Under Armour Inc (UA) 2008 Q4 法說會逐字稿

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

This call is being recorded today, and at this time I would like to turn the conference over to Director of Investor Relations, Ms.

[Alex Pettit].

Please go ahead, ma'am.

Thank you and good morning to everyone participating in this morning's conference call.

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

The words estimates, intend, expect, plan, outlook or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially.

Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our press release and in the Risk Factor section of the filings with the SEC.

The Company assumes no obligation to update forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Before we continue, I would like to direct you to our 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.

Joining us on today's call will be Kevin Plank, Chairman and CEO, followed by David McCreight, our President, and finally, Brad Dickerson, our Chief Financial Officer, who will discuss the Company's financial performance for the fourth quarter and provide some commentary on our outlook for 2009.

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

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

Thank you, Alex, and good morning, everyone.

It is a very exciting time for Under Armour as we launch running footwear at retail this Saturday.

It illustrates not only our ability to continue bringing newness to our consumers and retailers, but the opportunities that lie ahead in the potential for our brand.

It is also a great opportunity to reflect on the progress we made in 2008 and why our excitement about the long-term opportunities for the brand remain so strong.

But I want to be clear that we are focused on the short-term as well.

Our success in 2010 and beyond will be significantly impacted by the decisions we make in '09, and we're not taking our eye off the long-term growth strategy.

Our five growth engines all remain very much intact -- men's apparel, women's apparel, footwear, international and direct to consumer.

In large part 2008 was another very successful year for Under Armour.

We grew revenues 20%, successfully launched training footwear, and significantly strengthened our management team and our balance sheet.

For the long-term health of our brand, the most important development was that our consumer continues to pay a premium for our product, and our retailers view us more so than ever as an essential brand that consistently drives traffic for them.

In the context of a very difficult retail environment, what happened at retail for Under Armour in the back half of 2008 was very positive from a brand perspective.

There has been a lot of discussion about where the consumer is heading and where we are very aware of the challenges facing all brands in this environment.

Even the strongest of brands faced significant obstacles in 2009.

The strong brands in our business will position themselves for consistent growth in the out years.

We like our long-term prospects for a number of reasons, but the primary one is the strength of the Under Armour brand.

We believe there will always be an appetite for the companies that deliver on their brand promise, particularly those that are built on a foundation of performance.

It is exciting to think about the running room we have just in our current domestic apparel distribution, especially in the categories of women's and youth where we have not really scratched the surface yet.

Within our space, we believe we are operating from a position of strength, and beyond that, we have more long-term levers to pull than any other brand in our space -- new categories, new distribution and new geographies.

On the product front, we have been building that infrastructure for growth over the past few years where our revenue growth has been explosive.

Because we invested and built the teams during those years of high growth, we are now in a position to pull the levers such as running footwear.

This will not only drive growth in the short-term but also position us to continue scaling our footwear business.

Beyond running footwear, there are growth opportunities for us long-term in soccer boots and eventually once the product is ready, basketball.

From a distribution standpoint, our entry into running footwear provides us with a great opportunity to expand our brand presence into the mall specialty channel.

Places like Foot Locker, another logical step in the Under Armour brand story where we have not sold our first pair of shoes yet.

Through this constant evolution of our Company, our strategy of generating excitement among Under Armour's core consumers will not change -- innovative new products, new categories, marketing that breaks through the flutter and a continued focus on connecting with our consumers.

Under Armour running footwear hits the market this Saturday, and as many of you have seen on some of our communication already whether in print in-store or on TV, the product and the campaign speak directly to our core consumer, the athlete.

The campaign itself is our most inclusive ever, All Athletes Run.

The buzz has been great on the running shoes with major media outlets and niche running publications reporting with high anticipation of release of our very first pairs.

We will continue to invest in the business that will fuel our long-term growth.

But we're not blinded to the realities of the current state of the consumer.

We will prioritize those investments to ensure that we're delivering both short-term and long-term value for our shareholders.

For example, we have talked consistently about using our existing specialty retail stores as a test.

We believe the insight and information we get in our four stores about how our consumer likes to shop for our brand will help guide our decisionmaking around developing additional specialty stores.

For 2009, though, we are not planning to open any additional UA specialty stores.

In Europe we have invested in sports marketing assets such as the Welsh Rugby Union, the Hannover 96 Football Club in Germany to help authenticate the brand on field.

In 2009 we are using those assets to help the brand take root and build our presence.

We have been and remain a growth company and have a heightened sense of managing the profitability in 2009.

We're becoming better operators, better footwear developers and apparel designers, better at managing our inventory and our sports marketing relationships, better at managing our supply chain and better at understanding our consumer.

The slower consumer environment affords us the opportunity to relook at the operating structure we have developed over the past two years and identify areas where we can do things better and more profitably.

As COO, Wayne Marino, is driving our key initiatives from the operational side, and David McCreight, our President, who brings experience at maximizing profit at multibillion dollar brands is now charged with aligning our long-term growth strategy while fueling our near-term profitability.

To take you through that opportunity, I would like to pass it over to David so he can talk about some specific areas we're looking to impact in 2009 and beyond.

David?

Thank you, Kevin, and good morning, everyone.

Kevin spoke earlier about Under Armour operating from a position of strength.

For me the power of the Under Armour brand is really defined by the equity resident in the brand and the breadth of growth opportunities available to us unlike any other company.

Having worked successfully with brands where the business and company were more mature and the growth potential was less clear, I have a strong appreciation for where and how to help UA grow and grow profitably.

Some of the opportunities for growth were apparent before joining, yet further opportunities for growth and improvement were identified during my first few months with team UA.

One of the more apparent opportunities before joining was the footwear category as Kevin mentioned.

Credit for the existence of this growth vehicle lies in the wisdom of some of the investments the team made in building platforms around the brand.

Several years ago amidst rapid topline expansion with a clear and deliberate plan, investment and infrastructure was deployed, which enabled us to enter the multibillion dollar run footwear business which will begin to bear fruit this Saturday.

Our entrance into the footwear business started on field, the source of Under Armour's innovation and the heart of our brand equity.

And there our experience to date in building high-performance footwear for lead athletes in cleated training and now running footwear has materially informed how we brand product to market.

And while we are in the early stages of building a great footwear culture and business model at UA, it will be my role to ensure that the construction of our platform remains true to our original spirit of authenticity and innovation but is also executed in a strategic and profitable manner.

We will focus on ensuring we have the right team, supply chain, distribution plans, and innovation pipeline to fuel what could be our largest near to mid-term growth platform.

On the other hand, an example of the opportunities that were perhaps less apparent and were somewhat surprising to me is the amount of untapped potential remaining in the Under Armour apparel platform.

While already viewed as the leader in the performance category and currently the largest source of our revenue, when reviewing the apparel business, it became clear that material growth potential remains for men's, women's and youth.

With more aggressive merchandising capabilities and analytics, further developing product flow and assortment innovation, growing floorspace with existing distribution points, as well as targeting underpenetrated markets, points to the opportunity for us to introduce even more athletes to Under Armour apparel.

As Kevin discussed, we are acutely aware of the need to manage appropriately in the current economic environment.

However, we are confident that tremendous power of the Under Armour brand and the untapped potential of our growth platforms, when combined with more rigorous operating and investment disciplines, will deliver a dynamic combination of market share and operating margin growth in the future.

Thank you and with this, I would like to turn it over to our Chief Financial Officer, Brad Dickerson.

Thanks, David.

With Kevin and David having taken you through some highlights and strategies for our business, I would now like to spend some time on our fourth-quarter and full-year financial results.

As you will recall, on January 14 we announced preliminary financial results for the fourth quarter of 2008 of $179 million to $180 million for net revenues and diluted earnings per share in the range of $0.16 to $0.18.

Our net revenues for the fourth quarter were up 3% year-over-year to $179.3 million.

The growth was largely driven by our footwear business, which was up 36% to $9.2 million, and our licensing revenues, which were up 33% to $8.4 million.

Our apparel business was essentially flat in the quarter.

The US wholesale apparel business was impacted by a low level of at once orders and increased cancellations and returns on a year-over-year basis.

This was offset by growth in our direct to consumer channel, which was up 47% for the quarter.

For the full year, net revenues increased 20% to $725.2 million.

Our apparel revenues increased 13% for the year, while our footwear business more than doubled to $84.8 million with our successful launch in the performance training category.

Fourth-quarter gross margins were 50.7% compared with 52% in the prior year's quarter.

There were several puts and takes that impacted the gross margin for the quarter.

The largest impact came from the higher proportion of footwear sales in the quarter, which have lower gross margins than apparel.

The natural offset to this was the positive impact to gross margin from our growth in our direct to consumer channel.

Two other factors contributed to the gross margin decline.

First, although our core apparel styles continue to sell-through at full price in a tough retail environment, we initiated markdowns on some seasonal styles towards the end of the quarter.

Additionally apparel margins were impacted by a less favorable product mix.

For the full year, gross margins were 48.9% compared with 50.3% in 2007 and our previous outlook of 49.5%.

The biggest impact to our gross margin on a year-over-year basis was the growth in the footwear business, which was partially offset by growth in our higher margin direct to consumer channel.

Selling, general and administrative expenses were $68.1 million in the fourth quarter of 2008 or 37.9% of net revenues compared with $62.6 million or 35.8% of net revenues in the prior year.

For the full year, selling, general and administrative expenses were $278 million or 38.3% of net revenues compared with $218.8 million or 36.1% of net revenues in the prior year.

Marketing expenses increased $23.7 million in 2008 and were 13.1% of net revenues compared with 11.7% in 2007.

We had previously anticipated marketing expenses to be at the high end of the range of 12% to 13% of net revenues for 2008.

Also, impacting our SG&A for the quarter and the year was an increase in our bad debt reserves.

Although there are no specific items of concern, we believe the current economic environment increases the risk in general with some of our customers.

As such, we increased our bad debt reserves from $1.1 million to $4.2 million during the year.

Operating income during the fourth quarter was $22.9 million compared with $28.3 million in the prior year.

Operating margin was 12.8% compared with 16.2% in the prior year quarter.

Operating income for the full year was $76.9 million or 10.6% of net revenues compared with $86.3 million or 14.2% of net revenues in the prior year.

Our operating margin for the year was impacted by the year-over-year decline in gross margins, as well as SG&A to leverage.

Based on the timing of investments in our business, including a greater frontloading of marketing expenses to support our performance training launch, we had planned for substantial operating margin leverage in the third and fourth quarters.

Although we managed costs tightly in the fourth quarter, the slowdown in sales occurred late in the quarter and were limited in our ability to adjust spending at that point.

Below the operating income line, there are a couple of key items to address.

Net other income and expense is comprised of net interest expense and the impact of foreign currency.

We had previously estimated net other expense to be approximately $3 million for 2008 based on projected interest expense for the year, as well as foreign currency impact through the third quarter.

As we noted during our third-quarter earnings call, although we had hedged a portion of our foreign currency exchange risk for the fourth quarter, we remain exposed to some levels of currency risk.

As a result, net other expense was $5 million during the fourth quarter versus $90,000 in the same period of the prior year.

For the full year, net other expense was $7 million versus net other income of $2.8 million in 2007.

For 2009 we have expanded our hedging strategy to help us mitigate currency risk and anticipate less exposure to foreign currency exchange risk in the upcoming year.

Our effective income tax rate for 2008 was 45.3% compared with 41% in 2007 and our previous outlook of 42.7%.

The increase in our tax rate for 2008 came as a result of two factors.

First, a higher proportion of our consolidated taxable income was earned in the US.

Second, beginning in January of 2008, the state income tax rate for Maryland, our homebase state, increased from 7% to 8.25%.

Our effective tax rate is expected to be lower in 2009 as a result of certain tax strategies that will be implemented beginning this year.

Our resulting net income in the fourth quarter was $8.3 million compared with $16.9 million in the prior year period.

Fourth-quarter diluted earnings per share was $0.17 compared with $0.34 in the prior year.

Net income for the full year was $38.2 million compared with $52.6 million in 2007.

Diluted earnings per share for 2008 was $0.77 compared with $1.05 in the prior year.

Now a few moments on the balance sheet.

Total cash and cash equivalents at year-end were $102 million compared with $40.6 million at December 31, 2007.

Cash net of debt increased $30.2 million at year-end to $56.5 million compared with cash net of debt of $26.3 million at December 31, 2007.

At the end of the year, we had $25 million drawn on our revolving credit facility.

We had previously anticipated cash net of debt to remain relatively flat from our 2007 year-end the balance.

The increase was driven by the higher proportion of direct to consumer sales in the fourth quarter, as well as more focused management of our receivables.

Net accounts receivables decreased 13% on a year-over-year basis, which was below our net revenue growth for the quarter.

Part of this was impacted by the increase in allowance for doubtful accounts, which was mentioned earlier.

Inventory at year-end, which included approximately $15 million of Running Footwear to support this Saturday's product launch, increased 9.7% to $182.2 million compared with $166.1 million at December 31, 2007.

Without Running Footwear, which began shipping in January, inventory growth would have been flat at year-end.

While we have not delivered inventory growth at a rate below sales growth for the fourth quarter due to the slowdown in sales, we purchased over $50 million less of inventory in a year where we grew the top line 20%.

We made progress in systems and process development around inventory management in 2008, and in 2009 we're aiming for improved inventory turns.

As Kevin mentioned earlier, brand integrity is top of mind for us, and we understand the important role inventory management plays here.

Our investment in capital expenditures for the year was $40 million, below our previous estimate of $44 million.

We had previously stated that we expected future CapEx to grow in line with our topline, but we're taking a more conservative approach with CapEx as we look forward to 2009.

Although we're growing our business in 2009, we're currently planning our CapEx spend down year-over-year.

In this environment the balance sheet is of critical focus to us in an area we continue to look to strengthen.

I'm pleased to announce that we have entered into a new three-year revolving credit facility.

The new facility provides for an initial commitment of $180 million and replaces the existing $100 million facility.

Our new credit facility strengthens our banking syndicate and increases our access to capital.

Our ability to secure this facility in the current environment is a testament to the strength of our brand and our balance sheet.

With the uncertainty around the current environment, we believe it is prudent at this time to limit any specific financial details around 2009.

Although we cannot comment on how 2009 will stack up against the long-term goals we provided at Investor Day, we would like to provide some color around what we see.

We remain confident about our business and the growth opportunities that we have this year and in future years.

Our excitement about this Saturday's launch is matched with excitement from both our consumer and our retail partners.

In its first year, Running Footwear is anticipated to be significantly larger than Performance Training, and the product remains allocated for 2009.

Our direct to consumer business finished strong in 2008 and remains a growth driver for 2009.

As David spoke to earlier, we continue to believe in the long-term opportunity of our apparel business.

However, based on the trends in the fourth quarter and the limited visibility we have in the current environment, we're taking a conservative view on our US wholesale apparel business in 2009.

As a growth company, we're committed to driving short-term and long-term value for our shareholders.

Financial strength is critical.

And as CFO for a growth company in 2009, I'm focused on two things.

First, the balance sheet, and second, cost controls.

From a balance sheet perspective, our liquidity is strengthened with our current cash position, as well as the new credit facility now in place.

We're planning our CapEx down in the year with anticipated top line growth, and we are focused on improving inventory turns in 2009.

As far as cost controls, our goal is to protect our operating margin in 2009.

Our investments will be prioritized, and where we do invest, those costs will be managed tightly.

We have always said that we are a culture of growth balanced with a culture of profitability, and this year will be no exception.

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?

(Operator Instructions).

Robbie Ohmes, BoA-Merrill Lynch.

Actually two quick questions.

The first question I understand that you want to limit the details on '09, but can you just speak when you talk about conservative on '09 view for apparel, can you sort of speak to what that means in terms of approaching the category?

Does that mean that you will not be pushing to expand the number of doors that carry Under Armour apparel, or does that mean that you will be careful about launching new styles or programs in the apparel business or that you will not be pushing to grow women's or kids?

Just sort of maybe a little bit around what that means in terms of how you operate that business.

And then the second question, I guess maybe for Brad, I'm trying to understand the magnitude of the foreign currency expense, other expense stuff that hit you in the fourth quarter and how that lines up with the percent of your business that you do internationally.

Can you just walk us through how that works either from a sourcing or the size of your international business so we can get our arms around what happened there.

Let me start off and then I'm going to pass it over to Brad and then let him actually pile it on your first question as well and then get to question two.

I think we're pretty evident in the script is that we remain very optimistic about there is growth left in our apparel business, very much so.

Not only I think the way we highlighted the women's and youth but even in our men's business.

And that the levers that we still have to pull there obviously with geographies but we also believe with distribution and even more importantly, we believe within our existing doors.

So I think the conservative approach that I think the market as a whole has taken toward apparel is one of the things where ourselves being and continue to be the largest, the number one performing brand everywhere, virtually everywhere we're doing business today.

We continued on that trend.

We continue to outperform.

But I think we're just being, from some of the things that we saw in Q4 and basically without the visibility in 2009, I think we're just going to pace ourselves.

We have got again a great number of growth levers that we can pull, and with apparel it is one of the things that we are just managing on more of a go forward basis.

So let me let Brad take you through a little bit of the inventory components of that as well as get into CapEx with you.

Just on the conservatism in the top line, I think as Kevin was saying the impact on Q4 happened pretty late in the quarter.

So we're trying to get our arms around what the consumer spending behavior is in this environment.

So it is not just a matter of looking at the end of Q4, but how does that look in Q1 of '09 too.

So we will be getting back to you guys obviously in 90 days, and 90 days from now we're going to have a lot more data and information around the behavior of that consumer in this environment.

So we think it is prudent at this time to kind of be conservative and hold off on any specific guidance there.

Secondly, as it relates to the top line conservatism, that flows through the rest of -- a lot of our numbers, not only on the income statement but the balance sheet as well as inventory also.

So, as far as managing SG&A going forward, that matches our conservatism we're looking at as far as the top line goes and also in our inventory management going forward.

On the second question you had on FX, just to kind of give you some more flavor around that.

If you look at the whole year of 2008, we had foreign currency exposure, losses of about $6.2 million for the full year, and that is compared to about a $2 million gain last year in foreign currency for the whole year.

If you look at foreign currency, I could break it up into two components.

First would be our exposure to intercompany balances owed by our foreign entities, which right now for the most part are Canada and Europe.

And then the second part would be transactional foreign currencies.

So I will take the first one, first tier, which is the intercompany piece.

As we talked about in the past, we had some hedging done back at the end of 2007 and through 2008, and that was really on our Canadian currency.

In 2008 towards the end of the quarter of Q4, we implemented some European currency hedging relative to our intercompany balances.

The intercompany piece was the biggest exposure by far we had in Q4, and it was the Euro piece that was the biggest exposure since we did not really hedge that until the end of the quarter.

So, as we look into 2009, you have the intercompany Canadian dollar and intercompany Euro dollar hedged, which should reduce our exposure in those areas.

And currently right now in Q1 of 2009, we're working on hedging strategies around transactions in Canadian and Eurodollars, which is less of an impact right now than the intercompany.

Great.

Thanks very much.

And just one last question.

Can you just remind us so for 2008 what percent of your revenues was international?

For 2008 for the year, 5% of our revenues were international.

Great.

Thanks a lot, guys.

Kate McShane, Citigroup.

I was wondering if you can address how your manufacturing plans may have changed in order to address customers ordering more at once?

Good morning.

We have been fortunate where we have had two types of models in our business very early on.

One is in the at once ordering, and the other one has been the futures program.

And for us, the at once position has been a pretty substantial part of our business and a very successful part.

What we have done in at once is we have been able to shorten leadtimes, take safety stocks and use much more statistical information to work with, I would say, a quick return to the floor.

There's other things we have done too, and I have to call out a credit here to the logistics group, who has been able to utilize the shipments from our factories pretty much to the floor or to the doors of our customers.

That has cut leadtime; it has cut transportation time.

So we have been quicker in terms of responding to at once.

The other component, which is the seasonal orders, based on our leadtimes we have been able to get a read from our customers and have been using that read to put the orders in.

So I think we've got a good balance, and unlike I think other companies, we have always had a substantial part of our business in the at once or replenishment.

So we have developed that skill set, and we feel like we are on target for 2009 with that.

Okay.

Thank you.

And an unrelated question, I know you are not giving guidance for 2009, but can you give anymore color around the marketing spend associated with the Running Footwear launch?

Let me give you a little more color if I could just on sort of the way that we're viewing the market we are viewing in '09.

It may help out a little more context.

But when we last talked to you guys 90 days ago, we felt pretty good about the year and where we were standing.

And what we saw was again the year basically began to get progressively slowed down for us, and that is one of the things that has us again cautiously optimistic about where we are viewing '09.

So basically we're in a position to make some decisions about how we're going to treat our business, and there were two things that we decided we were going to do.

Number one is to protect our brand, and number two is protect our pricing integrity.

And within that, what you will see I think if you were out at retail, you saw that Under Armour for the most part was virtually full-price.

And more importantly than that, we still maintained our number one position in the marketplace.

And we -- of course, one thing we did not do is we did not make speeches.

We did not say we're not going to mark anything down, or we did not say we're going to put everything on sale.

We found ways to be I think prudent about the way we approached inventory and the product that we had out in the market.

One of the things that we're going through as a company right now is very much we're adjusting our model.

We are adjusting our model for being a growth company to learning how to manage our business at the same time.

And I think some of the ways that we have demonstrated our ability to manage that is through I think the inventory.

Not only as clean as we are in inventory out in the market, but we believe as clean as our inventory is here as well.

If there is one thing that we took away from 2008 is that we have maintained the integrity of the growth levers that we have in the business.

Men's apparel, women's apparel, footwear and international are still very much in place in things that we look at and say will very much be an opportunity for us in '09.

So let me let Brad jump in.

Yes, just on top of that, obviously if topline visibility is a little tough, it makes seasonality of expenses a little tough to talk about too.

But in general, what we can point to is the similarity of '09 to '08 relative to a major footwear launch in the first half of 2009 just like a major footwear launch in the first half of 2008, albeit the launch in 2009 is coming in Q1 versus Q2 of 2008.

Obviously in order to support that launch, we need to have marketing dollars behind that support just like we had in 2008.

Overall for the year, though, we still anticipate marketing for the whole year of 2009 to continue to be in that 12% to 13% range.

That is very helpful.

Just in the context of one of your comments with the lack of visibility, have you seen any cancellations in Running Footwear yet, or do you expect that, or is it more an issue with apparel?

No, we have not.

And again, we have been through the numbers, we have been over the numbers, and we feel that we have as best we can to date, we feel pretty good about the way that we're planning for our business internally and externally for 2009.

But again, there has been tremendous excitement around the Running Footwear, just a lot of hype I think a) from our retailers in looking at this as this is the launch of the year.

And again, this is not just an Under Armour investment in driving consumer traffic at retail.

This is our consumers, and these are a lot of cobranded TV, a lot of cobranded print.

You will see Under Armour brand on trucks at Sports Authority, you will see outdoor billboards with many of our partners, and Dick's and Modell's, and we really have between Finish Line and Foot Locker and the way that we are in-store now.

So again, there is tremendous excitement.

I think there's a lot of people that are looking for Under Armour Running Footwear to a) drive a new consumer to them as well as create excitement.

But again, if I'm going to stress anything and sort of temper anything, it is the fact that you are not going to be able to find the success of our Running Footwear launch by Monday or next Monday or on the opening weekend.

So we're going to learn a lot, and I think more importantly we're entering a category for the first time that has wind at its back versus explaining to a consumer why the heck they should ever need to buy a training shoe.

The consumer typically is going to buy a running shoe.

Now we're giving that athlete the opportunity to buy an Under Armour running shoe.

Omar Saad, Credit Suisse.

I wanted to follow-up on the inventory question.

When you guys last talked to us at the end of October, you had kind of put out -- your guidance implied, I don't know, somewhere around 17% or 18%, 24% or 25% revenue growth at the end of October, and then two months later clearly things deteriorated and decelerated significantly.

And you ended up with a pretty big shortfall from where you had been planning.

But inventories still look pretty clean, especially if you back out the footwear piece.

Help us understand where -- what happened to those inventories?

Were you just able to really push back on your supply chain and get them to hold stuff longer?

How should we think about where those inventories wound up?

I am going to let Wayne jump on that.

Frankly, we were a little disappointed that our inventory growth was higher than our topline growth at year end.

But the result would have been that much better had the topline not slowed.

The team has done a good job, and I think there are several things I want to point out.

One, inventory remains a very key focus for this Company for myself, and we have made great strides.

The first strategy we had was to minimize our excess inventory, and that really comes about through buying a little bit tighter, managing the at once business tighter, and buying closer to bookings.

We have also made some progress with our leadtimes.

So the first part of that is progress has been made with how we bought inventory.

An example of that is, you look at our full year, and our topline increased by 20%.

We actually purchased in the year $50 million less.

So great strides, great call-out for the team.

The second part I really want to point out is that when we talk about inventory and taking care of the excess or overage inventory, we have a very, very strong outlet division who has operated profitably at the same time has controlled our excess.

And with the growth in stores last year and the ability to move it through the outlet stores, we have actually started to reduce some of the excess inventory.

And third, really is the fact that our Company is finally putting in the systems and processes that I would expect of a large scalable company in managing inventory.

So I am very happy with the progress.

It was probably a little bit ahead of where we thought it would be, but we're going to continue to see improvement.

We're not finished.

We have a long way to go as you can probably tell.

And, as Brad called out in the prepared remarks, we will see improvements in our inventory turns.

And with our systems in place and processes, I would expect us to continue to improve our balance sheet by managing the inventory.

Then actually I want to ask David a question.

You have been there a little longer stretch now than last quarter, and it is certainly an interesting time to be joining a growth company.

You talked a little bit about other revenue opportunities in different categories for this brand.

What do you see from a profitability standpoint?

Are there opportunities on the margin line, on the cost side, or how do you think about helping the position -- put in place some of the learnings you have had from your prior experiences and perhaps make Under Armour as profitable a brand as it can be?

As you know, there are several components with building profitability, and Under Armour has such a unique position with its being a growth company and there have been so many investments made, that we think we can begin to harvest many of them.

Primarily the three components will be developing very strong and thoughtful business plans many years out, and that will help us control our costs and our investments and sequence them in a very sort of predictable manner.

Number two, we will be able to leverage scale accordingly, and the third big component will be how we harvest and partner with our sourcing partners worldwide and pricing structures to capture margin.

And I would like to turn that over to Wayne Marino to take you through margins.

When David joined, it was great.

The first thing he really said is, how are you looking at your costing and the opportunity?

Because we had fairly consistent and growing volumes in a market where other people were pretty much flat or cutting back, and he has been a great advocate and consistent with having us look at the costing.

And with our supply chain team, there is more opportunity in the apparel margins than we have today.

We're going to be looking at costing on a more detailed level with them.

We offer to our contractors the ability to put volume through.

As a matter of fact, what we have done over the last year or so actually consolidated our base a little bit.

We went from 24 suppliers down to 17.

So we are meaningful within our factories.

But I have to point out some of the savings that we will receive from being more efficient and focused on costing, we're certainly going to want to reinvest some of that back into the product.

So there are many factors that go into gross margin, but from the cost side of it, we will see improvements, and we will also see some improvements in the back half of '09 and 2010 just from the raw materials and the price of oil will also help us with that.

But again other factors I want to caution go into gross margin, so it is not just the costing itself.

Jim Duffy, Thomas Weisel Partners.

A couple of questions for you guys.

First, on the apparel side, have you seen a change in the mix of prebooks versus replenishment, and how do you expect that mix to play out into '09?

Any meaningful changes there?

We have been in close contact with our partners who have been through the Q4 timelines, and we don't see any material -- we have not seen any material change, and we're not expecting any material change that we have not discussed with them already.

Okay.

And then Brad, recognizing that visibility is really tough on the topline, (technical difficulty)-- for a little bit of perspective on the seasonality, in particular the first quarter.

Can you talk a little bit to inventory levels in the channel on the apparel side, and then your footwear, you are doing that all on allocation.

Can you give us a little bit of perspective on how much we should expect in the first quarter?

Yes, if you look at footwear, again, this is tough.

When you look at our overall business, the visibility challenge as far as the topline goes and the portion of footwear or any of our businesses relative to that topline, it is a little tough to get flavor on that.

So I would expect that our total footwear launch, it will be more heavily weighted to the front half of the year than the back half of the year in general.

Obviously from a seasonality perspective, when you look at that, you look at the impact to other parts of the business, gross margins, we call out footwear being a lower gross margin business than our overall business, so that will obviously impact margins in the front half of the year.

And also when we talked about SG&A, again although it is tough to talk about seasonality of SG&A when you cannot really give seasonality of revenues, it is the same as 2008.

We have to support that footwear launch, which is in the first half of the year and obviously earlier in the first half of the year this year versus last year.

Okay.

It seems just from being in the stores, that inventory in the channel, despite the slowdown in volumes, is pretty clean.

Is that a fair assessment?

I would say inventory is very clean right now, and that is something we look at as a tremendous opportunity for us in 2009.

Again, the two things we made the best decisions of, as we were looking at the environment change around us in Q4 was, a), protecting the brand integrity and also protecting our pricing integrity.

So I think we're very proud of the approach that we took at the end of the year last year and how that has positioned us for '09.

So there are no hangovers going into 2009.

We're great from an apparel standpoint, and I think with the advent of something as large as a completely allocated Running Footwear launch and the halo effect that will come from that, especially in the running side as well as what we can do on the -- I think what it is going to mean to our women's business is a real, real positive.

One more question if I may, sneak another one in, do you expect to make progress on the gross margins on the footwear in 2009?

Yes.

We're making steady and material progress, so there is still a big gap between footwear and apparel, and we believe we have more opportunity in the future in both -- in all our categories, as Wayne mentioned earlier.

Thanks so much.

Good luck with the launch.

Robert Samuels, Oppenheimer.

I know you're not giving it any guidance for the year, but just how are you thinking about the first half versus the second half?

I mean internally are you expecting to see any improvement in things in the latter half of the year?

If you look again as far as seasonality goes, not that we can give any specifics on top line, but look at the two biggest growth drivers that we called out in my prepared remarks.

Footwear again, first half of the year launch of footwear obviously impacted that.

We talked about it with gross margin also.

Our direct to consumer channel being a very strong gross driver for us, too.

As it was in '08, we see it continuing to grow in '09.

That channel obviously is much stronger in the back half of the year than it is in the front half of the year, specifically in Q4 with our Web business and our stores.

So I think if you take that in the context of seasonality without being able to talk about numbers, you can kind of see how those two different businesses kind of flow in the year.

Tom Shaw, Stifel Nicolaus.

The first question for David.

You talked about underpenetrated markets.

What are you seeing for opportunities in terms of just further expanding into the mall with some of your partners like Foot Locker and Finish Line and even on the big buck side where we're obviously seeing a pretty major pullback in terms of for this growth for us this year?

Tom, the Under Armour distribution has been beautifully managed.

It is a very tight distribution, and that provides us both in apparel and many of the categories as well.

Footwear is no exception.

While we're entering the mall and we have some very strong partners in the mall, we still will remain in a minority of their doors, which gives us plenty of potential in the future as we continue to evolve and grow the business.

With your relationships with Foot Locker and Finish Line, are those areas where you would expect to expand this year, or is it still kind of a testing phase as the running shoes start hitting some new outlets?

First of all, a) we see a great opportunity there.

It is important for us just to reiterate the fact that these are all door launches with our existing distribution at the same time.

And where are you are going to see really big impact is in some of our key big box sporting goods guys, as well as I think the upside that we have within the mall.

So if there's two things that matter and that we're really focused on, hyper-focused on as a brand, it is relationships and performance.

First of all, I think we manage it very well through the end of 2008 with the positioning of the decisions that we made around inventory with our partners at the end of 2008.

And I think that number one, I can tell you our relationships remain very strong with our existing partners, and the excitement that we have with our new new partners is really I think everybody has done exactly what they promise that they will do, and we are really pleased I think with the future relationship we have.

And, of course, all that hinges on performance.

We know that; we get it.

And I think everybody has pretty good expectations of what the Running Footwear is going to mean.

But I will reiterate the fact that this is really an 11 or 12 month launch in 2009 that will be defined at the end of 2009, again not defined at the end of the week or the end of January.

Okay.

And Kevin, I guess one more beyond the running, which you just illustrated as a longer-term initiative.

How do you look at the cadence for further trainer launches next year, and we even saw a recent article that said you had come out with the soccer boots in May.

Any further detail on those categories?

Well again, we view our brand as a story, and we view the products that we introduce as chapters in the book of that story.

And the thought process is every chapter needs to make sense, and the one in front of it needs to make sense and the one after it.

So first and foremost, we're very proud of the fact that we have been able to take ourselves from cleated footwear just three or four years ago, and now have the ability and the expertise from a team side, too, to be able to launch what we believe is the very best quality product.

What we are looking at, and one thing is important, is we're not forgetting about our training footwear platform either.

Our cadence so far has been football cleats in 2006, baseball cleats in '07, our training shoes in '08 and now running shoes in '09.

Now we definitely recognize that there is a consumer out there who is probably looking for Under Armour footwear in any stretch in 2008.

So the fact that we now have a little variety for them, we're not worried about a large cannibalization.

We are very aware, though, that I think we're trying to position ourselves as a bigger footwear brand in that.

So now as we are looking at saying there is great opportunity for us, a) with Running Footwear because again you're going from an $800 million market to a $5 million market.

We're committed, hyper-committed, to what training footwear will mean for us.

And I think that is probably highlighted by our recent sponsorship around the NFL combines is a good example of that.

We're down at the Super Bowl this year and the NFL experience.

We have got really highlighting because of our sponsorship in outfitting of NFL combine in Indianapolis this year.

Just training for us as a whole is a real platform for this business that we're not going to forget about.

So you will see us come back and be very proud of the training footwear, but again, recognizing the fact that running for us, while it is going to be challenged in the specialty market, we feel good about the technology and that there's growth and opportunity for us there as well.

All right, guys.

Best of luck this weekend.

Jeff Mintz, Wedbush Morgan.

Can you give us some sense of ex the trainers how the cleated footwear did in 2008?

Was there growth in that part of the footwear business?

So, when we talk about commitment to year two and year three of a product beyond just the launch, our football cleats and our baseball cleats are no exception to that.

We stormed into the football cleat business, for instance, in our first year and took greater than a 20% market share.

We raised ASPs.

We took market share, and we did it all profitably.

We're very proud, I think, of that accomplishment, and we understand as well that this is not -- what we have never done is just sold someone a logo.

We say our product is Under Armour long before we put a logo on it.

And so the approach that we have taken with that is consistently getting better.

There's one thing that is certain when you launch product is that year two will always be better then year one, and year three will be better than year two.

As we head into our fourth year of football cleats, I think the response that we have had in baseball cleats, from not only the consumer but particularly the athlete consumer which we're seeing on field.

Again, we have been testing our '09 product on our nine Division One football programs and on more than 30 high school programs that we have out there wearing it.

I think the performance and the feedback has been terrific.

From a performance standpoint, we continue to look to grow market share.

We're not looking to go backwards, and we're looking to take a larger market share in 2009 that we had in 2008.

So we will continue to move forward there, and I think the performance that you will see and you'll hear about us at retail will validate that at the same time.

Okay.

And then on the outlet channel, how many outlet stores did you finish 2008 with, and are there opening plans for new outlet stores in 2009?

We finished 2008 with 25 stores, and we are planning to open a range of at least five and up to possibly 10.

We're going to try to be opportunistic in this environment and see what the marketplace has for it.

But it is growing and commenced, yes.

Okay, great.

Thank you very much and good luck.

Operator, we have time for one more question.

Jeff Klinefelter, Piper Jaffray.

The question is really on your direct to consumer business.

When you look at that in isolation, if you do and if you can, can you give us a sense for the profitability of that business, where it is relative to your expectations and how much more scale in specialty stores would be required to get to your desired level of profitability?

And then Kevin, on not opening anymore specialty stores, is that -- I'm guessing a combination of factors, but does it weigh any more on capital preservation versus an unproven retail model or fluctuating leasing prices at this point?

Let me just start with the direct consumer channel, obviously with 47% growth there, we continue to see that we've got big legs and availability there.

But it is about prioritizing the investments, which I think sort of lays into the second part of your question.

It is one thing that we have done is at Under Armour, we have always had 13 items in our top 10 list as Wayne likes to say.

So the one thing that 2009 has made us to do as a company I think is limit that down to the top four or five where we're going to spend money.

And the question that we ask as we sit around this table is simply where are we going to deploy the resources?

Where are we going to spend the time, the money and the resources of our people to be great.

And we definitely see that there's tremendous upside in our direct to consumer channel.

But as we look at that specialty model, we have got four great stores out there.

We have got four great tests that are taking place right now, and we're still learning a ton.

We're interacting with our consumer.

And the great thing that we have just from insight as we're rolling out our goals for 2009 as a company, we had more than 1 million people throughout all of our stores in just December alone in 2009.

And the question, the information that we can learn is, again, we're not building this Company for just today or even tomorrow as much as this is very much a long-term the approach that we're taking.

We're building a broad foundation, a multibillion dollar platform for a large global brand.

And all those steps -- it begins one at a time, and it begins with our insights, and it begins with our commitment to innovation.

But I think you will see prudent investments around that, and that is why we did not feel that we had to stand on a soap box and demand that four stores would turn into 20.

But we're going to learn a lot, and we're going to listen to our partners, and we're going to make great decisions that make best sense for our brand.

Let me let Brad jump on the end there.

Jeff, on the margin question, if you take a look at the three components of our direct to consumer business -- outlet, specialty, retail and the Web business -- I will work my way up as far as the positive impact to margins, starting with outlet.

Our outlet channel has positive margins compared to our wholesale channel, and obviously outlet plays more of a brand equity, brand integrity play relative to liquidation of inventory.

But we do that profitably.

We do that at margins greater than our wholesale apparel margins actually.

On the specialty store side, obviously margins there would be greater than our outlet channel.

With four stores, though, obviously the impact to the overall business is relatively minor compared to the overall direct to consumer channel.

And at the top end of that would be our Web business, pretty much selling through at full retail price on our Web business as you could anticipate.

That would probably bring the best gross margins to our business overall.

If you look at operating margins, though, it is a little bit of a different take.

Again, the Web probably has the best operating margins of those three, and then when you look at the specialty and outlet stores, you do bring in a little bit more SG&A infrastructure into those.

So from an operating margin perspective, they are relatively comparable to our overall business.

Okay.

Thank you.

That is helpful.

Just one other question -- the last question for I think David on distribution.

You mentioned in your prepared comments that there are opportunities where you are underpenetrated.

I am just curious if you could give a little more color on that, particularly in light of the current environment?

Is this 2009 where you prune unproductive distribution?

Do you net add net neutral, and where are those underpenetrated pockets?

I imagine domestically is what you are referring to?

Yes, we are starting as you look at it, the opportunities for distribution are pretty broad for us.

But again, we're focused first and most intently on growing within our existing partners and continuing to grow where we already have terrific partnerships in sporting goods and the specialty stores, as well as the launch as Kevin mentioned earlier, of a tremendous new channel to access many more people in the mall as well.

The net we're going to continue to look at and view this as a multiyear approach, and we will be very sort of structured and continue to be very planned as we continue to look for places where the Under Armour brand currently has reached and then where there are pockets of customers who have yet to been contacted by our direct channel or existing distribution.

David, just to clarify on your existing distribution when you're talking about your sporting goods distribution domestically, where do you feel like you have -- because you guys have pretty strong presence, floor presence, obviously at Dick's and at TSA and Hibbett.

I mean where do you see do you mean more product categories represented on those floors?

More floor space?

Where do you see that expansion coming from?

As you start to look at it, if you were to walk our stores today, you would see a very strong men's presence, but you would still see a very young and growing women's business and a very early step into the youth category as well.

And you just heard earlier Kevin talk about the footwear channel, I mean the footwear business that we have in the wall.

We're in training, we're in cleated footwear, and we have other categories to expand within existing partners there.

And that is all the time we have for questions today.

Mr.

Plank, I will turn it back over to you for any closing or additional remarks.

If our answers sounded any more certain or deliberate today, it is probably because we are all sitting here wearing Under Armour Running Footwear, which I would encourage all of you to go get a pair this weekend and try them.

Now I would like to leave you with three critical things that we would like you to take away from today's call, though.

First, it is that our grow drivers remain intact.

Secondly, that we're approaching 2009 with the appropriate degree of conservatism, and third and most importantly, we're focused on protecting our strong brand equity.

We remain intently focused on our consumer.

That relationship is what the Under Armour brand was built upon and will ultimately determine our ability to execute on our long-term growth.

We have invested in and protected our brand equity since day one, and that continued focus will drive growth in 2009 and lay the foundation for long-term profitable growth in 2010 and beyond.

And with that, we thank all of you and again encourage you to go out and see Under Armour at retail this weekend.

Thank you very much.

That concludes today's conference.

We do appreciate your participation.

Everyone have a great day.