Under Armour Inc (UA) 2007 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Under Armour second-quarter 2007 earnings results conference call and webcast.

This call is being recorded.

At this time for opening remarks and introductions I'd like to turn the call over to the Director of Investor Relations Ms.

Alex Miyamoto.

Please go ahead, ma'am.

Thank you and good morning, everyone.

I'd like to start by welcoming you to Under Armour's second-quarter 2007 earnings call.

During the course of this conference call we'll be making projections or other forward-looking statements regarding future events or the future financial performance of the Company.

The words 'estimate', 'intend', 'expect', 'plan', '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 factors 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 continue I'd like to direct you to our website, investor.UnderArmour.com.

There you will 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 second-quarter 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 second-quarter; Wayne Marino, Executive Vice President and Chief Financial Officer, will conclude the prepared remarks with an updated outlook for the balance of 2007.

After that, we'll have a Q&A session that well end by 9:30.

And with that I'll turn it over to Kevin Plank.

Thank you, Alex, and good morning.

A solid quarter where we posted 51% revenue growth, we believe this is a good time for us to quickly provide some color behind the statistics so that we can spend more time on your questions this morning.

Let's start with the scoreboard.

Apparel revenues grew 53% with the men's, women's and youth apparel segments each growing at least 50%.

Our ASPs in apparel were up 8% over last year, or more than $1 per unit.

We've improved our gross margin by 120 basis points.

We've leveraged SG&A by 180 basis points despite a significant increase in our marketing commitments.

After the successful launch of football cleats last June we came back even stronger with a 29% increase in footwear in the second quarter.

We more than doubled our earnings in what's historically our most challenging quarter of the year from a revenue perspective.

From a strategic standpoint we are a much better Company operationally than we were a year ago.

Since we became a public company we've continued to drive revenues while enhancing our systems, improving our fill rates, expanding our sourcing base, and solidifying the internal infrastructure needed for long-term sustainable growth.

Last quarter we achieved several milestones in the second quarter which illustrate that we're making progress in building large scalable business.

As we stated on our last several calls, Under Armour has four key drivers of our growth -- men's apparel, women's apparel, footwear and international.

In addition to top four, our own direct to consumer strategy continues to play a more important role for the brand as we continue to expand.

Right now I'd like to take just a couple of minutes to update you on the progress we've made in these critical areas.

First, women's.

We had a great quarter from a revenue perspective with women's apparel up 53% driven primarily by our core compression and training categories.

We're also building strong businesses in core sports like running, soccer, softball and our team business with each of these categories growing more than 50% in the second quarter.

We believe these categories are critical for the Under Armour brand.

Our core consumer, both male and female, has always been the team athlete and we believe our product and our brand communication has always reflected that goal of authenticity.

That authenticity was highlighted with our most recent brand campaign targeted at the female athlete entitled BoomBoom - TAP.

This launch connecting on all platforms from television, media to in-store point of sale stars and speaks to the female athlete.

We partnered with ESPN to launch this during the ESPY's awards show just two weeks ago, connecting the campaign to our own branded award, the Under Armour Undeniable Performance ESPY which was dedicated this year to the best female collegiate team.

The fans voted by large for Pat Summitt and her national champion Lady Vols basketball squad.

With the BoomBoom - TAP campaign we have once again broken new ground in media by speaking directly to authentic team athletes, this time imaging the team girl in her element -- working out, practicing with her team and competing in games.

It's the same formula that succeeded with male athletes and we've provided their female counterparts with a tagline and gameday cheer they can make their own.

Most exciting though in the halo effect this campaign has had with females both younger than high school and older than the collegiate athletes featured in the creative.

The point made here is simple -- if our apparel and footwear performs at the top-level of team sport competition then it can perform for women in the gym.

I encourage all of you to visit our website if you haven't already to see the campaign and our dedication to the female team athlete, BoomBoom - TAP.

Internationally we took an important step this quarter by building on a foundation we've established over the past 18 months in Europe with the addition of Peter Mahrer as our new President of Under Armour Europe.

Peter has held executive leadership positions running international sales at Puma and global football at Adidas.

Peter brings Under Armour a great breadth and depth of experience in the European athletic market.

Our growth strategy in Europe remains unchanged.

We've started first by establishing the brand authentically on field, much as we did here in the states.

For Under Armour that means not only being authentic on field in key sports such as football and rugby, but it also means being an authentic athletic distribution.

Beginning early in 2006 we began building those partnerships and we now have over 1000 of these doors open in Europe, primarily in the UK and Germany.

The second phase of our plan was to bring in a leader with significant local experience on the ground in Europe to take us to the next level, which we believe we've accomplished by adding Peter to the team.

Our strategy for Europe remains in tact -- grow our authentic presence on field, grow our authentic athletic retail distribution and build the team and infrastructure that will enable us to have a large scalable business in this key market.

In growing our core men's business we continue to see demand shift away from cotton basics to a performance alternative.

Performance is accelerating; our second-quarter men's business grew 50% with our two largest categories, compression and training, accounting for more than half of the dollar growth.

Our good, better, best strategy continues to drive sales as cornerstone products like what is our good option, the $25 HeatGear full T-shirt saw growth of 38% in the first half of the year alone.

Meanwhile we're able to trade consumers up in price points by introducing a better alternative with the new color block $35 Blitz HeatGear that is generating great buzz at retail without cannibalizing the core.

In addition to a better option for the shirt we also offer two new higher price point styles of shorts to complement our core HeatGear micro shorts.

Again, the introduction of the new product has not only performed for us at retail but did so without cannibalizing the core micro short which saw sales growth of 60% in the quarter.

Golf is another big story to come out of the second quarter.

First introduced in the spring of 2006 our golf line has grown rapidly and is now our third-largest category in men's apparel.

Our golf line is a great example of our ability to introduce Under Armour technology into a traditional sport and quickly gain market share.

Our core performance polo golf shirt is up more than 82% year-to-date over 2006.

More importantly, we saw how performance apparel now plays such an important role in the sport with tour golfers like to Hunter Mahan who won his first PGA event last month in Connecticut wearing our performance polo and pants.

Many golfers have also adopted the Under Armour ColdGear compression mock beneath their shirt as so many did two weeks ago during the unseasonably cold weather of the British Open.

We continue to see velocity in our golf business across sporting goods, golf specialty as well as the green grass channels of business.

In store we continue to brand and create new experiences on our retail partners floor sets.

Within our strategic accounts we are ramping up installations of concept shops that will total 125 to 200 by the end of 2007.

Traditionally we've seen immediate increases in sales per square foot after the implementation of branded concept shops and believe this will continue to be the case with our current major rollout of shops in both the men's and women's sections.

Stay tuned.

And that brings me to footwear.

Before Brad and Wayne reveal more of our scoreboard around our cleated business I will speak to the business overall.

We continue to authenticate ourselves on the gridiron and the diamond with football and baseball cleat sales up 29% in the quarter.

After staking our position as the number two brand in the market, after just our first few weeks in the business in 2006, our 2007 plan is twofold.

Number one, to continue to innovate and invigorate the category with our technology; and to continue to accumulate market share every season until we reach our ultimate goal of being number one in the cleated category.

We plan to increase our football cleated market share in 2007 beyond the roughly 20% we achieved in 2006.

Our success on field as well as on the sales floor has laid the groundwork for us to enter the noncleated footwear business in time for the back to school sale season of 2008.

What I've alluded to in the past I can now confirm to be plans for our largest and single most important product launch in the history of our brand.

I'm talking about the Under Armour performance alternative to what is currently known as the crosstrainer shoe.

As the leaders of athletic performance we feel it's our duty and privilege to introduce athletes to authentic performance training footwear.

For too many years this dormant category called crosstraining has been ignored by the shoe companies and we look forward to changing and improving yet again the way athletes train.

That performance movement we started in apparel more than a decade ago will be complemented with the launch of a line of Under Armour trainers in 2008.

This is one of the most important projects our product creation team has been working on for the past few years and, quite frankly, it's exactly what our core consumers have been asking for since day one.

We realize the anticipation surrounding the launch and we will provide more details in the coming months as we introduce the shoes to our retailers -- that's when we will show the world our vision of what performance training footwear should be.

Our goal is simple -- to resurrect the entire category of training by finally complementing our performance apparel with the appropriate performance footwear for athletes who are training the majority of the time in preparation for their game.

We will continue to invest in and develop large scalable businesses that provide the platform for future growth of the Under Armour brand.

And with that we'll quickly review more of the numbers so that we can get to as many of your questions as possible.

Brad?

Thanks, Kevin.

I'm going to take a few minutes to provide some information around our second-quarter income statement and balance sheet.

First, our income statement.

Our consolidated net revenue growth in the second quarter compared to the same period in the prior year was 51%, well exceeding our 2007 targeted top line growth of 30 to 35%.

This was driven by a 53% combined growth in our men's, women's and youth apparel sales.

As Kevin stated, we are continuing to see benefits of an expanded product assortment in our good, better, best strategy with average selling prices in apparel up approximately 8% compared to the second quarter in 2006.

Year-to-date our consolidated net revenue grew 46% with our apparel sales growing 38%.

We continue to see strong demand for our most mature business, our men's apparel.

Growth in men's apparel for the quarter was 50% compared to 2006 and was driven by our compression, training, golf and football products.

Year-to-date men's apparel growth is 37%.

Women's apparel growth in the quarter was 53% compared to the prior year and was primarily driven by our compression in training products.

This strong second-quarter showing helped boost our year-to-date women's apparel growth to 31%.

Our youth apparel growth for the quarter was 90% compared to the prior year driven by our compression in training products.

Year-to-date youth apparel growth was 64%.

We believe this continued strong growth in our youth category is a testament to our brand being the choice of this generation.

In addition to the 53% growth in our core apparel business in the second quarter we also had strong growth in our nonapparel categories.

Second-quarter growth in footwear up 29% was driven mostly by our second-year of football cleats.

Our accessories business grew at 76% as a result of increased sales of our football gloves mainly from our new Blitz gloves.

Licensing revenues increased 77% from continued strong demand for our socks, hats and bags along with our new licensing agreements which include distribution of products to college bookstores and golf pro shops along with performance eyewear products.

Now moving to our gross margin.

For the quarter gross margin increased 120 basis points to 49% from 47.8% in the same period last year.

There are several puts and takes impacting the margin for the quarter; I'll take you through some of the significant highlights.

First some good news here in that the temporary shifting of our supplier base to shorter lead time manufacturers that impacted our first-quarter margins were less prevalent in the second quarter, enabling us to see margin improvement related to product mix and costing on certain key items.

Second, plan -- beginning in 2007 we began to shift dollars previously given as customer discounts to in-store marketing and SG&A.

Third, growth in our direct to consumer businesses combined with our licensing revenues provided an improvement in gross margin for the quarter.

These gains were partially offset by increased sales returns and allowance reserves in the second quarter.

SG&A as a percentage of net revenues for the quarter was 42.2% compared to 44% in the prior year.

On a dollar basis SG&A for the second quarter totaled $50.9 million, an increase of $15.7 million compared to the same period in 2006.

Within SG&A we continue to invest in our brand by increasing investments in marketing.

Marketing costs represented 13.5% of net revenues in the quarter compared to 13.2% during the same period last year.

This increase in cost for the quarter was driven by increased costs associated with our NFL, Auburn, Texas Tech and South Carolina sponsorship deals and, as discussed in our gross margin highlights, increased in-store marketing costs.

It is important to note that approximately $2 million of marketing spend previously anticipated in the second quarter will shift to the third quarter of 2007.

As Wayne will mention later, this is mostly due to the timing of the installation of new concept shops and will not affect our total year marketing spend.

Overall the increase in marketing costs represented over one-third of the dollar growth in the second-quarter SG&A compared to the prior year.

Our operating income for the quarter increased $8.2 million compared to $3 million the prior year, an increase of 171%.

Operating margin for the second quarter was 6.8% compared to 3.8% in 2006.

In the second quarter of 2007 other income net includes a $1.2 million pretax foreign currency gain or $0.01 diluted earnings per share.

The effective income tax rate in the quarter was 40.9% compared to 35.4% in the second quarter of the prior year.

The lower rate in the prior year quarter was a result of a state tax credit received.

Our resulting net income for the quarter increased 136% to $5.7 million from $2.4 million in the same period last year.

Second-quarter diluted earnings per share was $0.11 compared to $0.05 in the prior year.

The $0.11 earnings per share was higher than our previously provided outlook of $0.02 to $0.03 per share due to stronger consumer demand, better than anticipated gross margins, and lower than planned SG&A spending specifically in marketing where we are shifting approximately $2 million in spend from the second quarter to the third.

Now I'd like to move on to the balance sheet.

Total cash and cash equivalents at the end of the quarter were $25.7 million and cash net of debt was $20.2 million compared to $33.7 million in the prior year.

This decrease was driven by our investments in inventory and capital expenditures which I will speak about shortly.

Net accounts receivable increased 31% or $19.8 million on a year-over-year basis.

Our accounts receivable team has been working extremely hard to improve processes and communications with our customers in order to receive payments according to terms.

This has obviously paid off in that our receivables balance continues to grow at a pace well below our top line growth.

Inventory at quarter end increased 61% to $128.8 million compared to the prior year quarter end.

In addition to increased inventory needed to support our top line growth, this strategically planned increase in inventory was attributable to increased safety stocks on our core offering; increased percentage of volume from our Asian source base which increases in transit volumes; international expansion specifically Europe; and an increased average cost per unit of inventory of 11% driven by our new fall/winter outerwear along with the earlier receipt of ColdGear and fleece products.

As we move to capital expenditures we need to continue to point out that we are building the foundation for large scalable businesses.

We continue to plan 2007 capital expenditures at $34 million to $36 million.

Year-to-date we have spent approximately $16.2 million.

These expenditures were mostly related to infrastructure needs to support our continued growth and primarily included the following categories -- first, approximately $8 million of CapEx related to capacity expansion and improvements in our existing warehouses in anticipation of growth in our apparel and footwear businesses, along with continued investments in our warehouse management system implementation.

This system will become fully operational in the first half of 2008.

Second, in-store fixtures in the beginning of our concept shop builds represented $2.5 million of the planned $11 million spend for the year for this category.

Third, information technology investments of approximately $2.4 million relating mostly to continued improvements in investments in SAP to support our growth along with other general technology needs.

And the balance related primarily to the buildout of new retail outlet stores and other general corporate needs.

Now I'll turn it over to Wayne who will take you through our outlook for the remainder of 2007.

Thank you, Brad, and good morning, everyone.

I'm going to spend time on our outlook for 2007 and the progress we have made to date on our initiatives.

First, our long-term growth targets remain at 20 to 25% for both our top and bottom line.

Two quarters behind us and better visibility into the full year, we are increasing our 2007 outlook for both net revenues and income from operations.

As a result of the continued demand for the Under Armour brand at retail and our ability to service this business with an appropriate level of inventory, we are raising our annual net revenue outlook to $580 million to $590 million, an increase of 35 to 37% compared to last year and up from our previous outlook of $560 million to $580 million.

Taking into account our performance for the first half of the year and our continued investment in marketing and new businesses, we are raising our full-year income from operations outlook to $79 million to $81 million, an increase of 38 to 41% compared to last year and up from $74.5 million to $77.5 million in our previous outlook.

Our long-term strategic growth initiatives remain the same -- first, continue to grow our men's and women's apparel business; second, enter new categories of footwear while continuing to maintain a disciplined approach to gaining market share in existing categories; and third, build the Under Armour brand internationally.

We also believe that we have considerable opportunity in our direct to consumer business over the longer-term.

Our continued investment in these growth drivers as well as the infrastructure to support our growth including investment in people is paramount to our long-term success.

For 2007 we now expect our men's business to grow faster than the 20 to 25% previously stated at a pace closer to 30% for the full year.

We expect our other businesses to exceed a 30% growth rate for the full year.

Our men's and women's results during the first half of the year were bolstered by strong growth among our core HeatGear compression styles, but the second half of the year we are also anticipating robust growth in core compression styles, specifically the more seasonally relevant ColdGear.

We expect growth in our core products to be complemented by new programs such as our base program.

Our new base program for men's and women's gives us access to the mountain consumer and provides us with a vehicle to grow our base layer business beyond our existing compression style while also allowing us to expand our distribution into the mountain specialty channel.

On the international front, we will continue to focus on Western Europe with particular emphasis on the UK, France and Germany.

We currently sell to over 1000 doors across Europe and are planning to expand that number by year end.

We are planning to install over 75 shops with an average size of 41.5 square meters per shop in cities throughout the UK, Germany, France and Spain.

We continue to believe that the long-term opportunity for the Under Armour brand internationally is as large as the opportunity in the United States and we will make the appropriate investments in people, brands and infrastructure in 2007 and beyond to reach that goal.

The addition of Peter Mahrer this month was one example of our long-term commitment and vision for the Under Armour brand in Europe.

Here are some highlights of our initiatives for 2007.

First, we realize that we have to continue to make the right investments to support large scalable businesses.

We will continue to invest in working capital, specifically core inventory, to position ourselves to fill the demand for our product in the back half of the year.

We're investing in infrastructure within our distribution house; we are expanding our floor space at key retail partners with in-store fixtures and concept shops; and we are making the investments to grow our direct to consumer business.

We will also continue to make one of the most important investments of all, the people necessary to help us build large scalable businesses.

We believe the near-term impact of some of these investments will be top line growth of 35 to 37% to $580 million to $590 million, gross margin improvement for the full year, SG&A leverage for the full year even while investing more dollars in marketing, operating margin increasing once again for the fourth consecutive year.

Now let me take you through some of the detail.

First, our gross margin.

Based on our gross margin in Q2 we now see gross margin improvement of 20 to 30 basis points for the full year.

Here are some of the puts and takes.

As Brad mentioned earlier, the good news is that the temporary shift that we began to see in Q1 to shorter lead time manufacturers, an effort to fill demand has paid off and we expect to be back to normal production levels with our strategic supplier base by year end.

Secondly, we anticipate that our higher margin direct to consumer business will grow at a faster rate than our overall business.

We will also have a positive benefit to our gross margins from the shift in spending from discounts to in-store marketing and a portion of these improvements will be offset by our cleated footwear business, both football and baseball, which carry margins lower than our existing apparel margins.

Now moving to SG&A.

We believe our marketing has a direct impact on our top line growth.

As I have previously stated, for the full year we are planning to invest at the high end of the range and as volumes increase we will be opportunistic with our marketing spend as we invest in campaigns to launch large scalable business.

It is worth noting that for Q3 marketing is planned to exceed the high end of the 10 to 12% range and will include approximately $2 million that shifted from Q2 due to the timing of the installation of new concept shops and other in-store marketing.

for Q4 marketing is planned at the low-end of the range.

Given our increase and our expectations for our top line and our continued investment in marketing we are expecting SG&A leverage of 10 basis points for the full year.

Taking all this into account we have raised our expectations for income from operations for the full year to be in the range of $79 million to $81 million, an increase of 38 to 41% compared to last year.

We are forecasting net interest and other income to be approximately $3.1 million for the year including a foreign currency gain of approximately $1.2 million that Brad mentioned earlier.

As our foreign currency transactions continue to increase in scale with our international businesses we are implementing hedging strategies that we believe will limit our future exposure to these fluctuations.

We are projecting our effective tax rate for the year to increase to 41.3% as a result of additional state income taxes.

Weighted average diluted share count in 2007 is expected to be approximately $50.3 million.

Now turning to our balance sheet, the increase in inventory that Brad spoke about earlier is consistent with our previously stated strategy, be in stock on core offerings to meet consumer demand while improving our inventory efficiency over the long-term.

Ship seasonal product at the start of the shipping window and earmark any seasonal access for our current 15 outlet stores and operate those stores at a profit.

Our investment in core inventory during the first half of 2007 allowed us to fill a significantly greater percentage of demand for core items today than we did one year ago.

Similar to our strategy in 2006 where we raised inventory levels to meet the demand for the back half of the year, we will continue to invest in core inventory, specifically fleece and ColdGear, to position ourselves for anticipated strong consumer demand in the fall 2007 season.

As we reach the service level that maximize our ability to fill demand our supply chain team led by Jim Calo will continue to work on reducing our leadtimes and improving our inventory efficiency.

Most recently this team has been successful in reducing leadtimes by over 30 days for certain core styles.

We expect these inventory initiatives to begin to impact our balance sheet positively in 2008.

As we previously stated, our CapEx for 2007 is expected to be in the range of $34 million to $36 million.

Taking into account our strategic investments, including our expected investment in working capital, specifically inventory, and our capital expenditures, in 2007 we are expecting to use approximately $12 million of our $70 plus million cash balance on hand at 12-31-2006.

We remain proud of our accomplishments for the quarter.

We are confident that the investments we are making for the growth of the brand will yield large scalable businesses.

We are excited about the opportunities we have created for the future, long-term success of the Under Armour brand.

This concludes our prepared remarks.

Now Kevin, Brad and I will take your questions.

I will ask that each of you please limit yourself to one or two questions each so we can hear from as many of you as possible.

Thank you.

(OPERATOR INSTRUCTIONS).

Jeff Edelman, UBS.

This essentially Chris Ferrarone for Jeff Edelman.

First of all, great quarter.

Just had a couple questions.

The first one, the guidance you provided for the year implies a slowdown in both sales and EPS for the back half.

Can you give us a little color to what's driving that versus the first half and maybe how we can look at that in light of the inventory growth?

Sure.

Chris, this is Wayne.

The first point I want to make is that in the first half of this year we actually had an introduction of baseball cleats in Q1; so in the back half we're really anniversarying our apparel and our footwear business.

We don't have an introduction so you're going off of a change there.

But secondly, I think the take away I'd like to make sure you have is that we are positioned, we are positioned with our inventory as we've invested in both ColdGear and fleece and other core items to take advantage of demand in the back half.

But one of the things that I don't want to do is I don't want to bet on the weather.

So I'm going to be somewhat balanced in our approach to the back half of the year when it comes to the outlook.

Okay, thanks.

And maybe just along the lines of the baseball cleats, you had mentioned that the growth in cleats was a little bit below the corporate average and you said it was driven by football.

Can give us some color on how the launch of the baseball cleats went vis-a-vis football?

Chris, it's Kevin here.

First of all, we mentioned football cleats, number one, that we had 29% growth there which is about -- you've got a confined market, number one.

And so we want to be pretty strategic about the way that we enter putting product into the market.

There are only so many football players out there, so you don't quite have that scale or that opportunity.

Baseball for us I'd say is something where we targeted initially was double-digit market share.

The way that we look at it and, again, finding an apples-to-apples comparison to define that market share becomes more and more difficult for us.

But we feel pretty good about the launch that we had in baseball clears.

I think our retailers feel very good about it.

And again, you've got to remember that this is a season one for us.

So I think the excitement and enthusiasm we have around 2008 is something that you'll continue to see us build up for, particularly in this fall as well.

So baseball Click Clack is something that should echo much of the excitement that we've put out there for football Click Clack.

Great, thanks very much.

Great quarter.

Sujata Shekar, CIBC World Markets.

Good morning.

I had a question about Europe.

What was the contribution from Europe to revenues and how much of a benefit did it have to the core men's apparel business?

This is Brad.

International was a couple percent -- 2% of our revenues for the quarter.

And for the most part it's not going to have a significant contribution.

I think what it is, it's Europe is an investment for us.

We continue to see very strong top line gain in Europe as we expand our distribution to the right customers in Europe, but it is an investment and it's a long-term investment for us and we're going to continue to make that investment as we see Europe one day being as large as the U.S.

business.

Sujata, this is Kevin, too.

All three of us are going to pile in on this question which sounded pretty simple, but let me just give you an indicator as a good statistic I like to use to define where we are in the European market.

Compression made up roughly 80% of our business that we're currently doing in Europe.

And just to give you some perspective on how we've matured and where we're balanced here in the states today -- today in the U.S.

compression versus loose we're at 48 to 52%.

So the first half of the year is the first time that loose product or looser fitting product has overtaken compression as the leading fit type that we have as a business.

So what you'll see is us continue to mature in Europe and I think there's a lot more color that goes behind what our strategy is there.

But I think what we're doing is we're establishing ourselves and we believe it's important to our story, telling a very core as we call it HeatGear/ColdGear story, keeping it very simple, telling the consumer message about innovation in technical fabrics and performance.

Okay.

So do you still expect around 3% of 2007's revenues to come from Europe or could it be higher than that?

This is Brad again.

Right now we definitely see the back half of the year having more revenues as a percentage of our total and for international.

So we are seeing somewhere around the 3 to 4% range for the year.

Okay.

One other question I had was on the women's side.

Did you see an immediate benefit from the recent ad campaign and do you see that continuing into the third quarter?

And also the outerwear campaign, should we expect something in the third quarter for that?

Well, first of all, the first thing I'd say is I'm not sure we ran as much as just the women's campaign as much as we ran our brand campaign like any time we run a commercial.

And I believe that our consumer saw and feel about us -- we want our goal, whether it is a men's or a women's specific commercial, I think is to entice athletes and that just speaks to an authentic language.

The feedback we've heard anecdotally has been terrific and it's -- if we could pinpoint the good ads from the bad ads, I think we just have to rely on the brand impact.

So our Web is always a good indicator for us.

I think we've seen very positive responses there as well as people dialing in and rating the spot too.

So a tremendous amount of -- I think probably a good word is appreciation from the female consumer is to finally highlight and to be the first brand I think to put the teen girl on a pedestal and say that she's important as well.

The statistic that I love to quote is what you see about high school team participation for women -- in the early '70s it was one in 25 girls were participating in a team sport; today the same statistic is nearly one in two.

So I don't believe there's a brand out there currently that's taking that voice with the female consumer.

And so we're very proud I think of our role and the place that we're taking with this consumer of finally speaking directly to them.

As far as outerwear goes, again, we've been very conservative with the launch of outerwear for us as a brand.

And that mean very highly specialized limited specialty retail that's taking -- that will have the product at retail.

And again, the goal that we have for outerwear was really to use it as something to establish us in the category for authenticity.

Our real long-term play -- or rather our short-term play with outerwear, because we do see ourselves, when we enter a category we plan to the number one in that category.

But our short-term play is really selling more base layer.

We've had tremendous success I think with the programs we've had, obviously our ColdGear mocks continue to accelerate for us as a business.

But the new program we have called base, which is base layer one, base layer two or base layer three, will continue to be a growth driver for us and something that we're looking at to really be a franchise or a wheelhouse business for our company going forward.

So a lot of excitement around that new program and I think outerwear as a whole.

Yes, you'll see us continue to commit to that from an authentic standpoint.

Excellent quarter, Kevin.

Thanks.

Thank you very much, Sujata.

Omar Saad, Credit Suisse.

Thanks, good morning.

Hoping you can kind of give us an update on marketing and marketing strategy.

I saw a lot of product placement in the quarter.

I've heard that Adam Sandler is wearing Under Armour golf shirts in that recent movie, and we all saw A.J.

in The Sopranos finale.

Can you give us an update in terms of product placement and your marketing strategy?

In that 10% to 12% long-term as you enter new categories, footwear in Europe, how are you thinking about that on a spend level?

Well, I think one of the things that we've demonstrated this quarter was that when we tell you that we want to invest in our business and whether it is product or whether it is on the marketing side, that it continues to pay dividends for us.

And we believe, frankly, in that 10% to 12%.

We believe in the opportunities that we can create for ourselves.

Product placement, again, it is one of those things if we have got a pretty strong team.

Again, we do all of our marketing in-house, and whether it is the creative for our commercials, whether it is the placement in these campaigns, we continue to drive it over and over.

You know, a couple places where -- and it's good to hear that you are a Sopranos fan; I'm sorry the season ended for you too, Omar.

But I think we all enjoyed it, and I think having the opportunity to cross into really cultural shows like that are something which I think is pretty defining as to the position that Under Armour has taken with the consumer out there.

That is not a place where you can pay them to place product.

It is just what is the authentic beat of what is happening in the marketplace.

A couple places that we have been, I think, pretty opportunistic is number one, our strategy is always about being authentic with the places where we show up, whether it is in a movie or whether it is on an athlete, or frankly, the athletes of the teams that we sign; we are always very thoughtful about the way that we approach that.

Some places I think where it does make sense is a recent partnership that we have done with EA Sports, where you will continue to see Under Armour show up with the Protect This House Zone, where you can dress your teams out in Under Armour product and being authentic.

You know, finding ways that we can connect, I think, with that consumer on levels beyond just product in a store to a commercial on television is some of the ways I think that we have been pretty innovative around our marketing.

Then longer-term on the 10% to 12% as you go into new categories, are you still kind of -- that's still your target?

One of the things that we look at each year is to make the right investments long-term, and this year of course we have been at the high end of the range closer to the 12%.

And you can see in certain quarters, we have actually exceeded the high end of the range because it was important for us to make those investments and be opportunistic.

From my position from the CFO position and working with Kevin and Steve, it is obvious that longer-term we're going to have to continue to make more investments in marketing.

Now certainly as our volumes increase, that has always helped us stay within our 10% and 12%, but I don't think we can just put a cap on it overall long-term.

I think we have to allow ourselves to use marketing as a weapon and be able to raise it as we make the right investments in businesses.

Of course, we will balance that.

We are a prudent company.

We will balance that with other leverage that we see in fixed costs, so that we can still deliver a very strong operating margin.

Okay.

So for this year, do you see yourself coming in ahead of that?

This year, we still stay with our outlook of coming in at the high end of the range as volumes have increased.

We will manage to that, but I think longer-term I would expect us to really be a little more opportunistic and may raise that in the future.

Okay.

If I can switch tracks just a little bit here, can you give us a direct-to-consumer update, the outlet stores, how many stores you ended with, the Internet business, how much that was up?

I don't know if you started kind of tracking comps, now that you have had a lot of these stores open for a year.

And then looking ahead to later in the year as you're planning to open this kind of full-price store for the holiday season, kind of give us an update where you stand on that front.

First, on the direct-to-consumer side, we really look at our direct-to-consumer business kind of combined, our Web and our outlet business.

We are up -- for the quarter we were about 105% year-over-year, so year-to-date that makes us up about 96% for our direct-to-consumer business.

We ended the quarter with 16 stores, 16 outlet stores.

I think we've added one recently here in the last week or so.

So we are up to 17 right now as we stand.

I think the one thing I can tell you, we really haven't looked at it and reported our comp store sales, but what I can tell you now that it has been a year on probably half our store base, the growth in our comp is very much in line with our long-term growth rate at 20 to 25%.

Okay.

Then looking ahead to the holiday season with the full-price store opening?

Let me give you a little detail on that, Omar, is first of all, I think we are very excited about what the opportunity means for us.

And as you heard me make in my opening remarks as well, the direct-to-consumer business continues to become more and more important for us, mostly because it gives us the opportunity to directly connect and communicate with our consumer.

We are going to learn a lot, and again, that is the way that we are approaching this, is that this is going to be a test for us and for the business.

But the stores we have it right now, it is going to be opening at the Annapolis Mall here in Maryland about 30 miles from our office.

So we're going to be able to see it and test it.

It's going to happen in the fourth quarter in the new wing of the Annapolis Mall there.

And the impression that we want to create for the consumer is the physical manifestation of the Under Armour brand.

I mean, when you walk in the store again, it should be like walking into an Under Armour commercial.

The concept that we're looking at, and while we don't have distribution in the mall, for instance, for the most part, and we've done good business with Finish Line, but frankly we do not have any other mall partners at this time.

We see that channel of business as open and, frankly, available for us.

So we are going to, I think, continue to make the right decisions to be able to place our brand in retail settings where we currently don't have any presence.

And the last thing is we plan to be profitable in year one with the store.

Great.

Thanks, guys.

Robbie Ohmes, Banc of America.

A few quick follow-up questions.

First, if you look at the revenue guidance for the back-half based on what you said today, you know, 45'ish slowing to mid 30s, can give us more detail on if we're trying to model that if you look at men's, women's, youth, accessories, footwear, are they all slowing the same amount or is there a specific segment that is slowing that is pulling that down?

Then the second question is it sounds like international revenue growth is accelerating in the back half.

Can you talk about specifically what is going on there?

Is it mostly UK-based or are you pressing into the continent?

And then also expectations, more specific expectations for Peter Mahrer heading into '08 on how you're going to be approaching Europe would be great.

Thanks.

I will take the international one first.

The international business not dissimilar to the business in Under Armour we started is, as Kevin mentioned, compression business.

It's a tight assortment.

And as far as the product mix, it is pretty weighted toward the ColdGear which has had great success internationally, specifically in Europe last year.

So when we looked at our business and modeled our business, we have two things happening.

One is you have a higher price point product which is in the back half of the year not dissimilar to the U.S.

And also in the back half of the year, we are just starting to add new customers and new Concept Shops.

I mentioned adding about 75 Concept Shops throughout the major markets in Europe.

So a combination of product and a combination of opening new doors, opening Concept Shops in the right accounts, in the right distribution, is what makes it weighted toward the back half.

In terms of when you look at the modeling, the one thing to take into account in the first half which has the 46% top-line growth is that baseball cleats in Q1 were a factor, where it was a new business, that we don't have a real new business in the back half of the year.

The back half of the year dominantly has been always a bigger base for us, weighted more toward ColdGear.

And the way I like to look at it and provide an outlook.

We set our men's businesses now outside the 20 to 25, closer to 30.

We feel that that is going to continue to be a very strong business in that range for us.

The women's business also, and other businesses would grow outside of that 30% range off of a smaller base.

So we feel good about all of the businesses.

I don't think we look at any one of them and say there's going to be any type of a slip in those businesses.

I'm trying to be balanced with the back half.

We have spent a lot of time logistically and working capital to position ourselves.

And I think if you have to take away one thing, Robbie, take away that we are well- positioned for the back half; well-positioned in ColdGear which is a dominant product in fleece in the back half.

We are well-positioned in our core basics.

We have increased our fill rates versus the prior year.

So that really just demonstrates for me that if the demand is there and we do have the weather cooperating, that there is opportunity for us.

But I want to be balanced with us, because I don't like to bet on the weather, and it also is very much tied to our ColdGear product as well.

Got you, terrific.

Thanks a lot, guys.

Jeff Klinefelter, Piper Jaffray.

Congratulations on a great quarter and a great year so far.

Just wanted to get a little bit deeper into the international markets.

Thank you for the update on that business, and appreciate the progress you're making there.

But in terms of the growth strategy, Wayne, it sounds like you were outlining the store growth with the 75 shops.

I assume those -- or I guess I was assuming those are company-owned shops, as opposed to shops within shops or company-owned stores.

What other differences are there in this market that you have identified so far in terms of how you're going to sponsor teams versus individuals?

How are you going to work your way into the dominant football or soccer leagues over there, and any other expense and profitability considerations for that market?

Jeff, it is Kevin Plank.

Let me just start out with the -- first of all, they are that 75 shopping shops that we are going to have, and so those are all partnering with other stores.

It is not our own retail, number one.

Number two is the growth strategy that we have for Europe, we feel very good about -- and the way we have defined it and the way I define it in our script is first and foremost building the right team of people to tell our story, building the authenticity on field, and establishing the appropriate distribution.

We feel like the first component of that, and what Ryan Wood and the team that we have in Amsterdam have done over the last 18 to 20 months has really been Herculean to say the least.

Just getting the lights turned on and the phones working and a lot of those things; we are up and operational.

So having an industry expert like Peter Mahrer with the ability to come in and to really hit the ground running is exactly what we feel has been accomplished.

What we're doing right now is really going back and forth and ensuring that Peter understands the Under Armour DNA and culture.

And again, this wasn't someone that we necessarily had to recruit as much as this is an industry veteran and expert who decided how did he want to spend his next role.

And he really came to us, I think because he saw the excitement and the opportunity that we have over in Europe.

That being said, we are really putting -- we're staying with the same plan that we had before.

We are also looking for Peter to help us evolve that plan.

You know, 2007 for us will be a year where we will continue to see sales growth, but really it is a positioning year for us as we put the new team in place and as we prepare for 2008.

Again, I don't think what the market, the U.S.

or Europe, for that matter, need is a slightly better sporting goods company than some of the competition they already have.

So the model that we are looking for isn't necessarily to go in and buy our way into some of these countries, although when Wayne references some of the investments that we would like to make, either on the product side or the marketing side, Europe gets high consideration for the places where we want to not only be investing, but frankly, overinvesting to insure our long-term growth.

We believe it is a key market and a place that we should be very heavily invested in.

But let me just drive that last point about athletes.

Again, I don't think that we need to try go toe to toe.

We haven't done that here in the U.S., and I wouldn't say our strategy would be too different.

We are interested in teams, and we will continue and I think you'll see us make some noise on that front over the coming months as well.

So where it makes sense, I think again we want to be our strategic.

Our brand isn't about being everywhere as much as it is about authenticity and recreating that for the consumer.

Kevin, at this point you don't have any plans for more company-owned stores in Europe to help you drive that brand awareness and drive wholesale?

Well, we need to get the first one up here first.

So again, we want to use the opportunity that we are taking in Annapolis to really understand retail.

And I think to be honest with you, more even than the domestic opportunity as we do look at going international and you look how difficult, frankly, sporting goods is in a lot of different countries right now, having the opportunity and frankly having the competency to do it yourself is something that is very compelling to us in controlling our own destiny.

So again, we're going to get this first store open in this fall in the fourth quarter, and hopefully, we will begin to continue to build on the competency that we take as a company there.

Great, thank you.

Congratulations.

Eric Tracy with BB&T Capital Markets.

Actually, all my questions have been asked.

Just congrats on a great quarter.

Jim Duffy, Thomas Weisel Partners.

Good morning, nice job.

A question for you.

You have a number of new products in the mix for the back half of the year.

In aggregate, how do you see the balance of pre-book versus replenishment business in the back half?

This is Wayne.

I don't know if this will get to it, but overall when we look at our business, you're looking at futures versus at-once business.

And for the most part, we don't really talk about the futures part of it, but what I can tell you is our business usually breaks in a couple of different ways.

About 50% of our business would be the seasonal product, which we would have orders for in the back half.

And we feel very good with those orders, and that is baked into our outlook.

The other 50%, which is a fairly high number, has really been our core products.

Now in the past, we have had the core product demand, but we didn't do a very good job with filling that demand.

And I think Kevin called it out multiple times as a logistic opportunity.

What we've done in the back half of this year very similar to 2006, we positioned ourselves to take advantage of a much higher fill rate by investing in inventory.

So about 50% of the business in the back half, which would relate to at-once orders, we are well-positioned for.

So there hasn't been a change in the mix; you just expect replenishment to grow with these new styles.

Yes, I think the important, if I had to use a metric, one of the things in the past is that our fill rate was in the '80s.

So for every 10 pieces, we were able to ship you about 8, 8.5.

Now we are into the '90s, and that is with the initiatives that we've taken in the last year.

So what that would do is even on the same demand, it translates into an opportunity to grow the top line.

And it's certainly, from my point of view, a great return on the investment we have made.

Okay, very good.

Then a question on the fixturing.

Some of the expense seems to be delayed into the second half of the year.

You would think you would want to have that in place going into the stronger seasonal quarters.

Was there some sort of delay in the deployment of the fixtures?

What is the impact on the timing?

Jim, it is Kevin.

I think, first of all, is we plan to get these out, and logistics, a lot of things that go into the approval process in putting in a whole new branded shop concept in a store.

It is something obviously, I think, that we predicted for 2007.

We are still on pace to make that happen, so we're not too far behind.

And you will begin to see those shops popping up.

Again, our goal here is 125 to 200 shops around the country.

And not only, frankly, just our big partners, but we are also going beyond that into people beyond just the Dick's, the Sports Authorities, of the world.

Hibbett, for instance, is another partner that we be having a version of a Concept Shop as well.

So again, we want to make sure that these shops are timed with the delivery of the product that we are putting out there.

So we should see -- you should see great results by fourth quarter come this year.

Great.

Again, nice job.

We have time for one more question.

Dan Wewer, Raymond James.

Good morning, thanks for taking the question.

A question on the 8% increase in the average selling price.

Just confused if this was a price increase on a broad number of SKUs that you are able to pass through, or was it achieved by a change in mix?

No -- it's Kevin -- number one, it is putting better product out there as a company.

A couple of stories that we are proud of and I highlighted in my script earlier, I mentioned what we're doing with our basic HeatGear business of that basic T-shirt at $25, but also adding the $35 Blitz version to it.

And so you are creating a good and then adding a better level to it as well.

We are continuing to do that across our businesses, finding what we call again our wheelhouse styles and then adding or improving and taking the consumer up.

What we're finding is that, number one, we are not cannibalizing the existing business but, in fact, we're growing that core business as well as introducing product that is very well-received from the market.

So the whole strategy of good, better, best continues to become more important to us as well.

Our direct business also, it continues to grow faster than the overall business.

So there is three components that make up our direct business as well.

There's our e-commerce website, there is our outlet retail stores, as well as our full-price retail stores.

So we're seeing it on a couple different levels.

Kevin, just as a follow-up, the youth business up 91% is incredibly impressive, particularly given the marketing focus has probably been on some of your other businesses.

What is going on in the youth category?

Are you finally making progress and finding items really specific to the youth, as opposed to just taking adult sizes smaller?

Let me speak really big for a second, which is I think it goes to reinforcing just that reality that we have laid out there before, is that I believe that we are becoming the athletic brand of this generation.

This consumer -- and number one, it begins with great product from us, but more importantly is that this kid, the consumer, they are continuing to define themselves and align themselves more and more with the Under Armour brand each and every day.

And you are hearing that, and whether it is something that you can read from the statistics of 91% or whether it is just anecdotally of go to your kids soccer game and you will continue to find our brand out there.

So again, it just continues to be penetration.

Again, this isn't a war that's going to be won in a few months or a year, is that we are gearing down for the long haul and we continue to help that consumer with the choice of making Under Armour their choice as the athletic brand of this generation.

When you were talking earlier about advertising and things like the EA games, do you think that particularly benefits that youth category?

Yes, of course, and it is our job to continue to find ways to communicate and relate with our consumer.

I think our marketing continues to trickle down.

We're starting at the highest levels, and whether that is our relationship with the NFL or whether that is a computer game or a relationship or deal we have with EA Sports, we need to be very strategic about the places we spend money.

And hopefully, our shareholders feel good that we make those prudent decisions of where is the best place that we are going to get the largest return for the investments that we are making, both in the short-term and especially for the long-term health and success of our brand.

Great.

Thanks and good luck next quarter.

Thanks very much.

Operator?

That does conclude today's conference.

We do appreciate your participation.

You may disconnect at this time.

Thank you very much.