Under Armour Inc (UA) 2009 Q4 法說會逐字稿

Good day, everyone.

Welcome to the Under Armour Incorporated fourth quarter earnings and webcast conference call.

Today's call is being recorded.

At this time, I would like to turn the call over to today's speaker, Ms.

Alex Pettitt, Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good morning to everyone participating in this morning's conference call.

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

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

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

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

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

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

There you will find this morning's press release, and on our Webcast page, images of a number of the products and initiatives we will address on the call.

Joining us on today's call will be Kevin Plank, Chairman and CEO, followed by David McCreight, our President, and finally, Brad Dickerson, our Chief Financial Officer, who will discuss the Company's financial performance for the fourth quarter and provide an updated outlook for 2010.

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.

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

Thank you, Alex.

Good morning, all.

When we spoke to you early last year, we talked about Under Armour having multiple levers to pull to fuel our growth.

Today I want to discuss how pulling those multiple levers enabled us to finish strong in 2009, and how investing in these five levers, Men's Apparel and Women's Apparel, Footwear, International, and our Direct-to-Consumer channels, positions us well for 2010 and beyond.

We closed with a great fourth quarter.

Revenues up 24%.

We had our best quarterly gross margin number in two years, and we finished the year with a strong balance sheet driven by improved inventory management.

The combination of our strong brand and growing operational strength gives us confidence that we are positioned to win in this decade by continuing to strategically invest in our growth.

When we look back all over 2009, we are even more proud of some of our other accomplishments.

For the full year we grew our top line 18%.

We maintained our leadership position in our core compression business, even as large competitors heavily discounted their compression products.

We grew our share in non-compression, which is the key to our long-term apparel revenue story, and most importantly, we continue to bring new consumers into the Under Armour brand with new strength in key categories, and even greater on-field authenticity at every level.

From the NFL and college fields all the way down to the middle school soccer field, the Under Armour brand has never been stronger and more engrained in the fabric of American sports.

So today I would like to focus on how we are growing and investing on multiple fronts, continuing to leverage the opportunities immediately in front of us, while at the same time investing, so we are prepared for what lies ahead.

In 2009, we saw double-digit growth in our business units, with Apparel up 13%, Footwear up 61% and Accessories up 11%.

For the full year, our Direct-to-Consumer business grew nearly 50%.

We have added depth to our Women's team across all functions, and will continue to bring the right fit, the right colors, and cohesive merchandising to our Women's line moving forward into 2010.

Our Direct-to-Consumer business was a key driver of our 2009 growth, and will be a key element of our 2010 distribution expansion strategy.

Our goal is to continue bringing greater access to the Under Armour brand in a measured and thoughtful expansion.

David will discuss in greater detail our long-range strategy to bring our brand to where our consumer shops.

On the investment side, we made great strides in building the organization that will deliver long-term growth for our Company, and especially in Footwear.

And if we dive down into our Footwear business for a minute, we think you will see an organization that, much like Under Armour overall, is deep in both execution and investment mode.

On the execution side, cleats are a great example of how we use our brand strength and knowledge of athletes, to build great footwear for the world's best football and baseball players.

We are entering our fifth year in the cleated business, and our success there drives our confidence that we can accomplish that same thing for athletes of all types.

But we know that footwear is a learning process and we learned a lot in 2009.

We learned we need to invest capital, both human and financial, to fully leverage the Under Armour opportunity in Footwear.

We have since brought years of footwear industry experience into Under Armour, and added depth throughout the organization.

We have three goals for our Footwear business in 2010.

First, strengthen the categories that we've already entered and established ourselves, particularly cleats.

We expect to take market share in both football and baseball cleats in 2010 and beyond, additional market share.

Second, we are repositioning our training and running categories so that we are better organized to develop product that will move us down the path of being a multi-billion dollar global brand.

Third, we are developing new footwear categories that will begin to impact our business in 2011 and beyond.

Being a great footwear company is not just about making a big splash with launched products, and we have no major footwear launches planned for 2010.

However, we are developing our basketball footwear and positioning for a future launch.

While you won't be able to find Under Armour basketball footwear for sale at retail, you will find it being tested and authenticated throughout 2010 on the feet of ten Division I basketball programs, more than 20 top high school programs, as well as on the feet of NBA Rookie of the Year contender, Brandon Jennings.

We can be patient because of the multiple growth levers that allow us the patience to prioritize.

For instance, in 2009, Direct-to-Consumer and Footwear represented the two largest components of our 18% top line growth, and we anticipate 2010 top line to be driven by an accelerating wholesale Apparel business, and once again a strong Direct-to-Consumer channel.

Our Apparel business grew 13%, and topped the $650 million revenue mark in 2009.

Let me state it very simply, our Apparel business finished 2009 very strong, and we are in great shape heading into 2010.

Performance apparel remains the story in the athletic channels, and Under Armour continues to lead in both volume and our ability to maintain premium pricing.

Our apparel growth in 2009 was important to our long-term story, as we continue to grow our non-compression loose fit business at a faster rate than our core.

There is always tremendous focus on the base layer category, and that makes sense, as it has been such a key driver of industry growth.

But the facts are that while our compression business is where we have made our name, our business beyond compression is what will drive our growth going forward.

So our focus in apparel is two-fold.

Grow the core by continuing to lead in innovation and authenticity, and grow outside of the core by bringing the promise of Under Armour performance to a new audience.

Our brand communication is also two-fold.

First, we are protecting our core business, by expanding our authenticity with several recent deals.

Starting this July we will be outfitting Boston College's athletic program.

Also beginning this year, we are teaming up with IMG Performance to host athlete combines at regional sites across the country.

We will host more than 50 combines this year, touching thousands of young athletes on a grass roots level, showcasing the Under Armour brand, as well as new products and categories from us like Footwear.

Building momentum one athlete at a time.

As part of this partnership, we are developing a comprehensive athletic training platform that will establish a global measurement standard for improved sports performance, health and fitness called Combine360.

We believe the Combine360 score will be as universal for athletic performance as the SAT score is for academics.

Protecting our core means being about team sports, and what has historically been at the heart of that for our brand is football.

From the opening whistle at the first college game in August all of the way through the ballgames, playoffs and the draft in April, our brand speaks the language of football.

All this week, NFL coaches and scouts and the top senior collegiate players are at the Under Armour Senior Bowl in Mobile, Alabama.

We are the official sponsor of the NFL Combine held in Indianapolis at the end of next month, outfitting every player head to toe in Under Armour.

We will be telling our brand story during the NFL draft in April, which this year will be held in prime time on a Thursday night.

We then use these authentic platforms to launch key products for our brand, like the upcoming Under Armour core short that we are very excited to introduce to our consumer.

It is a patented compression short with an iconic X-type design that stretches across the body, which stabilizes and supports your muscles and core unlike any product before it.

The look of the short is as technical as its performance, and we are currently showcasing it on athletes at the highest level.

But it is a unique product that will be just as relevant for athletes at any level, and available at retail beginning this spring.

So when we talk about team sports or product innovation, we do it authentically; we do it where our consumer lives; and we do it nonstop.

Again it is about protecting our foundation, staying close to the heart of athletes, and not doing so by just adding another traditional sports marketing asset to our stable.

But just as we are rapidly growing our Apparel business outside of compression, we are investing in brand communication beyond the football field as well.

One great example of this in 2010 will be happening next month at the Winter Olympics in Vancouver.

Given our position as the market leader in performance base layer, the Winter Olympics gives us an opportunity to communicate our innovation story to a truly global audience.

We are the official uniform supplier for the US Bobsled team, and have created one of the most aerodynamic uniforms to appear on the track.

We are also official uniform suppliers to the US Freestyle Ski Team that includes Under Armour athlete, Lindsey Vonn.

Lindsey won her eighth event toward the World Cup this past weekend in Italy, and is unbeaten in the downhill this season.

She will be a favorite to medal in Vancouver, and has been appearing in our most recent ColdGear commercial that we made together with our partners at Dick's Sporting Goods.

Our brand communication strategy is in-sync with our overall growth strategy.

We are focused on maintaining our core while bringing new consumers into the brand.

We will continue to invest in our growth drivers, pulling the multiple levers to ensure long-term growth, and we will continue to invest in brand communication and distribution, that will bring the Under Armour performance story to a new audience.

Now I am going to pass it over to David who will discuss how our consumer-focused distribution strategy and our growth in Apparel will drive our business in 2010.

David?

Thank you, Kevin.

This morning I will be covering three areas critical to our growth in 2010 and beyond.

First, the positioning of our Footwear organization in product development for long-term growth; second, accelerating Under Armour revenue growth to our Apparel platform; and third, our consumer-focused strategy to expand the reach of our Direct-to-Consumer business, to new doors in existing channels and targeting new distribution.

To follow on Kevin's theme of investing and growing on multiple fronts, I am confident saying that all three of these initiatives are key elements of our long-term growth story.

For 2010, driving apparel growth and expanding our distribution to new customers will continue to have a material benefit on our current and mid-term growth targets, while building the foundation in Footwear will bring greater benefit to 2011 and beyond.

Footwear is a key part of our mid- and long-term growth story, and 2010 will represent a year of continued investment and concentration for us.

With the strong momentum we have in both our Apparel and Direct-to-Consumer businesses, we are not reliant on Footwear to grow the top line in 2010.

We are fully capable of achieving our 2010 targets for top and bottom line growth, while taking a more conservative approach to Footwear revenue.

We believe strongly that coming out of 2010 with both clean inventories and a markedly improved Footwear product line positions us well for growing Footwear starting in 2011.

Our focus for the team in 2010 will be on delivering excellence in the Footwear categories that we have already entered, and where material opportunities exist for growth in 2011 and beyond.

For instance, cleated footwear which we launched four years ago, is a study in how Under Armour successfully entered the market, grew to command a substantial market presence.

Earlier, Kevin talked about the strength of our cleated business.

One where we have worked closely with our athlete partners to develop football and baseball cleats that deliver the level of performance they expect from Under Armour.

We entered the cleated category several years ago, learned from our marketplace experience, adjusted our game plan, calibrated the offering, and the by-product of those efforts is reflected in the strength in our cleated market share, and our double-digit growth trajectory for 2010.

In our newer running and training categories, two large segments where we have been recently embraced by our partners and athletes, we are using 2010 to accelerate our learning curve.

We are rapidly absorbing the lessons from our recent marketplace experiences, recalibrating the product offering and supply chain, and moving quickly to build a world class Footwear team.

Based on the strength of our brand, the response from our retail footwear partners to our future direction, and our progress in building our team, we are confident that we will make material progress in 2011 and beyond in the run and training categories, just as we have shown the ability to command strong share in the cleated businesses.

As Kevin said, our Apparel story coming out of Q4 and into 2010 is robust.

We finished 2009 with strong growth across Men's, Women's, and Kids.

Our strong performance in base layer and training is evidence that our core business remains strong, while our growth in both mountain and golf shows that our brand is playing well outside of the core categories of compressions.

One of the stated goals of our Apparel engine was to continue the expansion of our Women's business to rival that of our Men's.

We closed 2009 with momentum in women's apparel and expect it to continue in 2010.

With our increased understanding of the female athlete, development of the Under Armour fit, the evolution of our merchandise flow, and with the support of our partners we continue to gain floor space, and by focusing on products and intensifying our market voice around our teen girl target, increasing share in our bottoms offering, and the new training products being introduced, we have confidence that we will have a strong 2010 in Women's Apparel as well.

Much like Kevin's discussion of paralleling growth with investments, our distribution story is expanding -- is around expanding our core contacts, while adding new athletes through additional reach.

First and foremost, our long-term distribution strategy is consumer focused.

We intend to meet our athletes where they prefer to interact with the brand.

Our distribution is tightly controlled, especially when compared to some of our athletic apparel competitors.

And each additional layer of our distribution reach will be intentional and have the consumer in mind.

The key to expanding access to the brand, is doing so in a way that keeps what is special about our brand special.

We are keenly aware that our core consumer seeks out our product in a much different manner than their predecessor one generation ahead of them.

The retail landscape has shifted dramatically over the past few years, and every brand has had to adapt to this new way of selling.

As a brand with a young core consumer, we have been witness to this in an even more acute way.

As we said on earlier calls, we believe there remains opportunity to grow Under Armour Apparel business within our existing base of retailers, as well as explore other ways to expand our reach.

The largest percentage of our distribution growth in 2010 will come from existing wholesale partners through a combination of new doors and increased dedicated space within existing doors.

The second piece of our distribution expansion and the area that was so critical to our revenue growth and margin expansion story in 2009 is our Direct-to-Consumer business.

As we continue to expand our brand's access to new customers, it becomes even more critical that we focus on the way our brand is presented to the consumer.

Our ability to control and influence this presentation at retail is central to our strategy of expanding our distribution.

With the key facets of our Direct-to-Consumer business, our Global Direct online business and our Factory House outlet stores, we can ensure that the brand presentation and merchandising mix of our product is aligned with our growth strategy.

Being a brand that is for and about athletes, we have always prided ourselves on maintaining an intimate relationship with our target athletes, and while we believe our investment plans for Direct-to-Consumer business are meaningful, the benefit to our margin and inventory management story, and our ability to bring the brand to new consumers is meaningful as well.

We will continue to invest in our Global Direct business ensuring that we have a robust shopping experience online.

Whether they wind up buying online or not, we know that a large percentage of Under Armour fans use the web as a primary element of their shopping experience.

We need to provide that consumer with the ultimate Under Armour superstore in an online environment, with access to and information about everything we make.

In 2009, we invested in our Global Direct business, and saw the benefit of those investments in both our top line and gross margin, and we believe continued investment in and even more focus on the global site, will deliver both financial and strategic benefits in the future.

Our Factory House outlet stores have proven to be a great channel as well for bringing new consumers into the Under Armour brand.

This channel has meaningfully evolved over the past few years, and gives us a great view into the consumer.

In addition to being a great inventory management tool we are able to bring the Under Armour brand to this consumer in an environment they have clearly shown to like, and surrounded by other top brands, bring the brand to places where we are not well-represented geographically by our existing wholesale distribution.

For 2010, our plan is to open 15 Factory House stores, which would bring us to a total of 50 stores by year end.

While we believe that is an appropriate number for a brand that is approaching $1 billion in sales, we also believe that number will continue to grow over time as the channel evolves -- continues to evolve, and our inventory management structure evolves as well.

In closing, I will echo Kevin's comments about our unique ability to pull upon multiple levers to drive growth.

In 2009, we leaned on our Footwear and Direct-to-Consumer businesses for revenue growth.

In 2010, Direct-to-Consumer and wholesale Apparel will be the primary drivers of revenue growth, while we continue to make the strategic investments necessary, to keep our current and future growth drivers primed to deliver great results in 2011 and beyond.

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

Thank you, David.

Kevin and David have been taking you through some of our highlights and strategies of our business.

I would now like to spend some time on our fourth quarter and full year financial results.

This year demonstrates the financial discipline we continue to develop within our organization.

We continue to invest in the critical areas of our business that will drive sustainable profitable growth, while managing our costs effectively and strengthening our balance sheet.

These are all keys to putting us on a path to drive successful long-term growth in 2010 and beyond.

Our net revenues for the fourth quarter were up 24% year-over-year to $222 million.

This success was largely driven by Apparel, which was up 26% to $192 million.

An important part of this Apparel growth came from our Direct-to-Consumer, which continued its strong growth, up 53% during the quarter, with success primarily in our factory outlet stores and web.

Our international business also continues to gain track traction, and was up 45% for the quarter.

Footwear was down approximately $500,000 to $8.7 million in the fourth quarter, due to returns and sales reserves.

Driven by our fourth quarter results, we exceeded our previously provided outlook for both our top line and EPS for the full year.

For the full year, net revenues increased 18% to $856 million, compared to $725 million in 2008, above our previously stated outlook of net revenues in the range of $830 million to $835 million.

Our Footwear revenues increased 61% for the year, with our entrance into the running category, while Apparel gained 13% to $652 million, with strength in Men's, Women's and Youth.

Direct-to-Consumer grew 49% in 2009, representing approximately 18% of net revenues, while our international business was up 48% in 2009.

Fourth quarter gross margins were 51.4%, compared with 50.7% in the prior year's quarter, primarily due to strong revenue growth in our higher margin Direct-to-Consumer channel, and a favorable product mix shift towards Apparel.

For the full year, gross margins were 48.2%, compared with 48.9% in 2008.

Although still a small percentage of sales, the liquidation of excess inventory to third parties impacted our gross margin for the full year.

These liquidation sales were one of our key balance sheet initiatives specifically around inventory management, which we feel was especially important in the 2009 environment.

The growth in our Footwear business also impacted our gross margin on a year-over-year basis.

These items were partially offset by strong revenue growth in our higher margin Direct-to-Consumer business.

Selling, general and administrative expenses were $87 million in the fourth quarter of 2009, or 39.3% of net revenues, compared with $68 million, or 37.9% of net revenues in the prior year's period.

This increase was primarily driven by the continued expansion of our Factory House stores, and higher personnel costs.

For the full year, selling, general and administrative expenses were $328 million, or 38.2% of net revenues, compared with $278 million, or 38.3% of net revenues in the prior year.

Similar to the fourth quarter the year-over-year dollar increase in SG&A was largely driven by the continued expansion of our Factory House outlet stores, and the higher personnel costs.

In addition, marketing expenses increased $11 million in 2009, and were 12.4% of net revenues, compared with 13.1% in 2008.

Our full year SG&A growth of 17.9% exceeded our previous outlook of growth in the mid-teens.

This was primarily driven by increased Direct-to-Consumer variable costs relative to fourth quarter top line, and performance equity expense tied to the impact our strong fourth quarter results had to the full year 2009, as well as our improved visibility into 2010.

Operating income during the fourth quarter increased 18% to $27 million, compared with $23 million in the same period of the prior year.

Due to the SG&A deleverage during the quarter, operating margin was 12.1% in the fourth quarter, compared with 12.8% in the prior year's quarter.

For the year, operating income increased 11% to $85 million, compared with $77 million in the prior year.

Operating margin for 2009 was 10% of net revenues, compared with 10.6% in 2008.

The primary impact to our full year operating margin was the declining gross margins I discussed earlier.

Below the operating income line we had some significant improvements.

Our enhanced and expanded currency hedging strategy significantly reduced our exposure to foreign currency fluctuations below the operating income line during the fourth quarter and the full year.

In addition, due to decreased losses in our foreign subsidiaries and tax planning strategies implemented during 2009, we had improvements to our effective tax rate for both the fourth quarter and for the full year.

Our effective income tax rate in the fourth quarter was 42.1%, compared with 53.4% in the fourth quarter of 2008.

For the full year our effective income tax rate was 43.2%, compared with 45.3% in 2008.

Our resulting net income in the fourth quarter was up 83% to $15 million, compared with $8 million in the prior year period.

Fourth quarter diluted earnings per share was $0.30, compared with $0.17 in the prior year, an improvement of approximately 76%.

Net income increased 22% for the full year to $47 million, compared with $38 million in 2008.

Diluted earnings per share for 2009 was $0.92, compared with $0.76 in the prior year.

As we have noted in previous quarters, we continue to focus on strengthening our balance sheet and improving our working capital efficiency.

These efforts continue to pay off, resulting in total cash and cash equivalents increasing over $85 million year-over-year to $187 million at year end.

Cash net of debt increased $111 million to $167 million at year end.

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

Net accounts receivable decreased 2% on a year-over-year basis.

This came as a result of our conservative approach to credit terms during 2009, the strong efforts of our collections team, and the fact that our Direct-to-Consumer business was a higher percentage of our overall business.

Inventory at quarter end decreased 19% year-over-year to $148 million, compared to $182 million at the end of 2008.

This improvement in inventory efficiency year-over-year was driven by increased demand for our product in the fourth quarter of 2009, increased liquidations of excess inventory during the year, and continued improvements to our inventory management from systems and processes implemented during 2009.

Our investment in capital expenditures for the year was $25 million, compared with $41 million in 2008.

Our previous outlook was for 2009 CapEx to be in the range of $30 million to $35 million.

Capital expenditures were lower than anticipated in 2009 primarily due to the shift in timing of some investments in our distribution facilities and IT infrastructure.

Now moving on to our full year outlook for 2010.

Previously we provided an outlook of 2010 net revenues and EPS growth in the high single to low-double digits.

Given our current visibility, we are raising the low end of our outlook and now anticipate 2010 annual net revenues in the range of $945 million to $960 million, an increase of 10% to 12% over 2009.

2010 diluted earnings per share is expected to grow in-line with net revenue growth.

It is also important to note that both net revenues and EPS in 2010 are expected to have first half/second half seasonality similar to that of 2009.

We expect our top line growth in 2010 to be fueled by continued strength in Direct-to-Consumer, as well as higher growth in our US wholesale Apparel channels.

US wholesale Apparel growth accelerated in the fourth quarter, and based on current bookings and feedback from our accounts, we believe our US wholesale Apparel sales will continue to be a point of strength in 2010.

As Kevin and David mentioned earlier, our focus in 2010 for Footwear is to continue to excel in the cleated categories, while taking a conservative approach to the running and training categories, to better position ourselves for new product in 2011.

As a result of this approach, we are planning Footwear revenues to be down in 2010, with the most significant dollar impact occurring in the first and third quarters.

As Kevin and David both stated, we are in the Footwear business for the long-term.

As a business, we have many levers for growth and we believe that this prudent strategy best positions us for the future.

Driven by the product mix shift towards Apparel and the continued anticipated growth in our higher margin sales in Direct-to-Consumer, gross margins are planned to be improved in all four quarters of 2010 over 2009.

In 2010 we will continue to invest in areas of our business we feel are important to drive near and longer term results.

We see these investments impacting our selling, general and administrative expenses in four critical areas of our business.

First, we will continue to invest in marketing in the range of 12% to 13% of net revenues.

Second, within the selling cost area, we will continue to invest in Direct-to-Consumer, specifically around Factory House and Global Direct online.

As David stated Direct-to-Consumer will be one of the primary drivers of our 2010 growth, and we are planning the addition of 15 new Factory House stores, and also anticipate incrementally investing in our online website.

The third area of our investment focus will be around product innovation and supply chain, as we continue to build the teams that will innovate, design, develop and bring to market Under Armour products in 2010 and beyond.

And fourth, we will have increased investments in Information Technology around analytical tools to support the growth of our Company longer term.

With these investments to support our growth, SG&A is expected to exceed our top line growth in 2010.

We believe these investments are the key to building the growth platform to provide accelerated profitable growth in future years.

Based on continued tax planning strategies we expect our effective tax rate in 2010 to improve approximately 50 basis points from the 2009 rate of 43.2%.

We anticipate fully diluted weighted average shares outstanding of approximately 51.1 million to 51.3 million for 2010.

Now a quick outlook for a few key balance sheet items in 2010.

We anticipate that the seasonality of our cash balance in 2010 will be consistent with prior years, with the second and third quarters having the lowest cash balances of the year.

Our key inventory metric remains turns, and we will continue to drive improved inventory efficiency in 2010, while also balancing the important need to service customer demand.

For 2010, including the impact of shifting some investments from 2009 to 2010, the capital expenditures for 2010 are expected to be in the range of $35 million to $40 million.

We are proud of our accomplishments in 2009, but as we have stated in the past, we have many opportunities to improve gross margin and operating efficiency, and these will be a focus for our business as we head into 2010 and beyond, as we strive to reach our long-term targets.

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 Instructions).

We will go first today taking a question from Omar Saad of Credit Suisse.

Thanks.

Good morning.

Good morning, Omar.

Nice job on the quarter.

I actually have a couple questions.

First, David, you were talking about some of the distribution opportunities for the brand as you think about Apparel growth opportunities out there across the region for the Under Armour brand.

You talked a lot about the direct side.

Can you give us a little bit more color on, outside of direct and your wholesale businesses how we should be thinking about some of those opportunities?

Sure.

As you may have noted from earlier calls, when we look at the brand, we see just great strength in the brand, but we also see gaps in our distribution.

And we are very proud of our existing partnership, and believe we are going to continue to grow with our existing partners in wholesale, and that is going to be our primary targets for growth.

And as you just mentioned, we think Direct-to-Consumer we are going to then deploy that as a lever to fill in some of the gaps.

But as we look across the landscape and looking at where athletes are and where they are being underserved, you find --- we are going to find areas that our current partners don't fill in those gaps.

A good example is the Pacific Northwest where due to some bankruptcies in 2009, and even before that some lack of penetration, we went and studied the market and evaluated our opportunities, and identified a very good potential future partner like Fred Meyers to fill in that gap, but that solves a very specific geographic need, and that is not a broad national opportunity.

In addition to that, we still know there are lots of opportunities in urban markets, and we have still great opportunity to reach athletes in the malls, and we are going to continue to work on solving that in 2010.

Okay.

Great, thanks.

And does that, do you think about Europe in terms of some distribution opportunity there?

I don't know if you really highlighted it on the call.

Omar, hi, this is Wayne.

In terms of our European distribution, I think we are really proud of what we have achieved so far in Europe in terms of authenticity with Europe, and we truly recognize that to be a global brand.

We are going to have to be relevant in both Europe and Asia one day.

But our Europe strategy right now is to continue to build the equity that we have with our athletes on field.

One particular area that we have done well with is Youth, and golf is another callout.

But right now as far as Europe is concerned, we will continue to refine our strategy, but we will really leverage on the investments that we made in the past and let them take root.

Okay, thanks.

And can you also elaborate on the comment about repositioning Training and Footwear, what that means, how we should think about that?

You are getting all the meaty questions, Omar, this is Kevin.

Let me spend a minute on Footwear if I could, and just dive a little deeper there.

David and I were pretty clear in speaking through the five growth levers that we have as a company, giving us the ability to lean heavier on one during any particular quarter or phase of our growth, and what we did in 2009 I think was evident of our ability to pull on Footwear and pull on the Direct-to-Consumer, and as we mentioned heading forward to 2010 with the reacceleration we are seeing in our Apparel business, and again as David mentioned, around distribution strategy again leaving us opportunity.

One thing about Footwear is first of all, we are absolutely committed to it.

We absolutely see momentum in it.

The idea about repositioning is just making sure that I think that we are spending time prudently to invest in the right leadership, and continue to bring on the right amount of talent.

We want to focus I think this year on being excellent in categories we are in and taking advantage of momentum that we have built and established, in things like our cleated business.

And again, football cleats and baseball cleats, we will sell more pairs this year, our market share will grow this year, and you will see more consumers and more kids on field wearing and participating in that product.

Our training and running programs through, that is where we want to really reposition.

I think you are going to see a big coming out party for us in 2011, but again it says that 2010 is that we have got good product in the marketplace, and our distribution continues to support us.

You are not going to see a drastically different presentation at retail either this year.

So we didn't see any surprises in Q4 that really changed our position on the way that we saw Footwear.

We feel really good about where we are, and more important, we feel really great about where we are heading.

The last thing is, what we are doing as we look at some of the new categories too, is that 2010 for us is a year that we really want to use to become excellent in the categories where we are doing.

Cleated is a great example.

It has come back and take a fresh look at Training and really bolster that category, and as well the same thing in running is that we want to offer the consumer, one thing we found in 2009, the consumer is highly apt at looking at what the price to value relationship is, and we want to make sure that comes through from our supply chain, our sourcing, our development, and of course, great looking product that actually performs to retail shelf.

So, we have all hands on deck and absolutely committed to becoming excellent in this category going forward.

Thank you.

Our next question comes from Kate McShane of Citigroup.

Hi, good morning.

Hi, Kate.

I was just wondering if you could give a little bit more color around the wholesale Apparel growth in the fourth quarter.

How much of your sales growth do you think was being pulled forward because retailers were a bit light on inventory, and do you think that is a phenomenon that will continue throughout 2010?

Kate, as we said we had really strong performance in Q4.

Certainly last Q4 we left some opportunity on the table with our partners.

But in general, we are seeing really strong core base growth out of it.

It is more than restocking, and that is why we are so bullish as we look to 2009 in Apparel through the distribution levers, through the growth within existing floor space, and share we are gaining with our existing partners, new product introductions we feel very strongly about, both the balance in wholesale and Direct-to-Consumer driving very strong results for Apparel in 2010.

With that, Kate, too, the emphasis that we put on inventory in 2009 is one of the things that had us with inventory being down 19% over the year as well.

We look and say we are really well-positioned we think as a company, and we think that going forward as our systems really begin to take hold, and we become better I think positioned as a brand, and just better at forecasting some of the other things that there is, of course, additional upside for us as we get better at what we do.

Okay, great, thank you so much.

We will take our next question from Jim Duffy of Thomas Weisel Partners.

Good morning, everyone.

Great work on the balance sheet.

Very nice to see the inventory improvement.

Related to this, I have a couple of questions about the outlet.

So 15 new outlet stores that is better than 40% door expansion on the outlets.

Given where the inventory position is, it seems like the outlet strategy is about more than just profitable inventory management.

How much of the revenue you are doing through the outlets is currently from first run products, versus excess inventory?

And then a follow-up to that, what are you hearing from key channel partners like Ed Stack about the outlet strategy?

As we look at it and go forward, where we have made changes, we think it remains a very viable portion of our Apparel business in terms of providing a liquidation, a prudent vehicle for liquidation, but we are also seeing opportunities to manage the brand experience, complete size ranges, color ranges, and ensure that the experience for 365 days a year is what Under Armour athletes expect in that location, and we have partnered and communicated very closely with our key partners about our growth plans, and they are aware of where we go geographically.

It is a partnership.

I think that they've been -- in terms of where our partners are first and foremost, they are committed as to what is the growth plan for Dick's Sporting Goods, or The Sports Authority, or anyone else, so we are highly keen on putting together plans that continue to grow the Under Armour presence, and more importantly, grow their overall business.

It is not about where else we are selling, as much as how we are affecting and impacting their business.

That is our commitment to them, and I think 2009 was a great example of our ability to deliver that for them as well.

Are you doing specific things that differentiate the product that you are representing in the outlet channel, versus what is represented at retail with wholesale partners?

Yes, we are.

It is different products, but it is still first-grade high quality product that is going out in the marketplace.

But also don't think of it as the outlets being the primary focus.

It is really a multi-pronged strategy between wholesale, Direct-to-Consumer being on our online web superstore that we are going to continue to build, and the Factory House stores filling in that last component.

Okay, and then final question about this, Brad, as you project this out, how does growth in the contribution of outlet stores impact the return on invested capital, versus the alternative growth vehicles?

Yes, Jim, it is a good question.

Obviously Direct-to-Consumer in total is one of our best return on invested capital models we have, Factory House specifically again a very strong return on invested capital.

When you look at Factory House, obviously higher gross margins than our overall business, but you also do have some increased selling, general and administrative expenses to run those stores, and that has been a call out of why our sales costs have increased year-over-year is really the buildout of those stores.

But overall from an operating margin perspective they are very positive to our business, and from a return on invested capital, they are one of our best models in the business.

Great, thanks.

Thank you.

Our next question comes from Robby Ohmes of Bank of America Merrill Lynch.

Oh, thanks.

Good morning, guys.

Hi, Robby.

Just a follow-up question on the wholesale outlook for 2010.

I don't know if you guys could maybe speak to it this way for us.

When you look at --- you are looking for good growth in 2010, can you break it up into sort of in your view how much you think 2010 there is still restocking going on in apparel, versus new product introductions, versus new doors?

I think you guys mentioned Fred Meyer, when would that be rolling in?

Could you also give us a feel for how you think that is going to break out, Men's wholesale Apparel growth, versus Women's wholesale Apparel versus Youth?

That would be I think incredibly helpful for all of us.

Thanks.

Coming off of a strong Q4 and 13% growth in 2009 and with the line of sight we have in looking at -- with our partners in future bookings, we are seeing strong growth in our wholesale Apparel business, both through new products, additional doors, and additional floor space within additional doors.

We have reviewed the line and both our partners and ourselves feel very confident about what we are going to deliver in terms of results in 2010.

We think while we are going to also exit 2009 with clean inventories, we don't think it is an issue of restocking.

We think our partner is in a very healthy inventory position, and feel very strongly about what we are going to deliver in 2010, and we think what is going to happen with our Direct-to-Consumer wholesale online and Factory House stores, will be equally balanced.

It is not overly weighted on one side or the other.

Men's, Women's and Kids are all showing growth.

We discussed earlier we believe there is opportunity to continue to grow Men's Apparel in North America and not to mention Apparel at large.

Men's, Women's and Youth will all be growing substantially in the year.

Does one stand out pretty dramatically for 2010?

So, for example, I know you guys really talked about Women's a lot heading into '09, would you say '10 is going to be more balanced between those three than it was in '09?

Women's will continue to lead the pack followed by Youth and Men's.

Great.

Thank you very much.

Rob, just let me follow on real quick of just compression versus loose, I think people understand that as we get and build out a better, we have moved beyond where compression is dominant in our business.

We actually sell more loose product today than compression, but we still see compression growing for us, we still see opportunity.

I mentioned the core short in my script of us innovating at the core, and being able to really reach and explain that and lead for our consumer.

But also the loose fitting product is something that is a real difference and driver for us across all channels between Men's, Women's and Youth.

Fit has been a big opportunity for the Company, where we have gone from one compression and one loose fit, to now we have compression, we have fitted, we have semi-fitted, and we have loose.

So we are really drilling into the things that are relevant to our consumer.

Thanks, Kevin.

That is actually really helpful.

We will go next to Michelle Tan of Goldman Sachs.

Great, thanks.

Kevin, just following up on the compression point.

I think I have heard up until recently you were still about 40% compression product.

How do you think about the right ratio between compression and non-compression, and ultimately is there some trade-off as the non-compression grows, or is it all incremental?

I don't think so.

I think that -- we like organic growth, we began as a compression brand, but I don't think that defines Under Armour, as much as being a performance brand.

So whether it is compression, whether it is loose apparel, or frankly some of these new categories that we have found, where the brand has the right or the ability to enter, call it Footwear in our fourth or fifth year, now that we have established ourselves in a growing market, which you will see happen as we are in the process of repositioning training and running, we are going to be successful there, and making sure that we authenticate ourselves in the right categories like basketball.

How your question evolves into how can we be relevant in entering the basketball category some day.

We are going to earn the right, we are going to wait for the consumer to demand that we are there, and we think more importantly, that we have a strong point of view that gives the consumer a value proposition, an equity proposition of what we are being able to deliver to them that is unique and different.

Our job is to innovate, and I think you will see us do that at the very tip of the spear, but our job is also to elevate those base layer entry price points.

2009 was really defined by discounting product, and I think if you walked in and you saw the way Under Armour was positioned in the store, there wasn't wholesale selling off of Under Armour versus some of our competitors.

And the fact that we were able to not only maintain, but in some cases grow market share in that environment, I think is a real testament to not only the brand that we built, but more importantly the momentum that we have going forward.

We feel very, very good about our position in Apparel, and I think everyone gets excited about what that growing wholesale Apparel business can mean for us.

Is there a magnitude as we think about the non-compression piece, if it is 60% today, should it be 80% over time, should it be 70%, 90%?

Yes, I think base layer, and layering in general I think is almost a new phenomenon, the way that people dress is not putting on a big jacket and going out, as much as people are smarter about what layering can mean to them.

We think there is almost an untapped market, that we are continuing to uncover in base layers as a whole.

I don't know if we are as specific as saying or mandating that we need to be X percentage compression versus X percentage loose.

There is obviously a lot more people wearing a loose product, or capable of wearing a loose product, than are capable of wearing a compression product, and it is not a vision that we have some day of everyone walking around in form fitting clothes, but we do want people walking around in better clothes.

We do think that people can think and expect more from their apparel than just the color block or the design on the front that is what drives someone to wear it.

We think that what you will see from Under Armour is our job is to be the thought leaders of all things apparel, of all things footwear.

But really what we are investing in on the research and development side, is what are those next great technologies around product and particularly around apparel where we can lead.

So long story short, we are proud of our market position in compression.

We are not succeeding compression, it is now becoming a loose fitting brand.

We think we continue to lead on the compression side.

In fact, we think that the authenticity, and more importantly, the smarts that we developed from understanding compression, is what gives us great credibility and capability of developing great loose fitting product as well.

We will continue to push on all fronts there.

Great.

Then a question on gross margin just quickly.

It seemed like there was a lot of opportunities in the quarter from the mixed benefit of direct, deflation, the discounting that happened when the world was collapsing last year, so help us think about what some of the offsets were this quarter, and then magnitude of the kind of increases you are thinking about for 2010?

Michelle, this is Brad.

When you look at the quarter, we called out Direct-to-Consumer being a big driver of the upside of our margins year-over-year.

That was about a 70 basis point impact was Direct-to-Consumer.

Everything else in the quarter for the most part there was some impact here and there, up and down, but it was pretty small and minor compared to the Direct-to-Consumer impact to the upside for the quarter.

When you look to the full year next year and going forward, we talked all along about what drives our gross margins as a business.

Obviously Direct-to-Consumer is a big benefit to our margins on the upside with Direct-to-Consumer as it continues to grow.

So as we have talked about a big growth driver for us in 2010 is Direct-to-Consumer, and Direct-to-Consumer business is very strong in the back half of the year, so there should be a benefit to the upside of our margins year-over-year.

On the flip side of that we talked about Footwear being lower margins than our overall margins in our business.

Obviously 2009 we had a lot more Footwear in with the entry into run.

We talked about Footwear being down on the top line year-over-year for 2010.

That will have a positive impact to gross margins in 2010 also, so that is why we called out the fact that we see our margins being improved in all quarters in 2010.

Great, thanks, that is very helpful.

We will take our next question from Chi Lee of Morgan Stanley.

Good morning, guys.

Hi, Chi.

Another question on the wholesale Apparel distribution for 2010.

As you look out after you've added doors and expanded distribution within your existing customers, do you expect a meaningful change in the A, B, C, type quality composition of the doors that you are distributing for 2010?

No, we still see opportunity.

We really look at it by market and by customer and where they are located, and we still see quite a bit of premium space in premium locations that we are not distributing, so we are still very bullish.

And then I know earlier it was still discussed that the mall doors continued to be an opportunity.

Can you talk about how that expansion in the mall will work with a little bit more of a conservative approach to Footwear?

Is it apparel that is really going to fill the space in the mall doors, or is it just greater door expansion with your mall partners?

We think it is ultimately going to become both -- a combination of the brands -- our drivers in Footwear and Apparel that is going to fill the void in the mall doors, and you are going to see that take shape as the product is ready and matures, and we reposition Footwear.

We also see opportunities for accessories down the road as well.

And lastly, with inventories just being down about 19% at the end of the fourth quarter, will there be any restraints to what Apparel can grow, at least in the first quarter in the near-term?

Hi, this is Wayne.

We are very proud of the inventory management that we have had this year, and the success and having the growth that we had in the top line and the improvement in inventory efficiency.

One of the strategies for next year is to continue to move forward with the inventory efficiency, but also keep a very, very close eye on our fill rate.

So in certain categories this year we felt that demand outpaced our ability to supply.

Some of that is around the cold weather product, and some around some training product.

But going forward in 2010, we are just going to be a little bit smarter about how we take positions, positions in raw materials, and positions in finished goods.

So we are gearing up to certainly improve our fill rate, and I think that is going to be a big plus for us as we move into 2010, and we also have the efficiencies in place to manage through inventory and buy it smarter.

Let me jump on the last question, too, for a second just again about distribution, because I think we want to make sure that everybody really comes through with what our message here on 2010 is from a distribution standpoint.

Is that one of the areas that David really prioritized when he joined the Company was us getting around consumer insights, and really talking and understanding our consumer, and probably some of the things that blew us away as second tongue, under the word Under Armour, is all of us at the table, a lot of consumers out there haven't heard of us, and more importantly, there are consumers who have heard of us that haven't had the access to the product.

So making sure that we can be in the places where our consumer shops, because frankly they are not shopping in some of the current places that we are selling today.

But I want to be really clear about one point is that while we may be expanding some of our distribution we are absolutely not compromising either number one our premium brand positioning, or just as importantly, our price integrity.

Just because some of the places that we sell, I think you will continue to see, and of course, a consistent branded and pricing strategy everywhere we go.

So our message here is about reaching more consumers, it is not about how is Under Armour taking a discounted approach to 2010, and changing anything about our business.

Great, thank you very much.

And we will take the next question from Michael Binetti of UBS.

Hey guys, good morning.

Congrats on a nice quarter there.

Thank you.

I was hoping you could just help fine tune comments you have been talking about a little bit today.

It looked like inventories -- some of the cold weather and maybe the fleece items -- ran pretty low in the quarter, and we saw that with the cold weather coming through here in December and January on the East Coast.

I think you probably mentioned that you were talking about the order book for fall 2010 with your retail partners, and I was wondering if you could comment maybe a little bit more on how those conversations are going so far, particularly whether you are seeing increases for orders like the high ticket fleece items, to better match consumer demand next year?

And then I have a quick follow-up.

Michael, this is David.

Both for our new introductions in the lines for spring and then the early discussions around fall have gone very well, and that is what is giving us an additional confidence in the wholesale arm, in addition to our Direct-to-Consumer side, helping to drive greater share, and really growing the Apparel business in 2010.

And we are seeing it again as I had said earlier, continued very strong growth in Women's and gaining share and floor space there, as well as Kevin alluded to earlier, with the increased developments of the core short, really expanding the pie, and the reach through fitted product, versus just compression.

And our great brand equity in Kids, where we are going to see strength across the board.

Then so obviously and you guys talked about this, you have some tough revenue comparisons lapping the running shoe launch in first quarter, but maybe if the initial order book for the back half is looking strong, do you think once we get past the tough first quarter comparisons there could be an opportunity to get a little more optimistic in our models for the second half of the year?

Michael, this is Brad.

So when you look at the seasonality of revenues we talked about, similar front half versus second half of the year.

But when you talk about cores a little bit, we did highlight the fact that Running Footwear in 2009 was prominent in the first quarter and third quarter of 2009, so when you are looking at the comps of revenue growth even though front half/second half is kind of the same percentage of revenue for the whole year, I think Q1 and Q3 will have the most impact relative to comping Footwear from a revenue perspective.

Okay, if I could just ask one last question.

If you wouldn't mind giving us a little more detail on how you see the three components that make up Direct-to-Consumer as growth vehicles maybe in 2010?

Obviously those all had different levels of profitability.

They are all above your corporate profitability.

Maybe if you could just give us a little bit of help on the breakdown of that?

We are seeing very strong double-digit growth in our online business, and we think we are going to continue to invest in that, and we believe that is going to be both, as we were saying earlier, both a way to reach more athletes, shape their brand experience in a way that may not be currently served, and provide us strong financial returns as Brad discussed earlier.

We are also going to see continued very strong growth, when you look at ending the year with a base of 35 Factory House stores, and ending to 50 you can see it is going to drive material growth, both in top line, and we are going to see comp door growth from those markets as well, with the existing 35 store base.

Specialty, the third lever we have four stores currently.

We have no plans to open the store or roll out additional full price, but we are going to continue to work on that in 2010, because we can see a time in which full price specialty rollout will help us add yet another lever to solve the distribution gaps, and a way to bring an even different and richer brand experience, but that will be for the future.

Okay.

Operator, we have time for one final question.

Our final question comes from Taposh Bari of Jefferies & Company.

Ian here.

I was hoping you guys could elaborate maybe on the visibility of the Under Armour brand as we head into the Olympics next month.

I know you guys are obviously partnering with those high profile athletes, but how should we expect to see or hear about the brand, whether it's at social events, during the competition itself, or on the podium?

Thanks.

This, first of all, the Olympics is our first real opportunity to tell I think a global story, and we are taking advantage of our relationships that we have with a couple of different teams and so, 2010 is a little premature as a lot of these deals are done four or five years in advance.

But we were lucky enough to form a relationship with US Ski a while back, and then US Bobsled as well, and you will see some other teams that will pop up from time to time.

For instance, the #1 curling team in the world is the Canadian team, who will probably be outfitted in Under Armour at the upcoming Olympics.

But what you will see on the teams that we are going to have is absolute innovation, and we are really looking for a grass roots story.

We are very focused on what 2012 is going to mean for us.

We are very focused on what the future is.

So you are seeing Under Armour as we continue to -- there are two decisions that we make when we look at making investments.

The first decision is that first and foremost we protect what we have, with 94% of our business coming from the United States today, we continue to plant seeds internationally.

Wayne mentioned Europe and Asia and China in particular, and some of the other places that we are thinking about or looking at as we think globally.

We are currently doing business in more than 40 different countries today, and we want to be careful about the investments that we are making there, or the way that we are thinking about expanding globally.

But for the most part it is protecting what we have.

The second thing that we are -- the decisions, the investments we are making, is ensuring that they are global decisions.

Is that our plan, our goal, our mission is to be a multi-billion dollar global brand.

What you have seen and what you have heard about today is -- are some of the investments in the foundation toward accomplishing that goal in the future.

So we haven't done everything, we continue to learn every day, but I think we continue to demonstrate our ability to manage and run a pretty good business.

It gets better and better every day.

We feel very good about the team that we have.

We feel very good about the team that frankly we continue to build and put together, and I think that there is a lot of great upside, and you will see just a small part of that showcased in Vancouver this February.

Great, thanks.

If I could ask a quick follow-up for Brad.

How should we think about marketing on a seasonal basis into 2010?

When you look at SG&A in total, I think as you look at the break out between first half and second half in total it is going to be pretty similar to what we have in 2009.

Marketing may be skewed a little bit more towards the back half of the year, only because in 2009 with the entry into Running Footwear, we had a little bit more marketing spend in the front half of the year of 2009, but not significant change.

Okay.

Great.

Thanks and good luck.

Thank you.

Thank you.

That concludes the question and answer session.

I would like to turn the conference back over to Kevin Plank for any additional or closing remarks.

The Under Armour growth story remains pretty simple.

Our strong brand and our willingness to invest, provide us with multiple levers to pull for long-term growth.

Last year two of those levers, Footwear and Direct-to-Consumer, drove our growth.

This year it will be wholesale Apparel and our Direct-to-Consumer driving the growth story.

Our balance sheet and inventory position are much improved versus a year ago, and our team is deeper, more experienced, and better prepared to take advantage of the opportunities that lie ahead.

Under Armour is a growth company, and we are intensely focused on delivering against the promise of our brand.

We appreciate all of your time today, and have a great day.

Thank you very much.

That does conclude today's conference, ladies and gentlemen.

Again we appreciate everyone's participation.