Under Armour Inc (UA) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen.

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

At this time, all participants are in a listen-only mode.

Later, we'll conduct a question-and-answer session and instructions will follow at that that time.

(Operator Instructions) As a reminder, this is being recorded.

I would like to introduce Ms.

Alex Pettitt.

Please go ahead.

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

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

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

These risks and uncertainties are described in our press release and in the risk factor section of our filings with the SEC.

30.

With that, I will turn it over to Kevin Plank.

Thank you, Alex, and good morning, everyone.

This morning I would like to cover two key topics.

First, how we're continuing to lead in the performance apparel market through the right balance of great product and a great store and secondly, how we're building the organization that will take us beyond the $1 billion platform that we discussed on this morning's release.

We have consistently talked about the abundant growth opportunities we see for the Under Armour brand and how we're balancing that growth with making the right investments to ensure we're doing two things.

Returning value to our shareholders and preparing our Company for its next phase of growth.

This past quarter, or more accurately, the first half of this year is a great example of our ability to balance growth while investing and a great example of how much horsepower is contained in the Under Armour, engine.

Our apparel business in the US was up 32% year-to-date and up 34% in Q2.

The strongest increase that we have seen in 10 quarters, going back to Q3 of 2007.

The best and simplest part of the apparel story is that everything was up.

With strong double-digit growth across men's, women's and youth.

Our growth is across the board.

Gender, channel, category, wholesale and direct.

I'm going to talk about a couple of key areas of growth but the fact that our strength is so broad based is evidence not only of the growing power of our brand but of our ability to step confidently into the next phase in our growth story, a multibillion global platform.

As I said last quarter, the growth story for Under Armour apparel is more than just intact, in fact, it's revitalized.

Our men's business continues to accelerate with strong double-digit increases in our training, golf, football, and underwear businesses.

We believe there is still meaningful growth for our brand in all of these drivers as we build off our position as the thought leader in performance and bring Under Armour innovation to a broader range of consumers.

Our women's business also accelerated in Q2 as our improved fit, style and color helped drive growth.

Our women's training business almost doubled in Q2 and along with underwear and base layer made up the majority of our growth in women's for the quarter.

The one common thread in both our men's and women's apparel business for the first half of this year has been the success of our fitted product.

In both men's and women's, our fitted products which provide the same functionality and compression material without the constriction gives us the opportunity to offer a broader range of silhouettes across key categories like base layer, golf and running in both men's and women's.

In addition, this fall we're introducing a great new evolution of our ColdGear fabrication that is warmer, softer and also has a more generous fit that will bring more customers to the brand.

This new high-performance moisture-wicking fabrication delivers great next-to-skin warmth without the squeeze of compression.

Without question, fitted product will be an important driver for us in 2010.

But longer-term, offering multiple fit options and introducing new fabrications like our catalyst T-shirt, which is made from recycled water bottles shows us that we can successfully reach new consumers with these new technologies and fits without cannibalizing our core compression business.

This continued success will be a critical driver of our growth as we evolve into our multibillion dollar global platform.

Another key to our long-term growth strategy is executing against the opportunity we have online, both from an e-commerce and consumer engagement perspective.

When our consumer is not on the field, they're online and we're working to improve our relationship with them there.

In the short-term, that will mean more focused marketing efforts and enhancing access to our site on mobile devices.

Over the longer-term, we need to consistently upgrade the consumer experience in our online store so that we're growing along with our consumer's expectations and that expectation is a robust Under Armour shopping experience online.

On the brand communication front, we continued to spend our marketing dollars in a targeted way.

This quarter, we broadened the reach of our protective house I will campaign outside the football world using the likes of Michael Phelps, Lindsay Vaughn and George Saint Pierre, the best pound for pound mixed martial arts champion.

On the field, the University of South Carolina baseball team won the college world series wearing Under Armour and starting this fall, Boston College and Temple University will also be joining the Under Armour team.

As we build equity with new athletes on field, we're seeing our brand grow in stature and popularity beyond the field as well.

This is an ongoing part of our brands expansion and we will continue building on this equity as the athletic brand of this generation.

Outside of the US, we continue to make solid progress both in Europe where we are building our base as a performance brand on field through compression and in Japan where the Under Armour brand has a great presence in the country's most important sport, baseball.

In fact, nearly 25% of Japanese professional baseball players wear Under Armour beneath their uniforms, a great testament to our brand's ability to translate globally.

Our growth in the Japanese market where our brand is approaching $100 million in wholesale is a great indicator of how Under Armour can bring the performance apparel story to athletes outside of the United States.

Footwear will be a key long-term growth driver for Under Armour.

We will deliver growth in our Footwear business in 2011.

Equally important is that we are investing today to ensure that growth and not only in 2011, but beyond.

We continue to build that long-term equity with our athletes and with our football and baseball cleats and we have become much more competitive on the retail floor in running and training when we strike the right balance between price and value.

Footwear is a long-term proposition for Under Armour but one that we're continuing to invest in as our apparel business continues to accelerate.

Finally, I would like to talk about our structure-end team.

As we continue to lay the foundation of our growing business, we have moved to a more defined business unit structure that we believe will drive better accountability and create more opportunity for our teams to innovate.

As we approach the $1 billion revenue mark, we are focused on bringing new talent into the organization.

Talent that will mesh with our existing leadership to provide the foundation for our multibillion global platform.

Since just our last earnings call, we have brought in Henry Stafford from American Eagle to run apparel and John Rogers from Orvis to run E-commerce.

With these two additions, plus Gene McCarthy in footwear, Dan Sawall in retail and Edward Giard will take over our accessory business for us, we have over 100 years of industry experience overseeing these key business units.

I've said on a number of occasions that the Under Armour brand is about leadership, leading on the field, leading in sell through and leading and communicating with our consumer.

With our US apparel business strong and gaining momentum, we're building a team that would take Under Armour to its place as a multibillion global brand.

And with that, I'm going to pass it to Brad Dickerson, our CFO.

Thanks, Kevin.

With Kevin having taken you through some highlights and strategies for our business I would now like to spend some time on our second quarter financial results.

Our net revenues for the second quarter of 2010 increased 24% to $205 million.

Year-to-date, net revenues are up 19% to $434 million.

This strong growth is largely driven by apparel, which was up 34% to $150 million during the quarter and up 32% to $323 million year-to-date.

Notably, our second quarter apparel performance was the highest growth rate experience since the third quarter of 2007.

Double digit apparel growth was registered across the men's, women's and youth apparel businesses during the quarter with particular strength in women.

Our direct-to-consumer net revenues increased 60% for the quarter and 66% year-to-date representing 21.3% and 19.6% of net revenues respectively.

Second quarter net revenue growth in direct-to-consumer was driven by a combination of new factory house stores, strong same-store sales growth and the web business.

We opened six new factory house stores during the second quarter, increasing our factory house store base to 45.

We expect to end 2010 with 52 to 54 total factory house stores representing 50% year-over-year growth.

International net revenues increased approximately $2 million to $9 million the second quarter and represented approximately 4% of revenues.

Footwear net revenues were down roughly 4% to $36 million in the second quarter.

We previously indicated running and training footwear revenues were expected to climb in 2010 compared with 2009.

Second quarter growth margins were 48.8% compared with 44.8% in the prior years quarter.

Several factors contributed to the 400 basis point growth margin expansion.

First, we continue to see strong growth in our higher margin, direct-to-consumer business contributing approximately 130 basis points.

Second, we experienced more favorable apparel gross margins during the quarter due to favorable product mix and sourcing efforts, accounting for approximately 120 basis points.

Third, lower sales returns, markdowns and apparel liquidations accounted for approximately 100 basis point improvement and finally, as previously forecast, a lower mix of lower-margin footwear sales contributed approximately 50 basis points.

Selling, general administrative expenses as a percentage of net revenues increased to 45.4% in the second quarter of the 2010, compared with 42.7% in the prior year's period.

Let me take you through the four major components of SG&A, many of which are consistent with our store last quarter.

Marketing costs held relatively steady at 13.4% of net revenues in the second quarter compared with 13.3% in the prior year.

Second, selling costs increased to 10.4% of net revenues from 9.3% in the prior year primarily driven by the continued expansion of our factory house stores which carry better gross margins but also incur higher SG&A expense as a percentage of revenue.

Third, product innovation and supply chain costs represented 10.8% of net revenues in the second quarter, compared with 9.6% in the prior year.

This increase is primarily a function of increased investments in personnel associated with the design and sourcing of our expanding apparel, accessories and footwear lines.

Finally, corporate services increased to 10.8% of net revenues compared to 10.5% in the same period of the prior year as we invested in additional corporate personnel and facility expenses to support our growth.

Operating income during the second quarter more than doubled to $6.9 million compared with $3.4 million in the prior year.

Operating margin was 3.4% compared about with 2.1% in the prior year quarter.

In other expense, we experienced a modest net loss of $170,000 related to foreign currency during the quarter and a net loss of $850,000 year-to-date.

Our hedging strategy allows us to limit our exposure to foreign currency exchange fluctuations.

With that said, there is no perfect hedge and risk remains that with future foreign currency fluctuations we could have positive or negative foreign currency impact.

Our effective income tax rates in the second quarter was 43% compared with 40.9% in the second quarter of 2009.

Primarily affecting discrete items which positively impacted the year-ago rate.

Based on continued tax planning strategies, we now expect our effective tax rate in 2010 to improve approximately 120 basis points from the 2009 rate of 43.2%.

Our results in net income in the second quarter increased to $3.5 million compared with $1.4 million in the prior-year period.

The second quarter diluted earnings per share increased to $0.07 compared with $0.03 in the prior year.

Now shifting over to the balance sheet.

Total The cash and cash equivalents at quarter end increased 96% to $156 million compared with $80 million at June 30, 2009.

Cash net of debt increased $81 million at quarter end to $140 million compared with $59 million at June 30, 2009.

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

Inventory at quarter end decreased 1% year-over-year to $179 million compared to $181 million at June 30, 2009.

While inventory growth has significantly trailed our top-line performance in recent quarters we expect this trend to reverse for the back half of 2010.

I will add more color on that later.

Our investment in capital expenditures was approximately $8 million for the second quarter and approximately $16 million year-to-date.

We continue to anticipate capital expenditures in 2010 to be in the range of $35 million to $40 million.

Now moving on to our updated outlook for the remainder of 2010.

Previously we provided an outlook for 2010 net revenues in the range of $965 million to $985 million, an increase of 13% to 15% over 2009.

And 2010 diluted earnings per share of $1.05 to $1.07 and increase of 14% to 16%.

Given the sustained strength in our apparel and direct-to-consumer businesses, and our improved visibility for the remainder of the year, we're raising our full-year outlook.

We now expect 2010 annual net revenues in the range of $990 million to $1.010 billion, an increase of 16% to 18% over 2009.

We also expect 2010 diluted earnings per share for the full-year in the range of $1.11 to $1.13, an increase of 21% to 23% over 2009.

To give a little more context on our updated 2010 guidance, we want to elaborate on three areas--Gross margin, SG&A and inventory.

For gross margins, we still see the same dynamics playing out that we previously outlined, this includes higher year-over-year gross margins in the next two quarters driven by product mix shift towards apparel, combined with continued anticipated growth and higher margin direct-to-consumer sale.

We recognize the industrywide concerns around higher labor input and freight costs for the remainder of 2010 and continue to 2011.

We would remind you that our product costs are largely locked in at this point through spring 2011.

So we see minimal near-term impact from input costs inflation and with minimal apparel manufacturing exposure to China, we remain comfortable that growth in our direct-to-consumer channel should mitigate these headlands in the midterm.

Looking at SG&A, we continue to see higher near-term investments to support the infrastructure needed to build out our growth platforms.

Importantly, this includes attracting new talent to support our business units, particularly in footwear and apparel.

It includes building the infrastructure to bring the hats and bags business inhouse starting in January 2011 and assets that yield no current revenues to absorb the incremental cost.

It also means higher costs as we continue to expand our factory house store base.

As we indicated, we expect 17 to 19 new factory stores in 2010, which would put us at a 52 to 54 total factory stores by year-end.

We would also expect comparable new store editions in 2011.

As we have indicated, we expect our full-year 2010 SG&A growth rate to exceed our net revenue growth rate and expect our year-over-year SG&A growth rate in the third quarter to look roughly similar to the growth rate for the second quarter.

On a separate note regarding SG&A, we continue to invest marketing dollars prudently and maintain our annual range of 12% to 13% of revenues.

On to inventory as we indicated last quarter, we plan on increasing our safety stocks in key core programs which should improve or service levels in the wholesale channel to better meet consumer demand.

In addition, several key program developments including the shift of the hats and bags business inhouse and the increase of our made-for-strategy for the factory house stores will require an inventory build later in 2010.

These factors are the major drivers for anticipated year-over-year inventory growth rate outpacing sales growth rate during the back half of the year.

While we are not prepared at this time to provide our initial outlook for 2011, we wanted to provide some color on the impact of bringing our hats and bags business in-house from our current licensing partnership.

As we have discussed, we have been investing on building the team internally to take this business inhouse beginning in January 2011.

With this transition, we expect this business to contribute an incremental $60 million of revenue for Under Armour in 2011, versus the existing license model.

Before opening up the equal for Q&A, I wanted to thank Alex Pettitt for over three years of terrific service as the head of our investor relations team.

As many of you know, Alex has recently broadened her role within the Company and we're excited to leverage her talent and industry knowledge towards new UA business opportunities.

Thank you, Alex.

Over the next couple of months, Alex will be transitioning investor relations functions to our new Director of Investor Relations, Tom Shaw, who joined the Company a few weeks ago.

Tom recently covered our Company and industry as a senior sell-side analyst at Stifel Nicolaus here in Baltimore.

With that we would now like to open the call for your questions.

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

Operator?

(Operator Instructions) Our first question comes from Chi Lee from Morgan Stanley.

Good morning, everybody.

Good morning.

Question on the gross margin side.

Of the 120 basis points that we saw coming from sourcing efficiencies as well as the apparel mix, how much on the sourcing side should continue into the following quarters?

Yes, we lock our prices in about 6 to 12 months in advance, so, obviously the pricing that we're seeing right now was locked in last year.

With some of the head winds that have been a lot, talked about a lot out there in the industry, we will see somewhat of an impact of that in the future.

But the biggest drivers of our gross margins the in the near-term and longer-term continue to be our direct-to-consumer business and the mix of footwear to apparel.

Strictly on the apparel side, we don't anticipate seeing the improvements that we have seen recently year-over-year in just apparel, but we still see the ability to maintain our margins in the near-term like apparel.

Okay, great and then Kevin, with some of your retail partnerships talking about starting to showcase some basketball product in the current quarter, can you just update us on your thoughts in terms of timing and strategy on the basketball side?

Yes, well, basketball, first of all is not an if as much as it's a when for us.

We have been out in the market testing products and you have seen it between our AU programs, won 10 division one teams, 20 high school teams and the star rookie last year, Brandon Jennings from the Milwaukee Bucks.

We think we have a lot of assets to build on and I think what you're going to find about basketball, while we're not making any decorations of timing right now, what you will see from us hopefully is all the learnings that we found in footwear over the last five years and hopefully we'll apply a lot of those learnings that I think we have learned and I think we've paid for into our approach as a basketball category, so we're tempering words like launch, we're tempering the way that we're going to get in the market.

But when we do, we expect to take market share, we expect to take meaningful market share and I think we'll let the numbers and the results proof out what exactly -- how we define meaningful.

Okay and presumably then what you're looking at in terms of the third quarter strategy is really just again testing consumer tastes with limited product?

Again, we're going to approach basketball when the time is right and make that decision when we come across it, so.

Okay, thank you very much.

Yes, thanks very much.

Our next question comes from Jim Duffy from Stifel Nicolaus.

Nice quarter.

A couple of questions for you.

Thanks, Jim.

Less inventory in the model.

Can you comment on how service levels have been trending and maybe the opportunity to meet more demand by increasing the inventory balance by some?

Jim, this is Wayne.

Service levels have been acceptable to a point, but we think there is going to be a greater opportunity if we provide some additional safety stock within our core programs.

Our core programs, for example, are offered mainly throughout the year.

We feel it's a very deliberate that on our part to increase that.

We have broadened our core programs as well.

One of the strategies in the near-term is to increase that safety stock level and that will have an impact on the inventory levels that Brad mentioned.

Is that a third quarter phenomena or is that really something that you're looking at into spring of next year?

We'll start to see that, Jim in the third and fourth quarter this year.

Okay.

And then recognizing that the past few years have been anything but normal, what is the maturity curve that you have seen on the factory house stores and then related to that, looking to the back half of the year, given the growth in factory house stores, would you expect stronger year-to-year growth in the fourth quarter?

This is Wayne.

Let me start that, the basis for the factory stores initially was to liquidate our excess inventory and then what we did was we learned that there is a consumer out there that we could reach.

We really take a lot of effort in building around our core customer base first and we'll add consumers who we like to reach with other points of distribution.

We're finding that the factory house is another opportunity, another point of distribution to reach other athletes.

As we continue to expand the factory-base, we're certainly not going have enough excess inventory to be able to fill that demand.

So, we'll start to move toward a made-for model.

The factory stores really balance out our ability to reach that athlete in places we don't reach them today.

And, Jim, Kevin, some of the numbers that we have, we have opened 10 stores here to date.

We're on track to open total of 17 to 19 new factory house stores this year and, obviously, we're very selective in looking for the opportunities that meet our specific criteria we have for opening.

With that we're still, by year-end, we'll still be less than -- we'll be in the 40s in terms of the total number of stores that we have in the high 40s and that leaves us a lot of opportunity to continue to grow there.

As Wayne mentioned, made for is something that, as we get into this, is an opportunity for us, I think, to be a little more efficient in viewing outlet as something more than just liquidating product to give our consumers a better experience.

Because frankly, it's one of the best brand experiences to have in addition to some of our key retail partners that we -- come to see Armour shops.

It's the one opportunity that we have to tell a comprehensive story to the Under Armour consumer which we just don't get many opportunities to do that.

It's a big area of investment, it's an important story to be told to our consumer.

Jim, one last point on your question with on the back half of the revenue growth, my answer is in a broad ur context but, obviously, we did see strong revenue growth particularly on direct-to-consumer channels to the back half of last year.

The comp in the back half of this year will be a little bit tougher than it was in the front half of this year because of that.

In addition, we have been calling all along that the biggest impact in the decline in footwear year-over-year, going to happen in the first quarter which we saw and also in the third quarter of this year too.

That also has an impact in the back half-of-the-year comps.

I see and so I'm thinking about the number of the new factory house stores that you have and trying to get my arms around how they ramp from say year one to year two, what type of comp store increase you have seen in stores that are just entering the comp base?

This is Wayne.

We're not going to go into specifics about comp store sales.

We can say is the factory outlets have been a very additive piece to our gross margins and also very positive in terms of profitability and they also have a very favorable return on cash model.

So, it's as Kevin pointed out, one of the strategies for us that we would consider within our direct-to-consumer strategies.

Great.

Seems like it's been a big driver.

Thank you.

Thanks, Jim.

Our next question comes from Omar Saad from Credit Suisse.

Thanks, nicer good morning.

Thank you.

Kevin, I wanted you to expand a little on your opening comments on the organization structure and the reporting lines in light of David McCreight's departure.

What's changed or how is the organization changing in terms of how view you're viewing the best way to structure the management teams and which businesses are reporting to you versus Wayne or other people?

Also, if you could comment on the rumblings of a cotton-based product and the fact that that might open up a new casual market to you guys and to the Under Armour brand?

Thanks.

First of all, when David joined the Company two years ago, we were in a much different place, and I think it's important that we let everyone know, how much better of a Company, how much better structured and organized we are of a Company today because of the team that we've been able to build and put in place.

David was an important part of that.

With that being said, we decided to make a decision to realign the organization from what was better, I think, to get the accountability from the different business units that we built.

Roughly, there are 9 different business units we have as an organization and the way that we're managing them is really in a monthly review format and so it gives us the ability for an executive committee that includes Brad Wayne and three or four other of our key executives here where we bring the different heads of the business units in to come present their business.

And in those meetings, you will have the President of the business unit and then you will also have the head of strategy, their head of finance and they'll bring in whoever else they need to tell their story.

The way that we view those meetings is simple as answering three questions.

Tell us, number one, about how you're tracking for the year, tell us how you're tracking for your 2013 plan, the second set of questions would be around structure and people.

Is there anything as we get bigger as an organization of slowing down, requisitions sitting on debt, people that you need, people that you need to move to different parts of the organization.

Third and probably most importantly, tell us the top five things you're working on to ensure that the organization stays aligned.

As we have grown and come from a pretty good North American wholesale apparel company into an organization that has a lot more complexity to it, bringing in women's, bringing in footwear, we want to make sure that we leave accountability within business leaders that can drive their businesses but make sure it's all working toward one, in one song that works for the Under Armour brand.

So, I tell you, we have had it for the last several months and it's been really effective the way that we've been running the Company.

I think it's given great empowerment.

And secondly, what both our consumers and our retailers have come to expect, Under Armour being about thought leadership when it comes to product.

Any category that we enter is going to be a large-scale of business and like large scale of businesses and you're going to see us attack that with innovative products and higher price points, but you think you will continue to see like in the fourth quarter us moving to a wider consumer base with things like our ColdGear product, which is, it's a wheelhouse product for us and a franchise business for us and the millions of units that has been only offered in compression, the fact that we have now offered that in a fitted silhouette and fitted style we're opening ourselves up for more consumers.

I think what you're going to see from Under Armour going forward, I'll tell you, is that we'll be much more sensitive to the idea of opening up to a wider broad-based sense of consumers versus the consumer who can, frankly, handle wearing a compression T-shirt all the time.

Okay.

Thanks.

Does that mean cotton is no longer the enemy?

It means that performance is our friend, Omar.

Always.

All right, great.

Thanks.

Good luck.

Thanks very much.

Our next question comes from [Tapash Fari] from Jefferies.

Congrats on the quarter.

Thank you.

I just wanted to get a sense of what you're hearing from your retail accounts as we head into the fall season here to maybe talk about how you see your inventories positioned at retail and maybe talk about if you're seeing any restocking at retail or just some thoughts about that?

Also, I just wanted to get a quick follow-up on that accessories coming in-house, appreciate the color there.

I wanted to get a sense of if any of that $60 million is going be accretive to EPS for 2011 and, if so, if you can maybe help quantify that?

Thank you.

Let me start off first, this is Wayne.

As far as our inventories at retail, right now we're having very strong results as you can see for the quarter and for year-to-date.

Up to over 30% and our inventories are inline at retail.

In fact, there is still a strong demand for us to increase our fill rates to our retail partners, which is one of the reasons we indicated earlier that we were going to take a greater position within our key and core items as far as inventory in the third and fourth quarter.

So I'd say we're well-positioned and in good shape as we get into the second half of the year.

This is Brad.

On the accessories question, as we motioned $60 million accretive top-line year-over-year in 2011.

Right now it's a little too early for us to talk about any kind of outlook or guidance for 2011 in general.

Part of the criteria about bringing a licensee in-house along with looking at the products and synergies with our product, other product lines is the economics of that business, so just to tell you that we would look at that and we would expect accretive operating income dollars to bring that inhouse.

At this point in time, it's really talking about 2011 EPS.

Great, thank you.

Our next question comes from Michelle Tan with Goldman Sachs.

Great, thanks.

I know you guys don't want to get too much into 2011, but I was wondering if you can give us any sense of, as we think about the SG&A investment behind some of these initiatives like Footwear and taking the licenses in-house.

How much of it is being front loaded into 2010 and leverageable for next year versus how much incremental spend you're going to anticipate for '11 as you bring these initiatives actually online?

Michelle, this is Brad.

To answer that, first of all, maybe if I can just go back and reiterate the data points we did give you for 2011 so far, even though we're not giving any kind of outlook or full-year outlook for guidance.

The couple of data points we did give you obviously is on the direct-to-consumer side, relatively same number of new stores in 2011 that we had in 2010.

Kevin did mention footwear will grow in 2011 and also we talked obviously about bringing hats and bags inhouse and the incremental revenue for that.

TAs far as the SG&A goes, I think you look at our SG&A and look at what is the ROI near-term, versus maybe longer-term on some of these businesses.

Obviously on the apparel side, we're seeing a lot of benefit from our investments over the last few years currently and we'll see that benefit in the near-term, too, especially around our wholesale apparel and our direct-to-consumer.

You've seen some benefits there.

As far as costs in 2010 that are for the benefit of the future, I think, obviously we have talked about increasing our investment in the footwear team and the footwear business and we've also talked about the footwear revenues coming down in 2010.

Obviously with Footwear growing again in 2011, you would see if there's a benefit on the footwear side going in 2011.

From the accessories perspective, obviously, we have been building a team in-house over the last 18 months or so to bring the hats and bags business inhouse.

So obviously there were some costs over the 18-month period of investments that had no revenue attached to it that will have revenue in 2011.

Great.

Thanks.

Thinking about both of those teams is the majority of the buildout in terms of personnel happening this year so you wouldn't need to necessarily add a lot of people, add a lot of headcount to manage those businesses as the revenues come online or is it something where it's kind of a two year process to build up those teams?

I think there is an ongoing investment that's needed with all of our teams.

Obviously with our growth rate and our growth trajectory, there is a constant need to bring talent house and investing our businesses.

Even though we do see some heavier investment here over the last couple years, we'll continue to see investments to drive our business going forward.

That is helpful.

Thanks so much.

Thank you.

Our next question comes from Robbie Ohmes from Bank of America.

Thanks.

Morning.

Actually two questions.

The first question, you motioned the new ColdGear fabrication and also on the cotton apparel that I think a lot of us are expecting to see in spring 2011, are these programs mainly targeting existing customers or would these be opportunities for you guys to broaden your distribution into account accounts that you're not dealing with?

Then the second question is just if you could comment at all on the youth apparel business momentum versus men's and woman's, it sounds like you lag men's and women's and then when I listen to the programs that you're coming out with in maybe cotton or the ColdGear program that you mentioned might be more targeted towards adult versus youth, and if you do expect your business to skew towards that demographic?

Thanks.

Hey, Robbie, it's Kevin.

Let me start with the categories we've commented on.

Fitted ColdGear to begin with is, I think, a huge opportunity for us.

Number one, building around the franchises that we have, I think leveraging the places where the consumer expects us, ColdGear is one of those obvious places that has almost become a brand in and of itself.

The consumer walks in the store and they referred it to ColdGear frankly, as the brand and so in doing that we realized that there was a large consumer base that we were not hitting by just offering compression.

So part of the logic that we actually -- we baited this spring with our HeatGear, and fitted HeatGear and we had the same concerns that the market does.

When you offer fitted product, what does it do to cannibalize the existing business.

The good news there, it actually did nothing.

We grew the overall pie as the business and we're selling more base layer products.

I think we changed our vernacular internally as a Company from saying we're a compression business to saying we're a base-layer business where we want to be dominant and that means not just in one fit but in multiple fits.

Number one, never giving any ground and continue to own compression but also I think attracting a new consumer by offering them someone who is not interested in having an obstruction to their body and a compression shirt and giving them a little more room to breath in the shirt and, frankly, that is not influenced just by the fact that I'm getting older either.

We see that and what we have done in fitted HeatGear, our $25 basic all year long and now having fitted ColdGear, I think you will continue to see that trend where we just become a little more aware of what the market is looking for and, in fact, we're moving to multiple fits like we have done in our women's business, we're also doing the same thing in our men's business, from a compression, a fitted, a loose and a semi fitted fits across the board.

You will see roughly four fits from the Company.

Again, it's about attracting new consumers there.

With regard to our youth and our men's and our woman's business, number one, youth continues to be a huge driver for us.

When you look at the places that we have seen and had success, particularly footwear is a great example of that.

Some of our greatest success has come out of our entry and our relevance with the youth consumer.

Europe is another place where we found that when we enter a market, we really resonate with that youth consumer and driving around brands that matter.

We don't see any weakness in our youth, in fact, as we have aligned and begun to put our business units together, youth will get a renewed vigor and focus because we see it as a big opportunity that I think the Company is yet to really capitalize on.

Terrific.

Thanks.

Thanks a lot, Kevin.

Thanks, Robbie.

Our next question comes from Sharon Zackfia from William Blair.

As women's continues to be one of your strongest if not the strongest category in growth -- in apparel, I'm just curious kind of what you're learning about how that female consumer shops for Under Armour?

Is she shopping at different places and how maybe the products, the product choices of that consumer is influencing the design of the product going forward.

Just any learnings that you're getting from the woman's side of the business.

Five years ago when, I think we went on our road show and we talked about having five distinct growth categories and growth leverage for business and it was men's apparel, women's apparent, footwear and national and direct-to-consumer.

Part of the strategy we mentioned is that we envisioned a day where women's would actually be larger than men's which I think a lot of people didn't frankly believe.

Until you see the momentum that we have been able to put around our business today, it's really beginning to come to light, an example I use of our recent line review, and this is more than five or six weeks ago now, as we came and we're looking at spring '11 and we're starting to getting to first round of the Fall '11 product.

In the room it wasn't a team of one product person building product for women's.

It's a comprehensive team that includes both product in marketing and sales and across the board where we have really done the things and put the infrastructure in place to become a relevant woman's brand.

That doesn't happen overnight and I think the last five years have been good learnings for us.

But what I can tell you is that the excitement that was generated not only in some of the Fall '10 product that's out on the floor and just hitting right now, we feel very good about.

And what you're going to see in spring '11 is even better.

Most importantly, I think, I think one of my -- our head of sales in the West Coast, she put it really well for me, she said Kevin, you remember three, four years ago, and I said the problem about women's is we just don't have a point of view, she said, well, today we have a point of view in women's.

And I think we're very proud of that and I think we're excited about what that's going to mean for us so we're going to continue to invest there and I think it's a fantastic product that has unique positioning to the market.

As a followup to that, in which channel is your women's mix the highest?

Sporting -- I mean it's sporting goods to -- is where we have seen the biggest impact.

I think that is pretty good.

We have not been, from a distribution standpoint on the women's side, there is more opportunity for us to find and to sell in places where women shop.

I think in the past and number one, that means helping our existing retailers drive more women to their stores to see that as a woman's destination but we do think that is an opportunity for us to be more relevant distribution as well, which is another task, another opportunity that we have in front of us.

Great, thank you.

Thanks.

Our next question comes from Kate McShane from Citigroup.

Thank you, good morning.

Good morning.

With such strong demand for your product, can you talk about any challenges you have experienced with freight and have you had to resort to air shipping in order to meet some of the demand?

Kate, this is Wayne.

I think Brad touched upon it.

As far as input cost, which has been a conversation that has been out recurrently, we have been committed for the next six to 12 months so we feel pretty good about our input costs and our total costs as it relates to our season through spring '11.

As far as freight costs, there is no doubt that the cost to move product has been increasing.

Air freight is not something that we use on a regular basis, it would be an exception basis so we're certainly able to weather whatever increases that we have seen in the marketplace.

I think the key point in terms of costs and Brad was really key on nailing this would be our direct-to-consumer business and how that impacts our overall gross margins has really been the key lever for us in offsetting some of the increases that could be creeping up in logistics.

Okay, great.

And then my other question, I think the number is that you have a UA shop and shop at Dick's that only represents about 60% of Dick's stores.

Can you update us on how many more shop and shops we can see in Dick's store in 2010 and how maybe they'll look differently from what you currently have in Dick's?

And also what role will UA be playing in the new Sports Authority stores?

I think when we go to Dick's, a couple years ago we invented -- we went around a program called Under Armour City that we invested in at Dick's Sporting Goods.

As we built that out I think there were a few legacy stores, particularly some of the old Galleon stores that weren't a part of the Under Armor City, which, again, the definition of what a shop is and what not a shop is not really defining of the amount of product that we have in the store or frankly, the performance that we have in the store.

Obviously we see upside when we put in a shop, and it's one of the things I think that we have been very open with the entire Dick's team about our wanting to have a committed presence in their stores and so that is one of the things, of course, you will see us working toward in this Fall and particularly in Spring '11 as well.

So -- just to jump on that.

One of the key growths for us would be comp store growths within existing shops and we haven't fully taken advantage of the floor space that we've able to invest in in the last couple years.

It is going to depend on the type of door and the presence that we have.

I just want to note that, especially within men's and also in women's, you will start to see if you go into a shop that we don't always have all of our pictures on the space that we built out and that is one of the growth levers that we're going to see going forward.

And Kate with regard to the Sports Authority, the new SA shops that they have in place.

The model there is less brands and more focused in higher-end products in story telling in that smaller 10,000 to 15,000 square foot range and Under Armour, of course, will be one of the, I think, key brands that they are going to have in the store and it will give us an opportunity to feature some higher-end product and some things that you maybe wouldn't see in a traditional big box format either.

We wish them the best of luck and be very exciting as they open that new format.

That is really helpful.

Thank you.

Our next question comes [Matt McClintock] from Barclays Capital.

Yes, hi, good morning, everybody.

Hi, Matt.

Kevin, understanding that this is more of an investment year in Footwear but can you perhaps provide us with some color on how some of the new product launches are performing, particularly like the Fleet or the Captive, and what lessons you've been able to incorporate into those lines?

One cute thing about 2010 is we actually didn't launch anything this year and part of our approach in the repositioning of Footwear for our brand was that we wanted to become excellent in the categories that we're currently in today and that means going back and of course, beginning at the top and with leadership and Gene McCarthy who is still less than a year in the chair.

The one thing that people need to understand about footwear as well, is that there is an 18-month product calendar that takes place.

So frankly, the impact to Gene and his team is not something that is in the market today and so while we feel very good about the product that we have out in the market in 2010, again, we've really taken a strong approach at balancing the placed a valued relationship with the product that we have in the market and we're not waiting by any stretch but we have, again, recalibrated our Footwear and it is something that beginning in 2011 and throughout 2011 and frankly into 2012, you are going to begin to see what happens as Under Armour becomes dominant in Footwear and I say that with the confidence of an example what we have done in women's and the same reaction that people have and they say how you can possibly become a women's brand in 2005.

It's just taken time and now we may be one of the least patient companies in the world.

What I can tell you is we do have the resolve and we continue to show and demonstrate our ability to invest in this business that we're going to figure it out and as we have been doing, it's not just in the personnel to come in, it's relationships with factories, it's the learnings that build with the infrastructure throughout our Company.

Apparel and Footwear do not leverage as a business.

As we sit here in year five and look toward when does that break even point and when do you start really getting momentum, number one, we don't believe we're far away and number two, we think that we continue put ourselves in a position to have a great product and a signature product in the market at any time and can you make that evaluation of new categories that will enter at the appropriate time, too.

The short answer, we've learned a lot and hopefully we're beginning to apply some of those lessons profitability.

Thank you.

Our next question comes from Dan Wewer from Raymond James.

A question on the inventory growth.

You noted that that reflects the increase in the safety stock inventory as well as bringing the licensed product.

At what point will the renewed effort on Footwear begin to impact inventory growth?

Is that next year or in the fourth quarter of 2010?

Dan, this is Brad.

We don't really see Footwear being a major driver of our year-over-year inventory growth.

I think you go back to the things we called out, the biggest three drivers we see really is that interest in safety stock on core programs and also recall that we also are increasing our on replenishment programs year-over-year also.

So we have more products on auto replenishment which is part of that driver along with increasing our safety stock levels across auto replenishment products and obviously they are two items we called out, hats and bags coming in-house and also the increase in made for.

Those are the three major drivers of inventory, footwear not (inaudible) can drive year-over-year.

Okay.

The second question I had, accounts receivable growth of 13%.

Is that a good proxy, the revenue growth that you are seeing from your core customers?

I know we'll get that data when you release the queue, but is that going to be a good proxy of the revenue growth of your core customers?

In general, yes.

Our DSOs, whether you look at them in total or with or without DTC are improving year-over-year slightly.

In general, that is relative to the growth of our core consumers.

Okay, and then the, I think the last question I have right now in the second half of 2009, you called out the cold weather as being ideal for your ColdGear sales, obviously, weather's unpredictable.

Can you tell us how that impacts your forecast for second half revenues?

Dan, it's Wayne, the first thing we learned a long time ago is not to bet on the weather.

Yes.

We're going to put ourselves in the position, ColdGear is one of those items that is an auto replenishment and safety stock item.

We're going to be well-positioned for that.

The consumer demand will come, the timing of it depends on various factors.

We're not sitting here betting on weather but we're sitting here making sure we're going to have the position for the fitted ColdGear as compression as well.

Wayne, was that a reason why you did not raise your revenue guidance the second half of the year?

Dan, I would go back to the tougher comps in the back half of the year relative to direct-to-consumer, first of all, and, second of all, also, we called out was that the biggest impact year-over-year decline in Footwear would be in Q1 and Q3.

The decline in Footwear is pronounced in Q3 versus last year and we had a very strong direct-to-consumer in the back half of last year also, which we'll be comping this year.

Great.

Thank you.

Thanks, Dan.

Oh, sure.

We have time for one final question.

Our last question comes from Mitch Kummetz from Robert Baird.

Thank you, a few questions.

Kevin on the apparel business you talked about the broad-based strength in the quarter.

Could you be a little more specific on how apparel grew wholesale versus consumer direct?

I know consumer direct was very strong on the quarter as a whole for the Company.

Let me least speak -- I will let Brad follow up.

With our brand so 40% of our total apparel business is compression-based and so there is a consumer that I think we've omitted and I'm coming back to the fitted answer, again, which is we see the opportunity and how that expands across men's, women's and youth.

Again, the product, the opportunity that we see is to continue to grow and expand.

It's been equal -- we're seeing double-digit growth in our men's business and that is around key products like our core compression, ColdGear, HeatGear and some of the basics.

And then as we have begun to expand that, too, and that is where Henry Stafford, our new head of apparel, who is somebody who has been living in the mall for the last 15 years of his career is going to help us move from beyond just on the field or at practice to to and from the gym and other venues.

This is Brad.

Just to kind of look at the growth rates in the second quarter, obviously, we don't get into the detail of wholesale versus direct-to-consumer and so forth.

A couple of data points that we did talk about, direct-to-consumer was 21% of our business in the second quarter and it grew 60%.

Obviously, a majority of our products are direct-to-consumer is on the apparel side so if apparel grew, 34% for the quarter, obviously, the wholesale business would have to be very strong growth rates, too.

Right.

That's a major part of our apparel business.

Right.

Can you talk a little bit about how you're thinking about your wholesale distribution right now?

I know you guys have said that there are certain major markets in the US whether it's like Los Angeles or New York, where you feel you're underpenetrated relative to some other ones where maybe the brands have just been more established historically.

How are you guys thinking about that?

How do you feel like you can get better penetration in some of those markets?

Is it through your direct business or is it through things like new TSA concept or working more with like Foot Locker or Finish Line or can you address that a little bit?

When we look at distribution as a whole, we begin with looking at it from a consumer point of view.

Where is our presence lacking and where is our target consumer shopping and we do believe that we're underpenetrated in certain regions in the United States.

A great example of those numbers is that in the Minneapolis/St.

Paul area, for instance, we have more than 100 points of distribution for the Under Armour brand.

In New York City, we have just less than 30.

So when you look at where are we showing up and where we're appearing as a Company, we think there is opportunity for us to be a bit more aggressive there.

We brought in - and a great example of that, too, is we have existing partners that we still have opportunity to grow for instance, Foot Locker is an in the mall channel alone, we're in 700 or 800 Foot Locker doors today with more than 4,000 doors globally for us to continue to move into.

So what we're declaring is not that we need to go to new partners as much as I think there is room for us to grow within some of our existing partnerships as well so I think you will see us be opportunistic but I think you'll also see us take a little bit of a different approach to defining our distribution as strictly being one particular channel as much as we want to be much more consumer focused with that than just channel focused.

And lastly, just a couple of housekeeping questions, Brad, you talked about SG&A growth and I think you said in the third quarter that you would expect it to be up a similar rate as Q2.

Is that correct and then how do you see that going into the fourth quarter?

Yes, yes, to that point.

Q3 growth and SG&A will be similar to Q2.

That is mostly going to be driven by marketing.

Yes.

We see in the back half of the year, marketing be a big driver of Q3.

Again, marketing in total will still be up 12% to 13% for the year but a higher growth rate in Q3 versus Q4.

Okay, and then lastly on the direct business, I know 45 stores or factory stores at the end of this quarter.

What was that number at the end of Q2 and you can say -- I don't recall if you said what your comp was in the second quarter.

Yes, Mitch, let me -- this is Wayne, let me just take that.

This year, our range is now 48 to 53 stores.

I just want to clear up that.

You have opportunities to get over 50 and if there is places for us that are right for us in the right locations, we're going to be able to take advantage of that.

Brad you want to take the other one?

Okay.

All right, thanks, guys.

Okay.

Thanks very much.

Ladies and gentlemen, this does conclude today's program, you may disconnect and have a wonderful day.

Thank you.