Under Armour Inc (UA) 2008 Q3 法說會逐字稿

Good day, and welcome everyone, to the Under Armour, third-quarter 2008 earnings results conference call and webcast.

This call is being recorded.

At this time I would like to turn the call over to the Director of Investor Relations, Miss [Alex Pettit] Please go ahead.

Thank you and good morning, everyone.

I like to start by welcoming you to Under Armour's third-quarter 2008 earnings call.

During the course this conference call we'll be making projections or other forward-looking statements regarding the 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 the 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 web site, investor.underarmour.com.

There you will find this morning's press release and our web page images of a number of the products and initiatives that 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 third-quarter results and our strategy for continued growth in 2008 and beyond.

Brad Dickerson, our Chief Financial Officer, will then discuss the company's financial performance for the third quarter and provide an updated outlook for 2008.

After the prepared remarks, Kevin, Brad, Wayne Marino, our Chief Operating Officer, and David McCreight, our new President, will be available for a q&a session that will end by 9:30.

With that, I'll turn it over to Kevin Plank.

Thank you, Alex, and good morning, everyone.

I would like to start by welcoming David McCreight, our new President, to his first Under Armour conference call.

This morning, we'd like to talk about our brand, our product, and our team.

The three core strengths of Under Armour and the three things that position us to dictate the tempo of our growth.

Frankly, while we acknowledge the current macro economic environment, the fact of the matter is that we still control our own destiny.

We built our business to scale on our own timeframe, and that cadence is based on authenticity, passion, and innovation.

We can continue to grow because our core consumers, the ones playing football, baseball, hockey, softball, basketball, soccer, lacrosse, field hockey, and so many other sports, believe in our brand and the advantage we bring to athletes every single day.

These core consumers will continue to be there for Under Armour because these sports will be played every Fall and every Spring, as long as we continue to deliver on that promise of constant innovation, Under Armour will continue to thrive and continue to grow.

Regardless of what goes on in the world, sports are played around the world every day.

And we believe in the tremendous opportunity that's in front of us to extend our brand beyond its core.

From a brand perspective, we have earned the trust of today's athletes.

But from a revenue opportunity, a distribution opportunity, and a geographic opportunity, we're still in the very early stage of becoming one of the great athletic brands.

As we look at the key businesses that will drive our revenue growth, we think it's important to understand the reasons behind our confidence.

Within the footwear business we have taken very measured steps to build credibility with the athlete.

We started in 2006 in the most authentic place possible with football cleats on the field of play.

We came back in 2007 with baseball cleats, and this year we took the next logical step, to training, where our consumer was spending most of his or her time preparing so they could be their best when out on that field.

We've had a tremendous impact in the categories we've entered, as well, bringing lots of attention to both cleats and training.

Most importantly, we've raised average selling prices in both categories and have traded consumers up to better products while gaining significant market share.

And now, we're poised to take that next logical step with our move into the running footwear category.

And we're communicating the Under Armour point of view to our core consumer.

That team sport athlete, with a very simple message -- athletes run.

When you look at the development of our footwear business, it has been measured and purposeful, with each step making sense of the one behind it and the one in front of it.

We have proven both to ourselves and more importantly to our core consumer that we are authentic players in footwear.

So we look at our acceptance as a running brand in early '09 as very achievable.

A belief shared among our retail partners and ultimately our core consumers.

We believe it's important to look out in the short-term horizon to understand where the best opportunities for growth exist for Under Armour, but we should also look to what we accomplished in this past quarter as evidence that not only does our brand remain very strong, but our growth prospects remain strong, as well.

The third quarter was the largest in company history with every category showing strong double-digit growth, with men's apparel up 17%, women's apparel up 27%, and kids up 13%.

We continue to outperform in term of retail sell-through and our consistent ability to sell through at full price.

In addition to these strong revenue numbers, our ASPs also grew for both footwear and apparel.

We're confident in our ability to grow because we've been making the investment in our growth drivers and we're starting to see the payoff in the investments.

With running footwear being the most obvious example.

We will continue to invest in these five growth drivers, men's, women's, footwear, international, and direct consumer business.

And as our product mix grows, we have a much bigger revenue opportunity as we enter new markets and new distribution.

The final piece of the growth puzzle is our ability to manage it.

To build an organization that remains nimble enough to enter new categories with the speed we have over the past two years but is constantly improving our ability to pull the operational levers that come with growth.

So I think it's informative to look at how we've managed our inventory situation over the past 12 months and how we've been able to deliver on what we promised our investors.

Our inventory grew this past quarter at a rate significantly lower than our 24% top-line growth and better than we had forecast.

Inventory grew only 8% year over year and was down more than $20 million from the end of the second quarter.

We believe it will continue to grow at a rate slower than revenue growth through the fourth quarter, as well.

This significant reduction came as we focused as a team on inventory and drove to a number that is both appropriate for our business and aligned with how we want to run our business with our retail partners.

Our infrastructure is catching up to our accelerated revenue growth of the past few years, and I believe that David has come aboard at a very important time for our company.

David will focus on the front end, prioritizing and aligning our key drivers of long-term growth, while working in tandem with Wayne Marino on the back end, who will continue to ensure the support programs for these engines.

The way we see it, our future is in our own hands, much as it was when I was selling college teams on the idea of a new type of t-shirt.

We like where we stand right now.

Our brand has never been stronger.

Our product line has never been broader, and despite any outside elements, we are the ones in control of our brand, we will dictate the tempo.

With that, I would like to turn things over to Brad Dickerson, our CFO.

Thanks, Kevin.

I will now review key financial highlights of the third quarter and year to date and discuss our outlook for the full year.

As noted earlier, the third quarter marked another period of impressive growth for Under Armour.

Our net revenues for the third quarter grew 24% over the prior-year quarter.

70% of the dollar growth in the quarter came as a result of growth in our apparel business which increased 19%.

Women's continued on the path of strong performance and was up 27% during the third quarter.

Footwear revenues increased from $2.2 million in the third quarter the prior year to $13.1 million was mainly fueled by performance trainers which were launched in the second quarter of 2008.

Third-quarter gross margins were 51%, an increase of 40 basis points compared to the third quarter of 2007, which was impacted by reserves and allowances related to discontinued cleated footwear.

In the third quarter of 2008, SG&A expenses represented 31% of net revenues a 150 basis point decrease from the 32.5% reported for the same period of the prior year.

Marketing expense decreased from 11.5% of net revenues in the third quarter of last year to 10.7% this year and was a main driver of our SG&A leverage.

Product innovation and supply chain costs as well as corporate service costs also leveraged in the quarter.

A meaningful portion of this improvement was driven by lower personnel costs associated with these areas.

Operating income increased 37% during the third quarter to $46.5 million compared with $33.8 million the prior year.

Operating margin was up 190 basis points to 20% compared with 18.1% in the prior-year quarter.

Again, this was driven by improvements both in gross margin and SG&A leverage.

Net other expense was $1.7 million during the third quarter versus net other income of $700,000 in the same period the prior year.

Primarily due to foreign currency impact in the current quarter.

Our effective income tax rate for the third quarter was 42.6% compared with 41.9% in the same period last year.

Our resulting net income increased 28% in the quarter to 25.7 million compared with $20 million last year.

Third-quarter diluted earnings per share was $0.51 compared with $0.40 in the prior year.

The top-line results this quarter are indicative of the strong results we have achieved year to date.

For the first nine month our net revenues increased 26% to $546 million from $431.7 million in the prior year's period.

Year to date our diluted earnings per share totalled $0.60 compared with $0.71 in the prior year.

As we have previously indicated, based on the seasonality of net revenues and the timing of marketing and other investments, we expected earning to be more heavily weighted to the back half of 2008, relative to 2007.

Now a few moments on the balance sheet.

Total cash and cash equivalents at the end of the quarter were $40.2 million compared with $14.5 million at September 30, 2007.

Cash net of debt at the end of the current quarter was $2.6 million, compared with net debt of $0.1 million at September 30, 2007.

At the end of the third quarter, we had $15 million drawn on our revolving credit facility as compared with $10 million drawn at September 30, 2007.

Currently we have $25 million outstanding on our $100 million credit facility.

At year end, we continue to expect cash net of debt to remain relatively flat from our 2007 year-end balance.

Net accounts receivable increased 18% on a year-over-year basis, which was below our net revenue growth for the quarter.

In 2008, we continue to expect net accounts receivable to grow in line with top-line growth.

Inventory has been a major focus for the organization, and we are pleased to report that the third-quarter marks another quarter of delivering on our inventory improvement goals.

Inventory increased 8% on a year-over-year basis, which was well below our top-line growth during the quarter.

Inventory of $163.6 million at the end of the third quarter represented a decrease from the $183.9 million inventory balance reported at the end of June.

With the efforts of our team and continued discipline around newly established profits, we continue to project inventory growth at a rate below the sales growths at year end.

We feel that our progress made with some inventory improvements this year as well as plans for improved inventory turn in 2009 are key components to managing our business effectively during these tough economic times.

In addition, greater inventory efficiency in 2009 will help our management of working capital.

Our investment in capital expenditures for the third quarter was approximately $10 million.

Our full-year 2008 capital investments are now planned at approximately $44 million versus our previous range of $40 million to $42 million.

The increase in our guidance for CapEx is mainly being driven by a noncash gross-up on our balance sheet for footwear, tooling, and molding, we own at third-party manufacturers.

This is a gross-up of the balance sheet, it is not a change to our cash flow or how we pay for these items.

Finally, I would like to discuss our outlook for the balance of the year.

As a result of prior investment in our business and successful execution of our growth strategy, we have reported strong financial results to date.

Our connection with the consumer continues to be a major strength for the organization, and we remain committed to making the investments in our team, brand, and infrastructure to support identified opportunities for meaningful growth.

However, based on the visibility we have into our business today as well as current economic conditions, we are revising our 2008 outlook for net revenues and income from operations.

We now anticipate 2008 full-year net revenues of $750 million to $765 million which represents 24% to 26% growth over 2007.

Compared with our previous range of $765 million to $775 million.

This is primarily driven by slower growth assumptions for our apparel business.

Men's apparel is now expected to grow in the mid-teens for the full year while women's and youth are expected to grow in the low-20s.

Moving on to gross margins.

We now anticipate full-year gross margins to be approximately 49.5% versus our previous outlook of 50% based on the gross margins recorded this quarter.

For the third quarter of 2008, our direct-to-consumer business was a smaller percentage of net revenues than originally planned.

This occurred as a result of order processing issues mostly impacting our web business.

Those issues have since been resolved, and we have resumed high service levels for our web customers.

We believe we can offset some of this gross margin impact on our operating income line as we implement tighter cost management for the remainder of 2008.

Our revised 2008 full-year income from operations outlook is now $97.5 million to $104.5 million, an increase of 13% to 21% over 2007 versus our previous range of $104.5 million to $105.5 million.

Based on our updated projected interest expense for the full year as well as year-to-date foreign currency impact at the end of the third quarter, we now estimate net other income expense to be approximately $3 million for the year.

We had previously anticipated $1.4 million based on our original interest expense estimate as well as foreign currency exchange impact in the first half of 2008.

Although we have hedged a portion of our foreign currency exchange risks, we remain exposed to some levels of currency risk going forward, and as such,.

the volatility of foreign exchange rates will continue to impact our financial results.

For the full year, we are now estimating an effective tax rate of approximately 42.7%, up from 41% in 2007.

This increase in the full-year tax rate is mainly attributable to an increase in the state income tax rate for Maryland, our home-base state, from 7% to 8.25% beginning in January, 2008.

Our weighted average diluted share count is estimated to be approximately 50 million shares, versus our previous estimate of 50.5 million shares.

Delivering more than 20% top-line growth in current times is an achievement and testament to the critical investments we were willing to make in the past.

We understand the challenges in the environment, and we will answer those challenges with greater discipline around the management of the business.

Due to the current climate and the resulting impact to our visibility, we plan to discuss specifics around 2009 outlook at our year-end call.

Our growth this year and next will be driven by our diversified business strategy, which positions our company for solid growth.

Our planning for 2009 will reflect the realities of the world today and opportunities for our brand with prioritization of investments in the areas that will generate the greatest long term value for our company and shareholders.

At this time we would now like to open the call for your questions.

We ask that you limit your questions to one or two per person so we can get to as many of you as possible.

Operator.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go first to Omar Saad with Credit Suisse .

Thanks, good morning.

Good morning, Omar.

Hoping you guys can give a little bit more insight into the -- how you were able to bring down inventory.

I think that surprised a lot of people.

And keep margins at the level that they were.

I mean, can you tie that into your outlet strategy and what's been happening with that inventory at retail.

And -- how retailers are thinking about inventory in this environment.

Sure, Omar, hi, this is Wayne.

I think first of all the biggest thing that impacts inventory is our growth.

We had really strong growth for the quarter.

And that plays right into helping reduce our inventory.

The second thing is we've made some very, very good progress operationally.

We've talked about this at investor day.

We'll take steps with what we consider a sales in operation planning process.

And the team has done an excellent job at getting visibility into our forecast and reacting accordingly.

So I have to really give a shoutout to the team.

They did a great job on that.

That that's one of the factors, as well.

In addition to that, we set out on a plan this year.

And that plan was to control our destiny and put our inventory through our outlets channel.

And that's been very successful.

Our business is very strong, and we've been able to keep our -- our profits in the outlets very well, as well as making sure that that is the place whether we started the outlets, it was the place where we wanted to put our excess through.

We made a very concerted effort not to do any major cutup programs for our outlet stores.

So that was a benefit that we took this year, as well.

Two factors.

As far as inventory at our retailers, I think one of the things that we do, we look at our retail business on a weekly basis.

And we look at several things.

We look at how we're performing at retail and we look at the inventories at retail.

And we've been very careful to start the season very clean.

And also a percentage of our business at retail represents our core product, which for us is really a full inventory, it's not something that you ship in and you wait.

It's really a pull by the consumers.

So the way our model is built allows us to be fairly clean at our retailers.

Plus, our performance has been very strong, as well.

So all factors working together that really nailed this for us.

Okay.

Great.

And then one question on the kind of the running launch that's kind of around the corner at this point.

Getting a lot closer to it, at least.

How-- we know you -- that you talked a lot about the cross trainer, the performance trainer launch was a million units.

How can we start thinking about the size of the running launch.

I know it's a much bigger category, potentially a broader set of distribution partners.

Also, is that going to start shipping in the fourth quarter?

Is that's that what's driving one of the drivers in the fourth-quarter growth?

Or is that an '09 driver?

Go ahead, Wayne.

Yeah, Omar, let me take the back half of that question in terms of how the fourth quarter looks.

Whether we put together our fourth quarter, we did not make any assumptions about shipping running footwear in that fourth quarter.

What will dictate for us whether running footwear does get shipped, is whether our retail partners and our stores really want to set their floors.

And so that will be the driving factor.

But when Brad put together the outlook for Q4, it has not include running footwear in it.

And Omar, let me lean on just -- I think the running message that we'd like to get out there.

We've established, I think, a pretty solid record in footwear to date that began back in 2006 with football cleats.

Came back in with baseball cleats in '07.

And then training, of course, this year.

And in every instance, I think we sold in and sold through the amount of product that we planned to do.

And -- what's happened there is really the support of some great partners that have helped us, but also some really good product, and I think some really great stories that we were communicating to that consumer.

So with that, and again when we started I used to use the statement that we didn't get into the footwear business to build football cleats as much as we've built football cleats to put us in position to sell additional categories of footwear.

And we also said that training would be decided if it was successful or not by our ability to enter additional categories.

So with the announcement that in the first quarter of 2009 we're going to be selling running shoes, is a big statement for our brand.

And the -- probably the message there as you look at the market sizes of categories, and we took a lot of guff when we first said we were going to make football cleats and people said the market's so small.

Football from a retail dollar standpoint is $110 million market.

And we took a 20%-plus market share there.

Baseball, softball is a little more than a $200 million market.

Training is about a $1.2 billion market that's currently more of a $40 shoe sold at Kohl's versus the $80, $90, and $100 product that we sold through in sporting goods.

And now we're entering into probably the first category with a little bit of a wind at its back.

It's nearly four or five times the size of the largest category to date, which is training.

With running shoes being $4.7 billion.

And we believe there's -- listen, there's a lot of established brands there because in these other categories we entered and said we're going to reinvigorate, wwe're going to raise ASP's and bring attention to markets that have been previously forgotten about.

People know about the running shoe market, but frankly we believe and I think I'm pretty confident that our consumer runs and that our consumer going to give us the opportunity to show them our product.

What I can tell you is that our product's been tested.

Our product has been received tremendously by the retailer's who've seen it.

We've actually had some on-site fittings and tryouts, with recent marathons including our own Baltimore marathon that we had here with more than 18,000 runners going through our booth and looking at some of the footwear and participating in the marathon.

And the feedback so far has been great.

And most importantly, our job as a brand is to -- listen, you hear about all the negative in the world.

Our job is to create innovation, to create new stories out there.

A, the ability to bolster our big box sporting goods guy and hopefully give a shot in the arm there.

As well as the expansion we have with footwear for the first time about to be sold with some of our new mall partners, as well, including Foot, as well as Finish Line.

And then of course run specialty.

I mean, this isn't something which is just big box story, this is something that the best specialty players out there, the mom and pops believe in giving our brand a shot.

So I think from a -- comprehensive standpoint, we feel good, and we feel like it's time for us to begin to expand and open our wings a little bit.

Omar, it's Wayne.

I just want to add one more thing on that.

In 2008, 1/3 of our year-over-year dollar growth came from footwear.

And I think what I can tell you, which we feel good about in 2009, that year-over-year dollar growth will be even greater for footwear.

Okay.

Okay.

And how many new doors is footwear kind of opening up for you in those new channels, Kevin?

Well, for the most part, it's where we've done business to date.

But frankly, it -- also the halo effect that's taken place of -- of course we have, Foot is going to be big, and we're basically going to be selling the product in the 700 roughly or so doors that we have apparel in today.

Not big expansion.

Again, with 4,000 doors behind that partner, there's plenty of room to grow there as we look to expand.

And then, of course, specialty.

The addition of having running footwear has made us relevant again.

Where we have difficulty getting in as an apparel-only brand in some of the Luke's locker rooms in Dallas, Texas, some of the more marquis specialty retailers.

It's really given us a venue and platform to enter the brand to give people the opportunity to experience Under Armour.

We really see it as a plus.

And you got to understand that from the highest end, the Road Runners of the world, there's a lot of people that are giving us a shot with this, so we're going to learn a lot in the first few months.

Again, we don't believe this is a one hit.

We think that we've got some legs.

And I think the product speaks for itself.

Okay.

Great.

Good luck.

Thank you very much, Omar.

We'll go next to [David Glick with Buckingham Research.]

Good morning.

Just --

Good morning, David.

Hi, David.

Good morning.

Wayne, just a quick question on your Q4 revenue guidance is fairly broad range.

Obviously you gave it guidance for the year.

But it implies a fairly broad range for the quarter.

Can you give us a sense of what's driving that variance?

Obviously there's a lack of visibility in the environment, I understand that.

But is that coming from lack of retailers confirming orders, potential returns on unsold product, if you're heavy in a seasonal category?

Is it uncertainty in direct to consumer?

Can you give us more color on why it's such a broad implied range for the fourth quarter?

Sure, David.

I'm actually going to let Brad take that one.

Hi.

Thanks.

David, yeah.

There's a lot going on really in the revenues, in the current environment.

And actually also with the retailers and consumers' reaction to the environment.

So also as we've talked about in the past, weather's a very important factor in Q4 for us also with cold gear.

So as far as the indicators that we're looking at, the drives of Q4, we're looking at a couple of things.

One, our performance at retail that we've seen so far in Q4.

At once trends for punishments business, our booking percentages and cancellations on the bookings that we've seen also in the last few weeks.

So we made some assumptions there as far as Q4 goes.

And it may be -- just walk you through some of those assumptions.

On the low end of our outlook for revenues for the year, we basically assume that trends do not worsen from what we've seen so far.

Specifically, around either At Once business as far as replenishment business goes.

Also we've taken a more conservative stance on cancellations of existing orders that are out there.

So that's kind of the low end of our outlook.

On the high end of our outlook, we've assumed better At Once trends that we've currently seen.

And reflects us to cancellations we've seen to date.

And again, we're not counting on the weather as much as -- that is an important driver of Q4, though.

Is it fair to say that since, say, the third or fourth week of September is really when you've seen the -- the slowdown and it really hasn't picked up since this at --

Yeah.

The visibility really has been over the last four or five weeks as far as the change in the visibility.

That is reflected in our outlook for the rest of the year.

That's correct.

Okay.

But David, it's important to understand the fact that, we're not going to say when the weather gets cold, we all get a lot smarter, too.

So you know, trying to decipher between -- we slept on a -- a warm October a year ago.

And the weather in the -- the market was pretty tough.

And we weren't facing as -- as drastic as an economic climate as we're seeing or hearing about today.

So, frankly when we see cold weather, I think our business reacts accordingly and I think our retailers react the same way as well.

It's been obviously pretty chilly, walking into 39 degrees, and rain this morning.

That's good news for Under Armour.

Okay.

Great.

Just a quick followup on marketing expenses.

They came in lower than you had guided to.

My recollection is you had guided to a flat percent of sales.

Can you give us some sense on -- on how that number came in.

Where you may have pulled back on -- on some marketing spending.

Yeah.

David, this is Wayne.

You know, that -- that number for the quarter was really essentially just timing shift.

It's really when we spent that marketing.

We're still going to be in the same range for the full year.

The high end of the 12% to 13% range.

So there was really no adjustment in marketing.

Just really timing.

Okay, great.

Thank you very much.

Good luck.

Okay.

Thank you.

We'll go to [John Shanley with Susquehanna].

Thank you; Good morning.

Can you give us an update on the European business and any indication whether or not you're about to -- or fiscal '09 introduce a football boot into the European market.

Yeah.

Hey, John, it's Kevin.

Well, first of all, Europe as a whole is something that we continue to invest in our opportunity that we have there.

And remember going back to the same three points of our strategy of market entry there as it has always been, which is first of all to build the right team of people to help tell our story.

Peter Morrow on board now is in month 16 or 17 of his tenure here at Under Armour and is really building a great team of people in our Amsterdam office.

And really beginning to get traction I think from a relationship side, with -- with people rear doing business with there.

Second component is building authenticity on field.

And fresh off of -- the German Bundis League has been in play for a little over the last month.

And Hanover 96 is actually being pretty competitive out there.

And I think they have a good shot including a win over Byran Munich.

So, authenticity begins there.

And also this past week, we actually really began our kickoff for the WRU, the Welsh Rugby Union, in Wales.

And their first game is in Cardiff, and in the next week here, we're actually going to go over and see that effect too.

So I think we're going to spend time in that market, we're listening and learning, but.

authenticity is something, it's amazing what happens when people are not only seeing it and discovering it sort of as a surprise tactic underneath the people's uniform.

As we become more visible in the market, I think attraction is beginning to take place.

And of course distribution.

We continue to have -- little more than 2,000 doors in the market today.

And, we like where we're doing business.

And I I think we're seeing good traction as they're having a pretty good climate in the fall season, as well.

And probably the most important thing that we have is -- and what David McCreight is doing here is helping us prioritize this.

And prioritize international for a company that 90% of our revenues and that we came from in Q3, 90%-plus came from the US.

Again, we just see tremendous, tremendous opportunity there.

I'm going to let Wayne jump on the soccer booth.

Yeah, John, a quick note on soccer.

You know, we've built and continue to build a very, very strong footwear team.

And there's no doubt that we'll continue to work on those next categories.

But right now, we really need to focus the organization.

And we are focused on running.

And that's where we're going to keep our focus.

So our team is working on new product.

But running is our focus today.

So no boots this year.

Is that what you're basically saying?

There is nothing of -- of material that I can really talk about, John.

If we -- one of the things we always do when we put new products out is we test.

We test on field.

We test with the athletes.

So as we develop new categories, you may see small tests out there just to make sure that we're authentic and it's working properly.

But, you know, not planning our major launch is -- is running.

We've learned a lot of good lessons as we grow this business.

One of the best lessons we learn and maybe this comes with age is a little bit of patience, too.

So as we -- as we learn and make sure that we have the product right before we do full-blown market entry, we want to make sure that consumers are screaming for it, the product's tested, that durability is intact.

And when we enter, we enter with strength and we enter strong.

That's the way we intend on entering the market.

The short answer is that we absolutely will be in the soccer boot business.

Again, sort of hedging the question, not unlike basketball, I think the product and product readiness will dictate the timing as to when we enter those categories.

Fair enough.

The other question I had was on the running shoe launch.

Can you give us an indication of the marketing spend for that.

Will it be comparable to what you did when you launched the cross trainer and also can you give us an idea of the size of the product offering that you're going to be bringing in for running?

John, this is Brad.

On the -- as far the marketing spend goes, I think what you can anticipate, obviously we're not giving a lot of guidance here in 2009 right now, but what you can anticipate is the fact that our running launch is in the first half of 2009.

Similar to our performance train launch being the first half of 2008.

I think you'll see the same kind of seasonality in our marketing spend year over year as far as first half versus back half.

As far as the size of the launch goes, yeah --

Yeah, John.

This is Wayne.

I think what I've said earlier was that we had a very successful training launch, and this year footwear in total was 1/3 of our year-over-year growth in footwear with the running in 2009, I would expect that year-over-year growth to be even greater in footwear.

So running is obviously a larger category.

It will -- it will have a bigger impact on our year-over-year growth.

But in term of specific details we're not going to get into that right now.

John, it will be larger than training, but it will also be 100% allocated just like training was.

And so again, I think that the consumer, the market -- and we can tell you there's more demand out there than what we're putting in the market, as well.

That's good to hear.

Congratulations, and good luck with the new programs.

Thank you very much.

Thank you.

Our next question is from Jim Duffy with Thomas Weisel Partners.

Hey, Jim.

Good morning.

Good morning, Jim.

Brad, question for you.

The 49 (inaudible) percent gross margin mark for this year, how do you think about that mark on a go forward in your planning process?

Yeah, Jim.

We've talked in the past about a couple of levers to gross margin.

First being footwear.

And the second being direct to consumer really having the most impact on our margins going forward.

So when you look at going forward, always look relative to the guidance we give around the growth in those categories.

So obviously we're talking about footwear, another major footwear launch in 2009, the first half of 2009.

And obviously footwear we've talked about in the past being below our historical apparel margins.

As far the direct to consumer goes, again, we're -- we're looking at direct to consumer growing above our overall company growth rate in 2009.

And again, our direct to consumer business is very strong in the back half of the year, especially in Q4.

So you should see an uplift in margins from that perspective.

Those two will always try to balance each other based on their revenue growth year over year.

Jim, hi, this is David McCreight.

Also -- also as you can expect, with the company that's growing and as we start to become more sophisticated with our supply chain, we're going to continue to look for opportunities for margin expansion and apparel, as well.

So you can see three material levers for us.

Okay.

And then on the direct to consumer, you were talking about 15% of revenue or so for the year.

And I think if I remember from your last call, you'd expected to kind of maintain that steady as a percent of revenue.

So it sounds like maybe an increased emphasis on direct to consumer going forward?

Yeah.

Direct to consumer for 2008 should be around 14% to 15% or so for the year.

And yes, we would anticipate again, we'll give some more clarity around 2009 in our year-end call.

But we would anticipate direct to consumer to grow faster than our overall company, and thus be an increase in percentage of revenues in 2009.

And then quickly on the direct consumer, the orders that didn't shift, can you provide a little more detail around that.

Was that just a delay in the processing of shipments, so that's pushing some revenues from the third quarter into the fourth quarter.

Or do you -- do you think those are actually lost orders?

Jim, hi, it's Wayne.

Let me take you through that.

The third quarter I think Kevin said it well, is -- is one of our largest quarters.

I think it was our highest quarter ever in the history of the company.

It's a very busy time for the company and the start of the third quarter, particularly around our product offering.

Specifically in the web business where we are basically offering our Spring demand and also transitioning into Fall.

As a result of this we've encountered in the third quarter, we had some problems with our processing, which is really our ability to put through as many units in a compressed time in our distribution house.

This is mostly centered around our web business.

So although it wasn't overly significant from a top line perspective to the overall company, we did have lost volume, lost sales on line.

But it was impacted.

It did impact our gross margin as you can imagine, the web business has a much higher gross margin than our overall business.

Now the good news is that the operational team in the quarter was able to correct it.

And by the end of the quarter, the service levels for our web business were back to normal.

And equally important, I think to note, is that we still see our direct-to-consumer business year to date, even our web business along with service issues, is much stronger than our overall company growth.

I think Brad has articulated that.

So it was a blip, we did lose revenue, but I think the impact to the company was gross margin, and Brad called out.

But again, good news -- it's been resolved.

And we'll continue to take steps to ensure that doesn't happen again.

Very helpful.

Thanks.

Good luck this holiday season.

Okay.

Thanks, Jim.

We'll go to Robbie Ohmes with Merrill Lynch.

Thanks, guys.

Can you hear me okay?

Perfect.

I apologize if this was mentioned already, I got on your call late.

But the revenue reduction related to the slower men's growth in the fourth quarter, can you just -- Can you discuss existing customers by channel?

So is that more of a sporting goods, big box issue versus smaller accounts, or the independents.

And versus how your outlets performed?

And then the other question I had was you mentioned tighter cost management for the guidance.

Can you give us some examples of what you're going to be doing to keep costs down in the fourth quarter?

And I would imagine in -- in '09, as well?

All right.

Robbie, this is Brad.

I'm going to jump on the last part of that question first as far as cost management goes for Q4.

A couple components I can walk you through there.

First of all, part of our team's compensation is tied to the company's top line and operating income.

So, there is some offset in costs there as far as if we hit our internal targets or not in those two items.

Also, there is some variability in our marketing spend as we talked about before.

So although we still anticipate being in the high end of the 12% to 13% range for marketing for the year, the fact that we brought our top line revenue down a little bit, as far as an outlook, means that -- that marketing spend will come down with it.

In addition, there's some other smaller variable costs we have, distribution and -- and sales specifically.

Not a major part.

But there are some variable costs there.

And then probably lastly and most importantly, we -- we've identified some specific areas just from a fixed cost perspective that we can control costs.

That maybe won't affect our Q4 revenues or revenues going forward.

Things such as travel and so forth, are areas we're looking at.

So those are really the areas in Q4 that we're looking at.

from the perspective of cost management.

Revenue side?

Yeah, it's Wayne.

Certainly when -- how do you do, Robbie?

On the revenue side it goes back to what we see in terms of visibility.

And, whether it's men's, women's, youth in total.

What we've looked at for our visibility in terms of, Q4 and -- is really several things.

One is how the retailers are reacting to general conditions.

The bookings that we have in place.

Our At Once business.

now our At Once businesses certainly impacted by cold here, which as Kevin said related significantly to the weather, cancellations.

So all of those factors together make up our visibility.

And so when we looked at it for the full year, I can't give you any specific piece on why one part of the business is up or down.

I can tell you it's based on the visibility we have.

But also equally important is what we see out there.

We watch our retail business every single week.

How we're performing at retail.

And all of our business continues to grow.

And we're pretty happy with that performance.

Again, it's all the factors that I mentioned that really has an impact.

Kevin?

Yeah --

And just -- sorry, go ahead, Kevin.

Well, I was just going to add to that that still wherever we are performing right now, we continue to lead.

And we are -- we are clearly number one in the majority of places we are.

And in -- worst, maybe a close two.

But in certain categories.

But for the most part, I'd say it -- the majority of the time Under Armour is far and away number one.

So I think we're very proud, I think, of the -- the purpose that we serve for our great big box partners.

And, I think we're doing a good job for them right now.

And I think we're both appreciative of the businesses that we have with each other.

Our job is continuing to drive innovation.

We have great, new programs on the floor now.

from micro fleece programs from folded hoodie and, some other other programs with some of our big partners.

And -- especially, Dick's Sporting Goods right now has a great presentation of Under Armour on the floor.

And Sports Authority, of course, is another one of our important partners.

These guys are doing a -- a fantastic job I think with -- but they're managing their own inventory and trying to keep dealing with the -- the environment that they have.

So just to clarify because what I'm really trying to dig at is -- is there a significant difference between sort of your customers and them managing inventory versus the trends your seeing in your own outlet stores, or is it your own outlet stores are in line with -- a little bit slower trends or plans for order in the men's business for the fourth quarter?

Well, let me -- whether we have our -- our fourth specialty store just opened in the last couple of weeks.

And so to be clear on our own specialty model, the way that we're approaching retail, we don't have any more leases on schedule for the balance of 2008 or 2009 right now.

And again, as we've mentioned all along, our specialty store model is purely a test.

And of course, the addition of David joining our team is going to help us really make sure that we're evaluating these in the right metrics to evaluate that test.

On the factory outlet side, we'll have 25 factory outlet stores by the end of the year.

And what I can tell you from our own indicators, and obviously our web site being the most immediate and then of course our factory outlet store helping us is that our business there is -- is pretty good.

We're not seeing the effects to the extent that we're hearing about or reading about or others are preparing for, but of course, again, that business for us is simply liquidation.

And expose -- and expelling excess product.

So we've -- it's been a big help for us in helping get our inventory down.

And I think that our assortment there is pretty good.

And I think that we're giving a pretty good product to the consumer right now, too.

Robbie, this is Brad.

Just to add to that real quick, like Kevin said, our outlet business and our web business as far as what we're seeing right now in Q4 is pretty much on par with what we had planned for for the quarter.

On the wholesale side, you may have missed this earlier, I kind of walked through this a little bit, too.

If you look at our outlook for the year and the range of our outlook at the low end of our outlook, what we're assuming there's is that -- that the current trends we see in At Once stayed pretty consistent going forward with what we have seen over the last four or five weeks.

And then we've also taken a more conservative stance on -- on potential cancellations with existing orders on that low end of the range.

On the higher end of the range, what we'd assume there is that At Once trends get a little bit better than we've been seeing the last four or five weeks.

Then we take into effect cancellations we've seen to date.

Kind of gives you an idea at least on the wholesale side.

That does, that's very helpful.

Thank you, guys, for the clarification.

Thanks, Robbie.

We'll go next to [Camilo Lyon with Banc of America Securities].

How are you?

Good.

Most of my questions have been asked.

But I did want to follow up on the gross margin line.

With the recent drop in oil prices, is that -- what are the implications that -- that is having on your cost of goods?

You -- have you seen any benefit in raw materials sourcing costs or -- or transportation costs there?

Camilo, hi, this is Wayne.

You know, one of the things that we've done consistently is we've been able to lock our prices in.

Typically we lock our prices in almost a year in advance, specifically as it relates to fabric.

So we've locked in the 2009 prices.

So as -- as oil fluctuates, we're not necessarily seeing any big change or benefit within, our cost of goods sold.

There's always the opportunity to impact the transportation, but the ability to lock it in is really something we've taken advantage of.

And the good news from my perspective, where I sit, supporting the finance side and the operations side, is that we continue to hit what we consider our house targets.

And for 2009, we're pegged pretty well.

So there's no surprises either way.

The bigger story on gross margins going to be as we continue to open these -- really leverage the new platforms that Kevin alluded to earlier.

And that also the company's growth.

You know, our pencil's getting a lot bigger.

We're going to continue to be a lot smarter as we continue to invest.

And Wayne's team is building some pretty good disciplines as it relates to leveraging those -- that larger scale.

So we have -- we feel pretty optimistic about margins in the future.

Okay.

And also could you perhaps provide a little bit of detail around maybe how much the web order processing issues caused you on the gross margin line during this quarter?

I can, this is Brad.

It probably cost us around -- for the quarter, probably somewhere around 100 basis point, for the year, it's about 50 basis points when you do the math.

Great.

That's very helpful.

Okay.

Thank you very much.

Thank you.

We'll go next to [Tom Shaw with Stifel Nicolaus].

Hi, guys.

Hey, Tom.

Any color around the response to the new generation two trainers, and secondarily how you would expect that product to be positioned in year two given the running launch?

Yeah.

Tom, this is Kevin.

So first of all, the product hit the floor in the last couple of weeks.

And the early rates that we have great pop.

One of the things that you learn in the footwear business is that it's -- too's much more seasonal, or it -- the product needs to turn much faster.

You don't get six months on the floor where the consumer is looking for something in a -- on more of a weekly -- at the very worst a monthly basis.

So the ability for us to freshen that up and, A, I think we're sold through, we're pleased and happy with the shelter we had with the Gen-1 training.

The ability to come back and now clean out because we sold virtually what we wanted to with the Gen-1 training.

And come back with the new color in the holiday is important.

But, again for us it's a lot of learning that's happening right now.

We're going through this process of how instead of-- , two uppers a year or over a seven-month timeframe begin to look and say how are we going to compete and more importantly be able to differentiate our important big box sporting goods partners.

And of course the new players and existing players that we have in the mall.

And then of course -- as we're heading to other categories.

What you can count on from us, though, is that we are not going to forget about training.

We're not looking to cannibalize our training business with running.

And we are very aware that that's possible.

And, of course, we're looking for a great, big pop in the first part of 2009 with the launch of running.

But you'll see us come back-- you'll continue to see us tell the training story.

Training for us as a business is frankly a much bigger platform at the same time, too.

Is that training has that halo effect beyond just the footwear.

But, really leads back to our apparel, as well.

So again, you'll see us stay consistent and make sure that we build that platform that when someone should not train in running

And Tom, this is Wayne.

We're going to get-- we expect,certainly a full-year performance trainer this year.

We launched part year.

We'll get a full-year 2009.

And then the other point that Kevin and Brad make consistently, yeah, there could be some cannibalization, people could actually choose the best shoe on the wall, but, we -- we've been very confident, but yet not overly aggressive.

So our program for running is an allocated program.

The benefit of that, again, is to continue to keep that demand up pretty high.

I think is a smart way to launch the program.

Okay.

All yours, Tom.

And --

I was going for gratuities plug, but all right.

The gross margin question.

Yeah.

I'll shift gears here.

The mountain category, you guys haven't talked a whole lot about it.

How is that going to be expanded or is it going to be expanded as we head into cooler weather?

Well, we actually -- we just finished our fall '09 mountain outdoor sales meeting here.

And it was great.

I can tell you that the product looks terrific.

And that we are in the process of building, I think, a really great team.

Of course, I think a great sales -- great authentic sales force, great authentic athletes that we have out in the field for us.

But, just as importantly our product team and our internal team is really, really very strong.

Especially from an innovation standpoint.

A couple of the big stories that we've come back, we want to own, where we launched outerwear at the end of 2007.

And I think we have some -- we learned a lot in that first year.

And we built some pretty high price points.

We didn't build a lot of product, but we learned of, where the market sits for $400 and $450 jackets.

So we've come back this year and I think we engineered better product than what's in the market.

But also I think it -- closer to more wheelhouse price points.

But we also decide as a company that it's important first and foremost that we own First Layer.

We want to own the base layer.

So our base program, actual we have a base layer one, base layer two, and base layer three that are effectively three separate weights for replacing your old long underwear, has just been out of this world.

And we've -- we've had a difficult time actually keeping up with demand with that product.

And if this was something I think we made the long-term claim a while ago that this was in the out years a million-plus type of unit program.

And we still feel confident with that being something that we'll see going forward.

So between base, between our basic cold gear, between some of the color block cold gear as well as some of the New Meadow cold gear products we have the ability to own the mountain beginning with that first layer.

And I think what you're seeing is great outer wear as we put together a great team to really own that -- that outer wear portion, as well.

Then of course our affiliation with the US ski team.

It's something that will play a major role there, as well.

Okay.

And last one.

I would assume the youth business is one of the more resilient parts of the apparel piece.

And the growth is a little slower than we've seen in the past.

In the third quarter.

Was there anything that went on there -- and how -- I guess you guys gave the -- the full-year guidance, the low 20% growth range.

Trying -- any more color on that category in the quarter?

Tom, there is Wayne.

There really isn't anything specific.

It's really the timing of when we anniversary some launches.

I think we feel confident that, low 20s is where we'll take the full year.

And we'll start to put in programs toward the -- the fourth quarter.

Year to date, 21% is still a very, very strong growth.

And so I -- really there's nothing I can call out specifically.

Really just the timing.

All right.

Thanks.

Best of luck.

Okay.

Thank you.

We'll go next to [Jeff Mince with Webb Bush Morgan.]

Thank you very much, good morning, guys.

Jeff.

Good morning.

Can I ask you a quick followup on the trainers with the launch of -- of version two.

Did you guys change the volume that you did this year, or did the volume end up being about where you expected?

Yeah.

Hi, this is Wayne.

The volume really didn't change.

It was, for us, when we launched an allocated program and we stayed with it.

The one thing if anything was the timing really of how we shift.

I think the way we shifted and had planned it was 70% first half, 30% back half.

Then we were anticipating the shift a little bit more in the Q4 versus Q3.

But we ended up shifting a greater amount in Q3.

If you saw any shift it was really the timing of when we shifted in Q3.

Overall the number itself was an allocated program and stayed that way.

And Jeff, as we look at -- again, to reiterate some of the assets that we've built around training.

We've really utilized the sport of football is the place we look to get the big bang from training.

We talked about our high school all American game, the Senior Bowl All American game on the collegiate level.

Then we had from a marketing standpoint, we've owned the NFL draft for years.

The thing that was missing from that of the NFL combine.

And we were happy to announce this year that we actually came to a -- signed a relationship, an agreement with the National Football League to take over the outfitting of all more than 300-plus athletes that will be invited to the NFL combine this upcoming March.

So we-- , that's something which is, again, just a major platform for us.

Of, A, the ability of the authenticity from our apparel standpoint, but again reaching back to the concept of combine, the concept of that when athletes are training they're not just doing linear movement.

It is about lateral side-to-side stability.

And you'll see that authenticity bleed through in the product that's on the field.

And also what you'll see the great athletes wearing on field when they are in

Great.

Thanks.

And then just one -- one more question.

On the move kind of more into the mall stores, can you talk a little bit about, what you're learning in terms of the different consumer who's shopping the mall as opposed to the -- the big box stores and how that might impact what you're selling there.

Yeah.

Well, from a -- from a wholesale standpoint, it is -- number one, our customer goes to the mall.

What we've found, I think, is that our customer in the past hadn't gone to the mall specifically for Under Armour.

There's two things at play there.

A, it's the presentation that we, frankly, are receiving from some of our partners there, and Finish Line has done a terrific job to date.

Again, kicking off with Foot Locker, I think they've been pretty intent on the presentation that we had there, too.

Because we don't want to be just -- we've been typically in the past known as a white, black, and navy brand.

Well, I think we've expanded that.

We realize that in order to keep people competitive, we need to be able to differentiate them.

So, A, we're going to learn a lot of things from that.

And again, we -- we believe that our customer 's are there, we just haven't prodded them to try the type of Under Armour product that would compelling to them in that environment.

So I think you will see with the addition of Susan [Parkus] on the apparel side, you'll see our apparel offering continue to expand and become more relevant there.

On the retail side, let me let David maybe expand on that.

Hey, Jeff, David McCreight here.

Hi, David.

As Kevin indicated, the opportunity for this brand and platform for growth really is tremendous in the future.

And you're seeing a very -- all the hard work and authentication and development of training at the platform, and the expansion into footwear is one of many opportunities that the company is going to be working on.

In addition to the distribution growth in the mall.

We're also continuing to develop our direct to consumer business which will be another strategic arrow in the quiver.

And we're going to continue to grow that at our pace and where it makes prudent sense, as well.

Okay.

Thank you very much for the color, and good luck.

Thanks, Jeff.

Thank a lot, Jeff.

We'll go next to Dan Wewer with Raymond James.

Thanks.

Brad, you had noted that the low end of your fourth quarter guidance assumes that there's not any improvement from the-- I think the trend you said in the last four or five weeks.

I would note that a lot of the retailers who are customers of yours that we talked to are suggesting this might the worst -- might be the worst holiday since since 1991.

I was curious, did you consider a scenario where the environment would actually worsen heading into the holiday season?

I -- I think, again, we have a pretty wide range there in the -- in the revenue guidance for the rest of the year.

So we -- we do have visibility into the first of three months here for this quarter.

So we feel pretty comfortable in -- in the different assumptions we've used both in the low end and the high end of -- of that range and outlook.

In addition to that, also remember that our direct-to-consumer business is very strong in the fourth quarter.

So obviously we have a better visibility and good idea of what we're tracking with our direct-to-consumer business.

Okay.

Dan, this is Wayne.

One of the things that we do is we look every single week at how we're performing at retail.

And certainly as Brad and Kevin said at the outlook, we said that several weeks ago.

But I can tell you based on what we see is that wherever we are, we continue to outperform in places where we sell.

I think that's one of the best indicators for us on the strength of the brand and the loyalty of the consumer.

Kevin?

Yeah.

Probably one of the greatest compliment we've received from one of our key -- one of the merchants that we -- we interact with was, I think that you guys have always been impressive in -- with our sell-through and the way that we've led the market and outperformed the market when times have been good.

But especially in difficult times, the fact that we still continue to drive foot traffic into stores and frankly I think lead the categories where we've -- where we compete is a pretty great testament.

I think, A, to the brand, but more importantly the strength of the brand.

Is that I want to reiterate again is that we believe that our brand frankly has never been stronger.

Never a wider or broader array of products.

And more importantly, never a wider or broader array of opportunities.

And one of the biggest challenges that we're going to face in 2009 as times get difficult-- is, deciding where we do deploy the resource.

Again, the timing of David joining our company is very helpful to us because, listen, we've been a company that historically we've -- we've got 10 or 12 things on the list.

And it's just the way it is.

With the way that we're going to adjust and the way that we're going to prepare for what everybody's talking about is we're going to take 10 or 12 things and turn it into five or six things.

And we're going to focus and we're going to do them great.

That we believe is the key.

Not necessarily what we do, but also, just as important, the things that we don't do to execute to become a great company.

Then my other question, maybe for Wayne.

During the month of August and September, I know that you ran a few promotions on your web site, offering free shipping.

I was curious as to, your thought behind that kind of promotion and also curious as to why you were running that kind of promotion, if you were simultaneously having difficulty in processing orders.

Yeah.

Dan, this is Wayne.

One of the things -- we've been running free shipping for over a year now.

It's been part of our strategy.

I think it's important that we set thresholds, which is very common, hit over a certain threshold, and you have free shipping.

Stow's not something that we did new with our business.

It's something that we've been doing for over a year now in terms of how we dial that up.

It's only -- we've run it over 100 hours from time to time on a promotion so it's not necessarily --

(inaudible) they shipped it free.

Which I'm sure, wasn't the intent.

I didn't realize there of a minimum.

The -- the offers I saw, there wasn't a minimum.

At least the ones that you were in in September.

But --

Yeah.

Dan the other thing is in September, I mentioned earlier that one of the things we did have, we did have some service issues in September.

Specifically to the web business where we were unable to process orders in what we would consider a timely manner.

So, we did whatever we could to process those orders, and in some cases, we probably put on some freight on our backs to ensure that we got the goods to the customer and filled out demand.

Since that time, by the end of the quarter, we certainly had completed what we would consider everything we had to do to get ourselves back in high processing, so where we could ship an order if you needed it within two days.

So there was a period of time when we had that order processing I spoke about, that earlier on the call.

So it could have been related to that.

Yeah.

The illusion of the web business in the back-to-school timeframe is probably the worst three or four weeks that you could have asked for.

So we made it -- I think --

We learned from that.

You know what, we're in a position now where the team has reacted to it just like we did whether we reacted to inventory, as well.

Thank you very much, Jim.

Yep.

Operator, we have time for one more question.

We'll take our final question from [Shawn McGowan from Needham and Company].

Jim Lewellyn in for Shawn McGowan.

The questions we had have already been addressed.

Thank you very much.

Hey, Shawn.

Thank you very much.

All right.

If I could, operator --

That does conclude our question-and-answer session.

At this time, I'd like to turn the call back over to Kevin Plank for any additional or closing comments.

Yes.

Thank you again for joining us on the call today.

I hope that we have demonstrated for you the continued excitement we have for the Under Armour brand.

Our connection with the consumers is strong as ever.

We're getting ready for the most exciting launch in our brand's history and we've added significant depth and experience to our leadership team.

If you take only one thing away from our call this morning, it's that Under Armour is a growth company.

And while we did not provide specific outlook for 2009 today, we are certain that in 2009, we will grow.

Our men's apparel business will grow.

Our women's apparel business will grow.

Our youth apparel business will grow.

Our footwear business will grow.

Our direct-to-consumer business will grow.

And our international business will grow.

We're focused on our consumer, we're focused on innovation, and we're focused on dictating the tempo that will enable us to execute on the growth opportunities we see ahead.

Thank you all very much.

And happy Halloween.

Thank you.

Bye-bye.

That does conclude today's conference call, thank you for your participation.

You may disconnect at this time.