Under Armour Inc (UA) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Under Armour Inc fourth-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 be given at that time.

(Operator Instructions)

As a reminder, this program is being recorded.

I would now like to introduce your host for today's program, Mr. Tom Shaw, Director of Investor Relations.

Please go ahead, sir.

Thanks, and good morning to everyone joining us for today's fourth-quarter conference call.

During the course of this call we are 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 risk 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 factors section of our filings with the SEC.

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

Joining us on today's call will be Kevin Plank, Chairman and CEO, followed by Brad Dickerson, our Chief Financial Officer, who will discuss the Company's finance performance for the fourth quarter and full year 2012, followed by an update to our 2013 outlook.

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

Finally, a replay of the teleconference will be available at our website at approximately 11 AM Eastern time today.

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

Thank you, Tom, and good morning, everyone.

2012 was another outstanding year for Under Armour.

And as we enter the new year, 2013 holds great promise.

Because Under Armour has always been about a promise.

What is it that we can do as a team to empower athletes to reach their full potential?

How do we help make athletes perform better?

Stay warmer, stay cooler, stay drier and stay lighter.

This morning, I want to talk about the promise of Under Armour, both the one we share with our consumers and the one we have with our shareholders.

Those promises have been connected since our inception and we believe that both our revenue and EPS CAGRs of 30% plus since our IPO in 2005 is a great measure of our success.

19 months ago we hosted investor day here on our campus in Baltimore and promised that we would double our revenues to $2.13 billion by 2013.

Given some of the noise that was going on around about the appetite of the US consumer, we understood that was an aggressive number, but we had enough vision and an executional plan to get there.

In our release this morning, we issued revenue guidance for 2013 in excess of the doubling of the business that we forecasted in 2011.

Our ability to provide that guidance tells me two things.

First, we've become a much better Company operationally.

While our business has become more complex the multi levels we've grown, our operational and financial planning teams have met the challenge.

Secondly, not only have we kept our promise to the athlete who helped us reach our first $1 billion in revenue, but our growth is a measure of how we've been able to reach out to new consumer, one who understands the promise of what Under Armour brings.

Our growth is come through a diversity of product as well.

We've taken a number of logical next steps moving into product categories like Charged Cotton and Storm Fleece that were adjacent to our core base layer businesses.

Developing these large-scale apparel platforms has not only enabled us to take a bigger share of [profit] with our core of men's consumer, but it helped us grow at in even faster rate in women's and youth.

The results of this diversification are quite clear.

In our IPO year of 2005, compression represented 64% of our apparel mix.

This past year, that compression number was down to just 14%.

But our diversification extends beyond apparel.

In footwear, we've achieved meaningful market share in just one category to date, cleated.

However, when we look at categories like run and basketball, which are significantly larger markets than cleated, it's clear that the footwear opportunity for Under Armour extends well beyond the near $0.25 billion in revenue we saw in 2012.

The path for our continued growth in footwear is clear.

Over the past three years we've aggressively built a team designers and developers who can execute against the promise of Under Armour footwear.

Under our new leadership with Kit Fulks, my original partner, and the person who has overseen all of our product development and innovation for the past two years, we are building a UA footwear culture that will ensure we are positioned to fight for market leadership in every athletic footwear category.

Kit's primary focus in footwear will be to lead and continue to bring new talent into the team.

Our success in cleated is a great indicator of what happens when we execute in footwear as effectively as we do in apparel.

Kit's proven leadership skills will ensure our culture as innovation and anticipating the needs of the athlete is part of our footwear DNA for the long term.

By continually flowing new technologies to market and growing our business, our existing distribution in key retailers like Foot Locker and Finish Line, we believe the future of Under Armour footwear holds great promise.

The diversification of Under Armour extends beyond product categories, though.

Through the growth of our direct to consumer channel, we've learned much about how our consumer likes to shop.

Our direct to consumer business accounted for 29% of our revenues in 2012, compared to just 21% in 2010.

We've also diversified our leadership, bringing in experience from outside of Under Armour to lead our apparel, supply chain, women's and international teams, and we are focused on our growth outside the US in 2013, prioritizing the key markets where our brand is best suited for growth and building the teams and infrastructure to execute.

But our focus, not only as a brand, but also as a public Company, is on next.

What does the Under Armour promise hold in 2013 and what are we doing executionally to make that happen?

Our growth drivers have not changed since our IPO in 2005.

Men's, women's, footwear, direct to consumer, and international have been critical to achieving our promise and remain our focus in 2013.

More importantly, the aggressive diversification of our business will continue.

In fact, we will be even more aggressive in 2013.

We will bring more innovation to our consumer.

We will redefine the pinnacle of how we present our brand at retail.

We will elevate the presentation of our brand in our wholesale distribution, and most importantly, we will speak with a louder brand voice than at any point in our history.

So, first, on bringing more innovation to our consumer.

At the NFL combine in 2011, future NFL stars like Cam Newton and Julio Jones were the first wear our performance monitoring system now known as Armour39.

Next month, that same state-of-the-art technology will be available to the high school freshman in Florida who's look to improve enough to make his varsity baseball team this spring.

And the college Lacrosse player who wants to make her all-conference team in her senior year.

The Armour39 is the first of its kind performance monitoring system for athletes that measures what matters most, willpower.

Willpower is the score that tells you exactly how hard you worked during your training session.

Willpower combines a range of dynamic inputs including body position, user profile and key heart rate measures.

With Willpower, athletes can, for the first time, objectively measure a hard day and a light day to ensure they're training effectively to meet the goals.

Armour39 is the first system that detects and responds to every move athletes make; any direction, any speed, any position.

The Armour39 wearable on body strap works with an accompanying watch or on your phone through a mobile app.

So, on how we look at retail.

In two weeks, we will debut our new specialty retail concept across the harbor from a campus here in Baltimore.

It will be over 8,000 square feet of the ultimate expression of the Under Armour brand, delivering an unrivaled retail experience through specialization, localization and of course, innovation.

From a merchandising perspective, our new store will have two clear distinctions from how we look at wholesale.

First, the footwear presentation will be a primary focus of the store, enabling us to tell our technology story across multiple categories.

Secondly, the new store will carry as much women's apparel as men's, allowing us to tell a focused story on fit and style with products like the Armour bra and the latest from our UA studio line.

We believe that when our consumer sees a cohesive story of our product merchandise the full power of our brand, we will be positioned to take our growth in both footwear and women's to the next level.

Elevating our retail presentation will be a focus for us in 2013, and not just in our own store.

While we look to expand upon the learnings we gain from our Baltimore store, we're focused on improving how our brand is presented across our wholesale distribution.

Within Dick's Sporting Goods, we are adding 15 new All-American and 20 blue chip chop in shops, including our new prototype in Cranberry, Pennsylvania, which is the most complete presentation of Under Armour apparel at wholesale today.

In addition, we are significantly expanding our women's and youth assortments across key accounts like Academy and Hibbett Sports.

Our focus on how our brand is presented at retail extends beyond our sporting goods partners.

Within our growing department store distribution, we are gaining new doors and growing existing floor space with key partners like Macy's, Dillards and Bell's department stores with our key initiative in women's, youth and underwear driving most of that growth.

With all this happening, it's clear that we need to speak with a louder voice to our consumer, because our product innovation demands it.

We believe we have some of the most compelling product that has ever come from our design team, and we plan to let people know about it, starting this quarter.

Our revenue growth in 2012 was strong, yet we believe there is a consumer who wants more from Under Armour, more Storm Fleece, more innovation like the Armour bra, more thought leadership from footwear like the highlight cleat.

Our plan to talk to that consumer will be different this year, and we will do so in multiple ways.

We will show them who we are as both the women's and footwear brand in our new store here in Baltimore.

From a media perspective, we will go harder, we will talk to them in a concentrated and focused way.

We will consolidate our spend into a tighter but louder message to ensure we continue to reach that new consumer who has helped drive our $1 billion of growth over the past three years.

We will tell the Under Armour innovation story this quarter, with the first of several planned campaigns, or what we are calling holidays.

We will create several brand holidays throughout this year, creating a call to action for our consumers to stand up and get the latest innovation from Under Armour.

You will be hearing the Under Armour brand voice in 2013, louder and better than ever, and the first of those holidays will happen in just the next few weeks.

In summary, I want to remind you of the Under Armour promise.

We have lifted and delivered it for our shareholders since our IPO more than seven years ago, and we of course do it by understanding our consumer and bringing them new products that they didn't realize they wanted or needed.

We will do that even more aggressively in 2013, bringing new dimension to our brand than what the world has seen in the first 17 years of our journey.

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

Brad?

Thanks, Kevin.

I would now like to spend some time discussing our fourth-quarter and full-year 2012 financial results and our updated 2013 outlook.

Our net revenues for the fourth quarter of 2012 increased 25% to $506 million.

For the full year, net revenues also increased 25% to $1.835 billion, which compares to our most recent full-year guidance of $1.82 billion.

Apparel grew 25% to $405 million during the quarter, representing the 13th straight quarter of at least 20% growth for our largest product category.

Our big story driving growth across genders were fleece and storm.

We were able to significantly expand the storm platform beyond just the charge cotton line last year to now encompass the broader Armour Fleece line.

Adding value to this product to the consumer was key as consumers look for more versatility from our assortments.

In women's, we continue to raise our consumer's expectations with new product categories like Studio and Armour bra.

Youth products lead the way from a growth rate perspective in Q4 as we gained shelf space at both existing and new distribution and continue to broaden into areas like graphics, which more than tripled during the quarter.

Our direct to consumer net revenues increased 29% for the quarter, representing approximately 39% of net revenues compared to approximately 38% in the prior-year period.

For the full-year, direct to consumer net revenues increased 34%, representing 29% of net revenues compared to 27% in 2011.

In our retail business, we opened five new factory house stores during the fourth-quarter, increasing our domestic factory house store base to 101, up 26% from 80 locations at the end of 2011.

In e-commerce, we achieved a growth rate in line with our overall net revenue growth during the fourth quarter.

Fourth-quarter footwear net revenues increased 43% to $45 million from $31 million in the prior year, representing approximately 9% of net revenues.

New running products led by the UA spine platform continues to be the largest contributor to category growth.

We also experienced a strong initial sell in our 2013 line of baseball cleats.

Our accessories net revenues during the fourth quarter increased 16% to $43 million from $37 million in the prior-year period.

International net revenues increased 30% to $34 million in the fourth quarter and represented approximately 7% of total net revenues, highlighted by solid growth in Latin America, Asia, and our Europe regions.

Moving on to margins.

Fourth-quarter gross margins contracted to 50.3% compared with 51.6% in the prior year's quarter.

The three primary factors driving this performance were consistent with our expectations outlined last quarter.

First, our sales mix was adversely impacted by moving through a higher rate of excess inventory at our factory house stores, as well as a higher mix of footwear which carries lower margins than other product categories.

Combined, these factors negatively impacted gross margins by approximately 80 basis points.

Second, given our previously outlined supply chain challenges, we had to air freight some products which negatively impacted gross margins by approximately 50 basis points.

Third, we realized lower North American apparel product costs, partially offset by higher North American footwear product costs which benefited gross margins by approximately 35 basis points.

Selling, general and administrative expenses as a percentage of net revenues leveraged 370 basis points to 34.2% in the fourth quarter of 2012 from 37.9% in the prior year's period.

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

First, marketing costs decreased to 9.7% of net revenues for the quarter from 10.9% in the prior-year period.

As we have previously outlined, our 2012 marketing budget was more weighted to the second and third quarters to better align the brand initiatives.

Second, selling costs decreased to 10.7% of net revenues for the quarter from 10.9% in the prior period.

Third, product innovation and supply chain costs decreased to 7.6% of net revenues from 8.2% in the prior-year period, driven by overall expense leverage in these areas given our topline growth.

Finally, corporate services decreased to 6.2% of net revenues for the quarter from 7.9% of net revenues, primarily driven by leverage in corporate personnel, incentive compensation and administrative cost.

Operating income during the fourth quarter grew 48% to $82 million compared with $55 million in the prior-year period.

For the full-year, operating income increased 28% to $209 million compared to our most recent full-year guidance of $207 million.

Operating margin expanded 240 basis points during the quarter to 16.1% and 30 basis points for the full year to 11.4%.

Our fourth-quarter tax rate of 37.1% was favorable to the 39.6% rate in last year's period, our full-year effective tax rate of 36.7% was below the 38.2% effective tax rate for 2011, primarily due to state tax credits received in 2012.

Our resulting net income in the fourth quarter increased 54% to $50 million compared with $33 million in the prior-year period.

Fourth-quarter diluted earnings per share grew 51% to $0.47 compared to $0.31 in the year-ago period.

Full-year diluted earnings per share increased 31% to $1.21 compared to $0.92 in 2011.

Now, moving over to the balance sheet.

Total cash and cash equivalents at quarter end increased 95% to $342 million compared with $175 million at December 31, 2011.

Long-term debt including current maturities decreased to $62 million at quarter end from $78 million at the end of 2011.

The inventory at quarter end decreased 2% year-over-year to $319 million compared to $324 million at December 31, 2011.

The modest decrease of our inventory levels relative to our 25% topline growth during the quarter was primarily driven by the ongoing success of our inventory management initiative.

Our investment in capital expenditures was approximately $23 million for the fourth quarter and approximately $63 million for 2012.

We are currently planning 2013 capital expenditures in the range of $80 million to $85 million.

Now moving on to our updated outlook for 2013.

Based on current visibility, we expect 2013 net revenues up $2.20 to $2.22 billion, representing growth of 20% to 21%, and 2013 operating income of $255 million to $257 million, representing growth of 22% to 23%.

The low operating results we anticipate a comparable level of total interest and other expense in 2013, a full-year effective tax rate of 39% to 39.5% and fully diluted weighted average shares outstanding in the range of 108 million to 109 million.

Of note, on the expected tax rate in 2013, we have not assumed a benefit from any state tax credits, which we anticipate pursuing.

Looking further into our operating expectations for 2013, I would like to provide additional color on expected quarterly timing throughout the year.

First on net revenues.

As Kevin mentioned, our growth drivers in 2013 are consistent with recent years.

We anticipate that most of our dollar growth for the year will continue to come from apparel, with strong growth across men's, women's, and youth.

Looking at footwear, the growth is expected to be slightly above our overall net revenues growth for the year.

In direct to consumer, we expect these channels to grow modestly higher than our overall business as we opened 10 factory house doors and up to 2 specialty doors, focused on larger footprints within our existing factory house fleets and invest in more targeted traffic drivers in e-commerce.

Finally, we expect our international businesses to outpace overall growth, both still off a small base.

Moving on to gross margin.

We continue to anticipate stronger gross margin expansion in the first half of the year, relative to the second half, primarily driven by favorable year-over-year product costs expected during the first half.

However, we expect several factors to limit the overall progress in the first quarter relative to the second quarter.

First, as we continue to work through recent supply chain challenges, we expect to incur higher year-over-year air freight costs during the first quarter.

Second, we expect strong quarterly growth in our Latin American regions, which is currently distributor based business carrying a lower gross margin.

Third, the mix of excess and made-for products in our factory house outlet channel is expected to remain relatively consistent year-over-year during the first quarter.

We anticipate a shift back towards more profitable made-for products commencing in the second quarter.

Given these factors, we foresee year-over-year growth margin rates as relatively unchanged in the first quarter, followed by over 100 basis points expansion during the second quarter.

In the second half of this year, we will be lapping last year's excess disposition strategy at our outlet stores and incremental air freight.

These positive factors are expected to be partially offset by certain changes to our supply base, especially in fleece.

While these stages give us better confidence in measures, such as delivery performance and future capacity, the moves will ultimately result in higher North American apparel product costs.

As a result, for the full year, we expect modest gross margin expansion from 47.9% level in 2012, primarily driven by the first half of the year.

Next on SG&A.

As Kevin outlined, we are planning to be more targeted in some of our marketing expenses this year, which we anticipate will create some significant year-over-year timing shifts.

The first quarter in particular is expected to see nearly 350 basis points of deleverage, primarily as we launch a major brand campaign focusing on innovation and incur costs around our Tottenham sponsorship which commenced in July of 2012.

We also expect a meaningful leverage of marketing expenses in both the second and third quarter, followed by a more consistent year-over-year rate of spending in the fourth quarter.

Despite these expected shifts, we plan to hold total 2013 marketing spending relatively flat as a percentage of revenues compared to 2012's 11.2% level.

Beyond marketing, we expect heightened deleverage in our other three SG&A buckets in the first quarter, driven in part by incremental expenses tied to the expansion of our California distribution center, the opening of our Harbor East specialty door in Baltimore, and higher year-over-year incentive compensation expense.

These combined factors are expected to drive a total SG&A expense rate for the first quarter to a range of 44% to 45% of net revenues.

During the remainder of the year, we expect meaningful SG&A leverage in the second and third quarters, and a relatively consistent rate of spending in the fourth quarter.

With our overall focus on investments and product creation, international and innovations, we expect a relatively consistent rate of overall SG&A spending for the full year.

In summary, we anticipate the strategic marketing decisions plan will result in some significant quarter to quarter shifts in SG&A.

With these shifts, we expect year-over-year operating income growth to be slightly higher in the second half of the year compared to the first half, yielding modest full-year operating margin expansion from 11.4% achieved in 2012.

Before Q&A, I would also like to provide some details around our inventory position.

We made some solid strides in our inventory management efforts in 2012 with inventory below our plan the past three quarters.

During 2013, we expect the inventory growth rate will remain below net revenue's growth rate in the first quarter and then be generally in line with our topline trends for the duration of the year.

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

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

Operator?

(Operator Instructions)

Robbie Ohmes, Bank of America Merrill Lynch.

Two questions.

The first question would be, Kevin, can you give us a little more detail on exactly what a louder Brand voice means?

Maybe paint more of a picture for us what the big change could be in the approach to marketing for 2013.

Then, just the second question would be on international.

You're talking a lot more about Latin America and maybe Asia.

I am just curious where Europe fits into the international growth strategy going forward.

Thanks.

Thanks, Robbie.

Let me take a second and tell you about what we want to do from a marketing standpoint.

What we did in -- I guess starting, so 17 years in the business now gives us tremendous amount of perspective, and looking over the areas in the years where we've been really effective and years that we still moved forward, but maybe we haven't been quite as loud.

So, what we want to do is we want to go back to this concept around cluster marketing, and the idea there is to create holidays.

What holidays are, are places where basically the entire Brand meets at once.

What we want to do is consolidate our spend to tighter bit louder messaging, and so we are planning on several Brand holidays this year.

To give you probably the best descriptive idea of what we are doing, it's about to happen in a few weeks, here, and within the span of about four or five days, you will see several things coming from the Brand.

First of all, we are going to kick it off with a PR event in New York in the second week of February that we will be announcing some of the innovations we are bringing to market.

Things like our new Spine Venom running shoe that's coming out, we are very excited about on the footwear side as well as probably the marquee product that we have, which is our Armour 39, our biometric measurement device that I went into a bit of detail in my script on.

This is something we think is going to finally apply some data and takeaway the subjective into the type of workout I had by -- that was typically judged by the size of the sweat stain on in my grey t-shirt, to actually giving some hard facts as to how did I work out and giving you a score around this thing called Willpower.

In addition to that, we are opening a Brand-new retail concept down here in Baltimore that again, the primary focus of that store is giving us the ability to showcase things that maybe you don't get the opportunity to see as big or as loud and proud as we believe where we are as a Brand in some of our wholesale distribution.

It's things like what we are doing with footwear, and when people walk into our store they'll say, my gosh, I had no idea you made all the styles and colors and you are so broad.

It's because a lot of this has been -- people living with the footwear Brand, we were maybe two or three or four years ago.

So, we see the ability to really accelerate that, as well as to our consumers and frankly, to our wholesale partners as well and demonstrate to them what our Brand has the ability to look like at retail.

Then capturing and sort of tying the whole thing together, we've got this new I Will campaign that we'll be kicking off, which is our Brand-new creative, you will see it in 30, 60 and long form 90 and 2 minute versions of it, but it's effectively telling you what our Brand is.

It's explains to, what does the idea of I Will?

And this is not just a local or domestic because as I get into the answer to your next question about international, we're pleased with the strides that we are making and the foundation that we are building in global, but it's important that we begin the tie the success we have here in the states around the world.

So, it will be a global campaign, it will be something that a voice that will be heard in all 61 countries that we currently do business in today.

When you hear from us, you may see us quiet at points during the year, but when we are loud, you are going to really hear us.

I guess that's where you'll see from where in the past and maybe helping Brad out with this answer, had been a more smooth out approach to the way that we approach marketing.

We are going to take those dollars over what was 12 weeks, and you'll probably see them condense in about 2 or 3 weeks.

As I take on international, we continue to believe it's a true opportunity for us.

I'm still thinking about our business as a global business.

Global companies define their growth by their success by where more than half of our revenue should come from outside of our home country.

That still remains to be the way that we think about our international opportunity.

But, when we think about where we'll start seeing meaningful impact that maybe you guys would see in a bigger way, it's 2015 and 2016.

Along the way, we are not asking you to wait that long either because we are laying additional foundation and resources and putting points on the board.

So, just a couple of things.

In Europe, you've heard us talk about Europe and we've been there since 2006, I -- we generally believe that we are close to the tipping point of what's happening in Europe.

We are doing more than $60 million US today, and it's taken us while to get to that number, but we feel very good about it.

We are leveraging things, and what you see like our relationship with Tottenham who is currently sitting in fourth place on the English premiership right now.

We've got new distribution, we just opened up a new concept shop inside of Harrod's that is doing terrific today.

It's establishing that presence of people asking the question, how can we be successful?

And we are seeing that the consumer wants us, it's just a matter of us meeting that demand with appropriate distribution, of course, with the right product mix.

Looking around the world and shifting over to Japan for a second, it's our oldest market, our most mature market and frankly, it's our most successful market as well.

We've been in Japan for nearly 13 years now, and we did nearly $200 million US dollars in 2012.

Now, they continue to be on a growth trajectory that is in excess of what we are even doing here in the states.

The limit of the size of how big that market could be, I think we are still waiting to see.

But, they are growing, and again, our partner there Dome Corporation's [Shuishi Yasuda] are doing an unbelievable job for us, and it's truly -- it's not a company doing it business in Japan, it is Under Armour of Japan.

They have got 23 doors open in Japan right now, wholly-owned stores because they have such a large wholesale business, 18 of which are outlet, they have 5 specialty stores as well, and you will see them increasing the number of specialty doors that are there.

Probably most importantly, when I talk about international as leadership, bringing Charlie Maurath onto our organization.

And again, we are still inside of six months, but his impact has been extraordinary.

Charlie joined us in September 2012 from Adidas where he'd been for 22 years and ran nearly -- took a business of running all of Latin America for them from just under $300 million in 2003 to more than $1.7 billion for them.

Charlie is in process of building out his teams in key markets in Europe and Latin America and China, and we are leveraging his expertise in Latin America and prioritizing the strategies that we have in each of those markets.

So, there's a lot of things where we are coming and a lot of the things that Charlie learned from his past experience that are really going to pay dividends and save us a lot of time.

So, within that, some of the early moves that Charlie made was taking somebody from our outdoor business in Kevin Eskridge, the guy who's a real killer for us here and took our outdoor business from under $30 million to more than $150 million, and Kevin and his family moved over to China this year.

Getting on the ground and more importantly, getting local with the team that we are building underneath of Kevin as someone who understands the UA DNA and understands our culture, as well as combining that with local knowledge, is something that's been a real opportunity.

We've got four stores open in China right now, two of which are Under Armour owned, the other two of which are a partner that we have in Beijing.

And our e-commerce site just launched in December.

So, we feel pretty good about it.

As I mentioned, I think, global for us, we are very fortunate to have the 20% plus growth numbers we are putting up in our apparel business, moving our DTC to nearly one-third of our total business, as well.

And so between those two markets, it allows us to make these longer-term investments of things like where you are seeing the progress coming in footwear and more importantly, what you see in the international.

So, I use that 2015, 2016 is a bogey, and it's pretty consistent where we talked about international will come on in a meaningful way.

But I tell you, with leadership like Charlie and some of the team he has from the leadership and that share that we have in Europe and what we have in China, we feel very good about that.

Thanks, Kevin.

That sounds great.

Omar Saad, ISI Group.

Nice work.

I wanted to follow-up on the specialty store you are opening up in Baltimore.

Can you talk about how -- and I think Brad alluded to there might be two openings this year, can you talk about how that is different from your last efforts in the specialty retail department?

Obviously, it's in more of an urban location as opposed to a mall, but can you talk about the product mix and merchandising strategy for the store and what you hope to accomplish with it?

Yes, Omar.

Well, I think we want to learn.

We went at -- when we looked at specialty retail three or four years ago, I don't think -- I think we still had a long way to go in terms of putting our infrastructure in place bit more importantly, we had so much work to do in our wholesale distribution.

Now, I tell you, there's still a tremendous amount of work with our wholesale partners, because first and foremost, we love our wholesale distribution and hopefully, I think you see from the presence we have there, that they feel pretty good about us, as well.

We are going to start testing with February 16, we open our new Harbor East store and most importantly, we are going to learn a lot.

We are going to learn a lot about the consumer, and I think as we grow as a Brand, it's important that we have this close relationship with the consumer, the same way that we learned in our e-commerce channel is the way that we can learn watching a consumer walk in and seeing what products are compelling.

The primary goal here is for us to get closer to that consumer, and again, a place that we can tell the full Under Armour story in this environment.

I mentioned those two product categories, those AR women's and having a larger and a more important presence believe I don't believe that our women's gets enough credit for the size of the Company that we built there.

We are nearly a $400 million women's business in 2012, and it is still on an amazing trajectory of growth right now.

That's $400 million at wholesale, mind you and it's close to $800 million at retail.

We think that the idea of how we can show products and showcase products like Armour Bra, more importantly, our studio line is having rave reviews in something that's coming across very, very well.

What we've done and our team has done to build out our women's team is paying great dividends for us.

I mentioned women's and footwear because that will be the focus, and what will be unique about the store also is that footwear will actually be in the center of the store, and so it will be a real primary focus when the consumer walks in.

Of not people walking in saying, oh my gosh, you sell shoes too?

Versus wow, this is a footwear Brand.

We believe that we are the ones that need to take the lead in making that bold statement about our being a footwear Brand.

You're also going to have an innovation area, you're going to have clear messaging of features and benefits, layout flexibility.

And it will be this real simplicity.

It will almost be like a personal shopper for the consumer.

It will be a way to really make buying Under Armour easy and get us away from being so item driven where it's cold gear mock or maybe a heat gear T and a very much more collection driven.

Again, of we had a goal from this store, it's being that as we evolve, and you heard me talk about in my script too, the emphasis we have in our wholesale presentation of moving us away from being, frankly, just quite so item driven to do adding and driving more collections there.

We want to be prescriptive in how we teach athletes how to dress, and we'll have people in our store that are specialists and experts and allows us to showcase new products by like Armour 39 where you can really get the product and the explanation out there.

Again, this is the store in our backyard.

We are very conservative with declaring what this is going to be, other than we think it's going to help us learn a lot.

It will be a place that I can stop on my way home from work and we can see how consumers are shopping and really get a sense of understanding retail.

Okay.

It sounds like it's a Brand messaging store, but it's also aiming to be -- with the hopes of being profitable and replicable on a larger scale.

Is that correct?

Yes, first and foremost though, we specifically did not use the word flagship, and I don't believe in the idea of leading with marketing or flagship or oh, it's a loss leader for us.

We should make money in everything that we do, and so our approach this store is no different than that, and that's why we say 8,000 square feet is maybe bigger than you would say, a 5,000 or 6,000 may feel right.

We want enough room to telebrand presence, but 100% we believe that our intent is to make money in the store.

Thanks.

And then real quick on the Under -- on the Armour 39.

Is that an offshoot of the E -- Under Armour's E39 product innovation that you guys had on some of your athletes last year?

Is it embedded in the apparel?

Is it some sort of arm band a wrist band or is it related to the footwear?

Any insights you can give the?

Yes, it's the evolution of the same product, and this is me -- there's attorneys in the room, but I'm going to tell you, the attorneys got the better of me when we had to come down to the naming of this thing.

It's a perfect product, the same product and again, we've had this product in the market for 2.5 years.

So, we've been testing it, refining it, and now we are finally ready to go to retail with this product.

It's something that what you saw, again, Cam Newton, Julio Jones, two of the stars of the NFL that you will see today, when they went through the NFL combine more than two years ago, it's the same product they were wearing.

We've evolved that into something that has commercial application and as I said, it will give the consumer at home the ability to finally measure themselves beyond being on elliptical or treadmill.

But what happens from the full time that you're in the gym, the full-time that you are exercising and taking this objective away, as I said earlier, the size of the sweat stain in your T-shirt into actually, what is my Willpower score?

That's something given on a 1 to 10 basis and allows an athlete to measure and say, well today I was a little better than yesterday and tomorrow I'm going to be a little better than today.

Thanks, Kevin.

Michael Binetti, UBS.

Congrats on a nice quarter, there.

Thanks for all the help today on the components that are going to be contributing to the revenue growth in 2013.

As I think about that, with the kind of detail you gave to us, it seems it might be a good time to ask about how you think about long-term gross margin potential of the business.

Back in 2011, I think you were targeting 50% gross margins.

Kevin, as a look at the places you are going to be taking the Brand over that's few years, how are you thinking about gross margins today?

Michael, I can jump on that one, to start with.

Our vision of long-term gross margin hasn't changed.

We do believe that over the long run our gross margins should start with 5, that being driven by continued innovations and the marketplace which would justify the price points and justify the margins for the product to get there, first of all.

Second of all, obviously direct to consumer is the help and the mix equation for gross margins also.

Nothing is changed relative to our vision of over the long run getting up to that 50% plus gross margin goal.

Okay.

Then this might be for Kevin.

With -- Kevin, with footwear, there's obviously been some changes on the team there.

Do think as new leadership moves in we will see the footwear program take a change of direction over the next year or two as you -- or your approach to that market?

Or do look at the platforms you have now like Spine and the new basketball shoes will be more of an evolution to those platforms that you've already launched?

Look, we are very pleased, I think, with the direction in how we've been moving as a footwear organization, and we are especially pleased with the team that we have in place in footwear.

The thing is that, since we've added $1 billion in revenues in the last three years, we've added new skill sets and the evolution in the team of what makes the most sense with us.

At the end of the day, we've had to make a lot of these decisions over the last seven years since being public, but it's also come out to netting a 31% CAGR top and bottom-line in that same period of time.

As our business evolves, so does the need to consistently build and recalibrate our leadership.

So, what we are doing is we are taking my original partner, Kip Fulks, who is a guy who, first and foremost, is a product guy.

I want to make sure the assumption that people understand and know about Kip is he ran the supply chain because he's a great leader.

He's running footwear because is a great leader, but he also understands product at the same time.

And we'll -- again, his primary focus is to get him to help us continue to build out our footwear team, because even where we are crossing the $0.25 billion mark, we feel there is a tremendous opportunity in front of us and a long way to go.

When I said a product guy, I mean footwear has reported to Kip for the past two years in addition to innovation, so he understands the things that are in the pipeline and really the way that we are going to pull the trigger there.

And the reason we are able to do that is because we've done such a good job hiring within Kip between Jim Hardy coming onboard on the supply chain side, he's doing an excellent job for us, and what Henry Stafford has been able to do on the product side for us, we are able to focus Kip more on the footwear side.

With shoes as a whole though, I don't want to stop the message yet where we been as much as where we're going.

First of all, with some of our track record, we've been in shoes for seven years, and our first category there was football cleats.

But frankly, it took us seven years to get to this place where we are now, where we are making -- telling product from the consumer, things like that highlight cleat that we point out at $130 price point.

The pairage wasn't a ton of pairs, but it was the fastest selling speed shoe that you saw at sporting goods this year through our retailers who carried the product.

And more importantly, the lift that provided us was we went from a market share of started with a 2 to a market share that started with a 3. It comes back and driving home the point, when we innovate, we will win beyond just one particular product, but we sold more $50 to $100 product because we were selling that $130 product as well.

You'll see us continue to push there in things like running.

Our pipeline is full.

Spine Venom, as I mentioned, kicks off in the middle of February.

Our new Charged 2 products, we've got another product which is the Toxic 6 which is launching.

We've also got another -- you will see another running concept from us this year.

In basketball, we've had success on court with, many of our players are playing very well from Brandon Jennings in the Bucks and Kemba Walker in the Bobcats and Greivis Vasquez and Ray Felton from the Nicks as well, DeAndre Jordan with the Clippers.

Plus we've got another eight or so players that are also wearing our Brand that aren't being paid money; they're wearing it because it's good product.

Many of these things just take a little bit of time, and the good news is that we have a very young athlete base including people like -- if you saw the Australian Open, you watched Sloane Stephens who is definitely one of our next athletes at 19 years old, who was the first teenager to ever beat Serena and move on to the semi finals of the Australian.

Her first comment, I think, from the announcers was how cute her shoes were.

But more importantly to them being cute was the fact that they actually work.

We are very proud of that and we're also moving to pleasantly where yes, it does matter if the shoes look great, too.

We feel like we're making great progress and we feel very comfortable that Kip is going to do a great job for us, and we will continue to build out and evolve that team.

Okay.

Thanks a lot guys.

Eric Tracy Janney Capital.

I guess, Brad, for you, focus a little bit more on supply chain.

Perhaps the learning since Jim Hardy and his team have come on.

I understand the cadence still a bit of a constraint in the first quarter, but maybe just talk about the upside opportunities in the back half and as we enter '14, what those opportunities to drive further gross margin expansion from the supply chain.

Eric, we talked a lot about some of the supply chain challenges over the last quarter than the impact to our results in the back half of 2012 relative to having to air freight some product in to get product in on time to meet demand.

Some of that -- some of those challenges are going to be consistent as we get into the front half of this year, especially in Q1, some more heightened air freight than usual, again, just to make sure we are meeting demand on time.

It's the same type of issues we had from last year.

It's relative to a few factories that we onboard during the course of last year and some challenges around the onboarding of a few factories.

So, that will be consistent to the front half of the year.

As we start moving through the year, the thought there on the supply chain side in the short run here is to move some of the supply, especially around the fleece categories where we had most of our challenges last year, to move that to more consistent, historically reliable suppliers of ours.

That will help with obviously delivering on time, but in the short run, that will come at a little bit of a cost, especially in the back half of the year when some of that movement f product starts to hit the market.

Lessons learned, really, as we get into 2014 and four, and Jim has done a really good job at looking at his, and his team is capacity in general, planning longer-term capacity in where we need to be.

Not just of the next year or two, but farther out in years three and four, and making sure that we can onboard factories at the right pace and at the right time.

That will be an important part of our long-term strategy in the supply chain.

So, we do kind of see this air freight issue back half of last year, first part of this year and then the switching of the factory base to the back half of this year to be more of a short-term need to meet demand, longer-term doing a much better job of planning out capacity and onboarding new factories at the right pace.

Okay.

And then maybe Kevin, for you, apparel is holding up really, really well.

I think there's probably misinterpretation of being saturated domestically, that goes without saying.

In terms of the distribution expansion beyond the core, particularly on the men's side of the business, how do you balance continuing that expansion supportive of the apparel growth without potentially diluting or getting maybe cannibalization within that core channel?

I think it begins by having and continuing to drive great growth within our existing base.

If you did your checks, I think the expectation that we believe our existing distribution has from us, is that we are the Company that continues to deliver double-digit comp growth in your stores.

And so finding ways to do that, is isn't putting the same things in there, but finding newness, frankly showcasing innovation.

It's not always -- it can be simple innovation, too.

It's the Charged and the Storm platforms that will each be $200 million businesses for us this year that effectively didn't exist in 2010.

When you look at, again, some of the simpler innovations, it's things like fleece.

Our fleece business, this year, was on fire, not literally, but up 50% for us.

You imagine taking a simple category like fleece and driving that kind of growth?

That is a will house product.

Our Charge cotton business plus 90%, our Storm platform plus 300%.

When you look at apparel, we're still not servicing the appetite of our consumer within and through our core base.

When I mentioned that we like our distribution, they like us very much.

We understand where our bread is buttered, and we'll continue to make sure we take care and that we build out things in taking time.

You heard me, hopefully very thoughtfully talk about the retail presentation expansion we will have in our wholesale distribution.

At the same time, we do see opportunities, so you will continue to see more.

And we could spend a lot of time talking about Dick's and I think some of the headway that we have there.

They continue to be a headline for our Brand as we are presented in the marketplace.

But, you also have great things happening with Academy and Hibbett, there's over 30% growth there driven by base expansion of women's and youth that we have there.

Our youth businesses is unbelievably healthy, particularly as we move into things -- Sports Authority has done very well.

The new management team is getting really settled in there, and we are cleaning up the business.

It's becoming more profitable, and we expect is a double-digit growth from Sports Authority in 2013 as well.

So, as you look at where you would expect to see us to some of the new places you are seeing us.

Last year, we told you that we were going to spend 2012 and we were going to be exploring the department store channel, picking up some best in class partners that we have there, Macy's, Dillards, Nordstrom, Belk, Lord and Taylor, Bloomingdale's, Von Maur.

It was a business that we primarily focused on underwear and youth, and we put that in about 700 doors throughout 2012.

We like the doors we are in, we think there is about another 200 doors, potentially, we could go in in 2013 as we look.

But, we are going to start doubling down and becoming better in the stores that we are already doing business in.

For instance, with Macy's, we're doing Shop in Shops, and some of the obvious places you'd expect like Harold Square, Union Square, State Street in Chicago.

So, we will be -- we want to increase our presence and we want to make sure most importantly that it's not just a couple of shirts hanging on a rack, but that our presentation is important.

I think that's one thing you'll have from us.

What we want to demonstrate, again, going back for second to what we're looking to come from the specialty store model, is that when you walk in that store, you will see that the Under Armour brand is important, our products are important, our innovation is important and that the presentation is important.

And we want people to walk in and we want the me to say, wow, I see what the vision can look like of how you could look in my store, and I want them to think like that as well is that our goal for that is not cannibalizing existing stores or distribution.

Our goal for that is the ability to be strategic because we still believe there is a large need for -- or want or desire for Under Armour that is currently going unmet.

And so we will continue to find distribution that fits that idea and that fits our brand and you'll continue to see, frankly, our brand open the aperture of where the consumer has come to expect us as well.

But we are not going to jump from chapter 1 to chapter 30.

Hopefully you will see the patient growth.

I think we're demonstrating that growth the whole time while continuing to put points on the board.

That statistical of 31% CAGR top and bottom-line for IPO is something we are very proud of, and especially doing it again in 2012 where there's a lot of wind or noise out there about difficulties, we still put 25% on the board.

I think that's what, frankly, you've come to expect from us, and we are very proud of that type of performance.

Okay, great.

I really appreciate it.

We do have time for one more question.

Our final question comes from the line of Kate McShane from Citigroup.

With regards to the warm weather which has been on everyone's mind the last two winters, I wondered if there was any insight into any possible strategy change with regards to the change in flow of product or the change in mix for next winter, subsequent winters.

Kate, let me jump on that, first.

First of all, our inventory is in really good shape right now.

We've had some great cold weather, obviously, as you felt the last several weeks and that's really had things moving at retail.

Doesn't have a big effect to us, but it's been helping our partners in getting things cleaned out as they start looking forward to 2013.

We've been doing several things that from repositioning.

I mentioned that growth that we had in base layer.

We made a decision, I think we were in this position the fourth quarter, particularly, and we all had a fingers crossed sitting around waiting for it to get cold, and we realize that that probably wasn't the best model or way for us to be thinking about our business.

So, we made a conscious decision to stop being so weather reliant., and for a company whose two basic categories of business was something called the heat gear and something called cold gear, that was a pretty big shift.

Keeping that DNA and that explanation to our consumer of how they shop our brand intact, we started adding things like a lighter fleece product.

Something that isn't just as much about keeping warm as much as it has more style, it has more relevance to it.

I think you've seen us take that.

Apparel business in the fourth quarter was up 25%.

But, moving away from weather reliant is something that allowed us to keep that in what was probably the most challenging fourth quarter that anyone has seen in a very long time.

We are more, and I think that's hopefully what comes across; we are more than just two grounded apparel side, a cold weather compression brand.

Compression, as I mentioned that stat in my script, and think about that, in seven years, when we went public, compression was 64% of our business being just 14% today.

We continue to ebb and flow with the market as it makes its demands of us, and I think more importantly, we continue to tell the market what we think with our point of view.

When we add newness and innovation to the assortment, we are going to win.

Again, as I mentioned about not just being a cold year mock $50 company, we have that and we have enhanced it and we've come to our Evo Cold Gear, but that's not a product that's in high demand when it is 65 degrees outside in December.

So, that's where the Storm cotton and the Charged Cotton, the platforms have really been helpful for us.

And again, continuous flow where what we've done on the merchandising side in Henry and his teams up and down the line have really done a great job is getting to where we've got more product flow.

It's not two shipments the year, but we are really answering the needs of the consumer as the weather change.

So with that, we will continue to emphasize more versatility in our assortment with weatherproof items like fleece, which again, I say grew 50% in 2012, and you will see us continue to push that.

But our partners are doing a great job for us, I think anticipating the market and product, and I think we feel pretty good about the flow that we have from an innovation standpoint in apparel.

I can tell you we do good things, but between sonic base layer and we've got a new technology people have been talking about at the Outdoor show we unveiled last week as well, that we will be unveiling soon.

We've got a lot of great things in the pipeline.

It's a competition.

It's a competition to be a featured product from Under Armour.

It's our job to edit, it's our job to make those decision for the consumer and hopefully, we are continuing to build that trust to the consumer that it's great product at a fair value.

More importantly, it's something that works.

Kate, just relative to, on the dollar side of planning the flow-through the year, and it ties into what Kevin's talking about here.

If you look at the quarterly revenue growth, relatively consistent across the quarters as far as revenue growth but a little bit more heightened growth in Q2 and Q3 versus Q1 in Q4.

Again, not a significant difference, but just how we're planning the business right now., a little bit of a timing difference.

Q1, Q2 is more timing in general.

Q4 is going to your point of coming out of two warm winters, still trying to get our arms around what that means.

As Kevin mentioned, obviously, our product has expanded and it's much more versatile right now, even with warm winters.

But, still trying to get our arms around what these two warm winters mean.

Also, have not had bookings for Q4 come in yet, so that is kind of the timing difference there in Q3 and Q4 relative to revenue growth.

Okay.

That's great.

And if I could just sneak in one more question.

I think you mentioned, Brad, the incremental cost of footwear during the quarter.

I just wondered what that was from and how many more quarters we can expect to see that pressure.

Well, as we've talked historically, Kate, footwear's gross margins are well below our apparel margins right now, and as footwear grows quarter by quarter, that could have impact to our gross margin.

In Q4, technically Q4 really isn't a big footwork quarter for us in general.

What we do see in the fourth quarter sometimes is the sell in of some of the spring product for the next year.

Specifically, this fourth quarter was around our baseball cleats.

If you remember, last year we had a very, very strong baseball season and had very strong sell in and sell through baseball cleats.

A lot of our customers on the wholesale side wanted to make sure we got product on the floor in time set coming up at success last year, so we had some shipments of baseball cleats in December.

Okay.

Thank you.

Thanks everyone.

Thank you for joining us on the call for today.

We look forward to reporting our first quarter 2013 results which tentatively has been scheduled for Friday, April 19 at 8.30 AM Eastern time.

Wait, Ravens, 35/33, final prediction, go Ravens.

There you go.

Thanks, everybody.

Bye-bye.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.