Under Armour Inc (UA) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen.

Welcome to the Under Armour, Inc.

third quarter earnings webcast conference call.

At this time all participant lines are in a listen-only mode.

Later we will conduct a question and answer session, and instructions will be given at that time.

(Operator Instructions).

As a reminder this conference is being recorded.

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

Tom Shaw.

Please go ahead.

Thanks and good morning to everyone participating on 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.

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 sections 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.

Joining us on today's call will be Kevin Plank, Chairman and CEO, who will address the drivers of the third quarter results and our strategy for continued growth in 2010 and beyond.

Brad Dickerson, our Chief Financial Officer, will then discuss the Company's financial performance for the third quarter, provide an updated outlook for 2010, and introduce our preliminary outlook for 2011.

After the prepared remarks, Kevin, Brad and Wayne Marino, our Chief Operating Officer, will be available for a Q&A session that will end by 9.30 AM.

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

Thank you Tom, and good morning everyone.

At Under Armour measuring success has always started with the scoreboard, and I am going to get to that in just a moment.

But as we complete year five as a public company, the measure of our success as a brand gets a little more complex.

In addition to our quarterly numbers, I want to talk this morning about four benchmarks by which we measure ourselves to ensure we are building our platform for long-term brand strength, and long-term return to shareholders.

Product, story, service and team.

First to our scoreboard.

Our apparel net revenues are up 30% year-to-date.

We think that number speaks volumes not only in our ability to continue resonating with the core consumer, but to the strength and validity of our strategy.

We believe that 30% year-to-date apparel net revenue growth is great evidence that there is still tremendous opportunity for us in the US apparel business, as we continue to lead in our core sporting goods accounts, and gain traction outside of our core distribution.

For the quarter our apparel net revenue growth was extremely balanced with men's, women's and youth all growing at least 25%.

In addition, our growth being broad based, we continue to see our market share of dollars run ahead of market share of units, which we believe is a great indicator that our consumer remains willing to pay a premium for Under Armour apparel.

We have consistently talked about building our women's business to be larger than our men's.

This past quarter the dollar growth in wholesale women's training apparel, our largest category in women's, was equal to the dollar growth we saw in men's training apparel.

While that is just a snapshot, we think it is a great sign that we have established the right cadence to build the same level of equity and loyalty among our female consumers, as we know exists with our core male consumer.

So as we become strong in areas like women's and direct to consumer, we are also able to invest in areas where the opportunity is even larger.

First, there is footwear.

In this past weekend consumers got their first taste of Under Armour basketball footwear.

And while a few days of sell-through aren't an accurate measure of how well we have been received, we are much more confident about our entry into this important category because of the approach we have taken, and because of what we have learned and now applied to basketball with the experience of the past five years of building footwear.

By the time our first basketball footwear arrived in stores last week, literally hundreds of the country's best players have tried our product and given us feedback.

That process has helped us deliver a basketball shoe that works for the player and gives us confidence that we will see a return to growth in our footwear business in 2011.

Outside of the US, the Under Armour brand continues to gain traction and build a base for long-term growth.

Our international business grew 60% in the quarter with both Europe and Japan showing very strong growth.

In Europe our base layer continues to lead the way, but we are making strides toward diversifying our apparel mix as our fitted product grows as a percentage of our business moving into 2011.

We are also bringing grass roots marketing to our European business as this past quarter we brought hundreds of young athletes to the Under Armour rugby combines in the UK.

Our business in Japan continues to perform exceptionally well, where our partner, Dome Corporation, will pass $100 million US dollars in sales in 2010, as they continue to push forward including the launch of the first non-cleated footwear for the Japanese consumer this quarter.

We also saw the first UA branded full price retail store open outside of the US as Dome opened a UA Clubhouse in Tokyo.

Our success in Japan and the traction we are gaining in the UK are great indicators of our ability to speak to athletes who play something other than American football, and better position us to succeed in new categories to help drive our growth.

We have talked about developing the Under Armour brand like chapters in a book, with each chapter connected to both the previous and following ones.

As our brand continues to reach new consumers both here in the US and internationally, we will be bringing the next chapter of Under Armour innovation to the athletic apparel market next spring.

When we first brought the idea of moisture wicking compression apparel to the market, our goal was to make athletes rethink expectations for their apparel.

Our history is built on our ability to trade consumers up when we deliver true unexpected innovation, and it is with this spirit that in 2011 we will bring to market the world's first true performance cotton T-shirt.

This evolution will introduce Under Armour to a whole new audience of consumers, while bringing a new level of performance to a category where expectations for it have been low.

You will be hearing a lot more about the next chapter in Under Armour's performance apparel platform in the coming months, and we are confident this innovation will expand both the reach and equity of our brand.

I talked on our last call about investing to build the UA team.

That is an ongoing part of my job and one where we continue to make great strides.

I would like to focus on another area where our apparel net revenue growth is enabling us to invest, and that is on the field of play.

Our strong apparel engine is fueling our ability to invest not just in new categories and geographies, but in marketing as well.

Under Armour was born on the football field and our business there remains very strong.

To help ensure that brand strength going forward, we continue to activate and invest in sports marketing assets.

On the college fields we continue to generate great visibility for the brand with our great collegiate teams, and this week we are very proud that the Auburn Tigers, an Under Armour school for more than five years, who exclusively wear our uniforms and cleated products, has just moved to number one in the BCF college football standings.

War Eagle.

On the pro side, we recently signed on to not just maintain but to expand our relationship with the NFL.

So in addition to teaming with the league to maximize our involvement at the NFL combine this spring, we are adding Pro Bowl players, like Miles Austin and Anquan Boldin to the roster of UA athletes wearing Under Armour cleats that you will continue to see on the field.

So while we are investing to help us grow our share in a core category like football, we are also positioned to invest in assets that we believe will help us accelerate our growth in categories where we are just establishing ourselves.

We are confident these coming investments will enable us to quickly build the UA identity in these new categories and bring increased focus to the global opportunities for our brand.

I talked at the opening about setting additional benchmarks to help guide us toward the million billion dollar platform.

Going forward our focus is very clear.

There are four areas where we need to win as we continue to drive value for our shareholders.

Product, Story, Service, and Team.

First and always foremost at Under Armour it is product.

Our apparel engine is strong as we continue to create the best solutions for the athletes.

We will continue to demonstrate our apparel thought leadership in 2011 with our next generation of apparel innovation involving a brand new category for Under Armour in cotton.

We promise to make it exciting, and the market opportunity is very large.

2011 will mark our fifth year of making footwear, and we believe that the opportunity in footwear can some day be greater than apparel for us.

We have built up our equity with athletes over the years and they have embraced our footwear product on the football and baseball fields.

Our challenge is to invest and win outside of the cleated business.

Because while the core consumer is found on the football turf and baseball diamonds, the bigger dollar opportunity remains in growth categories such as running and basketball.

Our second focus for growth is around telling the Under Armour brand story globally.

We have begun to lay the foundation for this story telling in key markets like the UK and Japan, and have now taken our first steps in the world's largest market in China.

Our challenge will be to assemble the pieces in each of those markets.

Retail presence, sports marketing assets, and grass roots storytelling that will position us to win.

We have established our priorities in our key markets, are investing to grow globally, and we are confident that you will see these pieces start coming together over the next several months.

Third is our ability to service the business.

We look at 30% growth in our apparel net revenues year-to-date and it looks like we are checking that box pretty well.

But we are not satisfied with our consistency in servicing consumer demand for UA products.

We've made servicing the business a top priority in 2011, and are committed to making it a competency that will help drive long-term operating leverage.

The fourth and final piece of our plan is building the team.

I have spoken to this consistently on these earnings calls as I believe it is the number one priority for the CEO of any growth company.

Our results this past quarter give me confidence that progress is being made.

Our retail team continues to drive net revenues exceeding our wholesale growth, and bringing in new consumers to the UA brand.

Our web business continues to deliver strong numbers while building the next evolution of what UA needs to be online for our core consumer, and the continued strength in our core apparel business is fueling our growth and enabling us to invest across growth categories and geographies.

All three of these areas are run by experienced leaders we have brought to Under Armour within just the past 12 months.

Building the team will continue to be my primary focus, as we build out the infrastructure of a multi billion dollar global brand.

Our revenue growth and the opportunities ahead means we continue to attract the best and the brightest.

We will continue to bring in experienced industry pros to help us navigate these new categories and geographies, and complement the home-grown UA team who had built our business and brand equity to date.

Making a great product, telling a great brand story, servicing our business and building a great team of people that are going to help us do that.

Our goal is to continue to win in each of these areas, ensuring that our core consumers maintains his and her loyalty to the Under Armour brand in 2011 and beyond.

With that, I will pass it over 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 discussing our third quarter financial results.

Our net revenues for the third quarter of 2010 increased 22% to $329 million.

Year-to-date, net revenues are up 20% to $763 million.

This strong growth was largely driven by apparel which is up 28% to $277 million during the quarter, and up 30% to $600 million year-to-date.

Apparel strength was broad based during the quarter with each of our men's, women's, and youth apparel businesses growing at least 25% year-over-year.

Our direct to consumer net revenues increased 47% for the quarter, and 58% year-to-date representing approximately 18.1% and 19% of net revenue respectively.

Similar to last quarter, third quarter net revenue growth was driven by a combination of new factory house stores, strong same store sales growth, and the web business.

We opened five new factory house stores during the quarter increasing our factory house store base to 50.

We expect to end 2010 with approximately 54 total factory house stores, up from 35 locations at the end of 2009.

Footwear net revenue declined 20% to $26 million in the third quarter in line with our previous indication that running and training footwear revenues were expected to decline in 2010 compared with 2009.

International net revenues increased 60% to $21 million in the third quarter, and represented approximately 6% of revenues, up from roughly 5% of revenues in last year's quarter.

Third quarter gross margins were 50.9% compared with 49.5% in the prior year's quarter.

Several factors contributed to the 140 basis point gross margin expansion.

First, we incurred lower sales returns and markdowns contributing approximately 60 basis points.

Second, we experienced a favorable impact year-over-year from liquidations and inventory reserves contributing approximately 50 basis points.

And finally we continue to see a higher percentage of net revenues from our higher margin direct to consumer business contributing approximately 45 basis points.

Selling, general and administrative expenses as a percentage of net revenues increased to 33.6% in the third quarter of 2010 compared with 32% 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 stories throughout 2010.

First, marketing costs increased to 10.9% of net revenues for the quarter from 10.5% in the prior year period, primarily driven by increased sponsorships and higher marketing costs for specific customers.

It is important to note that third quarter marketing costs reflect an approximate $2 million shift of certain media costs to the fourth quarter.

Given our updated full year plan we now expect 2010 marketing costs as a percentage of net revenues at approximately 12% compared to our previously indicated range of 12% to 13%.

Second, selling costs increased to 7.1% of net revenues for the quarter from 6.6% in the prior year period, 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 7.7% of net revenues for the quarter, compared with 7.3% in the prior year period.

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 7.9% of net revenues for the quarter, compared to 7.6% in the prior year period as we invested in additional corporate personnel, facility expenses, and information technology initiatives needed to support our growth.

Operating income during the third quarter grew nearly 21% to $56.7 million compared with $47.1 million in the prior year.

Operating margin was 17.3%, compared with 17.5% in the prior year quarter.

In Other Expense we experienced a net loss of $180,000 related to foreign currency during the quarter, and a net loss of $1 million year-to-date.

Looking at our tax rate, several factors positively impacted our third quarter rate.

First, we received a state tax credit similar to ones previously received by us in 2002 and 2006, along with a Federal Research & Development tax credit.

Second, we continued to develop and implement our tax planning strategies.

These efforts reduced our effective income tax rate in the third quarter to 37.7% compared with 43.9% in the third quarter of 2009, and are expected to result in a full year tax rate of approximately 39.2%.

Our resulting net income in the third quarter increased 33% to $34.9 million, compared with $26.2 million in the prior year period.

Third quarter diluted earnings per share increased 31% to $0.68, compared with $0.52 in the prior year.

While our operations remain strong during the quarter we did experience approximately a $0.05 favorable impact from the lower than expected effective tax rate during the period, and approximately a $0.02 benefit from the shift of marketing spend from the third quarter to the fourth quarter.

Now moving over to the balance sheet.

Total cash and cash equivalents at quarter end increased 43% to $134 million, compared with $93 million at September 30, 2009.

Cash net of debt increased $40 million at quarter end to $115 million, compared with $75 million at September 30, 2009.

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

Inventory at quarter end increased 28% year-over-year to $196 million, compared to $153 million at September 30, 2009.

In line with previous guidance, inventory growth outpaced net revenue growth as we increased our safety stock around core programs to better meet consumer demand, and increased our made for strategy across our factory house store base.

Our investment in capital expenditures was approximately $9 million for the third quarter, and approximately $25 million year-to-date.

We now anticipate capital expenditures in 2010 will come in toward the lower end of our previously indicated $35 million to $40 million range.

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 $990 million to $1.010 billion, an increase of 16% to 18% over 2009.

And 2010 diluted earnings per share of $1.11 to $1.13, an increase of 21% to 23%.

Given the sustained strength in our apparel and direct to consumer channel, our improved visibility for the remainder of the year, and a lower effective tax rate, we are raising our full year outlook.

We now expect 2010 annual net revenues in the range of $1.030 billion to $1.035 billion, an increase of 20% to 21% over 2009.

We also expect 2010 diluted earnings per share in the range of $1.23 to $1.24, an increase of 34% to 35% over 2009.

Similar to last quarter, we wanted to elaborate on three areas of our updated 2010 guidance.

SG&A, taxes, and inventory.

For SG&A, we see year-over-year dollar growth in the fourth quarter approaching 30%.

We continue to make the right investments to support our growth platforms.

This includes footwear which was planned down this year, and hats and bags which are not generating revenue until 2011.

It also includes higher personnel costs at our factory house channel where we plan to end the year with 54 stores up from 35 stores at the end of 2009.

Now looking at our tax rate.

Our effective tax rate in the third quarter benefited from one-time state and federal tax credits along with an improved outlook relative to long-term tax planning strategies.

As we stated earlier these items will drive our effective tax rate for the full year in 2010 to 39.2%, down from our previous outlook of 42%.

As we move into 2011 we anticipate our effective tax rate will increase to a range of 40.5% to 41%, due to the one-time nature of the tax credits received in 2010.

However, this increase will be partially offset from the permanent impact relative to our continued long-term tax strategies.

Finally on inventory.

We continue to see the same factors from the third quarter driving fourth quarter inventory growth ahead of sales growth.

This includes an increase in our safety stock and continued investments around made for product for our factory house outlet channel, it also includes new product categories for 2011 including hats and bags coming in-house, and the introduction of our new cotton product.

Before we turn it over for Q&A, we would also like to provide you with a preliminary view for 2011.

Based on current visibility we anticipate both 2011 net revenues and 2011 EPS growth to be at the higher end of our longer term growth target of 20% to 25%.

We intend to give more details in our 2011 guidance in the coming months.

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 as possible.

Operator?

Thank you.

(Operator Instructions).

Our first question is from Michael Binetti with UBS.

Your question, please.

Hi, guys.

Congratulations on a nice quarter.

If you could maybe help us out a little bit with some more detail on the gross margin.

I am just wondering, I mean I see what you guys talked about as being year-over-year lifts to the gross margin, what were maybe one or two of the biggest offsets to that in the quarter, please?

Hey, Michael, this is Brad.

I think when you look at a lot of positive things on the gross margin side, as far as negatives maybe offsets, we did have a little bit more apparel liquidations year-over-year, but I think that is more a function of keeping the inventory clean , and actually you are seeing some of the benefit of that in what I called out as lower returns and markdowns.

Even though we had a little bit more volume on the apparel liquidation side, which had a little bit of a drag on margins, very small, that was more than offset by the fact that our inventory is very clean now, and we are seeing less returns in

A quick follow-up.

As I look through the initial statements on 2011, how should we think about the growth algorithm in our models for 2011?

It seems like there has been quite a bit of preloaded costs this year as you guys bring in hats and bags, and you build out for footwear to be getting bigger.

Should we think about EPS to start levering revenues next year, as we think about this 20% to 25% target.

Should EPS be growing ahead of revenues as you guys start leveraging some of those costs, or to what extent we should be thinking about that at this point?

We will give a lot more detail around 2011 on the next earnings call.

As we said here targeting a higher end of 20% to 25% both for top line and bottom line.

We are going to target a modest SG&A leverage in 2011.

We need to continue to invest in our businesses, but with hats and bags coming in-house to your point, also with footwear returning to growth, we are targeting a modest leverage in SG&A.

Did talk about the tax rate, so year-over-year the tax rate will be going back up again a little bit, because of the one-time nature of some of those tax credits.

And on the margin side right now, we are still working through a lot of the details.

Although we have been seeing some of the challenges that the industry has been seeing relative to some margin pressures out there, we are working through that right now, specifically around the back half of 2011.

That is a gross margin comment, Brad?

Right.

At this point we shouldn't expect a huge amount of leverage on the growth.

There is quite a bit of noise in that gross margin outlook for you guys next year so I am just trying to think about how we should maybe think about that number heading into next year, even though it is early for you guys?

You have got some puts and takes there with SG&A, with the tax rate, and also with right now we have more detail on gross margin later on the next earnings call, so I think for now look at that 20% to 25% both top line and EPS line.

Thanks.

The higher end of that.

Thank you.

Our next question is from Robbie Ohmes with Bank of America Merrill Lynch.

Go ahead, please.

Thanks.

Just a few quick questions.

The first, I apologize if I missed it, but were any basketball shoes shipped in the third quarter, or does that shipment all fall in the fourth quarter?

And then related to that, can you talk about the sort of the inventory investment there, and the allocation strategy for basketball shoes?

And then my follow-up question would be for the performance cotton business launching next year, maybe sort of a similar sort of discussion is this an allocated launch, or could it be pretty broad, and does it encompass any new distribution channels?

Thanks.

Robbie, this is Brad.

On the Q3 shipments for basketball, no there were not any Q3 shipments for basketball.

That is a Q4 entry into that marketplace.

And as Kevin mentioned we are really talking about a taste here.

From an inventory perspective don't really anticipate any significant movements in inventory relative to the basketball footwear.

As far as allocation, yes, that is an allocated program this year, and as we head into next year also for basketball.

On the cotton side, also for the most part an allocated program, we will have a little bit of replenishment on the cotton side, too.

Going forward from a distribution perspective, no significant changes in distribution in 2011 for us, and that includes our cotton product.

And just a quick follow-up on footwear.

If you look at the shipments for the third quarter, it looks like your revenues were down about 20% if I have the right number in there.

Were there some wholesale accounts where your footwear business was actually up in the third quarter?

And/or were you doing footwear in your outlet stores?

I would have thought you would have planned that footwear business down more significantly versus the numbers last year.

Thanks.

Any comment on that?

I think when you look at year-over-year in the third quarter, obviously, Q3 last year was a pretty big quarter for us with the back to school program around Run, so obviously it makes sense that year-over-year as we called out training and running will be down this year, that Q3 would be down.

We have seen some pretty good success in our outlet channels with our footwear, so that helped a little bit to offset some of that.

But again, as we called out consistent with prior quarters our footwear is down overall.

Got it, thank you very much.

Yes.

Thank you.

Our next question is from Omar Saad with Credit Suisse.

Your question, please.

Thanks.

Good morning.

Kevin, I wanted you to elaborate on the comment you made at the beginning on the basketball launch, Under Armour's greater level of confidence given the experience and key learnings over the last five years in footwear.

Could you elaborate and maybe give some examples of things that you have learned in the footwear business that makes you more confident on the basketball side?

Yes, I actually wanted to give more color around footwear in general, so let me take a minute to do that.

And if I could drop it into three buckets.

The first bucket is reality, the second is what we have learned, and the third being what we are doing about it.

So first of all I want to set expectations for people, when we talk about what we believe our opportunity in basketball is.

We have been pretty clear about saying that our goal is to be the number two player in basketball in the next several years.

Keep in mind it is about a $1.3 billion market opportunity in the US alone.

That is currently dominated by one company through three different brands controlling 90-plus percent of the market.

As we say targeting number two, you are looking for, about mid-single digits would accomplish that goal for us.

That being said, our long-term goal is like it is in every category that we enter is to some day be the number one player, but that, of course is going to take time.

As you can tell from our brand, we are thinking more about Under Armour 2020, than we are even about Under Armour 2011.

So we have absolutely had a great education in footwear since 2006, and first and foremost we have listened, and I think hopefully applied most of those learnings to what we are doing through our basketball introductions.

First and foremost the emphasis on youth.

Winning brand fans overt inception versus the age 25.

A great example is when we launched running shoes, even after training shoes, one of every two pairs of shoes sold in training in 2008 were to youth.

When we came back in 2009 we didn't sell youth product in the initial launch.

So lesson learned.

Narrower distribution for the introduction, and a limited amount of pairs.

We put out to the market a fraction of what we have done with other introductions from a total number of pairs in the market.

And most importantly we built around our key sporting goods partners that have been great and terrific with us through this past weekend, as well as incredible support from the mall with Foot Locker and Finish Line really doing a great job for us.

And then most importantly the acceptance that we had from some of the top specialty doors and some of the top urban doors around the country.

So there are a lot of lessons to be learned here, and again it is very early, but the indications are that we are going to get started.

Again we will, the one certain thing that we can tell you is that day 365 will be better than day one, and that comes back to one of the places where we have been pretty critical of ourselves, is what we have done when we introduce a product, versus what we do in season two and season three.

And what I can tell you with confidence is that season two and season three will be greater again than we were on day one.

And most importantly, we have core tested and approved the product.

We will have 20 Division One teams wearing them this fall, and throughout the last several years, 12 Men's, 8 Women's teams, 10 AU programs, 30 high school teams.

Brandon Jennings in the NBA.

We have really taken the time to build a good product, and more importantly, a great product that is a foundation that will be something to build on.

Finally, what are we doing about it?

I think the culture of being a basketball company is one of the most important things that we have really been able to evolve into.

Not just talking about being a basketball brand, but really walking about being a basketball brand, and a large part of that, and you are not allowed to call in sick for earnings calls, but I just got back from a week in China, visiting our factories, and visiting our offices in Guangzhou and Hong Kong, so I am fighting between cough syrups here, but bear with me.

You have to go there and you have to see it.

I can tell you is that the partner base and distribution base, the manufacturing base that we have today, the office, the more than 40 people that we have in Asia, the nearly 100 people that we have here, the open requisitions, and the culture of building a footwear business, and a particularly successful sport, and the basketball business is something that we are pretty proud of.

Thanks.

That is really helpful, Kevin.

The follow-up and talking about these things that have run in the past, with this new cotton product launch, you also alluded to some new channels or new consumer, new markets that are opening up.

Can you be more specific than that?

Obviously the addressable market of what cotton product would be for in large form is a big opportunity.

We looked in our athletes drawer, and find that the in the typical teenager's drawer you would find 30 T-shirts.

Four of which were performance, 26 of which were cotton.

Of the four, we had three of which were Under Armour and one was another brand, and so we were fighting ourselves to try to get and capture the fourth T-shirt, when we realized looking at the other 26 shirts was a greater opportunity.

So we never had an issue, we never had problems with when you think about Under Armour getting into cotton with frankly cotton T-shirts, as much as we had issue with nonperformance.

The ability for us to make a product that performs is something that we think A) speaks to our existing consumer, as well as opens us up to a new consumer, who always just said I am a cotton person, I don't like Under Armour which is that synthetic goods.

So we think there is a much larger market of opportunity there.

Again for consumers that are walking into existing distribution, and then of course, I think there is probably a bigger opportunity as we think about where can we go, where we haven't been able to go before because we didn't make cotton product.

Thanks.

Nice work.

Feel better.

Thanks so much.

Our next question is from Taposh Bari with Jefferies.

Your question, please.

Nice job.

Kevin, you talked about in your prepared remarks about service and brand experience.

Give us an update on your latest thoughts on your retail strategy?

Obviously your outlet stores are doing very well.

Any update on where you stand on full price retail?

Thanks.

We have no plans to open any additional specialty stores in 2011.

But you are going to continue to see us test the market as well, for instance we have got a great pop-up store that you will be seeing in New York City in November, right around the Marathon, and right around our ability to find out what we can do at holiday.

You know, as we look at distribution in the US, and where we are under penetrated as a brand, one of the vehicles we consider is our direct consumer business as a whole, and that includes both retail as well as our web business.

Our goal with owned retail is to supplement our existing distribution, to get to that consumer, because we think there are a lot of places where still we are frankly we are under penetrated, and so by offsetting or augmenting our existing distribution base with the appropriate full price strategy is something that may make sense in the future, but we have a long way to go, and we have a lot of work to do with our existing account base.

You look at where the most comprehensive branded story is told for the Under Armour brand, and we have some great distribution partners that make that happen, but in a lot of cases it is an outlet store.

It is Branson, Missouri, where we opened up our first outlet, and on day one we will have 53 outlets by year end, but a place like Branson, Missouri, on day one we sold nearly $60,000 out of a 5,000 or 6,000 square foot store in the opening day.

And you think about what that opportunity means from us from having the ability to continue to find pockets where the Under Armour brand and frankly the need from the consumer brand are not met, I think we want to be and remain thoughtful with that.

Got it.

Thanks.

And then just a quick follow-up.

Seems like there are some exciting new product launches scheduled for next year.

Can you maybe give us an update or some kind of idea for timing for the new cotton fabric, and also I guess running 2.0?

As I mentioned we haven't, basically I haven't told you anything about cotton yet, so just giving you an indication there is a lot more information to come on that, and you will see that around the first quarter of 2011.

We have a lot of great products out right now, and probably some things and some one-offs that we are really excited about that is out in the marketplace right now is our new EVO ColdGear.

Which in the past if you have ever said, tried an Under Armour compression cold weather shirt, we used to say that the two best times of the day are the minute you put it on and the minute that you take it off.

Imagine putting an Under Armour shirt and not being a full contact sport is something that we are excited about this new fitted product.

We think this opens up again to a much wider more addressable market, as well for people that aren't looking for supercompression.

So it is a little more of a relaxed fit, and with all of the benefits and properties of Under Armour.

So not a lot of new categories like that, but I think the performance that you are seeing with 30-plus percent net revenue growth in apparel speaks to the trust that we have from the consumer, and the fact that we have a pretty good thought leadership position when it many comes to apparel.

Any indication on when new Gene's new running products should be expected at retail next year?

It is consistent.

You are not going to see one big great new launch, what you are going to see is consistently better product in the marketplace.

And again, we feel very good about the product that we have there now, we feel very good about the product we have in 2011, which is why we have taken some of the steps backwards to reset in 2010, that sets us up for a position to have clean inventory and go attack the business in 2011, and especially heading into 2012.

What you are not hearing us say right now are any major predictions.

What you are hearing us say is that 2011 will be bigger than 2010, that basketball will be an important part of what we are doing, and that we have great confidence that for the long term, both running and training are going to be important categories for our brand.

Great, thanks a lot.

Best of luck.

Thanks very much.

Our next question is from Kate McShane with Citi Investment.

Go ahead, please.

Oliver Chen for Kate McShane.

A question related to gross margin and looking for it in relation to product costs?

Do you feel that your business model has sensitivity to any of the recent escalation in cotton prices, and if so, what does the base rate assume for that outlook?

Secondly, for modeling purposes what kind of, should we be projecting an inflection towards positive footwear growth as soon as first quarter of 2011?

Is there any kind of feedback about how to think about that?

Thank you.

This is Brad.

As far as gross margin goes, I think the important thing to note that still for us it is consistent with what we have said in the past, that the biggest drivers of gross margin for us will continue to be the growth in two businesses for us.

One, our direct to consumer business which positively impacts gross margins.

And two, the growth in our footwear business which we have called out right now, impacts our margins negatively from a gross margin perspective.

Those two really will still continue to be the biggest drivers of our gross margin story going forward.

To your point around some of the pricing issues, we are kind of rolling up our prices right now for the back half of 2011.

Still have some work to do on that.

We will give some more details around gross margin in the next earnings call.

The important thing to point out is that we don't anticipate cotton as a percentage of our overall business to be a significant driver of our costs.

So from that perspective I don't think cotton will have as negative an impact for us in 2011 but again we will give more detail around margins in the next earnings call.

As far as footwear growth and timing of footwear growth, I think what you should anticipate is probably Q2 and Q3 being the quarters that have the best footwear growth, and that is really more around the back to school season.

So to Kevin's point before, about talking about some of the categories of footwear, I think you will see the most impactful growth in footwear in Q2 and Q3.

Thank you.

Yes.

Thank you.

Our next question is from Michelle Tan with Goldman Sachs.

Your question, please.

Michelle Tan your line is open.

I am getting no response.

The next question is from Eric Tracy with FBR Capital.

Your question, please.

Good morning.

Maybe if I could just follow up a little bit more on the footwear side in basketball in particular, and I know you don't want to give specifics for next year, but is there sort of a goal or market share grab you expect, or is embedded in that top line guidance for next year?

I mean in basketball like I said we have got a few years to start really showing up in terms of absolute market share.

So our number one goal right now is just learning the cadence of how to work within that category, getting the consumer acceptance from the athletes on court, and then of course building up a little bit of excitement around some very key and limited doors.

Nothing from a basketball specific.

In terms of footwear overall market share, we are thinking more about how that compares to ourself.

What are we doing to ensure that footwear in 2011 again is greater than it is in 2010.

And then on the footwear margin side, as we think about next year again from a gross margin it sounds like it still is a little bit of a pressure, but sort of where we are in the stages of scaling that business up, to sort of leverage the costs that have already put in, or are we at that inflection point next year, or are we still working through that?

Yes, Eric, this is Brad.

I think from the margin side we still are calling out about a 1,000 basis point-plus opportunity in margins in footwear longer term.

We continue to see that opportunity longer term, in 2011 I think from a margin perspective you will probably see something similar to what we have seen in 2010.

Some puts and takes to get that, but we will give more detail on that in the next earnings call.

I know you don't want to get too specific on the gross margin side, but certainly you have got the pieces direct to consumer helping, but in terms of some of the takes again around these product costs inflation, not just cotton but be it labor, freight, even polys continue to escalate.

Is that obviously as we think about the back half of the input costs there embedded within this sort of guidance already, or still working through relative to sort of the price increases you think you can take to offset?

Our guidance takes into account the visibility we have today which is pretty good on spring summer.

On fall winter we are still kind of working through that, so that is why we will not be able to give too much detail until the next earnings call.

To reiterate again from an apparel perspective, when you talk about labor costs, less than 10% of our apparel is manufactured in China, so China labor is less of an impact to our apparel.

It is a little bit more of an impact to our footwear margins, which is a smaller percentage of our business obviously.

Like I said before cotton although incremental top line for us in 2011, still a relatively small percentage of our overall business, so we are still working through all of those margins and we will give you more detail on the next call.

Thank you, guys.

Thank you.

Our next question is from Michelle Tan with Goldman Sachs.

Your question, please.

Nicole filling in for Michelle.

Thanks for taking our questions.

We wanted to see if you could give us an update on your international efforts, and if there are any new initiatives that are driving the strength in that market?

Thanks.

It is Kevin.

First of all, our goal is to be a global brand, which we define that as being more than half our revenue should come from outside of our home country.

In doing that we have a long road in front of us, with 90%+ of our business is coming within North America today.

That being said we have got great confidence of what global can mean.

As we think about global, there are three regions that we consider that, The Americas, Asia, and Europe.

In Asia, I think that we have laid some great groundwork.

With Dome Corporation, and demonstrating that our brand, A, does translate, and the success that we have seen with Dome Corporation passing $100 million US.

It has been ten years to get to that point, but I think that they are really positioned to start scaling and start levering their business as well.

Again it took seven years to get to the first $35 million, and just three to get over $100 million since then.

We feel like that tipping point effect is something that has taken place there.

And again, it helps lay a little bit of a model as we think about entering other, particularly Asian countries.

China is the next one that we have on the map.

And as we think about entering China, we are going to do it very conservatively, and within the next several months we expect to have a shop and shop up in China at some point, and opening our first full priced store in 2011 as well.

All of that has been around putting to work all of the studies and all of the market research that we have done to date, putting ourselves in a position to enter that market.

As we see or what we found with entering other countries is that the first five years are about understanding culture, and understanding and building your team, so we have got a very long-term plan with that.

And we are very fortunate to have an apparel and a direct to consumer business that allows us to make these kind of investments.

Europe for us is a place that we continue to believe in, and again passing that five year mark we are at a point where we think that Europe is something that is poised for growth for us as well.

As we said, our international business is up over 60% in the quarter, 59% year-to-date.

So we feel very good about and encouraged by what we are seeing internationally, but it is all off of a small base, and something that we think over time, again our goal is to build out that global base where half of our revenues are coming from outside America.

Great, thanks.

Thanks a lot, Nicole.

Thank you.

The next question is from Sam Poser with Sterne Agee.

Go ahead, please.

A lot of my questions have been answered, but could you talk about how many stores do you have right now, and what is the store growth plan into next year?

Yes, Sam, right now at the end of the third quarter we have 50 factory house stores, obviously we still have the four full priced specialty stores on top of that.

We anticipate opening another four factory house stores in the fourth quarter, so we will end the year with about 54 stores, and next year right now we anticipate building approximately 20 new stores, factory house stores in 2011.

It will be a little more front end loaded as far as openings than we have seen in previous years too.

And then the big, the big basketball launch that is going to happen next year, the big basketball launch that you are going to do next year, when it is no longer just an eye dropper, that is going to be more of a back to school event, rather than third quarter based on what you said?

No.

I think, Sam, that we haven't said anything about any major launches next year.

One of the lessons learned that we have figured out of being in footwear for the last five years for us, is not putting that big bulls eye on any particular date.

What you see now is I would call it a little more than a slow roll, but we are looking to basically create some market want and desire and need from the consumer, and we now have that platform from a distribution standpoint.

I think we like the partners that we have selected right now.

I think we have a great balance between our core sporting goods guys at the mall channel as well as some of the specialty urban doors.

So we are basically going to go where we find heat, and we see that with the product standpoint.

And as I mentioned in my comments, and I want to is make sure that it doesn't get lost is that we will, when I say we will be greater on day 365 than we will be on day one is that we feel great confidence in the product that we have out there, and we will start looking at future seasons to come, what we have coming in the spring what we have coming next summer, and what we look at what we have coming next fall.

And so there are no big surprises that we are waiting for, what that product is going to look like.

But it has been tested, we are working with that and our teams right now, and we feel very good about the progression and the journey that will be basketball footwear for the Under Armour brand.

One last thing, sorry.

How did you comp in your retail stores, and what the is the breakout between made for goods right now, and selling markdown product, just off products that were discard products?

I think we really don't talk about comp percentages at our retail stores, but what I will say is that is probably the benefit we have been seeing from our made for strategy to some degree is better comp year-over-year.

That has helped obviously with our product assortment and has been a better consumer experience within our outlet stores themselves, that helped our comps more than anything.

As far as made for itself.

I think the industry range out there right now is about 75% to 95% made for in the factory store base.

We are well below that as a brand right now, and year-over-year we are probably, even though we are below that year-over-year, probably about double our made for than we were last year at this time.

Thank you very much.

Success.

Thanks.

Our next question is from Jim Duffy with Stifel Nicolaus.

Your question, please.

Thanks, good morning.

Good morning.

A couple of questions around footwear sourcing.

Can you speak to the progress you are making on costs there, and what are some of the keys to getting better leverage on the footwear gross margins?

Is it really just a volume thing, or are there some other aspects of it that should represent inflection points for you?

Yes Jim, I think volume definitely plays a part, obviously when you look from a tooling perspective, the more volume you can have in your footwear side, it helps to offset some of those upfront tooling costs, so that will always help.

Our footwear team and specifically our sourcing team within footwear has been doing a lot of work around short-term and long-term strategies of sourcing, to be able to be more flexible going forward with our source base, and really put us in a position, just from a product category perspective to improve margins across the board pretty much in all categories longer term.

As I spoke about before, we think there is a lot of opportunity on the footwear side margins.

1,000-plus basis points we think.

It will take some time, but right now that we are kind of working through the strategy, we anticipate seeing some benefits from that in future years.

Jim, just coming back from Asia and spending time in our factories with our key partners too, is part of that learning progression over the last five years has been us becoming a better customer to the vendors we do business with as well.

Erratic buys and some of those things when you just don't know the size of the business, and you are learning and getting your molds and your [lats] and all of the amortization that you going through, so there are some significant startup costs.

When we opened footwear five years ago, we started getting into that category, we had one partner.

We had 13 people on our team.

Today we have we had outsourced development and outsourced design, today we have five or six key partners that we are working with.

We have an office in Guangzhou, we have got 40 people in Asia.

We have 100 people here.

We have 30 open requisitions for new people to join the team.

We have become a lot smarter, we have become a lot bigger but I think we have become a lot smarter about this.

A lot of the infrastructure fill that you have had, even with categories that we haven't been in yet like basketball, we are now, A, starting to see revenue some revenue come in there, and it is also beginning to apply a little bit of consistency with some of our factory base.

When we started as a football company that was seasonal, and with factories like anybody wants, is they want the ability for 12 months of production that can smooth it out and some of those other things.

We are becoming a better customer allowing us to be more strategic and thoughtful about A, where we are manufacturing, and we can take advantage of appropriate local conditions to take advantage of costs and some of the other things, but I think that is giving us, we are again much more mature as a footwear business today than we were obviously five years ago.

Okay.

Are you working with fewer factories and trying to concentrate your sourcing through factories just to get some captive capacity, or help me understand the dynamic there as to how you are securing capacity, and how that is helping you from a cost standpoint?

Not unlike our apparel business is that we want to have a few key strategic partners.

I went and saw three partners on this last visit in six or seven different factory locations.

So where we can minimize geographic risk and geopolitical risk, and some of those things.

I think that the world of footwear manufacturing is going to move very quickly beyond just China.

That is one of the things that we have to be thoughtful with, and again, we are working with very large-scale partners who have that ability, because we want to be very important to a few partners versus trying to have a lot of those relationships.

Okay.

Thanks so much.

Feel better.

We are doing good.

Thanks, Jim.

Thank you.

Our next question is from Matt McClintock with Barclays Capital.

Your question, please.

Hi, good morning.

Hi.

With all of the focus on basketball I wondered if we could get an update on the cleat business?

What trends have you been seeing in market share in this category?

Is the Company still building on its position, and granted that there won't be major launches next year, but should we see anything exciting in this category next year along with training and running?

One thing that is exciting, I mentioned just some of the authenticity that we have with some of our collegiate properties that we will have wearing our footwear, from both baseball and national champion baseball winner, University of South Carolina, to the number one team in the country on the collegiate level in Auburn University, to just re-upping our deal and more importantly expanding our deal with the NFL by taking over combine, but ensuring that our athletes will be wearing our football cleats and football gloves beginning in 2011 as well.

Market share on the cleated categories continues to grow and expand for us.

So, we see, continue to take market share in 2011 in both football and baseball cleats.

Again while they are very small categories they are also very strategic and very important categories for us, and give us a great foundation and a great base to continue to build on things like our training footwear, as well as give us the credibility of going after categories like running and some of the bigger platforms like basketball as well.

Thanks.

Operator, we have time for one more question.

Thank you.

Our next question is from Chi Lee with Morgan Stanley.

Your question, please.

Good morning, guys.

Kevin, can you just talk about have you guys been able to manipulate the supply chain, so that you will be able to read and react on basketball to what you are seeing at retail, versus what you were able to do with running or training?

To read it, number one is, that we are not looking to be reactive with any of the categories at running right now.

I think we are putting a firm plan in place.

And the ability for to us chase, is something we can think about long-term.

Frankly, we don't need the revenues and so we are very fortunate to have the strong apparel business that we do, that allows us to be thoughtful and strategic.

And so when we say we have issued a taste of basketball footwear, there is much more demand than what we are putting into the market, and again we are selling at about a fraction of what we have done with other categories that we have entered.

So we are positioning this as this is a long-term, three to five to ten year plan, for us to look to become the dominant and leading player in every category where we are participating.

I guess my question wasn't so much on the quantities, and actually being able to chase quantities but actually being able to manipulate design or qualitative aspects about the product?

I think we stay very close to the consumer.

Today alone I mentioned the 12 men's and 8 women's Division One teams that we have.

The more than 10 AAU programs, the 30 high school teams.

So hopefully we are doing a lot of that work up front and we are finding out what the consumer wants.

But shortening and staying closer to the consumer, shortening those lead times and staying closer to market, I think that is everyone's goals, but we are, in footwear we want to be careful before we try to reinvent the wheel.

We want to understand the way that we can deliver great product to the consumer, and that unfortunately today is working with an 18-month calendar, so that creates its own limitations, but we are trying to shorten that any way that we can.

Right now again I think most importantly, the one thing you will find about our basketball is that some people will like it, some people will not like it, but it definitely has a point of view, and it is something that we are very proud of, and we feel very good about the way that we are coming to market with that product.

If I can squeeze in one last one.

Follow-up on the gross margin.

Can you talk about what categories saw the higher liquidation sales year-over-year in 3Q?

And as I looked at your fourth quarter guidance, it seems to imply some acceleration in the gross margin trends 4Q from what we saw in 3Q.

Is that just an expectation that those liquidation sales would go away?

Thanks.

On the liquidation side I wouldn't get too caught up on the components of that.

As a percentage of revenues, although on the apparel side it is a little higher as a percentage of revenue in Q3 this year versus last year.

Still a very, very small part of our revenue base, and usually right now on the liquidation side we have obviously seen a lot of success in our outlet channel liquidating apparel.

So from a third-party liquidation perspective it is more the one-off things that are a little bit more difficult to liquidate that we look to do that with.

As far as, what was your second question again?

Just in terms of what I think the implied fourth quarter gross margin seems to imply something like 170 bps or so improvement year-on-year.

Is that just really driven by lower liquidation sales vis-a-vis 3Q?

Just help us understand the drivers?

Yes.

I would anticipate your fourth quarter margins to be relatively similar improvement as your third quarter margins.

Again, strong direct to consumer quarter, as it historically has been for us, and also on the footwear side with the taste of basketball I think you will see a positive impact on the top line from footwear, although be it is a small quarter for us.

There will be a little bit of a positive impact there, so that may offset some of that direct to consumer benefit.

Thank you very much.

Operator, we are done.

Yes, sir, thank you.

Ladies and gentlemen, thank you for your participation.

That concludes the conference.

You may disconnect.

And have a wonderful day.