Under Armour Inc (UA) 2009 Q2 法說會逐字稿

Good day, everyone and welcome to the Under Armour second quarter 2009 earnings results conference call and web cast.

This call is being recorded.

At this time, I would like to turn the call over to Miss Alex Pettitt, Director of Investor Relations.

Please go ahead.

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

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

The words estimates, intends, expect, plan, outlook for 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 it differ from our forward-looking statements are described in our press release, and in the risk factors section of our filings with the SEC.

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

Before we continue, I would like to direct you to our website, investor.underarmour.com.

There, you'll find this morning's press release, and on our webcast page images of the number of the products and initiatives that 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 second quarter and provide an initial 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.

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

Thank you, Alex.

And good morning, everyone.

Our results this quarter demonstrate our continued ability to successfully manage our business.

As a growth company, we possess a diversity of growth levers that allows us to maneuver in a complex environment.

And what you'll hear our team talk about today is why we remain confident in the growth platform, the opportunities that lay ahead for the Under Armour brand, and the building blocks we're putting in place to capture those opportunities.

At a time when so many companies are focused solely on cutting costs and getting lean, our challenge is to accomplish those same things while investing and innovating to drive excitement and newness in the athletic apparel and footwear landscape.

Through all types of economic conditions, one fact remains true.

Consumers rely on the brands that they trust.

As the brand leader in performance apparel, one measure of our performance is to what degree are we bringing newness to the category and delivering on the promise that has earned our consumers' trust?

In Q2, we achieved double digit growth in all of our apparel categories.

Men's, women's and youth.

We delivered these results without compromising the integrity of our growth, and maintained our brand's premium positioning and price integrity.

But what you want to take away from today's call, is while this revenue growth may look relatively strong in the competitive landscape, we have both the capacity and desire to do so much more.

In terms of capacity, we are becoming better operators, each quarter in every area of our business.

David and Brad will both talk about specific areas where this operational experience is directly impacting our bottom line.

And in those areas where we're not making as much progress as we believe we should, we are committed to bringing experienced talent into the organization that will drive that change.

As for desire, our challenge is to ensure that we as grow, we maintain both the energy and high expectations of ourselves that drove us from a small presence in the back corner of our sporting good's partners, to our leadership position in performance apparel.

We are young enough as a team to remember that our early victories were won with hard work.

Taking that level of commitment to our work everyday, and shaping and forming it with the experience we've gained through our growth is what will enable this team to deliver on the promise of our brand.

To maintain industry leadership in athletic apparel, we cannot rest on our laurels.

Innovation does not occur by happenstance.

It takes investment, resolve and insight.

For instance, we recently introduced the Recharge suit.

Recharge is built with strategic compression that stabilizes muscle tissue, and controls post-workout swelling to create a healing environment for the body.

It then lets the body repair itself to a greater magnitude through compression, getting the athlete back in the game faster.

Under Armour athletes across all sports such as Mike Modano, in ice hockey, Heather Mitts in soccer, and Hunter Mahan in golf have all started to incorporate the Recharge suit into their training regimen.

But Innovation cannot solely exist for the elite athlete.

Our challenge is to bring that same level of insight to the needs of the everyday athlete, and to scale that innovation so that it reaches a broader range of athletes.

We will be bringing to market over the next six to 12 months, compelling new materials and technology that will reinforce our position as the thought leader in performance apparel.

The Under Armour brand was founded on the principle of making athletes better, and we'll continue to invest to bring new applications to the next generation of athletes.

While keeping our primary focus squarely on the needs of the athlete, we also remain vigilant about cost controls and prioritization of investments.

During the quarter, we demonstrated an ability to tighten our spending, while continuing to invest in critical areas for growth.

We believe we continue to have the most overcrowded white board in the industry.

The opportunities for Under Armour and new product categories, new geographies and new distribution are as abundant today as they were in the past.

But becoming better operators of our business also means planning our business better, and we have cleaned up our white board to focus on our collective energy on the areas that will have the greatest return for both our brand and, of course, our shareholders.

This growing financial discipline positions us well for the future, as we better funnel investments toward those areas with the best return.

Over the last several years, we've demonstrated our ability to diversify our business and build a compelling platform for growth.

As we enter these new businesses, we recognize we'll not always be perfect, but our commitment to you is that we become better operators over time.

Last quarter, we discussed that we had planned on training footwear business to be down in 2009, as we plan conservatively given the introduction of Running Footwear in January.

Our results of training in year two, even with the addition of a running assortment tell us that the category of performance training is relevant to our consumer.

They get it, and they want products specifically built for it.

We're going to leverage our authenticity in this category to deliver the best training solutions in both apparel and footwear, raising the bar for the industry and growing the overall category.

As we've discussed, there are three key measures for our entry into Running Footwear.

First, great product, that delivers on the Under Armour promise.

Second, retailer support from all three channels that we entered.

Big box sporting goods, athletic specialty, and run specialty.

And third, and most importantly, consumer acceptance from both our core, as well as the broader consumer demographics that running takes us to.

Based on what we've seen in our six months since airing the Running Footwear market, we believe we checked the box on all three measures and that we're here to stay.

Over the long-term, we'll measure our success in new categories such as Running Footwear by our ability to earn equity with an ever-expanding core of athletes.

To that end, we've begun to put the team in place that will help us earn that position in footwear.

We recently announced the addition of Gene McCarthy who will join us as our Senior Vice President of footwear in August.

Gene joins Under Armour with more than 20 years of senior level experience in our industry.

We are excited about the recent additions to our team, and the impact we believe this will have over the long-term.

David will speak shortly about the continued progress we've made in building the team to support Under Armour's development into a major, athletic footwear brand.

The strength of the Under Armour brand has enabled us to enter new categories, new geographies and new distribution.

We took a fairly aggressive approach to the Running Footwear market in year one.

And now that we're here, we have a better understanding of the things that we did right, and certainly some opportunities to improve.

There is a learning curve associated with any new business.

The key for us as always, is that we learn quickly, we adapt, we correct, and we move forward.

Our growth story remains simple, and our potential remains great.

We are the athletic brand of this generation, a performance brand born on field, with a growth platform focused on delivering the best head-to-toe solutions for athletes across the globe.

We're proud of what we've accomplished, but will continue to hold ourselves accountable to a higher standard.

We are committed, we are energized and we're confident.

We are on a mission.

I will now pass it over to David for some color on our results and business strategy.

David?

Thank you, Kevin.

Our second quarter results validate that the growth platform we've built provides with us multiple levers to pull to generate growth.

Apparel revenues were up 16% in the quarter, as male and female, adult and youth athletes continue to vote for our performance apparel solutions.

As we look ahead, we are compelled by the potential for UA, we see in gender, category, age and distribution.

Our challenge is not to find more platforms for growth, but to invest appropriately and accelerate the capacity of our organization.

What I would like to focus on this morning are some of the strategic and operational initiatives we're undertaking to activate and manage the platform, as well as our plan to prioritize our investments, against those opportunities while continuing to deliver growth.

Kevin spoke earlier of learning quickly, adapting and correcting.

One area where we see this manifest itself is the first half of 2009 is Europe.

While our business is still largely concentrated in the US, we continue to make progress overseas.

International revenues were up 51% for the quarter, and 48% for the first half.

Since entering the European market place, we've learned a great deal about our brand and the opportunity.

Our current performance reflects a product strategy that has become more attuned to the needs of the European consumer, and a distribution strategy more concentrated in specialty.

We will refine our strategy and without material investment, continue to make progress and drive results.

In our direct-to-consumer business, we made the decision last year to focus near term on our e-commerce and factory house opportunities, and slow the rate of investment in specialty retail.

Direct-to-consumer maintained its strong performance for the first quarter with net revenues up 37%.

We will utilize this area of business to connect with an athlete we are not currently reaching, and to build deeper connections with our core consumer through branded content on our website and in our stores.

We control the pace in our direct-to-consumer platform, and have opportunities to scale this business in the near and midterm.

Now, on to footwear.

Under Armour has offered non-cleated footwear for little over a year.

We've consistently said that we'll approach all new categories and geographies with patience, recognizing the need to learn as we grow.

We're getting better at this with each season.

And we understand the challenges involved to become a consistent player across the broad footwear spectrum.

As Kevin discussed earlier, we've achieved a number of objectives with our initial entry into the Running Footwear market.

We delivered a good product in a technically demanding space with many entrenched competitors.

We introduced Under Armour footwear to two new distribution channels, athletic specialty and run specialty, in addition to our existing sporting goods distribution.

And the brand was accepted by the footwear consumer in all three channels.

But the opportunities for Under Armour footwear are vast.

And we will continue to refine our strategy.

We have learned over the past six months not only what we have, but also what we need.

First, we are going to further dial in our price value offering to the consumer.

Improved sourcing, product and material engineering are parts of the equation.

The second is recalibrating our seasonal demand forecasting.

And finally, is the development delivery of our next technology platform in footwear.

We are building the foundations for a long-term successful footwear business.

Each new season and every new year add to our knowledge set moving forward.

It is important to maintain our learning, and want to enter 2010 in the best possible shape at retail with our run footwear.

To do so, we're going to mark down some of our current products to increase velocity, and make room for the improved offering in the back half of 2010.

What we've learned being in the footwear business for over four years is significant.

But I'm confident the new leadership we've added to our footwear team dramatically accelerates our learning curve.

As Kevin mentioned, we recently hired a new head of footwear, Gene McCarthy.

Gene was most recently the Co-President of the Timberland brand and prior to that, held senior positions at Reebok and brand Jordan.

Gene joins another recent addition to the Under Armour footwear team.

Gavin Ivester, our design and development consultant.

Gavin served as a senior Vice President and GM of the global footwear division at Puma.

And also held several leadership positions within the Nike footwear design team, and began his design career with Apple.

This infusion of decades of industry experience and world-class design to our existing team is the first step to bring new skills to our strategy of becoming a meaningful performance footwear brand to an ever expanding audience of athletes.

Moving on to U.S.

apparel business.

Our strengths are more apparent in the apparel area, and I believe the opportunities are equally clear as we add to our organizational capacity.

In our current distribution, we believe we can continue to gain floor space, as we prime our product engine to establish better seasonal flow and category extensions in sports where we're still building equity.

Our R&D efforts, another area where we are laser-focused on improving our capacity, center on delivering relevant innovation to our consumer.

Earlier, Kevin described one of our exciting innovations for this fall, the Recharge suit.

Recharge represents tip-of-the-spear innovation and commands a premium price point at nearly $200 for the top and bottom.

And we will continue to invent ways to deliver innovation to a broader base of athletes as well.

More on that in future calls.

As the leading brand in performance apparel, we possess the capacity to dictate price and value.

We spoke last quarter about opportunities we see to take costs out of the manufacturing process.

Our core basic programs drive large volume and provide us with obvious targets on where we can focus our efforts to really move the needle on cost without compromising quality.

The supply chain team was able to reduce apparel, product and transportation costs for the back half of the year, And we're reinvesting some of these savings by offering the consumer greater value in certain core basic programs.

Ultimately, by offering more value in core basics, and expanding around those with introductions of new, more technical products, we believe we can tap into more athletes and can continue to grow our apparel share.

Over the years, the scope of the Under Armour brand has expanded.

We have entered many new markets, and tapped into the needs of athletes across many sports.

As our brand speaks with a louder voice to more consumers, it is critical we remain close to our consumer.

Consumer insights and product innovation have always been the cornerstone of the Under Armour brand.

Our original compression T-shirt came from a single key insight and through that, we were able to serve the needs of athletes across sports.

While other brands rely heavily on markdowns, and shift their assortments to basics, we're recommitting to insight-led development.

We've become more vigilant in the study of our athlete.

We'll improve our capacity for content creating great product for the athletes to generate demand.

Greater consumer insights research and analytics will help us understand the consumer segments and product categories with the greatest untapped potential, and craft more strategic plans which accelerate our success path.

We will couple these learnings with distribution mapping we're performing, to then determine the best vehicle to deliver the brand to those underserved athletic segments.

Under Armour earned its reputation amongst athletes by delivering a superior product.

And we will secure our position in the global athletic apparel and footwear industry by raising the bar each and every season.

We are proud but not satisfied with what our organization has achieved in the past.

We're creating a more nimble, responsive and sophisticated team focused on the opportunities with the best return.

And all the while, we'll drive greater coordination and efficiency in how we execute.

We are not content with being merely good, because our brand and competitive advantages give us the opportunity to be great.

The multitude of our growth vehicles, our brand power and the strengthening balance sheet give us the ability to be patient, and to optimize our time and investments.

And though we're making strides, we have much to do to reach the potential for the Under Armour vision.

It is clear that our organizational capacities need to continue to grow.

My focus is on accelerating our capacity, by aligning the organization strategically, improving our decision making processes, and most importantly, building the team that can deliver on the promise of the Under Armour brand.

You have heard today about where our initiatives are starting to bear fruit, along with some opportunities for improvement.

For Under Armour the question is not if we should invest, but where we should invest.

The runway for our brand is tremendous.

As we gain experience and expertise, we will drive greater alignment across the organization to create a potent combination of product development, distribution and storytelling to transform Under Armour into a global performance platform.

With that, I would like to turn it over to Brad.

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 second quarter financial results.

This quarter illustrates the financial discipline we have developed within the organization.

We managed our costs effectively, continued to invest in critical areas of our business and strengthened our balance sheet.

These are all keys to putting us on a path to drive long-term value creation.

Our net revenues for the second quarter of 2009 increased 5% to $164.6 million.

Year-to-date, net revenues are up 16% to $364.6 million.

Apparel net revenues increased 16% during the quarter bringing our year-to-date growth rate in apparel to 8%.

As mentioned earlier, the training footwear business was planned down in 2009 with the addition of Running Footwear.

During the second quarter of 2009, we anniversaried our May 2008 trainer launch, which as anticipated, offset much of the growth in other areas.

As a result, footwear net revenues decreased year-over-year in the second quarter.

For the first six months of 2009, footwear revenues were up 51%.

Second quarter gross margins were 45.1% compared with 45.3% in the prior year's quarter.

There were several puts and takes that impacted gross margin.

First, in order to prudently manage our excess inventory, we increased our apparel liquidation sales above historical rates, impacting our year-over-year gross margin.

These liquidation sales still represent a very small portion of revenues, and allow us to profitably sell excess apparel inventory, while helping to free up working capital which we feel is important in the current environment.

In addition, as David discussed earlier, with more visibility to our Running Footwear performance, we increased our reserves for footwear allowances and returns in the second quarter.

Finally, these items were offset by improvements in apparel product margins, as well as the strong net revenue growth in our higher margin direct-to-consumer business.

Similar to the proficiency we have achieved in apparel, we believe that experience gained in newer businesses such as footwear, as well as optimization of product engineering and sourcing will allow us to offset some of these factors long-term.

SG&A as a percentage of net revenues decreased to 43% in the second quarter of 2009, compared with 43.2% in the prior year's period.

As a percentage of net revenues marketing declined to 12.9% in the second quarter, compared with 14.4% in the prior year.

Partially offsetting this were selling expenses which deleveraged due to the continued expansion of our direct-to-consumer channel.

Operating income during the second quarter increased 3% to $3.4 million, compared with $3.3 million in the prior year.

Our effective income tax rate in the second quarter was 40.9% compared with 44.7% in the second quarter of 2008, due to certain one-time items recorded during the current year quarter.

We are projecting our annual 2009 effective tax rate to be approximately 100 basis points improved from our 2008 effective tax rate of 45.3%.

Our resulting net income in the second quarter rose 5% to $1.4 million.

Second quarter diluted earnings per share remained at $0.03.

Year-to-date, our EPS is $0.11 compared to $0.08 in the prior year.

Please note, the Company adopted a mandatory EPS accounting rule in 2009, which retroactively reduced our EPS for the first six months of 2008 from $0.09 reported last year to $0.08.

Now to the balance sheet.

Our balance sheet continues to strengthen, and our efforts to protect our liquidity are paying off.

Total cash and cash equivalents at quarter-end increased $66.2 million to $79.5 million, compared with $13.3 million at June 30, 2008.

Cash, net of debt increased to $59.2 million at quarter-end compared with net debt of $16.3 million at June 30, 2008.

We currently have no borrowings outstanding on our $200 million credit facility.

Net accounts receivable decreased 17% on a year-over-year basis, which was significantly below our net revenue growth for the quarter.

In addition to the strong performance of our collections team, part of the improvement in accounts receivable came from the higher mix of direct-to-consumer sales, and a year-over-year increase in the allowance for doubtful accounts.

Inventory at quarter end decreased 1.4% to $181.4 million compared with $183.9 million at June 30, 2008.

In addition to improved inventory management processes, our inventory balance at quarter-end benefited from apparel liquidation sales mentioned earlier, strong performance of our outlet stores, and an increased level of direct shipments related to footwear.

We expect our inventory growth to be below revenue growth in the fourth quarter of 2009.

We are pleased with the stabilization of our inventory growth over the past several quarters, but longer term, we will continue to strive for improved inventory turns to strengthen our cash position and working capital.

Our investment in capital expenditures in the second quarter was $4.5 million bringing our year-to-date CapEx investment to $13.2 million.

We continue to anticipate 2009 CapEx to be in the range of $30 million to $35 million, below the $41 million invested in 2008.

Summing up the balance sheet, invested capital net of cash decreased year-over-year while we still achieved double digit top line growth for the first half.

This is another indication of our improved inventory management, and points to the opportunities in our balance sheet for greater efficiency.

We now have improved visibility to our business and as such, we would like to provide an initial outlook for 2009.

It is important to note that we remain cautious on the remainder of the year.

And our outlook assumes there is neither a material improvement or deterioration in consumer spending trends.

With a great deal of back-half consumer activity centered on the upcoming back-to -school and holiday seasons much remains to be seen.

However, with our current level of bookings, and trends in our at once business, we are estimating full-year net revenues of approximately $810 million in 2009.

In addition, as discussed last quarter, we do not anticipate back half revenues in 2009 to be as heavily skewed towards the third quarter as they were in 2008.

Full-year gross margins are anticipated to be down year-over-year due to a number of factors.

First, a majority of our top line growth is anticipated to come from our lower margin footwear business in 2009.

Second, as discussed earlier we are recognizing a higher amount of reserves year-over-year related to our Running Footwear.

And third, there is the impact of the increased apparel liquidation sales to third parties.

Apparel liquidation and anticipated footwear reserves will have a pronounced impact on third quarter gross margins.

However, assuming continued strength in our direct-to-consumer business, fourth quarter gross margins are expected to be at least flat year-over-year.

We are still planning 2009 SG&A dollars to grow in the low teens on a percentage basis year-over-year, and do not anticipate any significant change in the timing of our SG&A spend as compared to 2008.

For the full-year, we continue to expect to invest in marketing in the range of 12% to 13% of net revenues.

Based on our current top line projections, gross margin direction and planned SG&A, diluted EPS for the full year 2009 is currently expected to be $0.80 to $0.82.

We maintain a cautious view on the consumer spending environment, and will continue to focus on effective cost management and liquidity.

Combining such diligence with powerful brand equity, and a compelling growth platform will strengthen our ability to be a growth company, balanced with greater profitability.

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, sir.

(Operator Instructions)

Our first question comes from Omar Saad with Credit Suisse.

Please go ahead, sir.

Thanks, good morning.

Hey, good morning, Omar.

On the apparel side of the equation, could you help us understand kind of -- I think it came in better than a lot of us expected, showing some strong resiliency after a couple of quarters of slower sales growth.

Could you help us understand like how much of that was from distribution growth versus comp growth, versus ASPs?

What role did ASPs play and kind of men's versus women's and kids, if there was any disparity in the growth level in the second quarter on the apparel side?

Thanks.

Omar, this is David.

We actually saw a pretty broad-based acceptance to apparel in the quarter.

As I had said earlier, we saw -- as Kevin mentioned, we saw success in men's, women's and youth, so it was broadly received.

In terms of actual distribution, we saw it with some key strategic account success as well as strength in our direct-to-consumer channels as well.

Was there a big change in the amount of distribution you had kind of year-over-year in apparel?

No.

No.

Okay.

And then on the ASP side was there much change?

Sorry.

Not material.

Okay.

Okay.

Alright.

Thank you.

I don't want to take up too much time.

Hey, Omar.

Thanks very much.

We'll take our next question from Kate McShane with Citi Investment Research.

Please go ahead.

Would you mind repeating what you said about inventories in the back half?

Did you say you expect them to be up in line with sales?

Yes, Kate, this is Brad.

At the end of Q4, we expect it to be slightly below our sales growth for the year.

Okay.

Right now, Q3 probably relatively flat to maybe up a little bit, but more on Q4 to be down year-over-year compared to the revenue growth.

Okay, great.

And then, in terms of liquidation sales for apparel, how should we think about that for the second half, relative to what you saw during the second quarter?

Kate, this is Brad again.

So, I think, you know, when we look at apparel liquidations, I think it is important to note, again, we talked historically about how we've handled liquidations on the apparel side.

So we have our choice here of moving them through the outlet channel, our outlet channel, moving them through third parties, and also holding on to that inventory maybe for future outlet sales down the road.

We thought in this environment first of all, that, again more of a balance sheet liquidity play in this environment, we thought it was important to really look at our inventory, and really make sure that we're as clean as possible going into next year.

Also, if you remember, we had Q4 of 2008, the destocking and retail that obviously puts more pressure on our inventory in the front half of this year.

So, really, that's just looking at really more of a one-time event here in 2009.

Again, it is pretty small piece of our revenue overall.

Not material change in our strategy there at all.

Just more of a focus in this year to clean up our inventories as we get towards the end of the year.

But again, we have the option of also moving our inventory through our outlets, very profitably also.

Again, I think when you look at timing of this, probably more pronounced in Q3 versus Q4.

Some of that is just by design as far as the number of units we're moving, and also some of that is comparing this year versus last year and the different business environments in Q3 and Q4 also.

Okay.

Great.

That's very helpful.

Thank you.

We'll take our next question from Michael Binetti with UBS.

Please go ahead.

Hi, guys, congrats on a nice quarter.

Thanks, Michael.

Just a follow-up to a prior question on apparel.

I just wanted to see if you could give us a sense of how men's apparel trended in existing distribution, versus distribution that was new for you guys this year.

Then I have a follow-up.

Hey Michael, this is Kevin.

So let me jump in, if I could, just a little bit.

First of all, in terms of the greater environment I think, we're seeing and feeling a lot of what everybody is seeing out there.

The difference that we have going for us, is the momentum of the Under Armour brand.

So, I would imagine being in the middle today and defining I think we've talked about a bar bell effect in the past.

Is that people are either going low, and either want to be down there or you want to be up high.

I think the way that we are currently positioned is as a premium.

I think we are seeing and feeling the benefits of that.

Do I think do our decisions to protect our brand, and especially our pricing integrity?

There is not a lot of Under Armour on sale in the market place, compared to what other brands are doing, so a lot of the comps that you are hearing about and success that other people are having is really being driven by price.

And I think what you're seeing drive the Under Armour brand is brand, and great product.

So, we are really coming back and we are focusing on innovation.

And that's why making such a big pitch around the Recharge suit has been very important to us.

And I think, again, going forward, you're going to continue to see more and more compelling products out at retail.

In terms of distribution, we did not have -- our men's comp and what you're seeing in the performance out there, is we are -- you're watching us adjust our business.

We're continuing to take the definition of our compression business, and redefine that as our base layer business.

We're adding things around some core basics for us.

Our core compression.

We're adding things like the fitted component.

So, we're not really standing still and just waiting for the market sort of to come to us, as much as I think that we're really taking the fight to the market.

And we're being really proactive about the way we're addressing the business right now.

And that's -- I think that's coming through in some positive momentum, particularly in our apparel business.

Alright.

Just a quick follow-up.

Thanks for that.

And it looks like your guidance for revenues for the second half, if my math is right, implies about an eight point slowdown versus the first half.

And that's versus a 15 point easier comparison in the second half of '08.

I know you guys are planning conservatively, but perhaps you can give us details on what you're seeing that's making you more conservative in the back half.

And finally how much of the back half revenue do you expect to come from new categories like footwear versus core apparel.

Yes, Michael, this is Brad.

So just again, to at that, obviously, we're really happy with our first half of the year apparel growth.

We do remain a little cautious here towards the back half of the year, especially on the consumer spending in Q3 and Q4.

That's not a thing we like to predict obviously going forward.

So, we're going to remain cautious on our outlook for the back half of the year, specifically around apparel.

We have definitely seen less volatility later in the first half of the year, than we did earlier in the first half of the year.

But again, we are going to be a little cautious here as we look towards consumer spending in Q3 and Q4, and what that means with the back-to-school season and the holiday season.

As far as you look at, apparel is definitely the major driver of the back half of the year.

Footwear for the most part at this point, I would say if you wanted to break footwear out, first half versus second half, probably about two-thirds of our footwear has shipped in the first half of the year versus the third shipping in the back half the year.

So, definitely, more weighted towards the apparel side.

Thank you.

Yes.

Michael, this is David McCreight.

And while we posted good numbers for the second quarter and [surprise], we believe we still have a long way to go, and have much, much more opportunity to execute, and to grow the apparel business within the great brand platform we have.

As Kevin alluded to, you should see more of that in 2010 and 2011.

And our next question comes from Dan Wewer with Raymond James.

Thanks.

The question on the increased reserves, on returns for the running shoes, and the increased amount of clearance.

What is the reason for that, given that product is so early in its life cycle?

Was it the reflection of the pricing strategy might have been a bit aggressive for this environment?

Or was it reflecting more maybe some technical features with the shoes were not well received?

Hey, Dan, it's Kevin Plank.

First of all, let me just chip in here and then I'm going to let Brad finish it up.

First and foremost, is that we've entered this new category.

We called it a launch.

We're officially in the running business.

And what we've seen, and in all indications point to the fact it is going to be a long-term viable business for this Company and this brand, and all of the indications frankly point to that.

We had three objectives when we kicked off in getting into the running business.

Number one was to have a great product and we feel like we achieved that.

Secondly was retailer support and I couldn't tell you from the bottom of our heart just how committed our retailers have proven to be, and what a great job they've done for us across the board.

And thirdly, is consumer acceptance.

We think that, again, we checked the box in all three of those.

And with that was distribution.

We really focused on three primary distribution channels.

The first thing, athletic specialty, also run specialty which was effectively new for us.

And then, of course, our committed big box partners.

And most importantly, we found out that the brand was not rejected from any one of these.

Now, as we did that, we planned for this business back in the beginning of 2008, and planned our production and other things accordingly.

And frankly, we made decisions throughout that process to adjust as best we had the information coming in for 2009, as we continue to do.

The world changed a little bit.

But I think that we feel good about the business that we've put in place, and we can continue to make the proactive decisions.

And some of those decisions, of course, begin with our team and the people that we're putting around the table to help us make those calls.

But also it comes back to inventory and some of the other things we're doing, which is where Brad and his team come in.

Yes Dan, let me add on to that a little bit.

Again, if you look at where we are today versus where we were at the end of the first quarter, we have six months of information of sell through now on the Running Footwear side, which is double the information we had at the last time we chatted, at the end of Q1.

So, really, with more visibility now to say what we -- what the sell through rate is the front half of the year versus what we sold in, that really led us to make some decisions around what we do going forward.

From an assumption perspective, we're assuming the sell-through rate of run footwear in the back half of the year is similar to what we see in the front half of the year.

So again, from an assumption perspective, that's what we're planning for in the back half of the year for run.

Couple of other things to -- just real quick -- one of the things David talked about was again making sure we're set up for long-term success in footwear.

So next season, in 2010 is the first step in that.

And we wanted to make sure that we were as clean as possible going into 2010.

So that's why we thought it was important in the back half of 2009, to take appropriate measures to make sure that we're clean going into 2010.

And just to make sure I understand, the pricing strategy, earlier you noted, I think it was in David's comments about adjusting the price value proposition, so I guess that's implying that the 2010 product line will be a bit more affordable priced for the customers than what we saw in 2009.

Dan, price value is a combination of sort of perceived value of the product.

And what we'll be dialing in will be in some cases, perhaps a more experienced view on when we're -- what the value is of each shoe.

But as it gets into, for example, we were able to, in year one, launch and in our space, deliver a top ten shoe, number six out of the box.

So where -- we've shown examples of where we can dial it in correctly.

And there are other places where we think we have to adjust.

For 2010, you are actually going to see us continuing to add new technologies.

And you may see price points in some areas go up and then you will see some come down, as we want to embrace and bring more athletes into the business.

Great.

Thank you.

Our next question comes from Robby Ohmes with Banc of America.

Oh, thanks.

Good morning.

Just a couple of quick follow-ups.

The -- really footwear focused, I was wondering if either Kevin or David, you could talk about the hiring of Gene McCarthy, and what drew you to him and how you envision the footwear division ramping up, and from both an expense standpoint as well as maybe timing of a launch of basketball, and sort of what the goal is, and related to that when we would see footwear in Europe would be one big question?

Thanks.

That's a loaded question, Robby so I'm going to let David start when I'll pile on at the end.

Let me note them all down for a second.

All right.

Good morning.

When we were looking for a leader, it was consistent with Kevin's vision for leaders within Under Armour bringing world-class experience, the ability to really accelerate the capacity of our organization to match the reach of the brand, and the desire for the marketplace for Under Armour to be an excellent performance footwear Company.

And so, we went out into the industry and we spoke, as you can imagine, with many people and Gene fit that bill.

You can see the breadth of his experience suits that quite nicely, adds another, clearly another skill set notch in the basketball area as well as an intimate relationship with the market place.

As it relates to basketball we currently are already on court.

As you know, we have a -- one of the top ten picks in the NBA.

Brandon Jennings is going to be playing this year with the Milwaukee Bucks.

We have eight to ten D1 schools.

We have 20 undeniable high school programs that we're working through.

And we're continuing to develop a great technology, and a great shoe to take to market when we think we're ready to do so.

Europe, we'll be testing footwear in Europe in the near future.

We'll continue to read the market place there and roll out when appropriate.

Hey, Rob?

Yes.

I was just going to pile on.

I think just some color just around the footwear category or business for us as a whole.

We've really -- one of the things we listened and we learned about when we got into this back in 2006, and really started preparing for that all the way back to 2003, was that footwear and apparel, they just don't leverage very well.

There are some things you can coordinate on the back end, but for the most part, you're building a brand new business.

And so I think what you've seen us do, really beginning of starting to put -- pour dollars in as early as '03 and '04, it was really about our team.

And so, again the addition of Gene has been well-received, and is going to be a really big help to our team when he gets going here in a few weeks.

In addition to that, from an infrastructure standpoint, there's so much opportunity with us in footwear.

And if we had a message today, it's number one that our team is, I mean they're working lights out number one.

But number two, is that we can do so much more.

When you look at the margin opportunities that we have as a business, and you guys extrapolate the numbers of where we're probably coming in footwear versus where some of our competitors are.

I'd say there's an -- we estimate there's more maybe than 1,000 gross -- bips of gross margin improvement available to us as we begin to figure this out.

And so I believe -- there is no magic formula or anything else that any of these other brands have.

It is a fact Under Armour, we're in this business.

The consumers accepted us in this business.

We're going to grind, we are going to work hard.

We're going to build the right team of people around it.

And you're going to see us continue to improve every single day, not just year or month.

But that's the approach and I think that's the mentality that we have.

It starts at a number of different places, but most importantly it starts with Under Armour's commitment to saying we're going to be a great athletic footwear brand.

That sounds great, Kevin.

Hey, thanks so much.

Thanks very much, Robby.

And we will take our next question from Jeff Mintz with Wedbush.

Please go ahead.

Thanks very much.

Good morning, guys.

Hi, there.

Could you talk a little bit more about your direct-to-consumer business.

What's the current store count, and is it up or down in the second quarter?

We saw -- as we discussed earlier, we're going to be building -- adding additional stores primar -- in the factory house area, and we'll be ending the year approximately at 35, that we are going to look -- continue to look for opportunities.

As you can imagine in the market place with a brand as appealing as Under Armour and the state of the real estate market, there are increasing opportunities for us to grow there.

And in through the quarter, we -- the direct-to-consumer results were fueled by comp door growth as well as new store count growth.

And what was the store count at the end of the second quarter?

28.

Factory outlets.

Plus four specialty stores.

28 outlets and four specialty.

Ok, great.

And then Brad, can you just give us a sense of how much did the gross margin benefit, (inaudible) product mix actually shifted a little bit back toward apparel this quarter compared to Q2 '08?

Yes.

I think when you look at the benefit on the apparel sourcing side and product mix, it was about a 60 basis point improvement year-over-year in the second quarter.

Okay.

Great.

Thanks very much.

Good luck.

Thank you.

Our next question comes from Michelle Tan with Goldman Sachs.

Please go ahead.

Great.

Thank you.

I was wondering if you could give us any color on how much the closeout sales added to the apparel top line this quarter.

And whether that pulled back -- or pulled forward any of the second half business versus being mostly seasonal for first half.

Michelle, Brad is going to answer that.

I got it, Michelle.

Really, again, the apparel liquidation number is relatively small in total, to our overall business.

So, it really doesn't impact the top line too much, and there was not really any significant fluctuation from Q3 to Q2 as far as the (inaudible) either.

Okay, great.

And then as far as kind of a follow-up to the last question, I would have thought footwear penetration being down and direct-to-consumer being up would be a bigger tail wind to gross margin.

Can you help us think about whether the apparel -- how much the apparel margin's changed year-over-year versus the footwear margins year-over-year?

Yes, we talked -- well obviously in Q2, we just said that the apparel sourcing improved by 60 basis points.

So I think when you look to the back half of the year, again, our call outs there really -- apparel liquidations, and the footwear reserves, more pronounced in Q3.

On Q4, more flat year-over-year.

And that's really more a reflection of our direct-to -consumer -- the strength in our direct-to -consumer business offsetting some of those in Q4.

And also obviously an easier comp in Q4.

But I do like to point out, there is a lot of initiatives we're working on right now, a lot of them are in the margin area, along with some cost area.

We're not really going to count on those, until we know they're going to be successful, and then we know the timing of when those will hit.

And so we're not just sitting here.

We're actually working very hard on trying to get some better numbers here, as we go into Q3 and Q4.

Understood.

Thanks for the help and good luck.

Thanks, Michelle.

Our next question comes from Chi Lee with Morgan Stanley.

Please go ahead.

Hey, good morning, guys.

Just -- you talked -- several points about specific learnings related to running footwear.

Can you be a little more specific about what that has been.

Would it have been challenges related to the product?

And how have you really recalibrated for the second half deliveries?

Well, Hi, Chi.

David McCreight here.

What we did, as Kevin had mentioned, we focus in on delivering a technologically sound product.

And so we have had learnings across all areas, from product point of view, we continue to improve the cushioning and ride of the product.

We continue to work closely with our athletes to make sure that the technology platform is relevant and improving performance.

We've learned a great deal about the distribution.

As you mentioned, we're in running specialty stores as well as mall-based athletic specialty stores, and the pace and flow of deliveries, the pricing mechanisms, the breadth of industry and the breadth of assortment and finally, we've also looked -- worked on our supply chain.

We have a great deal to learn still about making great shoes efficiently, and bring them to market accordingly.

So we're learning in all areas.

This is the first season of what we believe is going to be to be a multi-year growth platform for us, and we are going to get better each year.

But we're absolutely committed to the space.

And we are going to learn at a very rapid pace, be it people, marketing, process, all of the above.

Chi, this is Kevin.

One of the things we realize, we came in with a business that had an opening price point of $90 where the meat of the business -- in fact in sporting goods, which is our wheel house, is a few dollars below that, actually more than $10 below that.

Athletic specialty as a whole, it was a new category for us.

And we were a new brand to a lot of these guys.

So I think there has been a lot of learnings on both sides, and more importantly, the business is intact, and we are going to adjust.

And you'll see us make some proactive decisions to move forward.

One thing that we should note as well when we talk about running footwear is really the success that we continue to see in our training footwear.

The cannibalization that we predicted was not -- it didn't happen as much as.

And so, I really just want to emphasize we're not going to forget about training, and we think there is a real business there, the consumer really believes in the Under Armour brand there as well.

And they continue to see us drive innovation and put great product around training footwear.

That's helpful.

And then, just one more question on the apparel liquidation.

In terms of timing of when you actually saw those liquidation sales occur in the quarter.

Was it more back half loaded versus front half loaded?

This is Brad.

It was pretty much even throughout the quarter.

Great.

Thank you very much.

Our next question comes from Sean McGowan with Needham & Company.

A couple of very quick ones, and then a question about the liquidation sales as well.

Can you give us some sense of the relative strength in -- relative growth rates of men's, women's and apparel -- I mean youth, of which of those apparel segments were growing faster?

We're not going to get into that detail, but we just leave it said that all three segments grew.

And it's very solid and very broad-based.

And from the release, it is not entirely clear whether all three grew double digits, or the whole thing in aggregate grew double digits.

Yes.

All three grew double digits.

Okay, helpful.

Currency impact on sales and EPS in the quarter?

Any meaningful impact?

Nothing meaningful, Sean.

This is Brad, nothing meaningful there.

The question then on the liquidation sales, is -- has there been a shift in your strategy on how to deal with that?

I mean I thought in the past, more of the kind of stuff that would wind up with other companies in a third party outlet would go into your own stores.

Are you using third party outlets more now and can you talk about that?

No.

We're not.

Again, I want to reiterate this is a very small percentage of our overall sales.

And what you're seeing is more just the one-time cleanup effect from the destocking in Q4.

And any change in the model, we will signal to you all in future calls.

Okay, thank you.

Our next question comes from Jim Duffy with Thomas Wiesel.

Please go ahead.

Thanks.

With regards to the gross margin commentary, can you quantify the apparel gross improvement that you saw or expect to see from process and cost savings?

Yes, Jim, this is Brad.

For Q2, we said apparel sourcing was about a 60 basis point improvement year-over-year.

We will probably continue to see something similar toward the back half the year relative to apparel sourcing.

And, hey this is David.

We also -- just like we've talked about the other areas of the company, Wayne and the rest of the supply chain team are working hard to -- we believe there's still more head room ahead in apparel margins in the coming years as well.

And then you've spoken about the opportunity on footwear gross margins.

Is there low-hanging fruit that's near-term opportunity, or is the product cycle such that improvements might be delayed well into 2010 or even beyond?

Jim, we're working on -- I mean we are currently right now in 2011 working on products, so it is a combination of relationships with suppliers, the combination of our expertise, designing cost savings into product as well.

And really just being smarter about it.

So all of those things come in time.

All of those things come as the team continues to play together.

So again, putting the right team of people around the table, the right team of experts that bring that experience to the Company, and then just letting them work together.

So I think -- I don't know if we can declare a date, but I think you'll see consistent improvement, particularly on the footwear side.

So even in 2010, we should see improvement on the footwear side from a gross imagine standpoint.

Yes, Jim.

This is Brad

From a gross imagine standpoint.

Yes, I think we are talking more longer term.

And again to get back to some comments we said before, there is a lot that goes into margin relative to the price value relationship David talked about relative to demand planning and forecasting, in addition to logistics to move product from point A to point B and costing.

So there are opportunities in all of those things.

So we could see maybe some slight improvement in the short term, but that's more of a longer term play.

And part of that is offset by our investment into footwear.

We want to be clear.

We're building a long-term growth platform for our company.

We really believe in the footwear engine.

So, some of that investment is personnel.

It is offices, it is building really a complete company around Under Armour being in the footwear business.

So, it is not as much immediate as much as it is long-term.

Very helpful.

Thanks very much.

Thanks, Jim.

Our next question comes from Tom Shaw with Stifel Nicolaus.

Please go ahead, sir.

Hey.

Thanks, guys.

Nice quarter.

Thanks, Tom.

Two questions.

One, you kind of talked about the price value relationship a little bit earlier with Dan I believe, but you talked about savings in core basics.

Is that an opportunity to potentially open up distribution, or maybe expand a good, better, best assortment or how do you guys look at that savings that you're going to pass on to consumers?

We're always looking to be more efficient and define savings.

And the core basics provide us with that, as I mentioned earlier, a clear target where we have high unit purchases combined so we can focus efforts and yield the savings.

As we're going to continue -- we're studying distribution.

Ultimately, our mission is to reach more athletes, and that is something we're looking at geographically, by sport, by gender.

And we are also going to look economically, but we will do that in due course.

We have plenty of opportunity in the places where we are.

And we know that great product is going to fuel that pipeline.

But our distribution is very tight, and that gives us -- affords us one of those levers in the future.

Okay.

And a second question for Brad.

Just on the SG&A in the quarter, I think it looked a little bit lighter than the maybe -- I guess the guidance had implied.

Was there anything in the SG&A side that may have shifted to the back half, or just more greater expense control than expected, given that the full year guidance remains intact?

Yes, Tom, there wasn't too much of a shift.

Maybe a little bit, but it's really more just on the way we planned our business.

So obviously, we stated that marketing will continue to be 12% to 13% of net revenues which is consistent with the prior year.

The pace of spend in the back half of the year should be pretty similar to last year.

So, it is just a matter of -- Kevin and David both talked about this, balancing our efforts around cost control with the appropriate levels of investment we need in critical areas for our growth.

So, although we're leveraging SG&A in some areas, we are investing in things like our direct-to-consumer business.

Kevin and David both talked about talent, new team members on board, especially around innovation, apparel and footwear design.

Consumer insights is an area we're spending money on, too, investing.

We're also investing in people and resources that can help with margin improvements longer term in the future, material and costing engineers.

So, there is a lot of investments we're making, and some of those are being offset by leverage we're getting in other areas.

All right.

Thanks, guys.

Best of luck.

We have time for one more question.

And we will take that final question from Sam Poser with Sterne Agee.

Please go ahead, sir.

Good morning.

Can you give us the what -- you talked about the 36% increase in the direct business.

What kind of percent to total is your direct business?

How do you foresee it being -- what was it for the quarter, or what do you see it for the full year, just to give us an idea of how important it is?

Sure, Sam.

This is Brad.

In the quarter it was approximately 16% of our net revenues this year.

About 13% last year.

As far as the full-year, we do see obviously with that business growing faster than our overall business.

that increasing as a percentage of net revenues year-over-year.

Last year in 2008, we were at 14%.

I would see that coming up a couple of percentage points probably.

The important thing about that lever is, in a period where partners may be focusing on their balance sheet, it allows Under Armour to continue to grow and reach athletes we may currently not be reaching because, again, we can control the pace of those openings.

Great.

Thank you.

And then you talked about the price points, the key price point at the sporting goods retailers being about $10 under the $90 opening price point.

You started with running.

When you -- how do you balance performance and those lower price points, because a lot of the price points they sell that have that $75 to $80 price points in running are more foot covering than technical footwear.

And I just wonder how you're balancing performance and the price point to hit the sweet spot of those sporting goods guys.

We're early -- we're early in the non-cleated footwear space.

And we're focusing on making sure first we're building a great product that delivers from a technical aspect, and then we'll worry about margins and margin growth later.

We want to get great footwear on more athletes.

That's our number one focus.

Margin will come thereafter.

Sam, you won't see us compromise our performance heritage or what we do with product either.

And I think one of the things we're seeing in the competitive landscape is that you've got a lot of our competitors out there that are taking what was formerly $90, $100 premium product, and they are selling it down in the $60, $70 range.

So again, it's more things to consider, and look, that's where the market is -- and you'll find us -- we're going to find a way to compete.

We're going to find a way to win.

So, that's our commitment to the category.

And hen, just one last thing.

I know we have to go.

But with bringing in Gene McCarthy, you said you're investing in the footwear space, continuing to invest in the footwear space, what kind of people -- I mean what kind of -- below Gene and sort of rounding out what you need there, I mean can you give us some idea of what kind of investments there, what kind of expertise you still think you need and so on and so forth within the space?

We have a team in place and we've been building the organization for several years, but not just related to footwear.

We're looking and want to make sure our team's developing and adding the skill sets necessary to deliver on the brand promise.

So, we've mentioned all of the components in areas, and we -- whether it is design, development, sourcing, technical, merchandising, all of those areas we have a team in place working very hard.

And Gene and Gavin's addition really are amongst the few people who are helping us move it to the next level.

And what you are seeing happen, Sam is that people are calling us.

And so if there is any message they'll send out on today's call is that Under Armour is in the footwear business.

And we are going to be here for a very long time.

When we launched cleated footwear back in 2006, we had a little more than a dozen people on our footwear team.

Today we have well more than 100.

We have offices in Guangzhou,, China, in Indonesia, sourcing office in Hong Kong.

We have got our offices here, design and development.

And you are going to continue to see us commit to, and build an unbelievable team of people, and most importantly, terrific product for the athlete.

Thank you very much.

Thank you, Sam.

And that concludes today's question and answer session.

I would like to turn the conference back over to Mr.

Plank for any additional or closing remarks.

Well, in addition to our commitment toward footwear, there are three critical things that I hope you take away from today's call.

First, we remain confident on our growth platform and our ability to generate long-term profitable growth.

Secondly, we are going to continue to invest in the team and infrastructure to capitalize on the opportunities available to this brand.

And third, we are committed to driving operational excellence throughout our organization.

We are on a mission.

Thank you again for joining us today.

Operator?

Thank you, sir.

And that does conclude today's teleconference.

Thank you for your participation.