Under Armour Inc (UA) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Under Armour third quarter earnings webcast and conference call.

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

Later we will conduct a question and answer session and instructions will follow at that time.

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

I would now like to introduce your host, Tom Shaw, Director of Investor Relations.

Please go ahead.

Thanks, Stephanie.

Good morning to everyone joining us on today'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 section of our filings with the SEC.

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

Joining us on today's call will be Kevin Plank, Chairman, CEO and President, followed by Brad Dickerson, our Chief Financial Officer, who will discuss the Company's financial performance for the third quarter, provide an update to our 2011 outlook, and introduce our preliminary outlook for 2012.

After the prepared remarks, Kevin and Brad will be available for a Q&A session that will end at approximately 9.30 AM.

I will then close with a tentative date for fourth quarter 2011 earnings call.

Finally, a replay of th is teleconference will be available at our Web site at approximately 11.00 AM Eastern time today.

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

Thanks, Tom and good morning everyone.

One of the intro mantras that we use here at Under Armour is focus and finish.

It's purpose is to remind ourselves that while the strength of your brand has created abundant prospects for growth, we will be measured on our ability to fully harvest these opportunities in new product categories and geographies.

So, when we look at where we stand at the end of our third quarter, I want to start today with how we are focusing and finishing in our apparel business and how that is driving us the continued strong results we reported this morning.

Our performance in apparel year-to-date has helped enable us to pass last year's full year revenue number of $1.06 billion, in just 3 quarters this year.

In the third quarter, we put up a net revenue increase in excess of 40% for the second consecutive quarter.

Not to steal all of Brad's thunder, but third quarter apparel net revenues increased 31%, the fourth consecutive quarter of growth in excess of 30%.

While we continue to lay the foundation for growth in categories like footwear and new markets like China, we are achieving these strong results by focusing and finishing on the opportunities we see in our core apparel business.

Specifically, we are seeing great success in our twofold strategy of innovating to drive better performance products with higher prices in our core, while expanding our reach beyond our core with new products like Charged Cotton.

Let me start with our core though, and specifically Armour Fleece which is exceeding our expectations and helping us drive higher price points at retail.

Armour Fleece is our signature synthetic based fleece with a soft brushed inner layer on the inside and a lightweight fast drying outer layer.

Armour Fleece is helping Under Armour, again, redefine the performance category.

Much like we did with the basic t-shirt, we have taken the basic hoodie, the go to apparel product for our core consumer and raised expectations of what that product can be.

It has enabled us to bring new price points to retail as well, with hoodies ranging from $50 to now more than $75.

All of this with a consumer who has been accustomed to paying less than half of that for a hoodie in the past.

This is a great example of focusing and finishing as we take our strategy of reinventing the basics and bringing performance to the garment.

Our Charged Cotton tees are redefining the t-shirt category and our Charged Cotton Storm fleece, which I will speak to in a moment, is the initial phase of redefining that very large category as well.

We believe we are one of the very few brands that continue to bring a true performance message to the athletic consumer.

And that has enabled us to continue raising our consumers expectations and driving the performance apparel category, which continues to be a bright spot for the industry.

Under Armour remains the market leader in performance apparel, especially as we continue to take our average selling price up in an environment where others have chosen not to or have been unable to do so.

While Armour Fleece is driving great volumes and higher price points on its own, we are also bringing the first of our cold weather Charged Cotton Storm product to consumers and this latest innovation from Under Armour is off to a great start.

Storm is really the next generation of protection.

We've taken the classic cotton heavy weight sweatshirt with its heavy weight feel and made it water resistant so water rolls right off.

We are bringing this product to market at price points from $60 to $100, and again, without sounding like a broken record, our consumer has shown a willingness to pay a premium when we can change the way an athlete uses our products.

That's what Charged Cotton Storm does.

So, we think there is a great opportunity here for us to build another real house product in Charged Cotton Storm.

As we've said before, using cotton opens access to the Under Armour brand to a much broader range of athletes.

Instead of competing to have 3 out of the 4 compression garments they may have in their closet, we are now competing for share of the 30 plus garments, many of which are cotton.

To put it in a more quantifiable measure, we've gone from competing for share in a $3 billion category just a year ago, to competing for share in a $12 billion category today.

That's why the phrase, focus and finish is at the heart of how we see the business at this point in our growth.

We know there are abundant opportunities for our brand outside of our core and outside of the US, but we will not pass up the opportunity to create these new building blocks in our core, while, at the same time, bringing the Under Armour brand to new consumers.

Innovations like Armour Fleece and our Storm product also give us a much larger tool box of products as we expand outside the US.

We will continue to consistently flow UA innovation to consumers with next generation technologies like Cold black, that reflects heat and UV rays before they get to you.

Imagine staying 10 degrees cooler in the summer time because of the effect of the material on your body.

That is Cold Black and it's a innovation coming to market next spring.

I said before that Under Armour remains the market leader in performance apparel.

Equally important is that with technologies like Charged Cotton and Cold Black, we remain the thought leader in performance apparel and believe the continued strength in our apparel business is the true indicator of our relentless focus on innovation and what is next.

One of the benefits of our success in apparel is that our core sporting goods distribution continues to allocate more space to the Under Armour brand.

We launched the first of our all American shops at Dicks Sporting Goods this quarter and it is really the pinnacle of presentation for your brand within sporting goods.

As you can imagine, we have a much richer story to tell our consumer at retail these days and these shops enable us to present the brand in a much more powerful way.

We have 50 all American shops in Dicks open to date with many, many more to come, and we are also significantly upgrading our retail presence in other key partners including the Sports Authority and Academy Sports and Outdoors.

Beyond sporting goods, our brand is having an impact within the department store channel as our initiatives in womens, youth, and underwear extend the reach of the Under Armour brand.

First, within Nordstrom, our womens assortment had seen very strong sell throughs and our footprint continues to expand.

Secondly, our licensed youth product for infants and toddlers is outperforming as we get traction in the department store channel.

We will grow our department store presence in youth going into 2012, not only as that younger license business grows but as we add new doors with our own youth product for older kids.

And third, we see the expansion and relaunch of our underwear program in 2012 as a key driver for our department store channel as we will offer a differentiated assortment and widen the distribution within this channel where consumers shop for their underwear already.

In footwear, the arrows continue to point up as our third quarter business grew 97% to over $50 million.

Through September, we've already surpassed what we did in all of 2010 and our sell throughs over the past 6 months give us the confidence that our footwear is resonating with consumers.

That confidence in running has come through great product at tiered price points, starting this past spring with the Assert at $70.

Then this summer with the Split at $90, and just this past month, with our strong introduction of the Charge RC at $120.

Just as we are expanding our reach within department stores with new womens, youth and underwear programs, the traction we are getting in footwear brings us to new consumers through key mall partners such as Foot Locker, and The Finish Line.

As we've said before, it's about getting the product to look and feel like Under Armour and running shoes like the Split, Charge RC, and some of our upcoming basketball footwear, definitely capture our DNA.

By focusing and finishing on the needs of the athlete, our footwear team has shifted the conversation on footwear from if, to when.

And this quarter's results reflect the progress our team has made.

Outside of the US, the Rugby World Cup just concluded this weekend and this event gets one of the top 4 global TV audiences behind only the Olympics, World Cup and the European Soccer Championships.

The Welsh rugby team made their way to the semis outfitting their Under Armour, Armour Grip Kits, putting the Under Armour brand in front of hundreds of millions of new consumers.

In China, we are very pleased with the results from the small sample we've seen since opening our first store in Shanghai.

Our brand position there is firmly rooted in performance and we believe that our long-term opportunity in China will be grounded in sport.

Just as it will be anywhere we take the Under Armour brand.

On the team front, you hear me consistently talk about building the foundation for growth.

We made 2 key appointments that we believe are important steps in assembling that right team for this next phase of our growth.

First, Kip Fulks, who has been with Under Armour since the beginning and has the most complete knowledge of our products and processes, has taken over as COO.

He will continue to oversee design and development of all product and has added oversight of our sourcing and information technology areas.

As today's results illustrate, product development has been an Under Armour strength and Kip has helped lead these efforts.

We believe his operational knowledge and insight will help us build the right team for an improved supply chain that is aligned with the strength of our product and brand.

All in the brand front, we are officially announcing today that Stuart Redsun has joined Under Armour as Senior Vice President of global brands.

Stuart brings a wealth of global brand management experience most recently at Sony electronics where he served as Senior Vice President of corporate marketing.

That global knowledge will be critical as we continue leveraging the Under Armour brand into new categories and geographies.

As we look to harvest these new opportunities for our brand, we will remain focused on what drove our success.

We will continue to do more with less, whether it is with the next generation of great athletes like Cam Newton, or bringing innovation to the college football uniform, Under Armour will continue to grow by speaking with the disruptive voice across broadcast and social media.

We will focus and finish and continue to drive innovation for our consumers and value for our shareholders.

With that I will throw it over to Brad Dickerson, our CFO, and then we will be back later to take your questions.

Brad?

Thanks, Kevin.

I would now like to spend some time discussing our third quarter and year-to-date plans results followed by our updated 2011 guidance.

I will conclude with our early read on 2012.

Our net revenues for the third quarter of 2011 increased 42% to $466 million.

Year-to-date net revenues are up 40% to $1.07 billion.

Apparel grew 31% to $363 million during the quarter, and is up 33% year-to-date.

We continue to experience strength across each of our men's, women's and youth categories.

Our men's business was driven in part by growth in the training category, including Armour Fleece and Storm Fleece, while both graphic and hunting easily outpaced overall growth during the quarter.

In women's, Armour Fleece continues to be a stand out and we also saw strong growth in running, led by our scape program of both tops and bottoms.

Our direct to consumer net revenues increased 73% for the quarter, representing approximately 22% of net revenues, compared to 18% in the prior year period.

The growth rates for both the retail and eCommerce business were strong during the quarter.

On the retail side, we opened 4 new factory house stores during the third quarter, increasing our factory house store base to 76, up over 50% from 50 locations at the end of last year's third quarter.

We plan to open 4 additional factory house stores in the fourth quarter, bringing our total factory house store count by year end to 80.

Our eCommerce growth remains robust as we continue to drive both higher traffic and conversion rates year-over-year.

In addition, we expect our new Web platform to go live over the next few weeks with enhanced features and functionality added during 2012.

Footwear net revenues during the third quarter increased 97% to $52 million from $26 million last year, representing 11% of net revenues.

We had solid results with our back to school running product led by the Split and strong consumer response to our new line of outdoor boots.

From a timing stand point, we shipped the bulk of our basketball footwear during the third quarter this year, compared to our initial product last year which launched in the fourth quarter.

In addition, we continue to introduce footwear to our Japanese consumer through our licensee Dome by shipping nearly $5 million of product to Dome during the quarter.

Accessories net revenues during the third quarter increased 211% to $40 million from $13 million last year, reflecting the addition of our hats and bags business which we brought in-house in January and has received strong consumer acceptance.

We are on track for our hats and bags business to contribute $65 million to $70 million to net revenue for the full year 2011.

International net revenues increased 53% to $33 million in the third quarter, and represented approximately 7% of total net revenues.

The footwear sale to Dome that I previously mentioned also played a significant part in the growth rate of our international business during the quarter.

Licensing net revenues declined 18% to $10 million in the third quarter, driven as expected of the transition of hats and bags business in-house.

Third quarter gross margins contracted 250 basis points to 48.4%, compared with 50.9% in the prior year's quarter.

Results were largely in line with our prior guidance and primarily reflect 3 factors, first, in north American apparel, less favorable product mix and higher input costs negatively impacted margins by 140 basis points.

Second, a lower mix of licensing net revenues negatively impacted margins by approximately 70 basis points.

Finally, an unfavorable year-over-year impact of inventory reserves, net of benefits and discounts in sales allowances, negatively impacted margins by 40 basis points.

It is important to note that the prior year periods margins benefited from a reversal of inventory reserves.

Selling general administrative expenses as a percentage of net revenues leveraged 130 basis points to 32.3% in the third quarter 2011, from 33.6% in the prior year's period.

Details around our 4 SG&A buckets are as follows.

First, marketing costs declined to 10.4% of net revenues for the quarter, from 10.9% in the prior year period.

Once again, our strong top line allowed us to leverage marketing costs which increased 35% during the period.

Second, selling costs increased to 7.9% of net revenues for the quarter, from 7.1% in the prior year period, primarily driven by the continued expansion of our factory house stores and investments in our eCommerce business.

Third, product innovation and supply chain costs held steady year-over-year at 7.7% of net revenues as we continue to invest in these areas to support our long-term growth.

Finally, corporate services decreased to 6.3% of net revenues, compared to 7.9% in the prior year period as we leveraged corporate personnel, facility expenses and IT.

Operating income during the third quarter grew 32%, to $75 million, compared with $57 million in the prior year.

Operating margin contracted 127 basis points to 16.1%, from 17.3% in the prior year quarter.

Below the operating line, other expenses increased to $2.7 million from $700,000 in the prior year's period.

2 factors drove this increase, first, given the sharp decline in Canadian dollar and euro late in the quarter, we had a little over $1 million of net foreign currency exposure during the period.

Second, we experienced a $1 million increase in interest expense related to the debt assumed for our acquisition of our corporate headquarters.

Our third quarter tax rate of be 36.3% was favorable to the 37.7% rate in the prior year period and our previous 40% guidance.

The lower tax rate during the quarter was a function of favorable developments in our ongoing tax planning strategies, including a benefit of $1.8 million during the quarter.

As a reminder, during the third quarter of last year, we benefited from the receipt of state and federal tax credits.

Our resulting net income in the third quarter increased 32% to $46 million, compared with $35 million in the prior year period.

Third quarter diluted earnings per share increased 29% to $0.88, compared with $0.68 in the prior year.

Results include the aforementioned tax planning strategies which benefited EPS by approximately $0.04.

Switching over to the balance sheet, total cash and cash equivalents at quarter end declined to $68 million, compared with $134 million at September 30, 2010.

From a funding perspective, we borrowed $30 million from our $300 million revolving credit facility.

Given the level of cash flow we typically generate in the fourth quarter, we expect to fully pay down these borrowings during the fourth quarter.

Long-term debt also increased to $80 million from $19 million in the prior year's period, reflecting the acquisition of our corporate headquarters.

As we outlined last quarter, this debt consists of a $25 million term loan and a $38 million assumption of debt attached to the property.

Inventory at quarter end increased 63% year-over-year to $319 million, compared to $196 million at September 30, 2010.

Although still exceeding our net revenue growth rate of 42%, our inventory growth rate has moved more in line compared to the second quarter inventory and net revenue growth rate of 74% and 42% respectively.

2 factors to consider in the third quarter inventory growth are-- transition of our hats and bags business in-house and higher input costs.

Excluding these 2 factors, inventory would have increased approximately 52%.

Our investment in capital expenditures was approximately $13 million for the third quarter and approximately $45 million year-to-date, excluding capital expenditures related to our acquisition of our corporate headquarters.

We are now planning capital expenditures for 2011 in the range of $50 million to $53 million, compared to our prior indication of the high end of the $45 million to $50 million range.

In addition to our normal operating capital expenditures plans, we have approximately $63 million in total investments for 2011, related to the purchase of our corporate headquarters and other investments and improvements in the campus.

Now moving on to our updated outlook for 2011.

Previously we anticipated 2011 net revenues of $1.42 billion to $1.44 billion, an increase of 33% to 35% over 2010, and 2011 operating income of $155 million to $160 million, an increase of 38% to 42% over 2010.

Based on third quarter results and our visibility for the remainder of the year, we are raising this full year 2011 outlook.

We now anticipate 2011 net revenues in the range of $1.46 billion to $1.47 billion, an increase of 37% to 38% over 2010.

And 2011 operating income in the range of $159 million to $162 million, an increase of 42% to 44% over 2010.

Our current guidance implies full year operating margins of between 10.9% to 11%, leveraging 30 to 40 basis points from the 10.6% level achieved in 2010.

Similar to my comments in the quarter, other expense should remain higher year-over-year, as we incur additional interest expense tied to our headquarters acquisition.

With the benefits of our ongoing tax planning strategies during the third quarter, we now expect to see an effective tax rate of approximately 38.4%, for the full year.

As a reminder, our full year effective tax rate in 2010 was 37.1% due in part to the 1-time tax credits received in both the third and fourth quarters last year.

Finally, we anticipate fully diluted weighted average shares outstanding in the range of 52.5 million to 52.7 million.

Now we would like to add some additional color on our outlook for the remainder of 2011.

First, regarding gross margins, consistent with our previous guidance, we continue to anticipate a 160 to 180 basis point decline in gross margins for the full year.

The contributors to this decline are unchanged and are primarily due to lower apparel margins driven by higher input costs and the transition of our hats and bags business in-house.

Second, a little additional color on SG&A.

We previously indicated marketing spend would equate to 11.3% to 11.5% of net revenues.

While we expect a generally consistent level of dollars spent as implied in our prior guidance, our higher top line guidance should allow us to leverage this line to a greater extent.

We now expect marketing spending as a percentage of net revenues between 11.2% and 11.3%.

This additional leverage in marketing will be offset by higher spending in selling costs related to our direct to consumer business as we continue to invest to drive current and future growth.

Finally, regarding inventory, we closed the GAAP between inventory growth and revenue growth during the quarter and continue to anticipate inventory growth moving more in line with net revenue growth during the fourth quarter.

As we highlighted on our last call, we believe we are continuing to make the right investments across supply chain and planning to help stabilize and improve our inventory turns and fill rates in 2012 and beyond.

Before we turn it over for Q&A, we would like also to provide you with our preliminary view for 2012.

Based on our current visibility, we anticipate both 2012 net revenues and operating income growth to be at the higher end of our longer term growth targets of 20% to 25%.

While we will provide additional details on our 2012 guidance in future calls, there are a couple of preliminary factors to consider when comparing 2012 growth to our updated 2011 guidance.

First, we will anniversary the hats and bags transition in 2012, which is providing over a 6% lift to this year's net revenue growth.

Second, we are planning for factory house door growth of approximately 20% to 25% in 2012, compared to nearly 50% in 2011.

And additional consideration for 2012 is our tax rate.

As a function of or ongoing tax planning strategies, we expect our effective tax rate in 2012 will be at or below the 38.4% level forecasted for 2011.

We would now like to open the call for your questions.

We ask that you limit your questions to 2 per person so we can get to as many of you as possible.

Operator?

(Operator Instructions) Our first question comes from Robby Ohmes from Banc of America.

Hi, Robby.

Robby, are you there?

Operator, you want to see if we can get Robby on the next question, and move onto the next one?

Our next question comes from Eric Tracy of FBR Capital Markets.

So, yes, Kevin, if we could first touch on footwear, obviously a quite a bit of traction here, more than anticipated.

You say not if, but when.

Can you talk about the cadence, how we should think about that business playing out?

And I know you're not going to talk specific about product introductions, but now that you've got this traction, just talk about the potential for new platforms coming out as we think about FY '12.

I think going back to 2010, we took a lot of the pressure off of footwear.

Our plan was to reposition, recalibrate, and effectively relaunch footwear, and we did that through leadership, we've done that through products, we've done that through cleaning up our inventory in the marketplace.

And so we feel really good about where we sit from footwear today.

When you look at the way that we've layered in product, we took a very patient approach, and frankly, because of the other growth drivers that we have with DTC and apparel, it's given us the ability to be as patient as we have been.

It started really this past Spring with a clean market, and we brought a product called the Assert, which is a $70 shoe, running shoe, that we brought into the market.

We saw nice sell-through with it, but frankly, $70 shoes isn't where we think the brand should be positioned in footwear.

The idea was walking the consumer up.

And then this past Summer we launched the Split, which is a $90 option, which is a great shoe, and we've gotten great feedback and, again, great sell-through with many of our key partners on that product.

And then just most recently launching the Charge RC, which is a $120 product.

When Kip took over the product role more than a year ago, the charge that we gave him, particularly, is we were going to focus a lot of his time around footwear, was to make product in excess of $100.

Where we see the brand position long term is having those types of products.

What you see is now is a little bit of texture to our footwear business where we've got $70, we've got $90, we've got $120, we've got more than just one shoe that defines the Under Armour footwear business.

More importantly, where we are heading in the future is we've got some really great technologies we will be introducing in 2012 that, I think, can start becoming more account specific, and giving us a little more range as we move beyond just three shoes into segmenting by sporting goods, the mall channel, and a few other places that we'll head.

Also, most importantly probably, in addition to the product is going to be the story telling that will go along with it.

We launched the footsteps campaign that featured Tom Brady, Cam Newton, Georges St-Pierre, this past Summer, and the tag line at the end was Under Armour footwear.

I'm not sure that we've had that message out there.

We want to make sure that we tell that story very loud, and you will hear in just a few weeks as well a new basketball campaign that will be breaking also around the fist week of November with Under Armour in the footwear space there.

It is really pretty a balanced approach, but as we've said all along, you are going to see a little bit of traction, and we are not declaring victory by any stretch, but I think we have demonstrated that we know how to win, and the team that we've assembled has really done a great job having us positioned to -- in a position of strength there going forward.

We feel very good about the footwear business, and more importantly, the future of the footwear business.

Okay.

Maybe switching gears, if I could, to the supply chain, coming out of last quarter, obviously identified some inefficiencies in terms of supplying product.

Can you give us an update there?

How we should think about the team and executing on the strategy you have in place to lift the gross margins as we head into '12?

Sure, Eric.

Obviously, we talked about the last quarter, some pressures there around gross margin going forward.

As we look into the rest of this year, continue to see some price pressures the back half of Fall/Winter '11 here.

Also into 2012, if you think about 2012 when we locked in pricing for Spring/Summer '12 specifically, that was back in the Spring, April-ish time frame, commodity prices were still pretty high back then.

We are going to still see some price pressures into Spring/Summer '12 on the input side.

We talked about the ability to raise ASP's in Spring/Summer '12, and offset most of that, but not all of that in Spring/Summer '12.

You will still see some pressures in the first half of the year.

We think we have some opportunity in the back half of the year, Fall/Winter '12.

A lot of that will be based on, again, where pricing comes in that we roll up here in the next 30 to 45 days or so.

So we are still rolling up those numbers right now.

We think we have some opportunity, but haven't quantified what that opportunity is.

Obviously, with Janet and her team being on board since April time frame, the ability to impact Fall/Winter '12 for her is a little bit more than she had for Spring/Summer '12.

Going forward, we feel pretty good for 2012 that we have some opportunity in the back half of the year, but still trying to roll that up.

Okay.

Just lastly, if I could, on inventories, obviously worked down a bit here in the quarter, but still elevated.

And I get there are some things going on.

Should we assume by year-end we can get those in line, too, with sales growth, or is this going to be a couple-quarter thing to work through?

I definitely think it's going to be a process over time.

We had called out hiring an SVP of Planning back in July, Rich Rapuano from Black and Decker, he is bringing some competencies and also some additional people he has hired.

Won't be able to see too much of an impact from him and his team in Spring/Summer '12, but, again, probably more towards Fall/Winter '12, maybe a slight impact on inventory management.

We do see though, our ability to continue to close that gap in the fourth quarter -- the difference between revenue growth and inventory growth.

Where we had a 32 point gap in Q2, down to a 21 point gap in Q3.

In Q4, we should continue to see that pace come down in the gap in Q4 for inventory versus revenue growth.

As we get into 2012, obviously letting Rich and his team take root a little bit, really from a Spring/Summer '12 perspective, again, the impact of Rich and his team is pretty minimal.

But I think our goal, as we stated in the near term, is to get to a 3 forward turn, and hit that 90% to 95% fill rate for our customers.

That's really going to be our focus throughout 2012.

Again, Spring/Summer '12, I think we can continue to try to improve on the gap between revenue and inventory that we've seen earlier this year, but the real benefit, and I think the real ability for us to achieve those goals of a 3 forward turn, and a 90% to 95% fill rate will be in the back half of the year when Rich and his team have more impact.

Okay, great.

I appreciate it guys.

Best of luck.

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

A couple of quick questions.

First, you had a great answer earlier on your strategy for segmenting for footwear across more channels than I thought you guys might be looking at right now.

Can you talk more about apparel through all those channels -- Foot Locker, Finish Line?

How you talked a lot about underwear in use in women's -- how about the men's business in the department stores as well?

And then maybe top it off with your oldest and dearest distribution channel where you guys are at on in-store shops, and what we could be looking at through this year and into 2012?

The second question is on Europe, maybe talk a little bit more about if the strategy is changing there?

I think near the beginning of your comments, you mentioned some of the newer products potentially being key products for Europe.

I would love to hear more about that as well; sorry about the long question.

Thanks.

Let me take them in pieces, and I may circle back on the second one.

To start off with the mall, fist of all, we are gaining traction in footwear.

Again, as I said, we are certainly not declaring victory, but we are very encouraged by what we are seeing.

The fact of the matter is, while we've had some very healthy apparel business in, for instance, the mall channel in the past, and we will continue to do so, and I think diversifying our own line with things like graphics and hooking better, the fact of the matter is that the key to the mall is footwear.

And until we are a significant player in footwear, everything else there will be taking a backseat to that.

That's the approach they have had.

But at the same time, we've had unbelievable support from both Foot Locker and Finish Line, from a patience stand point.

I think they are continuing to give us the opportunity, but they are just saying -- guys, when you get the product, we have an opportunity but it's incumbent on us to put the product there.

We feel good about where we are positioned now on basketball.

But a lot of that's going to come down to story telling as well.

It's a little bit of a chicken and the egg here between the story with the consumer and the product and performance.

Basketball is a good category just to look at, where I feel that we've made great strides with this consumer in terms of believing that we make a quality product.

Of the 30 state championships that were played for wearing Under Armour product last year, and the buy-in at our Elite 24 game of nearly a dozen kids, the top 24 players in the nation that chose to wear our product when they had a choice of any other shoe they wanted to wear, we are seeing those kinds of encouraging signs.

What we are not seeing yet is the kid after the game putting the shoes on and walking home with a pair of jeans.

That comes in time though.

Frankly, we are fortunate to have the ability to be patient with that thought process.

At the same time, you mentioned -- and I will get to department stores in a second -- our own sporting goods distribution.

I think we are seeing great success there.

I mentioned in my script about the success we are seeing with our heritage product like the Armour Fleece, and then also the introduction of things like the Storm cotton product we've now brought into the market.

Taking kids and really realizing higher ASPs in the $50 range and the Armour Fleece, our opening price point on that Storm cotton fleece is $60, and that full zip is $70, $80, $90, and so we are driving, again, I think bringing, A, an innovative story and driving consumers to retail and really helping our partners there.

But what is going to drive that is that there is so much story telling in our product, it really doesn't come to life, and it is hard to sell a $70 hoodie unless you are telling that story on the floor as well.

Our partners have been great, in particular Dicks Sporting Goods has been great with us with the All American shops and some of the blue-chip shops that we've built out at Roosevelt and Lombard, and we are going to continue to expand those programs from the 50 shops we are in now, and we are working with them on how big can we take it, based off of the lift we are getting with some of the story telling.

As I mentioned as well, it doesn't just stop at Dicks Sporting Goods either.

We are really trying to take a targeted approach, and when you look at the way we will be affecting our own in-store presence, we will be touching more than 700 doors over the next several months.

It's really an enhancement across the board.

What we are selling in those 700 doors, and I'd probably guess at the math, but I'd say it's at least 20%, 25%-plus of our total business would be affected by affecting those 700 plus stores.

The department store channel that we mentioned, there is a three-pronged approach that we are taking there, as we are thinking.

Number one is women's, and I think it's selling products where women shop, and it's doubling down in some of our existing partners like Nordstrom where we've had very good success and very solid, that's led to the 30%-plus growth we've seen in apparel.

Women's is driving a lot of that growth for us.

So, I think it's a bit of a misnomer when people look at our women's business.

We have great success, and we certainly haven't done everything perfect, and there is certainly a heck of a lot of opportunity for us.

But we are driving that, of course, in the product, of course, in the story telling, but also in the distribution.

And again, that goes back to the distribution and the way and the set up and some of those shops that we are building out, women's is a big focus in our sporting goods distribution first and foremost, but again, back in the mall.

Youth -- it's always a tough channel because we have such a great youth presence and such a great youth driving demand for our brand.

So, distribution has always been a big challenge there.

Frankly, department stores gives us a little bit of range to be a little more open, and so we've had and seen some success there.

Finally, with the underwear program, and underwear for us has been -- I look at that business and it is relatively small business that we are saying when we look at some of the competition out there with our brand, our name, our positioning, we believe that we could be the clear cut leader in underwear.

In addition, first and foremost of building out a comprehensive underwear line in our existing sporting goods distribution that we have basically have started with many of them, it's also going where a lot of underwear is bought in the department store.

I hope that covers it, Robby.

Coming back on the European question.

What were you looking for on Europe, Robby?

You had mentioned some of the products, some of the newer products potentially being very good for targeting Europe.

I didn't know if there was an update on strategy there, and what you are doing there.

I think it's about not entering a market with a compression shirt in nine different colors and saying -- look how innovative we are.

The fact is, in many of these markets we are not going to be first to market with things like compression.

So, it means bringing some of our new technologies to bear.

Whether it is things like Storm cotton that get that jaw-dropping response when people look and see the performance of the product, or the Storm cotton product rather, or just the hand and the feel and the DNA that is Under Armour, I think that it gives us the ability to reinvent ourselves when we go to new markets.

There is not one play book.

And the one thing we've learned, and probably fair to characterize the last six or seven years since we've really tried becoming a global business, number one, the seeds that we've planted.

And whether it's in Europe in our headquarters in Amsterdam and the things we've done in the UK, and the way that we are doubling down on some of those businesses, we are not a lot smarter but we know a little bit more than when we went into these markets.

They are certainly not easy, and it's certainly going to be something we will be fighting for a while.

But we are beyond just the we're-investing-in-Europe mode.

We are beyond the we-are-just-breaking-even-in-Europe mode.

But we think, more importantly, there is the opportunity for us to drive and move forward, and the confidence that we demonstrated with the investment in something like [cottonim], I think shows that we are ready to cut our teeth.

And I think the Olympics next year and a lot of things happening in London -- I don't believe we have truly told our story to the European consumer.

And maybe I'm focusing a little bit on just the UK, but I think that there is the ability for Under Armour to be successful there.

We've seen some of the beginning signs of it, and I think we've, frankly, only gotten started.

With the right product line, frankly with the right supply chain that can support us, and moving beyond the sophistication of trying to keep up with a 40% grower just here in the US.

And having the right team on board that can think globally and has built supply chains globally that can be affective for us, I think we feel very good about how we are positioned in the first six years in a place like Europe, that we are not that far from a tipping point, not unlike we saw in Japan in years '07 and '08.

I think we are very close to something similar in what we are doing in Europe right now.

Great, thanks a lot, Kevin.

Our next question comes from Omar Saad from ISI Group.

Good morning, thank you.

Kevin, I was wondering, how do you guys think about the opportunity to move consumers more upstream technical, the innovative products at higher price points?

I know there is some really interesting launches like the Storm fleece and Coal Black, but you also have very big programs for some of the basics at affordable price points.

How have your ASP's been trending over time?

What are your strategies around that and long-term goals?

Do your channels give you the flexibility to really drive prices higher through innovation?

Thanks.

I think we really have -- there is a lineup, frankly, of people inside the building from the different product teams that are trying to say they are fighting for the dollars of which story are we going to tell.

I made mention of something like Coal Black, which, to me, I use the quote when I define Under Armour is that someone said once -- whoever reinvents the white t-shirt wins.

I feel like that's almost what we did with the first product, the style 39, the first compression t-shirt.

I think we keep finding ourselves looking for pinnacle products, of course, that can be defining things like the E39, that we think is going to be a great opportunity in the future.

But what pays the rent for us here is also the simple innovations and reinventing the basics.

Our $25 Charged Cotton t-shirt is something that took a t-shirt market, and again, justifying why a consumer would spend $25 when, frankly, they can go to many partners and for $25 you can get five or six t-shirts for that price.

I think taking consumers up with simple innovation and things like a cotton t-shirt that dries five times faster than anything else is pretty defining of our brand.

I also believe that our job is to be the thought leaders in this space.

The consumer is looking for it from us, and I think our retailers are looking for it from us, in that we need to keep driving that through story telling.

Storm product, which shipped to market just in the last month or so, we've seen a great reaction from the consumer, and again, taking the hoodie market where you guys have been out at retail, and the hoodie market's a $20 or $25 hoodie typically.

But when you can put the right story and, more importantly, the right performance behind it, I think we can drive $60, $70, $80 price points.

I think that our job all along was to deliver -- maintain margin is where we were typically valued from our retailers in the past.

We were the company that changed the apparel floor from their anticipation of low- to mid-40% maintained margins, into delivering maintained margins began with a 5 handle.

I think we are going to do that through a number of different ways, innovation being the crux of it.

I think we've got a lot of stories in the pipeline, and a lot of things coming, and I think, again, our 42% growth was demonstrative of our thought leadership within the space.

That's great, Kevin.

Thanks a lot, appreciate it.

Thanks very much, Omar.

Our next question comes from Joseph Parkhill from Morgan Stanley.

I was just wondering quickly on third quarter gross margin line, I don't think I heard any benefit from a shift towards direct to consumer.

I was wondering if that mix shift did not positively impact gross margins, and if you could elaborate on why that might be the case?

To your point, direct to consumer didn't really provide an uplift year-over-year in the third quarter.

Although the mix of direct to consumer was higher year-over-year, the margins were a little bit lower in that business year-over-year.

That kind of offset some of the benefit of mix in Q3.

Was that driven by less made-for sell through?

I would say it was driven by an acceleration of the back half of the year of excess inventory moving through factory house, similar to what we talked about last quarter.

The made-for dollars in the back half of the year were consistent with what we planned.

But there was some additional capacity in the factory house in the back half of the year from what we planned, which gave us the ability to move some excess product through it, which has reduced the margins in the back half.

Thank you.

Just along the lines of retail, do you have any updated thoughts on exploring specialty expansion, or perhaps more on the combined outlet specialty store concept you have spoken about before?

I think Brad covered it in his script as well.

Our intent is to slow down our outlet expansion in that, again, the purpose and the reason that we open up outlet is pure and clear to disposition of excess inventory.

We obviously -- we've got excess inventory today, and so we are fortunate to have the nearly 80 doors by year-end, but our goal isn't just using that as simply a retail driver for us.

I think you will continue to see us test.

The ultimate goal that we have is to serve our consumer, and frankly, there is many markets that we're not doing that, but we are fortunate to have a great distribution today, a great relationship with the distribution that we have today.

So, our intent is never to cannibalize any of those sales, but to find opportunities where we can be that last line of defense, and frankly, that's where our DTC and our eCommerce channel has served a great role for us in doing that to-date.

Okay, thank you.

Our next question comes from Michael Binetti from UBS.

Hi, guys.

Congrats on a nice quarter.

Kevin, a quick question, and I have a couple of follow ups.

You guys have done a great job of innovating into some new categories, and really catching some market share and running.

When we look at some of the core categories and some of your oldest categories, and frankly, ones that for all rights, you guys actually invented for the most part, like compression, we've seen some market share losses there.

I think we've talked in the past about how some of that was planned -- you didn't expect to have 90% of the market forever or whatever you had when you came out.

As we look, it seems like a lot of people in the cold compression gear have innovated into that category.

Everybody has a cold gear compression at this point.

As you look ahead to next Fall, is there any way to differentiate the product or move price points higher and stand out from what has become a crowded field at this point?

When you look from a market share stand point, particularly around compression, the fact is that, you are right, we used to have 100% market share.

And so the declining nature of that has been on basically the mass acceptance of growing the entire pie, and more importantly, a pie that never existed before.

I want you to know that as we look at that, one of the indicators, and frankly, in difficult markets, that we use to judge our business is market share.

So, first and foremost is, number one, we continue to be the market leader in this category, and I want to be very clear about that.

But we are hyper-aware of sort of the competition we have, and the one thing is that when you talk about our competition, the word you can't say is -- boy, these guys stink, we are better.

The bar is very high.

And we need to do a great job.

The good news is for the consumer is that we think we all continue to push one another, and the consumer is getting a better result.

At the same time, some of the innovations that I've seen in the pipeline, and as you push and you look and you move, there is lots of places we continue to innovate.

But I think what we keep our eye on is moving beyond just being a compression company.

Again, the 40%-plus growth in the quarter is something that we say we have our eye on a much bigger opportunity.

We are taking the credibility that we've established in a market like compression, and we are using it to leverage ourselves into things like fitted, and into looser fitting products, and into outdoor, and into mountain categories, and into all these other categories that we have been able to expand to.

I want to be clear, number one, we are not taking our eye off the ball.

But it's a tough place where we compete, and more importantly, we've opened a lot of new categories that we are now competing in that are going to feed our growth today, and frankly, will be feeding our growth into the future as we build a multi-billion dollar global platform.

Let me ask you a couple of quick ones on footwear here if I could for a second.

In the past, you've talked to us about where your gross margins on the footwear program are, and the significant gap between where you are at versus industry standards.

As you look at, we won't call it a launch, but the re-energized footwear program here, what are your thoughts as we look ahead to 2012 with some new product coming, and how the product is built before we even talk about whether it will need to be marked down -- if it is accepted, anything like that.

But as far as how the product is built, are you going in from an advantaged position versus where you were previously on gross margins from the build standpoint?

And then maybe, I know when we talked at the analyst day, you didn't want to commit to guidance for the forward business, but maybe how we can think about the range of potential outcomes on the top line for footwear in 2012.

I know that's something the analysts have had a very tough time forecasting for you guys, since this is such a volatile business.

Let me weigh in on the margin question to begin with is, the challenge that we've given our team, and because we are a brand, it gives you the ability -- we are not competing at commodity levels here.

Frankly, we have the ability to set and dictate price.

In order to do that though, you must be innovating.

So, the challenge that we have for our team in some of the margin compression that you have seen around us, we don't see that as being acceptable, we just see that as we've had a lot of things going on.

The challenge we have internally is a road map to 50%.

That we believe we are a company that, frankly, should have a gross margin that begins with a 5.

We have the ability to do that through better product.

And again, I'm not putting a timeline on when that can happen because we are entering things, and frankly, a bit of the unknown with things like footwear.

But what we are doing and where we are pressing on the footwear team, for instance, is put points on the board.

We are, frankly, not going at it.

We haven't limited them with saying -- we need this margin, we need to be here, we need to be there.

What we are doing is we are driving ASPs up in our footwear business overall, and obviously that's going to give us the ability to put more innovation into the product, and frankly, tell a better story to our consumer of where the Under Armour brand should be positioned in footwear.

So, I don't think -- again, as we look or we think about footwear, we are really trying to create the wins.

As I mentioned, we've got this layering now with, call it, a $70 shoe, a $90 shoe, and a $120 shoe, that are, frankly, all still selling at full price as well.

And as we look at those, there is going to be a lot more technology that we will start layering in, in 2012.

But it is a foundation that has been laid at this point.

And while I think we are doing okay with margin, we are certainly not optimizing from a factory based stand point where, again, when we launched in 2006, we had one factory.

Today we have 9 or 10.

I think the optimal level we should be is 14 or 15, and where we can really start pressing price and pressing some of the other things, but the most important thing we are driving on right now is build a great looking shoe that performs well, that a kid is going to like.

Starting with that, and frankly, because of the luxury of the other growth drivers that we have, that are building and moving for us, it gives us the ability to be patient and thoughtful, and frankly, not putting as much pressure around something like footwear.

Okay.

Our next question comes from Camilo Lyon from Canaccord Genuity.

Good morning, guys.

I wanted to ask a question on Charged Cotton.

It seems like you've had some really nice early success with the product, good healthy sell-through.

You talked about the program being about a $60 million program this year as you start to gauge consumer interest for this new product.

How do you think about expanding that product into '12, whether it's going deeper in your existing distribution or expanding just the number of doors that it's in?

How should we think about what kind of growth we can expect from Charged Cotton?

I think, first of all, expansion can be one of the most dangerous things you do.

I used in my script the mantra -- focus and finish.

Frankly, I'm not sure that we focused and finished on just getting started in the original Charged Cotton t-shirt.

Number one, just from a making sure that we are keeping the fixtures full -- on the men's side, I think there is a lot more opportunity for us to be broader in the range, in terms of, again, an inventory replenishment.

But on the women's side, we left some meat on the bone, and it is something you will see us come back and really focus on color and fit and style.

We are going to get it right; we are going to get the core basics right.

You will see us move from one t-shirt that defines Charged Cotton into multiple weights.

You will see us move from short sleeve to long sleeve; you'll see us begin to layer in shorts and bottoms and all the other things that go with it, and lightweight hoods.

And I think that opening up, and again, using that idea of moving from a $3 billion addressable market to nearly a $12 billion market, it's pretty indicative of what we are sitting on.

We think we've got a little bit of a tiger by the tail with taking our performance DNA and guard-rails and being able to apply them to a market like cotton, which is getting the consumer.

Because we've sometimes limited ourselves with the fact of what a product needs to do to perform.

Our mission statement says to make all athletes better.

The way that we can do that, it is as much through performance as it is through style and fit and design.

I think you will see us take a much more design-enhanced focus, which will allow us to move beyond a item-driven company, into a company that is allowed to hook with shoes, and with pants, and with the accessories and the other pieces.

I think you will probably see a more mature approach from Under Armour beyond just a very simplistic one t-shirt that is sitting on a fixture.

And that will grow -- that SKU count, if you will, will start to materialize that growth in Spring of '12?

It will.

We are -- it's a big deal to grow a SKU count around here these days.

Brad keeps a pretty good measure on exactly how we are doing that.

Obviously, we feel very good about what we have, the opportunity that we have, and the entire cotton franchise for us.

It will absolutely be something that we will look to grow in a pretty significant manner in 2012.

Got it, great.

I had one second -- one other question for Brad, if you could.

Brad, with respect to the gross margin discussion, specifically around the sales allowance and the negative mix comparison in the outlet channel, when should those start to abate?

If so, do they start to abate at the same time, and is it purely a function of improvement on the supply chain side, or is there one piece of that, that will improve before the other?

To go back to the last quarter, my conversations around those, again, a lot of that comments on the last quarter was a change to the outlook to 2011 versus a comp over 2010 to some degree.

There might have been some confusion there, but on the sales allowance side, actually from a year-over-year comp perspective, we started seeing some sales allowance issues last year.

So, we are comping those this year, so there is not much of a year-over-year change on sales allowance.

It was more of a change in the current year.

Also on the mix side, same thing; it was more of a change in the last six months of mix as we saw the ability to move more excess product with extra capacity that we didn't quite know of in planning.

When you look at going forward in those two issues, I think both of them point to continued efforts in the supply chain and inventory management.

So, whether it's Janet Fox and her team on the sourcing side, or Rich Rapuano on the planning side, the ability for us to forecast more accurately and get the supply flow of inventory coming in on a timely basis, that should help us reduce sales allowances going forward.

Also on the outlet mix side, the ability for us to more accurately plan to total capacity we have in outlet, and plan accordingly from a made-for versus excess mix, and how we give our guidance should help going forward, too.

I think with Janet and Rich on board, you should start to see some minor improvements to those as we get into Spring/Summer '12, more opportunity in Fall/Winter '12 forward around those two items.

The first half of '12 pressure is going to be related to input cost pressures?

Yes.

If you look at that, because we locked prices back in April for Spring/Summer '12, and commodity prices were pretty much at their peak at that point in time, as far as pressure for the most part.

Spring/Summer '12 is going to still be challenging for us.

As you look to Fall/Winter '12, we will be locking those prices -- we are locking some prices right now, next 30 to 45 days locking a lot more pricing for Fall/Winter '12.

Obviously, commodity prices are heading in the right direction, so that goes to our comments around, we believe we have some opportunity in Fall/Winter '12, not only because of commodity pricing, but also the fact that Janet has a little more input into Fall/Winter '12 than she does Spring/Summer '12.

Got it.

Thanks very much, and good luck for the rest of the year.

Operator, we have time for one more question.

Our final question comes from Sharon Zackfia from William Blair.

Good morning, just under the wire.

I was wondering if you could talk about sell-through throughout the quarter, with your retail partners and direct to consumer.

I think there is a perception that there was some volatility, and maybe if you could talk about that, and the inventory levels at your retail partners, how you feel about that at this juncture going into the holidays.

I can start, Sharon, on some of the data you are talking about on sell-through of retail and DTC.

Obviously, if you look at the quarter growth rates, we saw strong sell-through, sell-in and sell-through in Q3, both in the wholesale side and direct to consumer.

Especially in direct to consumer obviously, with the 73% growth rate in the third quarter.

From a inventory management perspective at retail, I think along the lines of some of the commentary you've heard in the marketplace around concerns around the back half of the year, and consumer demand, I think we've seen a little bit more tightening of management of inventory at retail.

Not extreme by any means, but we have noticed a little bit more tightening, so that does impact, obviously, sell-in.

But obviously, if you look at our growth rate in Q3 and our guidance going forward, raising top line guidance and raising bottom line guidance, that has been taken into account in our raise of guidance.

Okay, great, thank you.

All right, thanks for joining us on our call today.

We look forward to reporting to you our fourth-quarter 2011 results, which tentatively has been scheduled for Thursday, January 26 at 8.30 AM Eastern time.

Thanks again, and good-bye.

Thank you, ladies and gentlemen.

That does conclude today's conference.

You may all disconnect, and have a wonderful day.