Under Armour Inc (UA) 2009 Q3 法說會逐字稿

Good day and welcome to the Under Armour, Inc.

third quarter earnings conference call.

(Operator Instructions) At this time I'd like to turn the call over to Alex Petitt, Director of Investors Relations.

Please go ahead.

Thank you and good morning to everyone participating in this mornings 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 performance of the Company.

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

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

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

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

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

There you will find this morning's press release and and our webcast page images of a 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 third quarter, provide an updated outlook for 2009 and a preliminary outlook for 2010.

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

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

Thank you, Alex and good morning, everyone.

Under Armour is a growth company and we are on on offense.

This quarter's scoreboard is strong proof.

Overall, revenues were up 16% with apparel growing 7% and footwear up 153%.

And our year-to-date numbers are equally strong with total revenues up 16%, apparel up 8% and footwear up 69%.

These results are a great example what Under Armour can accomplish as we build our multi-billion dollar global platform.

While our eyes are fixed on the road ahead, we thought looking back to the play book we were working from when we became a public company might provide perspective on how we've grown.

In 2005, Under Armour revenues totaled $$281 million.

Our women's business was just over $50 million.

We just set up our office in Europe.

Our retail store base consisted of just five outlet stores.

Our online presence was small and we had not sold a single pair of athletic shoes.

So, fast forward to our to our third quarter results let's look at how we have delivered against the opportunities we identified at the time of our IPO.

45% of our incremental revenue growth in Q3 came from wholesale foot wear.

Another 41% of that incremental growth this quarter came from our direct consumer business.

European revenues increased 53% in the quarter and the dollar growth in women's was the strongest of the three pieces of our wholesale apparel business.

Overall, we grew Q3 revenues 16% to $270 million dollars, roughly the same revenue figure that we did four years ago in all of 2005.

That's great evidence that the opportunities we identified four years ago are transforming from potential to being the large scalable businesses we believe they are.

We are playing offense.

David and Brad will take you through more detail on specifics around revenue growth, to but me, the important part of this quarter's story is how we accomplished this growth.

We did it by growing every piece of our business, men's, women's and youth apparel, footwear, accessories and licensing.

We continue to grow because just as we did when we started by making a breakthrough piece of equipment for the team sport athlete, we are are a company focused on innovation and product thought leadership and we continue to have a great dialogue with our consumer who are happens to love sports just as much as we do.

For Under Armour, innovation is taking many forms as we grow.

We continue to innovate on the field.

This quarter saw the introduction of the Armour Bite mouthwear, a revolutionary technology that provides customized dental protection, with results proven to increase strength, endurance and reaction time.

At $500, it's not for everyone, but we view it as a great example of what happens when we relentlessly seek to make athletes better.

We saw great acceptance among athletes this quarter for our recharge suit that we told you about in the last call.

It's built with strategic compression that stabilizes muscle tissue and controls post workout swelling to let the body repair itself to a greater magnitude, getting the athlete back in the game faster.

This is the type of innovation that helps to ensure our leadership position in performance apparel, but we're also aware that innovation needs to be scalable so we can bring that same level of innovation to more athletes more categories.

Toward that end, we are taking the performance benefits of Under Armour and expanding our reach with consumers beyond those who wear UA compression with our expanded line of fitted ColdGear.

It provides a similar level of protection and warmth as our tighter fitting compression products, but both the cut and the sleeve construction allow for a fuller range of mobility.

It's a great example of taking our core competency of making athletes better and bringing that level of innovation to a much broader audience than we did four years ago.

On the brand communication front, we're bringing the Under Armour story to that broader audience as well.

The brand continues to show up strong on Friday nights and Saturday afternoons on high school and college football fields across the country.

But, the star of our cold gear campaign this winter will be Lindsay Vaughn, the world's best women's best downhill skier and an Under Armour athlete.

In addition to our relationship with Lindsay and top US snowboarder Lindsay Jacobellis, we will be outfitting the US bobsled team and the US freestyle skiing team at the Vancouver Olympics in February.

We are protecting our house in football with our onfield presence and the Under Armour football campaign airing now, but we're also expanding our reach by using wider athletes in our brand messaging.

We are much more than the Company we were four years ago and you will see that through the athletes that we image going forward.

By scaling our brand equity, we are able to tell the Under Armour technology story off the football field and help shape our consumer's view of UA as a brand for all athletes.

Under Armour is on offense and we are fixed on the road ahead.

Apparel is the largest piece of our business and it is strong at retail and well positioned to accelerate in 2010.

Footwear contributed much of the growth this quarter and remains an area where we believe in the opportunity and will continue to invest.

Our footwear business is young.

We've made some great in-roads on field with our number two market share position in both football and baseball cleats.

Youth continues to be one of the largest opportunities and greatest successes in footwear for us.

Our training platform is positioned to expand for us and running will be a major piece of our long-term growth in footwear.

Our path in footwear is clear.

Our goal is to bring the same level of innovation and excitement that we bring to performance apparel to every category we are already in or plan to enter.

To accomplish that, we are committed to investing both the financial and human capital to ensure that we reach our potential in footwear.

Our brand equity has never been stronger and more broad-based.

We have grown in many ways in the last four years.

We are building large scalable businesses as the foundation of our multi-billion dollar global platform continues to expand and we will continue to play offense.

Now, I'm going to pass it over to David who will discuss more specifics on our progress and managing the growth drivers to drive that long-term profitability.

Thank you, Kevin.

I'd like to talk today about some areas of the areas that are driving our revenue growth in the short term, as well as those where we continue to invest for the long-term.

As Kevin mentioned, we are focused on cohesively managing our multiple growth platforms to allow us the flexibility to do what's right for our individual businesses.

We have strategically added resources across our organization to ensure that we sustain our trajectory as a growth company.

The Under Armour brand was established and continues to be validated by athletes on field.

Over the years, we've had tremendous success in driving growth through apparel, first through the lockers rooms, independent dealers and then sporting goods accounts.

Next, we're evolving from solely from a compression brand by growing our offering beyond impression into loose fit product and finally by adding new apparel categories, which began to address the needs of both youths and adults, male and female athletes.

As we've detailed earlier this year, we continue to believe the landscape for growing Under Armour apparel is abundant.

And while US wholesale apparel is the core of our business today, the foresight to aggressively develop our direct-to-consumer and footwear businesses is paying off now.

We benefited in 2009 as our strong revenue growth in both direct-to-consumer and footwear has helped offset the economic precious of today's environment.

Our improved ability to manage the total Under Armour brand growth will be important competency for long-term success.

Our direct-to-consumer business is robust with revenues up 47% for the first nine months of the year.

As we indicated in previous calls, we made the strategic decision to focus our energy on investing in our factory house outlets and on-line businesses and to slow the expansion of our speciality stores.

We focusing our resources, we were able to better drive and deliver on this high growth pace.

Through the factory house outlets we are able to reach athletes in new communities, build our multi-channel database and improve our ability to profitably manage excess inventory.

With the online business, we're able to better showcase the breadth of our product to hard core Under Armour fans, build on a relationship with them in a brand centric shopping environment and drive profitable growth.

You've heard us talk about how we at Under Armour learn, adapt, correct and move forward.

Our experience to date in footwear has provided our team with some accomplishments and with some great lessons.

As Kevin mentioned earlier, we play offense and our strategy around the long-term growth of our footwear business is no exception.

We have meaningfully increased our expertise level in-house, we have a better aligned vision for footwear across the organization, and most importantly, we are singularly focused on making great athletic footwear for the athlete of this generation.

Footwear has been a key component to our growth in 2009 and continues to be a key part of our plan to establish Under Armour as a global athletic performance brand.

As we've learned in a apparel, success comes from compelling innovation, thoughtful design and powerful communication aimed at your target customer.

Our experiences, learnings and close consumer connection in sport are key to the reacceleration we see for our football, baseball and softball cleated business, as well as slides in 2010.

In our newer, non-cleated footwear businesses, we are applying greater focus on our core athlete, identifying their future needs, whether they run to train or train to run, by developing a unique innovative design language specific to Under Armour that speaks directly to our athletes just as we do in apparel.

As our footwear team accomplishes this over the next several quarters and years, we'll be working to position our run business for the improved product we see coming as soon as 2011.

We are planning our running footwear business conservatively in 2010 and as such, our revenue plans for 2010 do not assume growth in our overall footwear business.

While our year-to-date revenue growth in 2009 highlights our ability to deliver today, we remain a company and a brand investing in a platform for a multi-billion dollar future.

During 2009, we continued to prime the apparel product engine.

We grew our team of designers, merchants, product developers and sourcing teams.

We invested in consumer insights to better understand the needs of our growing base of customers.

We expanded our product assortment and price points that, with the support of our partners will help us take advantage of opportunities to gain floor space and we embarked on a detailed analysis of US distribution to better understand the opportunity in our current distribution and identify potential new distribution in the future.

What we learned reinforces our belief that the opportunity to grow through apparel and other categories for Under Armour remains vibrant.

The investments and focus we have brought to the apparel product engine in 2009 will enable us to reaccelerate the apparel growth story in 2010 and allow us the flexibility to manage our footwear platform in 2011.

We have always had a good sense of where we could grow the pieces of our business.

What we are getting better at is the when and the how of growing these individual pieces of businesses and coordinating that growth so we can better plan and allocate resources.

We understand the challenges inherent in managing a brand with both the near and the long-term potential of Under Armour.

The efforts entailed in building the necessary capabilities are not just what our consumers or athlete sees, it's an integration of brand building, product creation, merchandising and distribution, as well as a coordinated alignment with the back end of the business to ensure that we're maximizing the opportunity and operational efficiency of the organization.

In summary, we are pleased with our ability to grow revenues 16% in today 's environment, but we recognize the need for continued investment to fuel this expanding platform for the future.

Investments will encompass many areas, including brand-building, product development, innovation, systems, infrastructure, and most importantly, talent.

We continue to build our team, bringing years of world class industry experience to Under Armour.

This ongoing infusion of talent, combined with numerous team members who have helped build this brand from scratch, instils in us the confidence that the expansion of the Under Armour platform is an increasingly stronger position as we become the brand of this generation.

We are building and we are playing offense.

With that, I'll pass it over to our CFO, Brad Dickerson.

Thanks, David.

Kevin and David have been taking you through some highlights and strategies for our business, I would now like to spend some time on our third quarter financial reports results.

As an organization, we remained focused on driving sustainable profitable growth by balancing financial discipline with a continued commitment to invest in the areas of our business which we believe will generate the best long-term return for our shareholders.

We believe our third quarter results are an example of this focus and commitment.

Our net revenues for the third quarter of 2009 increased 16% to $269.5 million.

Year-to-date, net revenues are up 16% to $634.2 million.

Apparel net revenues increased 7% during the quarter to $215.4 million, bringing our year-to-date growth rate in apparel to 8%.

Footwear revenues were up 153% to $33 million in the quarter and were mainly driven by shipments of running foot wear for the back-to-school season.

Year-to-date, footwear is up 69%.

Direct-to-consumer continued with strong growth with 62% growth in the quarter and 47% growth year-to-date.

During the quarter, direct-to-consumer represented approximately 15% of total net revenues.

Third quarter gross margins decreased 130 basis points to 49.7%.

There were several puts and takes impacting gross margin.

First, as we have talked about in the past, effective inventory management has been one of our key balance sheet initiatives.

While still a small percentage of sales, one aspect of this has been the liquidation of excess inventory to third parties, which impacted our gross margin the quarter.

These efforts continued to free up working capital and it's worth noting that without these liquidation sales, we still would have achieved a double rate of growth in the quarter.

Second, during the quarter we also increased inventory reserves on obsolete seasonal products.

These items were partially offset by strong revenue growth in our higher margin direct-to-consumer business and decreases in our reserve for sales allowances and discount incentives for our wholesale customers.

SG&A expenses grew 21% year-over-year to $87 million in the 3rd quarter.

SG&A as a percentage of net revenues increased to 32.2% compared with 31% in the prior year's period.

The year-over-year increase in SG&A was primarily driven by expansion of our factory house outlet stores as well as investments made in our team.

Much of the increase in personnel costs went toward the buildout of our apparel and footwear design, production and creation teams, as well as increased funding for our performance incentive plan relative to the prior year.

Year-to-date, SG&A increased 15%.

The percentage of net revenues SG&A decreased 37.9% compared with 38.5% in the prior year's period.

Operating income during the third quarter increased to $47.1 million compared with $46.5 million in the prior year.

Year-to-date operating income grew 8% year-over-year to $58.3 million.

Our effective income tax rate in the third quarter was 43.9% compared to 42.6% in the third quarter of 2008.

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

Our resulting net income in the third quarter rose 2% to $26.2 million.

Third quarter diluted earnings per share increased to $0.52 compared with $0.51 in the prior year's quarter.

Year-to-date, our EPS increased to $0.62 compared with $0.59 in the prior year.

As noted earlier, we continue it focus on strengthening our balance sheet and improving our working capital efficiency.

These efforts have paid off with total cash and cash equivalents increasing over $53 million year-over-year to $93.4 million at quarter end.

Cash net of debt increased from $72.5 million to $75.1 million at quarter end.

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

Net accounts receivable decreased 4% on a year-over-year basis significantly below our net revenue growth for the quarter.

In addition to the strong performance of our collections team, part of the improvement in AR came from the higher mix of direct-to-consumer sales.

Inventory at quarter end decreased 6.6% year-over-year to $152.8 million.

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

We still anticipate inventory growth to be below revenue growth at the end of the year.

Our inventory strategy remains intact as we continue to manage our inventory purchases, reduce our lead times and sell excess inventory through our factory house outlets and other liquidation channels.

We will also continue with our efforts to improve turns while supporting our growth platforms going forward.

Our investment and capital expenditures in the third quarter was $5.2 million, bringing our year-to-date CapEx investment to $18.4 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.

Now, moving to our full-year 2009 outlook.

We delivered strong results from the quarter, but we maintain a cautious view on the consumer spending environment.

However, given our performance year-to-date, we are raising our outlook for both the top and bottom lines.

We now estimate full-year net revenues to be $830 million to $835 million, an increase to 14% to 15% year-over-year.

This compares to our previous outlook of approximately $810 million.

Full-year gross margins are still anticipated to be down year-over-year through the increased sales mix of our lower margin footwear business.

However, with the majority of our planned third party liquidation sales for 2009 having already occurred and with the strength in our direct-to-consumer business expected to continue in the fourth quarter, we anticipate our fourth quarter gross margins to be up year-over-year.

Based on higher personnel costs during the second half of the year, including increased funding of our performance incentive plan, we now anticipate SG&A for 2009 to grow in the mid-teens on a percentage basis year-over-year.

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 improved outlook for 2009 and our conservative approach in the beginning of the year, we now have the flexibility to invest in areas we believe are critical to our business.

Given current top line projections, gross margin direction and planned SG&A, diluted EPS for 2009 is currently expected to increase to a range of $0.85 to $0.87 versus our prior outlook of $0.80 to $0.82.

Before we wrap up, I would also like to provide with you a preliminary view into 2010.

Based on our initial view, we currently anticipate 2010 net revenues and EPS to grow in the high single to low double digits.

This growth is expected to be driven by a degree of acceleration in our wholesale apparel business, as well as continued strength in direct-to-consumer and does not assume growth in our overall footwear business.

Obviously, it is still early and we will provide additional detail on our 2010 outlook in the coming months.

Once again, in 2009, we have demonstrated that Under Armour is a growth company.

Most importantly, we are growth company balanced with profitability.

Our growth this year is a result of the investments we have made for many years in the brand, in our infrastructure and in our team.

We are committed to investing in our growth initiatives while driving effective cost management and continue to strengthen our balance sheet.

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

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

Operator?

Thank you.

(Operator Instructions) We will take our first question from Michelle Tan with Goldman Sachs.

Great.

Thanks.

I was wondering if you could give us a little more color on the drivers of the apparel reacceleration next year from a products perspective and then also talk about the demand you're seeing in the current quarter for colder weather apparel and whether your sales are inventory constrained at all here in the second half.

Thanks.

Hey Michelle.

It's Kevin.

How you doing?

Let me start with some of the things that we're seeing in apparel and obviously we're really encouraged by some of the indicators that are out there and particularly in the performance in the quarter.

The first thing I think that's driving is more than anything probably just our brand equity.

I think we continue to see the brand moving beyond being sort of a narrow team sports brand into being much more open and accepted by athletes really of all backgrounds and we continue to build it with the consumer with great product, of course, delivered in a very authentic way.

Not compromising our message, not buying our way into categories, but really allowing the brand to be pulled into categories by athletes has really been driving it.

I think as we mentioned, we really saw strength across the board and so apparel is, obviously the highlight, but with men's apparel, women's apparel and youth apparel all growing, as well as footwear, international and direct-to-consumer, accessories and licensing, it's rare or not often that you get every category up in a given quarter.

So, while apparel, of course, is the largest aspect of our business, we're excited about all the different places we're seeing growth.

But, the equity we found particularly where you find a lot of people talking about today's environment, we've always had a relationship with that core athlete and that core athlete is someone that has -- never really leaves our brand.

In good times or bad, football will still be played in the fall and baseball in the spring and volleyball and soccer and so on.

So, we haven't seen them necessarily go away.

But, if we had any message around our business and I think you'll see us continue to innovate -- I mentioned our fitted options that we will have to our core compression business and continue to expand the idea of base layer, as we're not necessarily calling it compression anymore, but next-to-skin product lines.

And then, of course us innovating with the Pinnacle product like we spoke about Armour Bite and as well, some of the more premium products that we will have out.

So, I think our remaining focus on innovation is driving us and then just I think we are doing a really good job in apparel right now.

That's been a real positive.

In terms of the quarter in inventory, we obviously -- the cold weather helps and it always makes business, makes all of us a lot smarter, so we're seeing I think some of the effects of that.

But you know, I think we'll chase where we can and find the places where we see opportunities in the business, but for the most part, we feel pretty good.

Bradley?

Yes, Kevin.

Just a feed off what Kevin said, for the fourth quarter, Michelle, we do have some ability to chase a little bit of product, but based on our inventory management, there will be limited how much upside we have in the fourth quarter.

We'll be able to chase a little bit as Kevin said, but there will be some limit to that.

Great.

Thanks very much and good luck.

We'll take our next question from Robby Ohmes with Bank of America.

Thanks, good morning, guys.

Just a couple of quick one.

The first one, I apologize if I missed it.

If you could give us the number of outlet stores at the end of the third quarter and how many you expect at year-end and then the growth at factory stores you expect for next year?

The second question is just on the 2010 guidance.

Can you help us think about footwear for 2010?

You're saying footwear revenues -- I guess growth in footwear isn't included in your sort of initial 2010 take, but could footwear revenues actually be down or what's happening between running and cross training and new category launches like basketball in 2010, should we not expect that?

Sort of, if you could just give us a broad view on what footwear should look like in 2010 and also the 2010 international assumption in that would be great as well?

Thanks.

Okay, Robby, David here.

We ended the quarter with approximately 33 factory outlet stores and we are looking to add a few more for the balance of, or beginning of Q4.

We see continued opportunity to expand those and we'll get into more details on the direct-to-consumer expansion, but we're very satisfied with the direction we're taking with direct-to-consumer.

We think it's a great way to connect with the hard core Under Armour athlete and we think it's a nice way to partner with our retail partners.

As you've seen all year, we see have seen a steady march in progress and we will continue to see that in 2010.

As it relates to footwear and general guidance, we're not planning on growth in footwear.

We've accomplished a great deal.

We're seeing real progress in many categories.

As I mentioned earlier, we launched and immediately became a leading force in cleated footwear in baseball, softball and football.

We're seeing great progress in the slide business and we accomplished our goals with running this year, getting out, making a technically sound product, gaining acceptance from our retail partners and gaining acceptance, more importantly, from our athletes.

And we're going to continue with our new team to build that business and model, but not planning growth in 2010.

Robby, this is Brad on the international question.

We see international growing at a faster pace than our overall business in 2010 similar to 2009, but other parts of our business we also see doing that also so I think as a percentage of revenues in general year-over-year, I think you'll see international be relatively the same percentage of revenues year-over-year in 2010.

But again we'll give you more detail on 2010 in the coming months.

So, footwear, 2011 could be the big breakout year for you guys?

Well, I think we're giving you what we're seeing right now.

We'd really probably rather come back in three months and tell what you 2010 looks like.

We got two new bodies in the chair with footwear that are doing a great job and we're continuing to evaluate and see what our opportunities are there.

But, you know if there's a story right now about 2010, the good news is we do have five levers to pull on and the good news is our apparel business is accelerating or reaccelerating, the way you want to look at it, gives us the opportunity to make a prudent decision long-term what's in the best interest of the brand.

So, I think there's opportunity there, but again, we don't feel any pressure to try to push something if timing isn't right.

And in reaction to your question about categories.

Robby, we like the categories we're in right now.

We're going to become great and excellent in those categories and we're going to focus and refocus again on the places where we're doing business and the categories that we're in today.

So, we see that those additional places, i.e.

basketball, we're going to test, we're looking at them right now, we have got 8 Division 1 programs that will be wearing our shoes this year.

We've got 20 Elite high schools.

We've got Brandon Jennings in the NBA, so we have presence and we more importantly have feedback from all levels of competition and we will be evaluating and making those decisions to go at it, first and foremost when the product is ready and when we're ready to support it and tell a big story.

Go heavy or go home.

Great, hey, thanks a lot, Kevin.

We'll take our next question from Sharon Zackfia with William Blair.

Good morning.

Following up on the initial outlook for 2010, if higher margin apparel is growing faster than footwear and presuming you're taking this break in footwear to try to bring up those margins, shouldn't we think about earnings growing at a nicer -- a much more quick pace than revenues?

I guess I'm a little confused why we're expecting them to grow in tandem in 2010 rather than the earnings outpacing the revenues.

Sure.

Sharon.

This is Brad.

Yes, to your point, obviously with apparel growing being more the growth in 2010 versus 2009, you would expect gross margins have a benefit to that.

Consistent with what we've seen in 2009, we continue to invest in our business.

We think it's important to continue to invest in our business to drive future performance 2010, 2011 and beyond.

So, in the SG&A area, similar to what we did in the 2009, I think you're going to see similar investments in our team, product creation and development teams, direct-to-consumer, obviously growing relatively above our overall company growth rates.

We'll continue to invest in direct-to-consumer, so, there will be continued investment in our SG&A that we feel is important to drive long-term growth.

Are you assuming any material improvement in footwear margins next year or are you leaving that open?

I think where margins are right now with the growth that David and Kevin walked you through, I think we would see gross margins in footwear that would be relatively the same year-over-year as you saw in 2009.

We obviously, long-term see tremendous improvement ability in footwear margins but we won't see as much of that in 2010.

Thank you.

Sharon let me be clear, too, we are not taking a break in footwear either.

We are continuing to push and drive in footwear so, again, you'll hear a lot more from color us on the next call as well.

We'll take our next call from Omar Saad from Credit Suisse.

Thanks.

Good morning.

Nice quarter guys.

I wanted to ask you about your seemingly cautious view on the fourth quarter on the top-line side.

It seems like you're planning for a little bit of a deceleration, albeit a good number, but a deceleration from where you were in the third quarter.

The cold weather -- this used to be -- people used to focus so much on the cold weather for you guys in the last couple of years.

Obviously the weather early has been cold in much of the country, kind of cold and wet and requiring some warm apparel.

Can you help me reconcile what you're seeing at retail given the weather and what the sell-through looks like and your outlook for the fourth quarter?

Omar, this is Brad.

I'll start off with answering that question.

A couple things on timing between Q3 and Q4 which might help you answer your question, we did see some tiny shifts from October orders into September.

To your point, weather helped us in September a little bit and (inaudible) was very, very strong in September, so a couple of our larger customers did want to get some product in early in September to stock the shelves, so we did see some of October sales come in September.

Also, we talked on the last call about liquidation revenues to third parties, kind of being evenly spread out between Q3 and Q4.

We actually saw more of those in the third quarter and as I called out, even with those increased third party liquidation sales, we still had double digit growth in the quarter, but more of those came in Q3 than we had anticipated earlier.

Also, on the cautiousness on the consumer environment and I think in addition to that we also talked about in the previous answer our ability to chase product in the fourth quarter will be a little bit limited based on our inventory levels.

Is the weather impacting the demand for Under Armour apparel?

Omar, it's David.

We continue to make the leading product in our space and as Kevin mentioned, we have -- we are always smarter when the weather changes, but we continue to see our market share remain strong if not grow and we're building platforms that will be weather-proof in the future.

Got it.

I look forward to that.

Also, quickly on SG&A.

I like to hear the comments around SG&A and the willingness to invest.

Philosophically, to the extent as you think about how to plan your spending at the extent you see revenue upside in the year or two, are you looking to kind of plow that back if the business, build the platform to the best of what your resources allow you to do, marketing, advertising, the team, building up the team, systems, et cetera.

Or is it more kind of we have an opportunity to see some upside in terms of the bottom line to the extent that sales next year, over the next couple years come in high single, low double?

Omar, it's Kevin.

I think we're very bullish on the future and bullish on our ability to continue to grow as a company.

And in order for us to do that, there is certain investment that needs to be made and I think that we've prudently been able to balance the ability -- A to grow, B would be the ability to invest in key sources.

As Brad called out in his script, the key places that we are investing first and foremost is around the product primarily in continuing to put pressure around our apparel group and bringing great talent in there and as well as filling out the boxes footwear.

I made the point on the last call, if you look at our business, look at the upside that we have in our business where we've got -- if you compare us to where you can figure out where our margins are versus where some of our competitors and there's more than a thousand bits of gross margin opportunity in our business over time for us to able to invest back in.

Again, it's not some magic formula that our competitors have and we don't.

It's just a matter of time in doing business.

So, as we enter these other categories and frankly, as we begin to get better at it, we're just doing well as a company and hats off to our team on the quarter, but we have a long way to go and we have a heck of a lot of improvement and it speaks a lot of to opportunity.

The best way he think to be able to capitalize on that opportunity is the some of the shorter-term investment that you're seeing us make in 2009 and frankly, in 2010 as well.

Thanks.

That's great to hear.

Good luck.

Thanks Omar.

We'll go next to Jim Duffy with Thomas Weisel Partners.

Thank you and nice job on the quarter.

Could I ask you to speak to the split between apparel and footwear gross margins and then I want to talk a little bit about the opportunity for gross margin opportunities in 2010?

You talked about footwear staying roughly consistent.

As you look toward the new categories for apparel growth and your overall systems and productivity, is there more opportunity on the apparel gross margins in 2010?

Jim, this is Brad.

As far as the split between margins, we don't really break out the split between footwear and apparel margins in detail.

But, as we talked about in the past, obviously footwear in general now and in the future will be below our apparel margins.

Although we do see long-term our ability to improve those footwear margins.

Right now, they are below our apparel margins.

I think what you do see, though, in the third quarter and we also called out for the fourth quarter is direct-to-consumer is a bigger part of our business in the back half of the year so you do see some benefit coming through with the direct-to-consumer business, which is mostly on the apparel side.

When you look at 2010 I think we have been calling out the continued work toward improving our apparel margins longer term.

We still see the ability to do that.

We do see more long-term upside in footwear margins, but we do still see the ability on the apparel side to improve margins too in the short and longer term.

Let's also remember direct-to-consumer continues to be growing above our overall company growth rate in 2009 and also we see that in 2010.

There should be a positive impact to margins from that, too.

Okay.

Great.

And then a follow-up question, with regards to your decision to kind of let's say regroup in 2010 on the footwear side, can you speak to some of the process improvements and things like that?

What do you hope to accomplish by kind of tapping the brakes there and as I characterized it, regroup?

Jim, hi, this is David.

As we discussed earlier and we had mentioned, we've been out in footwear -- first started with cleated and learned a great deal and were accepted by elite athletes across many sports and rapidly gained a strong market share and we're taking the same approach as we enter the larger and very competitive space in running footwear.

We continue to sharpen the team.

We've brought in just tremendous experience with (inaudible) and Gene McCarthy and others in addition to the team we have in place.

We're working on sharpening our product development cycles, working with key factories, our sourcing base, as well as our use of technology to help us really define and develop a distinct point-of-view in bringing our technology and leading product to our noncleated footwear category.

So, we just had -- you go through a cycle of introducing a product, connecting with athletes, staying close to their needs and you have learnings and you build it and ultimate deliver on the brand promise.

We're very confident we have learned a great deal and feel even more confident about our future going forward.

Great.

Best of luck in the holidays.

Thanks, Jim.

Welcome next to Michael by Nettie with UBS.

Hey guys.

Good morning and thanks for taking my question.

Just a quick housekeeping question first.

You typically provide the revenue breakdown for your top three retailers with your quarterly release.

So, I was wondering if we could get those percent of revenues for your top three?

Michael,this is Brad.

We'll put that in the 10-Q.

We don't put that detail out right now, but that will be in the 10-Q, which will come out in the next few weeks.

Okay.

Thanks.

You commented, I think at the top of the call that you were looking at some -- you were doing some assessment of where to take distribution next year.

I assume you're talking about away from your direct-to-consumer business, but I was wondering if you could talk a little bit about what some of your initial findings are telling you there?

Perhaps a revised emphasis on the mix going through existing channels or some emerging opportunities in different channels that you might be seeing?

Any kind of detail you could help us with there.

Sure, Michael.

It's David speaking.

We've -- what we've learned is that there's great desire and acceptance of the Under Armour brand across America and we have found that in many locations that our partners are doing a terrific job, our plans in the near term in 2010 are to continue to grow our share within our existing partners.

We're continuing to try to build floor space and rack space in each of the locations and we're seeing nice progress there.

Additionally, we're seeing a place to strategically position our direct-to-consumer business, both from our reach of the Web as well as to our own branded stores and make sure that we're complimenting our exiting partners, as well.

So, we're seeing no material change in other partnership for 2010 as an offing.

Okay, and then if I could just follow up really quickly on the direct-to-consumer business.

You said that that business grew by 62% in the quarter versus last year versus your total revenues which grew about 16%.

And at the same time, it looks like direct only represented about 15% of the total in the quarter, which was just a little bit lower than the 16% of the total in the second quarter.

I would guess that based on the growth rate there, that would have led to a higher percent of revenues in this quarter.

I'm curious just if there's any kind of change you're seeing in that business as well as maybe any kind of change you can talk to us about in the buying habits of the consumer in your direct business or the average ticket that you're seeing through your direct channels that you'd care to call out?

We continue to make solid progress with our direct-to-consumer.

We sort of measure both competitive comp growth, as well as we look at new athletes we're bringing and we're continuing to do both.

Very solid comp growth in both our direct-to-consumer areas, whether it's in our own stores as well as through the website and we're also reaching additional traffic as well.

We've not seen any material shift in purchase behavior and our average order of value for the most part is holding steady.

It's one of increased traffic and conversion metrics.

Michael, this is Brad.

Direct-to-consumer was 15% of our business in Q3 of this year, just directionally last year was 11% of our business so we did see that increase grow year-over-year in direct-to-consumer.

Thanks a lot, good luck, guys.

We'll take our next question from Dan Wewer with Raymond James.

Thanks.

Kevin, prior to the recession, you said that you anticipate Under Armour growing 20% to 25% a year.

With this current environment perhaps being the new normal is the 10%, 12% growth in 2010, do you anticipate more likely the growth rate of the Company going forward as a lot of large numbers begin to catch up?

Yes, Dan.

I think first and foremost, our growth platform is intact, one thing we want to let you know.

We talked about five growth levers as far as back as our ITO.

We talked about men's apparel, women's apparel, footwear, international and direct-to-consumer.

I think that Q3 is great evidence that all of them continue to grow in light of any environment that's out there.

So, how we measure ourselves and put a barometer, I think long-term growth targets intact, is that we see ourselves building the next great athletic brand.

The opportunities that we have in the product categories, distribution and regions, I think we've again demonstrated our ability to have the brand equity to deliver.

So, more important than anything is right now, we focus on in 2009 and 2010, we always said that we're the kind of company that had 13 items typically in our top 10 list.

2009 made us prioritize.

So, instead we turned that list into our top 5 and we really began to prioritize our investment.

And, more importantly is our ability to not only prioritize on our investment, but continue to grow while we do that.

So, the thing I think that we're seeing from -- I think probably gives us the most upside is as we look at I think the scope of who we're speaking to today, the athletes we're talking to beyond just the team athletic field and particularly from some success we've seen in places like women's, golf, footwear, running and Europe.

And I think that message of learning, adapting and going is one that we will continue to push and drive going forward as well.

But, from a growth standpoint, I'm very clear on the fact that we remain a growth company and we will continue to play offense through 2009 and 2010.

And so the size that have growth is one of the things I think we want to put off until our next conference call.

We will see a little more, see how the holiday goes and get a little more understanding.

But right now we feel very comfortable with the outlook that Brad provided and we'll continue to execute on had that.

Fair enough.

As a follow-up,, in the prior conference call you noted that you were wanting to rework the pricing, maybe the technology with your running shoes.

I think a lpt of us were anticipating these changes would be in place perhaps by the mid-point in 2010.

I was curious as to why maybe it takes longer to reformulate the strategy it sounds like on the running shoes before it begins to grow again?

Dan, this is David.

Yes, like we've said and Kevin mentioned we do -- we get out, we call a play, we run the play, we learn, we adapt and then we revise.

With -- we've done that in cleated, we've done that successfully in other areas as you're seeing now.

In noncleated, we have had some terrific traction with our youth footwear and we think we have got a very good price value as well as an innovation story.

Most importantly, we've had great acceptance and commitment and support from our footwear partners and continuing to look to build the business with them and find the spot for Under Armour.

As you look to dial in, you'll see us really adjust price value probably in the first half of 2010 and then as you know the product development cycle, it's not a short development cycle.

So, that's why you'll see most that have coming in the future.

Just a quick --

But, overall, we're very optimistic about taking a leading position in footwear in the very near term.

Just a real quick question for Brad, I think I wrote in my notes on the gross margin drivers in the quarter that -- did you say you reduced the incentives to wholesale customers?

Yes, it was a combination of sales allowances and incentives to wholesale customers.

It's more a reflection of last year's number being a little bit higher.

More so than normal.

I think this year's numbers are a little bit more normalized.

So, just with key retailers cutting back on inventories, they're earning fewer of these discounts than they have in the past.

It could just be also -- it is also a shift sometimes in how we spend those dollars, so sometimes it shows up in margins, sometimes it shows up in SG&A.

So, it's not really a significant change in the cost as much as it is where that cost shows up.

Great.

Thank you.

Thanks, Dan.

We'll take our next question from Mitch Kummetz from Robert Baird.

Yes.

Thank you.

Your sales guidance for next year, high single digits to low double digits.

How should we be thinking of that in terms of first half and second half because you're going to be lapping a big footwear quarter in Q1 just based on the running shoe launch -- I'm guessing that in terms of footwear being potentially flattish next year you probably expect it to be down in the first half and up in the second half, but tell me if I'm not thinking of that the right way.

This is Brad.

We'll give a lot more detail on our 2010 outlook at the next earnings call.

But, to our points before and to what you're saying, with footwear growth not like it was in 2009, I think you can look at the timing what -- how footwear came in in 2009 compared to what you would see in 2010.

Also, similar to what we saw in 2009 on the direct-to-consumer side.

Again direct-to-consumer is a callout of ours that continues to grow above our overall company and I think as we pointed out the back half of the year is usually a lot bigger growth area for direct-to-consumer business.

And any color you can give us on your spring orders, how are they coming in?

Early on -- this is David here.

We've worked with our close -- our partners for spring and we're getting a good response to the product offering.

Okay.

And then lastly, you mentioned SG&A 12% to 13% of sales this year.

Would you expect that percentage to hold comparable in 2010?

Because it sounds like you're sponsoring some Olympic athletes in front of the winter games and I'm just wondering if you'd expect that percentage to come up a little bit or maybe being more lumpy in the 2010 with a focus on the upcoming Winter Olympics?

Mitch, this is Brad.

I think you meant marketing as a percentage?

12% to 13%.

Yes.

We see -- we'll give you more outlook on the timing of marketing on the next earnings call, but we don't see any significant changes in the marketing as a percentage of revenues in 2010 versus 2009.

Okay.

Thanks.

That's helpful.

And good luck.

Mitch, one of the things, I just want to add on to Brad's comments.

One of the things I think that's so unique about Under Armour and it's terrific to join -- has been Kevin's focus on driving the business forward and you're hearing of a lot of companies that decreased SG&A this year and the strategic push has been invest and build the future, we're investing in large scalable businesses that are going to lead to us a multi-billion dollar platform.

There's clearly some tension on -- hey do you want to leverage now and we are very committed to building what we need to.

So, you're going to see continued investment just like in 2009 in 2010 in building that platform.

Got it.

Thanks again.

We will take your next question from Kate McShane with City Investment Research.

Hi.

Good morning.

Thank you.

Most of my questions have been answered, but I wondered if you could give a little bit more detail on deflation and how much it contributed to any margin improvement in the 3rd quarter and can we expect an acceleration in Q4 going into 2010?

Kate, this is David.

We've -- we're working -- Wayne and team are working on some tremendous sources initiatives.

Those will as BRD was saying earlier, will start to see continued to apparel gains, both through shift and channel, as well as we're further along in building that supply chain and refining it.

And then we expect to see further opportunity for footwear, actually tremendous opportunity for foot-wear, but that's more in the mid to longer future.

Okay.

Thank you.

We'll take our next question from Chi Lee from Morgan Stanley.

Good morning guys.

Just a follow-up question on the outlook for reacceleration in the wholesale apparel side of the business.

Can you at a high level talk about what the drivers you expect to be between distribution expansion, perhaps a recalibration of inventory levels out there in the channel and what you expect the economy to really do next year?

Hi, this is David.

We're really -- we're seeing the reacceleration based on the strength of our apparel's business within our existing partners.

We're not planning on a tremendous expansion of doors with them.

It has to do with the messages that Kevin related to earlier.

Exceptional brand, working on innovative product that resonates with our athletes and we're seeing it in a broad-based manner.

So, it is less to do with backfilling of inventory and more has to do with the quality of the brand and the product that we have coming in the future.

Okay.

Just on the economic outlook, is your expectation that things will largely remain sideways from where we are today in that outlook.

Yes.

We're not planning on any macro economic factors to improve or detract from the environment as it is today.

And just one more question.

I believe last quarter you guys called out about 60 basis point benefit coming from the apparel costing gains.

Can you talk about what that was this quarter and what you expect it to be heading into the fourth quarter?

Chi, this is Brad.

Yes.

We did see some benefit from sourcing improvements as David stated earlier.

It was not quite the magnitude of Q2, but it was a positive.

It was also offset by some mix apparel margin mix year-over-year in the third quarter.

And also on -- also some distribution mix, also, which more than offset that apparel sourcing gain.

Okay.

And with the benefit lower than in 3Q relative to 2Q should we expect that same trend to persist into the fourth quarter with perhaps no benefit coming from the apparel costing?

With the mix issue it's a little tough to give you a direction on how apparel margins will go.

What we'll say is that we, as David stated, Wayne and his team are really working on improvements in sourcing going forward.

We continue to see incremental sourcing improvements quarter-over-quarter, but again mix plays a big part in that too.

That's a little bit more tough to give you direction on that.

Okay.

Great.

Thanks a lot.

Good luck, guys.

Thank you.

We'll take our next question from Chris Svezia from Susquehanna Financial Group.

Good morning everyone.

I want to talk about footwear for a second as you go into next year and more specifically on the merchandise and product margin trend.

My thought is how we should look at that?

I know you're not looking for too much of a benefit, but between less closeout product as you go into next year, kind of fine tuning the business model from a sourcing perspective, et cetera and I know there's lead times that get factored into this, but whywouldn't we really anticipate at least some improvement in the merchandise or product trend as we go into next year just given what you're up against and given maybe tweeks as to how you're sourcing and how you're doing materials, etc,?

Are you still dealing with some inventory retention on the running side of the business because of seasonality?

I'm just kind of curious, if you could flush that out a little bi more..

Hey, Chris, it's Kevin.

So, number one -- is I want to drive home the point we couldn't have greater confidence in the upside of our long-term potential footwear.

We believe in it and we are investing in and around it.

Hopefully, that message has clearly come through today.

As we do that though, we are also realizing that you have a long lead time category business here that typically runs 18 months or more when you figure in the design cycle and everything else that comes into it.

So, as much as we're working on enhancing, improving the supply chain for the cycle of product for us, more importantly, we're also working on trying to improve the product that we put in the market itself.

And there's a -- definitely there's a price to value balance there.

Were bringing in the expertise and the experience of people like Gene and Gavin to our team, have really given us the ability to take what in the past something -- it's the ability for teams to work together longer and a shoe that would typically take us 20 pieces to build, we can build, we're finding ways and efficiencies to build it with 14 or 15 pieces.

So, taking some of the weight to performance and just frankly, having the ability to build better shoes at a more cost efficient pace is something we are building.

So, we have two wheels in motion.

The first wheel is that long 18-month cycle, which we've engaged the guys in, which begins really in 2011, but also we're not giving up on 2010.

We do have -- we have some great product that we're going to have in the market in 2010 and again we mentioned momentum we have with our market share, our number two market share in both football and baseball cleats so, those businesses will be growing in 2010 for us and we'll be taking more market share there, so we're excited about what that means.

I think the momentum we have see around our youth business again is another place that we believe we have great upside.

But, also we have the luxury because of the growth model that we have with these five levers, I think to be more patient on areas where we want to ensure that we can put a great product in the market and ensure that we can deliver great value do the consumer at the same time and not charge them more money just because we have an immature supply chain.

I see.

Okay.

That's helpful.

Just lastly on Europe quickly, just kind of give us your thoughts as you go into next year about either how you might be investing in that business and your thoughts of how you look at that business as you go into next year?

We see -- this is David.

We see tremendous opportunity in Europe.

We planted a flag years ago and like we're seeing this year, we're planning on sizeable growth within Europe and we are continuing to build the team and develop the story and tell the brand story throughout the continent, so we'll investing additionally primarily in telling the story and reaching new market within the continent.

Alright.

Thank you very much, David.

We have time for one final question.

Your final question will come from Tom Shaw with Stifel Nicolaus.

Thanks, guys.

Nice quarter.

Pretty much all of my questions have been answered.

The only thing, maybe a little clarity on some of the breakdown of the SG&A costs in the quarter from a modeling perspective.

You typically give an outmark in cost as a percentage of revenues.

Just any that kind of data would help for the modeling standpoint.

Sure, Tom.

This is Brad.

For the quarter, I can give you some direction on some of the SG&A components.

Marketing year-over-year in the quarter was down 40 basis points.

We saw selling costs go up 60 basis points.

Let's remember that a big part of selling is cost is our direct-to-consumer cost, so obviously you would expect those to grow at a faster pace cost-wise and you saw also saw some increases year-over-year in product innovation supply chain that we talked about relative to building our teams.

Great.

Thanks, guys.

Best of luck.

Thanks very much, Tom.

This will conclude today's answer and question session.

At this time I'd like to turn the conference back to Mr.

Kevin Plank for any additional or closing remarks.

Number on, I'd like to start by just congratulating our team on what we thought was a very solid effort this quarter and particularly through our customer base, but more importantly I want to reiterate the fact that we certainly aren't declaring victory by any stretch.

We have a long way to go, a lot of work and hopefully you sense one thing from our team and our performance is that we have the resolve to do it and we will continue to go to work everyday.

So, with that I wish everybody a happy Halloween and take it from there.

Thank you.

This will conclude today's conference.

Thank you for your participation.