, one of the things I would like to point out with the initiatives and we have been investing in them but we started to see payoffs in those initiatives. If you look at the growth, the topline growth this year approximately 20% of the dollar growth is coming from these new initiatives. And I said in my prepared remarks that 20% will come from the new initiatives next year.

So although it is a growth and investment story, we are starting to see some returns early. But remember we are going to build large, scalable businesses and each of these businesses that we build, the international business, we are building a business where we have to build a business in a separate location, build the people, build the infrastructure and tell that marketing story to a different group.

So the potential is great but the investment is important. Because you are not necessarily getting as much leverage from the core business here in those businesses. I will tell you footwear -- very similar. You are building a skill set in the people for both cleated footwear and the skill set people for non-cleated footwear as well. Again those are businesses that have to be built from the bottom up.

Thank you. Best of luck.

Margaret Mager with Goldman Sachs.

Great 2006. A lot to be proud of.

A couple questions if I could. Wayne, I just want to clarify what you said with regards to the EBIT margin goal for 2007. What was that? Your operating margin?

What we said is that our operating margin goal would go up 30 to 35%. Now in my prepared remarks I think we had the same in the release today. It was going to be $74.5 million to $77.5 million in absolute dollars.

Operating margin percentage?

I didn't necessarily go over that. What I can tell you is it should increase based on the gross margin change and the SG&A change. It would go up 10 basis points in the outlook I provided.

Then can you talk a little bit more about your direct strategy and what is happening there? How big is that as a percent of your business now? What are you thinking in '07, '08? I know you said it will grow faster than the 30 to 35% that you outlined for the total topline so I'm interested to hear more about that.

Then looking out to '08 and Kevin's comments that you are getting ready in footwear to make another move probably in '08. What is the natural gross margin on footwear versus an apparel business? Is it comparable, lower, we know cleated is lower, but what will that mix look like just naturally as you move deeper into footwear?

Lastly, I would like to get your perspective on the competitive environment in the U.S. and particular and any commentary on Europe. Your decision to shift dollars from discounts into concept shops. Is there any risk in that? Could the competitors offer discounts to the retailers?

How are you making that move without upsetting the applecart at retail?

I will start with the first one. Our direct business. We define our direct to consumer business as sales through our website, catalog and phone orders. And for the most part, that business last year represented approximately 5% and then as we look forward it can be anywhere from 6 to 7%.

It was a significant growth story for us this year. We made some investments. Some marketing investments in the fourth quarter that paid off. I think in the fourth quarter was it 90 -- over 94% increase in that business alone in our fourth quarter.

So again it is starting to pay off. But still a small part if you want to look at it 6 to 7% next year. So it is really the Web business that I would call my direct business.

Secondly when we look at the next part of it was gross margin for footwear. Obviously, you are right. Cleated footwear is much lower than apparel. Looking forward we have the opportunity to set the prices based on the product that we put together. So there are puts and takes. Footwear margin in non-cleated footwear will be higher than cleated footwear. I can't tell you that I see it exactly the same as apparel right now. We will be working on that. So it is in between the cleated and the apparel.

But the good news is with the puts and takes we continue to see improvement in our sourcing and our volume programs in apparel. We continue to see businesses like the direct business accelerating that have higher margins. And in addition to that, our output business -- as Brad talked about -- is growing and that has a higher margin business. So with all the puts and takes we see 2007 being positive.

As far as the in-store being in this business many years, one of the opportunities to take discount dollars and invest them within a store to drive consumers and tell your brand story. It is a very very positive thing. My one takeaway I want to leave you with is that it has no impact to the operating income. It is a shifting between the discount line and the marketing line, but for us it is really an advantage that people believe in our brand and are willing to shift those dollars because it is a better spend of money.

Is that concentrated? Is that just Dick's, for example, giving you a break on discount and letting you build out more concept shops? It just seems like retail (MULTIPLE SPEAKERS)

It is going to be with our bigger accounts. Absolutely. And usually our key accounts lead the way and then I think when we demonstrate what a shop can do other people do follow. Maybe not the same proportion but, certainly, yes. It is the top cost customers that will drive that first.

Have a great '07. Take care.

John Rouleau with Wachovia Securities.

Couple questions. Just as a follow-up to that, could you give us an idea of how many of the kind of expanded newer in-store shops that you ended the year with and maybe how many you might look to add in '07?

Let me take that. We had it's really -- it's not a big number right now and we have made inroads into what concept shops are defining them through simply having our fixtures on floor to some graphics. And now what we are moving to with many of our partners are I think comprehensive shops that really tell more of a brand story beyond just a fixture or POP card.

So I would say it is probably depending on how you look at a built out invested shops, you are probably in a neighborhood of less than 100. So if you imagine the velocity that we have seen in our business selling $20, $30, $40, $50 T-shirts. Frankly without telling a story you are without question at a disadvantage.

I think we see the opportunity to move much farther beyond that. So with our biggest partners we are -- in the short-term we are targeting their A and B doors and again it is one of those things that for the most part we leave determined -- to be determined but we are going to be pretty aggressive. You will start seeing shops show up in our bigger players in the second half of the year and that is something that will carry through to 2008.

I think one component of that is that the approach we've taken is, it's no longer just a 12-month approach but we are doing two- and three-year deals with our accounts as well, to find a better way to leverage those dollars over a longer period of time and create a bigger investment. So if you -- you know, if you vet out those A and B's, I think you start getting to a better idea of having stores that actually is.

Sure. Then does the footprint, this square footage expand significantly with the shop or is it primarily just a different usage of fixtures and campaigning?

No. We are, absolutely, I think our product and our success is dictating the fact that we get bigger footprints and so we frankly earned it as well as we have earned, I think, some of the prime real estate within those doors. So we are seeing both of those grow but again it is not just growing the Under Armour section as much as we want to grow in the apparel pad without question, but we also want to expand through outpost. You'll see an Under Armour brand of footwear wall. You'll see us in outerwear, you'll see us in the golf section of sports and it branded men's and women's and then of course those key outposts. So that I think is the component that we want to drive. It's not Under Armour on one section as much as you can't go through the store without finding our brand in a relevant sporting goods section.

Sure. Okay. Moving on a little bit there is obviously still lots of areas for you guys to expand on the product category side. Outerwear is coming. Footwear is on the way. Anything else on the near-term horizon here? Six to 12 months? And I guess specifically just wondering how you are looking at the equipment side and at what point do you maybe test the waters there?

I think we've got -- I tell you that Wayne and I will be in here arm wrestling if we put any more growth initiatives on the board but we've got a pretty full plate. But as I say that, I wouldn't say it is too full. We feel great about the opportunities that we have laid out. We feel like we have got enough bandwidth to satisfy all the growth requirements that we say, looking at our long-term growth objectives.

So I think we have build scalable platforms that allow us to grow. Again the footwear comments that I made before, it's something we feel very good about. We continue to build and drive our authenticity there and we believe that when people ask a question as why are you going into these narrow categories with not a lot of upside, we believe we have laid the groundwork for authenticity and credibility in these categories to put us in position to be successful going forward.

So when we start expanding in the non-cleated I think you'll see that we will reap a lot of the benefits of that. But it is an investment. Again it's just an investment.

Thanks.

We have time for one more question.

Dan Wewer with Raymond James.

Kevin, do the retailers have a choice as to whether to take the purchase discounts or the concept departments?

Yes, of course. They are making the decision that we are driving volume with that.

And how long will it take to swap out the other fixturing for the (indiscernible) concept departments? How long does that process -- will that take?

A lot of it is swapping out -- without question, there's a new fixturing component to what we do but if you walk into sporting goods now -- we started with one fixture back in the equipment section. And we had this one branded eight foot fixture which we called The Transformer. It could be pretty intimidating when you walk into a store. So what we've done is we've come back and we've redesigned and created a load of high merchandising set that you'll see appearing in stores more as well as bolstered by both graphics behind in the retail store, in the retail set. I think that will really be telling more of a branded message for Under Armour to feel like you are walking in an Under Armour shop.

And again the momentum and velocity that we are driving as a brand of the Company right now we are driving foot traffic in those stores so our retailers are proud of the brand. And they want to tell the story that Under Armour is available and they have got the widest and broadest assortment of our brand in their stores.

So this is going to affect not just the space between the escalators (indiscernible) but also their footwear department, their golf department, you'll be setting up concept stores in each one of these departments as well?

I think what you'll find is, A, a (indiscernible) headquarters in store anchored in men's and women's apparel as well as outpost throughout that store that tell a branded story for whatever the particular product is.

Again it is getting into outerwear and how are we going to do that? We have got again a tight specialty distribution approach that we are taking that but there will be some of our key big box stores will a be part of some of those programs. So we want to make sure that we are telling a branded story. We are offering things like a stretch woven where the market has never seen stretch incorporated in that.

There is a price with that but that price is performance. And again when we get the opportunity to tell the customer the story, they are willing to pay up for it. And that is what our retailers are enjoying, those higher ASPs.

That sounds like a good strategy. One unrelated question, Wayne. The forecast of a slight increase in operating margin for 2007 makes a lot of sense. When you start thinking about 2008 and generating a larger portion of revenue from footwear or perhaps Europe where the operating costs are higher, do you still anticipate a flattish operating margin in '08 or is that going to be the breakout year when we begin to see those operating margins approaching 15%?

As we start to build down our large scalable businesses we are definitely going to see leverage in and some of our fixed costs. In addition to that we are going to have a balance. On the -- when we were preparing for the roadshow one of the things that Kev and I said consistently over and over again is, we believe we can improve our operating margins year after year. And to date we've delivered on that product promise and we expect to continue to deliver on that in the future. We will deliver on that as the businesses start to scale. The ones we are investing in today.

We will deliver on that as we become even more efficient running a large company. We will deliver on that as our gross margins which are balanced mix improve from the sourcing initiatives, from the increase in our retail business, offset slightly by the growth in footwear. But as I said earlier one of the benefits is we started with cleated footwear which is probably the lowest of the low and we can only go up from there.

Sounds like '08 not '09 but '08 when you would begin to see a meaningful improvement in operating margin?

We will improve our operating margin year after year. That has been our commitment and that is what we feel really comparable with.

Operator, thank everyone very much for your time and we look forward to driving them in 2007.

That does conclude today's conference call. Thank you for your participation and you may disconnect at this time.