Under Armour Inc (UA) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Under Armour, Inc., 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 turn the conference over to Tom Shaw, Director of Investor Relations.

You may begin.

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

During the course of this 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 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 event on which the statement is made, or to reflect the occurrence of unanticipated events.

Joining 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 financial performance for the third quarter, provide an update to our 2013 outlook, and introduce our preliminary 2014 outlook.

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

Finally, a replay of this teleconference will be available at our website at approximately 11.00 a.m.

Eastern time today.

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

Thanks Tom, and good morning everyone.

From our vert first date of existence, Under Armour has been about making athletes better.

Executing against that promise in 1996 had its own set of challenges.

But they're dwarfed by the complexities of running a global brand with over $2 billion in revenues.

Our consumers' expectations shift constantly higher, and they count on their favorite brand to consistently take them someplace new.

The Company that we are building to deliver on that promise is in constant evolution.

We are a different Company every six months.

Our consumer moves quickly, and fortunately, so does Under Armour.

Today I want to discuss that evolution -- how it's manifesting itself in product innovations like Speedform and ColdGear Infrared, which emerging athletes like Stephen Curry and Jordan Spieth, and new retail experiences in Shanghai and New York City -- all key elements of our growth story.

Yet all of them have only become important Under Armour stories in the past few months.

While this evolution is taking place throughout our organization, I want to talk today about four areas of our business, where our focus is helping generate growth in 2013 and beyond.

First, I will cover how we will be more integrated than ever when it comes to telling our brand stories; how we will have our product, communications, and retail presentations aligned unlike anything we've done in the past -- aggressively bringing our consumers into retail at key points during the year.

The second area is around innovation, and how when we innovate, not only do we win with consumers, but we drive an industry-leading pricing model.

Because wherever we show up -- in regional sporting goods, urban department stores, or our new retail experience in Shanghai, we are a premium brand.

That premium status comes from our ability to innovate, and that innovation enables us to drive that pricing power.

Third, we are winning with America's youth, as we continue to resonate at the highest level with our youngest consumer.

Apparel continues to drive our youth numbers, but we have had solid momentum in footwear as well, a great indicator of the long-term equity we are building in our brand.

Henceforth, our team is constantly evolving, as well.

I will talk to you today about some new additions to our senior leadership, and some other moves we are making to become a more globally focused organization.

Most importantly, we are doing this as we grow our business at an industry-leading pace.

This was our 14th consecutive quarter with net revenue growth of 20%-plus, and our 16th consecutive quarter with apparel growth up 20%-plus.

Our core is strong, and that gives us the firepower to grow in new geographies with new categories and new consumers.

The first topic, how can we better integrate our products, communication, and the presentation of our brand to consumers.

Clearly, it starts with product.

As I said in our last call, the pipeline of innovation at Under Armour has never been more robust.

Our ColdGear Infrared just hit retail in Q3, and it's off to a great start.

This latest innovation utilizes ceramic thermo-conductive inner coating to absorb and retain body heat.

This industry-leading technology provides warmth without the weight, and enables us to bring our consumer apparel that exceeds their expectations around cold-weather protection.

In footwear, our big story for 2014 is Speedform.

We are bringing to Under Armour footwear what consumers have come to expect from our apparel -- innovation around fit.

We're bringing that innovation to the world of footwear by not making these shoes in traditional footwear factories, but in bra factories that understand the importance of fit.

With innovations like these, our challenge is to align our communications and how we show up at retail for maximum impact with our consumer.

We started that effort this year with our three brand holidays, the third of which will hit next month, with athletes like Olympian Lindsey Vonn, freeskier Bobby Brown, and the lock for PGA rookie of the year, Jordan Spieth, who will help us tell a great story around ColdGear Infrared.

No story about Under Armour in the outdoors would be complete without an appearance by our friends from Duck Dynasty.

In 2014, we will take an even more integrated approach to our brand holidays, with greater focus on key products, and a more extensive effort with our retail partners, designed to drive traffic into their stores at key points throughout the year.

That greater integration will also be on display at our brand house here in Baltimore, at our newest store in Tyson's Corner that we announced earlier this year, and the next evolution of Under Armour retail, our store in Manhattan that we will open in Spring of 2014.

Combined with our New York office that is opening early next year, this new retail space in SoHo will give us a meaningful presence in the city, and enable us to bring a local Under Armour story to New Yorkers and the millions of tourists that make their way there, as well.

Just a week ago, I was in Shanghai for the opening of the Under Armour Experience, a first-of-its-kind retail theater, featuring an immersive multi-dimensional video experience that combines the high energy of our brand with our commitment to telling authentic athlete stories.

The Experience, in Shanghai's brand-new Jing An Kerry Centre on Nanjing Road, is connected to our branded store, with a [curade] assortment of Under Armour's best apparel and footwear technologies.

One of our big goals with this new retail experience is to help educate our Chinese consumer on what it is like to be an athlete.

In order to do that, we had to break the traditional model a bit.

While most retailers more like 80% product and 20% storytelling, we flipped that, and are really concentrating on storytelling as a primary focus of the store.

You enter through a red carpet to an illuminated hallway, and are greeted by a video image of Michael Phelps, who is your host and guest trainer.

He leads you through a series of vignettes that define the will of an athlete, including a training session with NBA star Brandon Jennings, rooftop yoga in Shanghai, and the exhilaration of running out on the pitch before a match at White Hart Lane, the home of Tottenham Hotspur.

The second piece I wanted to cover was how our innovation agenda enables us to win with consumers and drive a powerful pricing model.

Our strategy is fairly simple.

Wherever it is that we show up as a brand, our goal is to be best in class.

Whether it's at our national sporting goods partners, or regional ones like Scheels and Dunham's Sports.

Our innovation agenda is what enables us to be the premium brand at that retail destination.

When we have success with the ColdGear Infrared long sleeve at $50, or a woven stretch capri at $55, it reinforces our promise to deliver that best-in-class innovation to our consumers.

We saw great evidence of that in Q3, where our average selling price grew by 5% in apparel alone.

We believe our ability to continually innovate for our consumer, and the pricing power that comes along with it, is a key element of our growth story, and one that helps separate Under Armour from our competitors.

The third thing I wanted to cover was our success with the young athlete, or as we refer to them, Next.

Our continued strong growth in youth is prime evidence of our ability to make that emotional connection with the young athlete, both on and off the field of play.

We are winning with youth in both boys and girls, and it's not just in our core apparel, where we would expect to be strong.

Our youth footwear business is extremely strong, and we anticipate that strength continuing in 2014.

One great indicator is that in categories like basketball, where we are performing very well in authentic distribution with a slightly older consumer, and we are making great strides in the category with our youth consumer, as well.

Like we laid out at our Investor Day this past June, our focus when it comes to Under Armour athletes is all about Next.

When we partner with a great up-and-coming athlete like Stephen Curry of the Golden State Warriors, we're connecting with a hard-core athlete who knows he set the NBA record for three-pointers made this past season; and a 12-year-old kid in New York who remembers him dropping 50 on the Knicks on his last visit to the Garden.

It's athletes like Stephen, Jordan Spieth, Bryce Harper, Cam Newton, and Sloane Stephens -- none of them over 25 years old -- that help us connect with our young consumer, and challenge us to raise our product development game up to their level.

The fourth and final piece for me today is about our team, a team that is evolving from within, but also adding a new dimension to our leadership with experience from the outside.

First, the internal piece.

Kip Fulks, currently our COO, is adding the new title President of Product.

In this expanded role, he will now directly oversee the design and development of all product, including apparel, as well as our supply chain and information technology areas.

Henry Stafford, who has served as Senior Vice President of Apparel since joining Under Armour, will take on the role of President of North America.

In this newly created position, Henry will be responsible for our North American wholesale business, retail marketing, global retail, and global e-commerce.

Working together, Kip and Henry will drive an integrated product and merchandising strategy that will ensure we remain focused on growing our core business here in North America, while providing the foundation for the product, merchandising, and retail development to help Charlie Maurath drive our business outside of North America.

In addition to Kip and Henry's new responsibilities, we've elevated Matt Mirchin to the new position of Executive Vice President of Global Marketing.

Matt, Kip, and Henry all embody the Under Armour culture, and I'm confident in their proven ability to lead.

In addition to these appointments from within, we are adding two new members to our senior leadership team.

Susie McCabe is joining Under Armour as Senior Vice President of Global Retail.

She comes to us from Ralph Lauren with extensive retail management experience.

Also joining the team is Jason LaRose as Senior Vice President of Global eCommerce.

Jason joins Under Armour from Express, and will oversee our online consumer experience, and drive our web business strategy.

In their new positions both Susie and Jason will report to Henry.

I will now turn it over to our CFO Brad Dickerson; but I want you to know that there are multiple other areas of our business where we are working with just as much intensity as the four areas I have focused on today.

We will continue to be a growth Company, in constant evolution on all fronts.

We will use our brand momentum here in the US to fuel our global ambition.

We will stake out a new position with today's athletic female; and we will become a more digitally relevant brand for our consumer in the next 12 months.

There will be much more.

As I said earlier, we are a growth Company, and one that is focused on our future, but delivering results now.

With that, let me turn it over to Brad.

Brad?

Thanks, Kevin.

I would now like to spend some time discussing our third-quarter financial results, followed by our updated outlooks for 2013, and preliminary thoughts on 2014.

Our net revenues for the third quarter of 2013 increased 26% to $723 million.

Apparel grew 26% to $561 million during the quarter, from $445 million the prior year, representing the 16th straight quarter of at least 20% growth of our largest product category.

In apparel, we continue to perform best when we deliver newness and innovation to the consumer, a powerful dynamic that helped drive average selling prices approximately 5% higher during the quarter.

Apparel results benefited from new innovations like the recently introduced ColdGear Infrared technology, expanded platforms in areas such as Storm and Charged Cotton, an enhanced design across both legacy and new offerings.

From a product category standpoint, while training remained our largest category and drove the majority of dollar growth, we experienced strong growth rates in our running, hunting, and mountain categories across genders.

We also continue to see momentum in our women's studio line, as well as significant growth across our youth business.

Our direct-to-consumer net revenues increased 34% for the quarter, representing approximately 25% of net revenues, compared to approximately 24% in the prior period.

In our retail business we've opened six new factory house stores during the third quarter, increasing our North American factory house store base to 112, up 17% from 96 locations at the end of last year's third quarter.

We currently expect to open four additional factory house stores during the remainder of the year, bringing our total door count to 116.

We are also on track to expand nine existing locations in 2013 as part of our effort to better service demand with our broader assortment in areas such as footwear and women's.

Looking at our full-price brand house stores, we continue to see positive results at our store in Baltimore, and will open our second location at Tyson's Corner near Washington, DC, in early November.

Our story in our e-commerce business remains consistent year to date.

Strong results, driven in part by positive trends in average order value, given our improved inventory positioning across the channel.

Third-quarter footwear net revenues increased 28% to $81 million, from $63 million the prior-year, representing just over 11% of net revenues.

Running footwear remains the largest contributor to growth, with continued expansion of UA Spine, and improved penetration across wholesale.

We also concluded successful football season with Cleats, ld by our expanded highlight line, where we continue to take market share.

Our accessories net revenues during the third quarter increased 18% to $64 million from $54 million in the prior period, led by strong year-over-year gains in both head wear and bags.

International net revenues increased 38% to $44 million in the third quarter, and represented 6% of total net revenues, piloted by strong growth in our Europe and Asia regions.

Moving on to margins.

Third-quarter gross margins contracted 30 basis points to 48.4%, compared with 48.7% in the prior-year quarter.

Two primary factors contributed to this decline during the quarter.

First, we experienced a higher US import duty exposure on certain products imported in prior periods, which were identified and reserved for during the quarter, negatively impacting gross margins by approximately 90 basis points.

In addition, as expected, product costs were also impacted by the re-sourcing of fleets to more reliable but higher-cost suppliers, negatively impacting gross margins by approximately 30 basis points.

Partially offsetting these gross margin head winds, ongoing supply chain enhancements contributed to lower apparel sales discounts and allowances, and air freight expenses, benefiting gross margins by approximately 70 basis points.

Selling, general, and administrative expenses as a percentage of net revenues leveraged 120 basis points to 31.7% in the third quarter of 2013, from 32.9% in the prior-year's period.

Details around the four SG&A buckets are as follows -- first, marketing costs decreased to 10.3% of net revenues in the quarter, from 11.4% in the prior-year period, primarily driven by the planned timing of our global marketing campaigns this year, as well as overall expense leverage, given our top-line performance.

Second, selling costs increased to 8.1% of net revenues in the quarter, from 7.9% in the prior-year period, primarily driven by the growth in our direct-to-consumer business.

Third, product innovation and supply-chain costs have decreased to 7.3% of net revenues for the quarter, from 7.5% in the prior-year period, primarily driven by a shift from a third-party distribution facility in California last year, to a consolidated in-house facility this year.

Finally, corporate services decreased modestly to 6% of net revenue in the quarter, from 6.1% in the prior-year period.

Operating income during the third quarter increased 33% to $121 million, compared with $91 million the prior-year period.

Operating margin expanded 90 basis points during the quarter to 16.7%.

Our third-quarter tax rate of 39.4% was unfavorable to the 36.1% rate in last year's period, primarily driven by a lapping of the state tax credit last year, and higher levels of investment -- international investment -- this year.

Our net income increased 27% to $73 million, compared with $57 million in the prior-year period.

Third-quarter diluted earnings per share increased 26% to $0.68, compared to $0.54 last year.

Now moving over to the balance sheet.

Total cash and cash equivalents at quarter ending increased 19% to $186 million, compared with $157 million at September 30, 2012.

Long-term debt, including current maturities, decreased to $54 million at quarter end, from $72 million at September 30, 2012.

Inventory at quarter end increased 59% year over year to $497 million, compared to $312 million at September 20, 2012.

As previously discussed, the normalization of our fleet levels following last year's delivery challenges was a significant driver of a higher inventory growth rate during the third quarter.

In addition, we have moved some capacity back to certain suppliers after last year's challenges.

In an effort to help smooth capacity with our suppliers, we have brought in some product earlier than otherwise planned.

Our investment in capital expenditures was approximately $23 million through third quarter.

We currently expect 2013 capital expenditures of approximately $95 million, ahead of our prior guidance of the high end of $85 million to $90 million, with the incremental investment driven by international supply chain initiatives and domestic retail.

Now moving onto our updated outlook for 2013.

Our prior outlook called for 2013 net revenues of $2.23 billion to $2.25 billion, representing growth of 22% to 23%; and 2013 operating income of $258 million to $260 million, representing growth of 24% to 25%.

Based on our current visibility, we are raising our net revenues outlook to approximately $2.26 billion, representing growth of 23%.

We are also updating our operating income outlook to approximately $260 million, representing growth of 25%.

While on operating results, we continue to expect the full-year effective tax rate of 40% to 41%, while our full-year fully diluted share count is now expected to be approximately $108 million, which is at the low end of our prior range of $108 million to $109 million.

We have several additional updates pertaining to guidance for the balance of the year.

First on net revenue.

As we have previously outlined, we continue to plan our business assuming comparable weather year over year.

Due to significant shifts in the timing of shipments, we also expect minimal growth in both footwear and international during the fourth quarter.

Moving on to gross margins, we expect a year-over-year decline in the fourth quarter of approximately 50 basis points, with the factors driving this decline consistent with those outlined in last quarter's call.

The positive factors include ongoing supply chain improvements following last year's delivery challenges, and lapping last year's access disposition strategy at our outlet stores.

The negative factors include more expensive resourcing of key products, an FX impact on our licensing revenue stream from Japan, and the impact of the previously discussed change in our Canadian import duty methodology.

While we have a lot of moving parts for the quarter, we still expect the full-year gross margin rate to improve modestly from the 47.9% level in 2012.

Switching over to SG&A.

In marketing, based on year-to-date spending trends and leverage from higher revenues, we now expect the full-year marketing expense rate will be closer to 10.8%, compared to last year's 11.2% rate.

Looking at the other three SG&A buckets in aggregate, we expect expense de-leverage during the fourth quarter, given higher incentive compensation levels, and ongoing investments to support our global growth initiatives.

Overall, although we now expect a slight increase in consolidated SG&A spending rate for the full year, we still expect to achieve a modest operating margin expansion from the 11.4% level achieved in 2012.

As we indicated last quarter, we will remain opportunistic with any additional net revenues or gross margin upside to our plan during the fourth quarter by reinvesting in SG&A to help support our growth initiatives in future years.

Thus we expect more ability to improve our operating dollars in the event of better-than-planned results, and not operating margin.

Finally, a little more color on inventory.

The same factors that impacted the third quarter are expected to persist in the fourth quarter.

However, we expect the inventory growth rate will ease sequentially in the fourth quarter, but remain higher than sales growth.

Before we turn it over for Q&A, we would also like to provide you with our preliminary outlook for 2014.

Based on our current visibility, we anticipate 2014 net revenues and operating income to be at the lower end of our long-term growth targets of 20% to 25%.

I would emphasize that our focus will remain to drive higher operating income dollar growth, balanced with making the right investments to drive our long-term global success.

We wanted to outline two preliminary factors to consider for 2014.

For net revenues, we expect accelerated growth rates for footwear and international, with most significant growth impacts for each expected to incur in the first and fourth quarters.

For gross margins we expect modest full-year gains driven by ongoing supply-chain efficiencies, partially offset by a less favorable sales mix.

As has been our custom as we finish up the current year and get more clarity on next year, we will provide more color on 2014 during our fourth-quarter earnings call in January.

We would now like to open the call to 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?

Thank you.

(Operator Instructions)

Matt McClintock, Barclays.

Kevin, I was just wondering if you could drill down more into the women's business.

The improvement to the product that you have made in the fall, what you are seeing there, specifically.

Then if we could actually extrapolate that into what you're doing with the studio shop-in-shop, and how you think about using that to potentially transform what traditionally hasn't been a place for women to shop -- the sporting goods channel -- to actually draw women to that channel.

Thank you.

Great.

Our women's business remains a tremendous opportunity, we think, for the brand.

As we have stated all along, we believe that women's has the potential to be larger than men's, and frankly that it will be larger than men's someday in the future.

Women's today is nearly 30% of our apparel business, versus it was less than 16% when we were a public Company, that we'll celebrate here in just another week or two, more than eight years ago.

In addition, we've also added more than $2 billion in revenues during that time.

I am very pleased, I think, with the trajectory that women's has.

It's out-pacing our overall growth for the Company.

Our women's business, as we stated at Investor Day as well, is something we anticipate to be nearly a $1-billion business for us by 2016.

We're highlighting that with the emphasis around opening our New York office sometime the end of this year, early part of next year, led by Leanne Fremar, who joined us from Theory within the past year.

We are seeing the team that Leanne is building out, and again, addition to the other brand experts that we already had here; the momentum that we have and the ownership we believe we have with that female athlete; frankly, making more beautiful product for her.

Taking her from beyond just on the athletic field and taking her to places that I don't they'd expect the Under Armour consumer to be in the past.

We're also, I think, putting our money where our mouth is around women's.

You mentioned the shop-in-shops, and you will see a big emphasis on that.

One thing that we have done differently in 2013 we think that paid very good dividend for us was our use of the brand holidays.

We've had three of them, as I mentioned in my script -- the first two that have already taken place, the third of which will happen in the next couple of weeks.

We're planning to commit at least one of those brand holidays exclusively to women's in 2014, also.

We want to make a big statement that we believe that Under Armour women's has really arrived, and something that can be extremely important for us.

Now probably one of the best vehicles we have seen our women's product come to life has been the idea of Women's Studio.

I think it is really our commitment with number one, any of you that are here at Investor Day, you see it highlighted, particularly in our own brand house store.

But really some of the excitement we have, and some of our key partners like Dick's Sporting Goods, where we've built out this new studio presence.

I think we've all gotten extremely excited about what it can mean and what it's done, I think, to the dimension that's been added to the brand.

But also showing a different side of Under Armour than the female consumer has seen us before, is that we're much more than compression shorts and sports bras.

I think we've demonstrated that with the range that we have as a product.

I can tell you it only gets better and better.

We are also, from a distribution standpoint, we talk about the department stores as being something that's important to us.

We're in roughly 1,000 department stores today.

The majority of that, the assortment -- I want to be clear, these are not full assortments we have there.

The majority of that is youth, underwear, and there's a women's product.

We believe there's a lot of growth available for us there.

Frankly, it's a way for us to reach the female consumer where she shops.

We're going to hit it at all levels.

First and foremost in our core sporting good partners, we're going to become more comprehensive in the way that we present ourselves there.

We also have some initiatives that we stated at building out things like the Women's Studio shops, like the Lux shop that we have at Dick's, for instance.

We also are going to continue to emphasize, I think, the places where she's shopping -- again, and as I mentioned, department store business.

Women's for us remains a tremendous opportunity, and it continues to out-pace our overall growth of the Company, as well.

Thanks a lot, Kevin.

Eric Tracy, Janney Capital.

Eric, please check to see if your line is open -- or on mute.

I'm sorry.

Kevin, can you hear me?

Yes.

All right, sorry about that.

We really want to dig in on the footwear piece here a bit -- maybe just talk about the evolution of Spine as we go into spring next year; the introduction of Speedform, the cadence, and how we should think about the distribution strategy there.

It seems to be again we're at an inflection point and an acceleration, but I just want to gauge your thoughts, updated thoughts, on footwear.

Yes, I think I keep level-setting, I think, with the expectations we laid out back in June at Investor Day.

But one of the things we talked about was being a top-three footwear brand in sporting goods.

We look at where we're successful and where we're winning, and obviously the apparel floor space in any given sporting goods store, Under Armour has a significant impression.

Unfortunately, we haven't been represented that way on the footwear side.

We've done a couple things.

When Kip first took over the footwear business several years ago, one of the initiatives we had was building shoes that cost $100.

We saw success with things like Charge RC.

We've seen success with the first price point we introduced Spine with.

RC was at $120, Spine was at $100.

I think we came to realize is that just picking some number isn't necessarily the right place for us to be, particularly in sporting goods.

Where you're really winning there is at $70, $80, $90.

We've changed that mindset a bit.

We're very pleased, I think, with the premium product that we have.

Things like Charge RC and things like Spine and products that we have like Speedform -- and I'll get to that in a second.

But we also have some programs we're really excited about heading into the year with some wheelhouse price points, like the $80 product that we have called Engage coming out.

We really want to emphasize and focus on winning where we are already being successful in the apparel side, which is in sporting goods.

We also believe there's a tremendous opportunity in the mall.

Our key partners in Finish Line and Foot Locker that have been incredible partners for us, and continue to give us great runway.

Speedform is going to be a critical component of what that means.

Let me back up for a second and just talk about Spine.

Spine continues to sell very well for us.

The latest iteration that we have is called Vice, and we're about to launch a new, even lighter, sleeker, and faster version in early 2014.

I mentioned Charge RC, so you'll see us coming back with new styles and colors and updates to that style.

That range is somewhere between $110 and $120.

What we have with Speedform that we introduced in a very small way just to get a taste of what we thought the product could do, at $120 this year in specialty.

The product has been incredibly -- we're incredibly pleased with it at this point.

For instance, we made the cover of Competitor magazine, being labeled the best innovation in 2013.

We're coming back from a bit of a more commercial product that we have, we're going to call Speedform Apollo, which will launch at $100 in a lot more volume, in many more of the places where you would expect to find Under Armour.

The feedback we are seeing on the product has really been good, though, and something that we believe we are in a position to do well.

All of this that we say running -- and I think we've been clear that we need to win in running.

We are -- it's great not to just be talking about one style heading into a season, but being able to talk about $120 Charge RC, $100 Speedform, a $90 Spine, an $80 Engage.

You're seeing us begin to add some dimension to the brand.

At the same time, it's all underpinned by, I think, the authenticity that we are driving on field.

Football for us, in cleated -- and I think people roll their eyes a little bit -- but I can tell you the authenticity we get from being as good as we are in grabbing market share in places like cleated has been extraordinary for us.

Football for us as a whole, we are up 28% in units, and 42% in dollars, with the Highlight cleat leading the way.

When we enter our market with that type of innovation, we're seeing a cascade into many other products.

When we're selling, the Highlight cleat, at $100, $110, or $120, what that does for us in some of our $70 and $80 price points as well -- it really drives business, and it moves market for us.

We're also seeing, I think, really nice progress in things like basketball.

We recently announced Stephen Curry joining our roster of athletes, and something we're really excited about.

Again, he broke the record in the NBA for three-pointers last year; and I think a tremendous competitor and somebody that really fits well with the character of our brand; and frankly, somebody who I think likes the beginning of all of our athletes, someone who really wanted to be with us.

I think we're getting more presence on court, but I think we're doing it in a prudent way.

We're not trying to buy loyalty.

I think we're demonstrating we're earning it.

Whether it's on the football field, whether it's on the basketball court, some of the moves you're seeing us do in soccer with Tottenham Hotspur, Colo Colo, and others.

You're seeing us show up in more relevant ways with our brand.

Again, all these things underpin the success that we have had an apparel.

I think you're beginning to watch it move toward an area like footwear, too.

Eric, I want to tie in to Kevin's comments and clarify my prepared remarks around the Q4 growth rate in footwear; and again, just emphasize this is a timing issue.

The fourth quarter actually is our lowest-volume quarter for footwear.

This is really more around the timing of our baseball-cleat shipment, and again it's our lowest-volume quarter.

Our year-to-date 2013 growth rate in footwear's somewhere around 25%; and again, we've called out the fact that footwear's going to be above the Company growth rate in 2014.

So the Q4 growth is just a timing issue.

That's fair.

Brad to follow on that, the footwear acceleration next year.

Understand that dynamic in terms of weighing on gross margin, but the early color on gross margin next year of modest gains, given supply-chain enhancements, given now pricing seems to be -- again, whether it's within footwear or even apparel, a nice tail wind.

Some of these one-time up-front costs should go away.

Could you maybe walk through again the gross margin dynamic next year, where the potential is for upside, or is it purely just the mix on the footwear that should be the drag?

Sure.

To be honest with you right now on the gross margin side looking at the data we have and the data that we don't have yet, we have pretty clear visibility into spring-summer 2014, and don't have all the data points on fall-winter 2014 yet, so we're kind of using spring-summer 2014 as a proxy for our guidance for the full-year 2014.

If you look at the front half of the year and the things that you have, you have a couple things working in your favor.

It's a lot of the things you mentioned -- some supply-chain enhancements that we've been making along the way.

We would continue to expect to see some benefits from those going into next year and for the full year.

Some of the things working against us is the mix piece.

Obviously, if we're calling out things like footwear and international, those are two parts of our business that from a gross margin perspective -- although both improving year over year within themselves, are still a drag on gross margins overall for the Company.

That would be a big part of offsetting some of those supply-chain enhancements that we'd make during the front half of the year.

Again positives, supply-chain side; again, positive there working for us.

The negatives on the gross margin side would be the businesses that are growing above the Company growth rate, being footwear and international.

Okay, I appreciate it.

Thanks guys.

Best of luck.

Evren Kopelman, Wells Fargo.

Hi, can you hear me?

Hi there, yes.

Okay.

I wanted to ask on the inventory, maybe taking both the inventory on your book, and also thinking about the channel -- excluding the (inaudible - background noise) and timing compare issue you mentioned, how do you feel about the content of it, and thinking?

The second interrelated question is, how's the sell-through performance in the channel in the quarter?

Was there a difference in sporting goods versus department stores verses others in the wholesale channel?

Thanks.

On inventory in general and then sell-through from an inventory perspective, like I said, a couple big issues that are really driving that year-over-year growth rate.

We are absolutely comping a challenging service levels last year that we talked about last year, especially in the police business.

So more normalization of our inventory levels on the fleet side.

If you remember, our inventory growth last year in Q3 was a minus 2%, just going back to some of the challenges we were having last year at this time.

In addition to that, we are in this -- in the middle of a period here of improvement relative to some supply-chain things, specifically on the inventory side.

We talked a lot at our Investor Day about our three-year planning process and the benefit that's going to have, specifically to the supply chain longer term.

Those really probably -- the benefits of getting better visibility out there further, from a capacity perspective, probably won't start really coming into play for us until we get into 2015, maybe the end of 2014 into 2015.

In the meantime, we've talked about re-sourcing some of our products to our existing suppliers, and putting more capacity into our existing suppliers.

Part of the byproduct of that was making sure that we were really working within managing their capacity and their level-loading of inventory and manufacturing -- the ability to smooth that out and take some inventory in earlier, too.

The impact of that's been a little bit more than we anticipated coming into the back half of this year, on top of again, the comp issue that we were absolutely having the back half of last year, too, relative to our service levels.

Those are really the two big things that are driving inventory.

As you look again into Q4 and into early next year, I would assume pretty similar stories.

Again, I think if you looked at our growth rate in inventory, in Q4 last year it was minus 2%, In Q1 this year it was flat year over year.

If you look at some of those challenges we were having on the supply-chain side, we're definitely all in the back half of last year and into the beginning of this year.

We'll continue to have some of those comp issues, and we'll continue to have this issue of level-loading with our vendors, too, from a capacity perspective until the benefits of 3YP start to kick in, the three-year planning process.

On the sell-through side, obviously we're posting really strong results here in the quarter.

We've seen really good results in our direct-to-consumer business, obviously, as I stated in my prepared remarks.

On the wholesale side of business, we've absolutely had another strong quarter, and anticipate a strong quarter in the fourth quarter.

Have we seen some impact to the much-publicized softness at retail?

Absolutely.

I think everybody's seen some impact of that.

We've seen a little bit of that as we got toward the end of the third quarter and the beginning here of the fourth quarter.

Again, all that is built into our guidance and we're working through that.

It has impacted our business a little bit; but again, I think much less than it has probably other people in the space.

Camilo Lyon, Canaccord Genuity

Kevin, I wanted to just touch on youth, and in particular, Alter Ego.

It seems like that's been a runaway success for you.

I was curious to hear your thoughts on how you would plan to expand the distribution.

I know that you started going into your wholesale partners with the product this quarter.

How do you see that broadening unfold?

Do you think about shop-in-shops dedicated to the youth category?

First of all, Alter Ego for us has been a really great success in 2013.

It's a business that in June of 2012 didn't exist.

We (inaudible) it, tested it, built the product, and had it in store this year.

We primarily were in market with just a couple of our key partners, only maybe two or three of our partners.

We're just starting to get in front of them on the production side where we can get the product out there.

Within our existing distribution there's a lot of runway for Alter Ego.

At the same time, as good a partners as Marvel and DC Comics have been for us with this process, we're also -- we also will go after this cautiously optimistic about how many Batman and how many Superman T-shirts.

First of all, there's a whole slate of characters that they have, and so we're making sure we spread that.

We don't want to get caught holding the bag as trends move up and trends move down.

However, we believe in it.

We think there's plenty of runway there.

What we discovered as a Company, though, is that not as much about just any one particular character, as it is about the want and the desire and the need for newness and for novelty.

We believe we've invented this new category of novelty.

Whether it is Batman, Superman, Iron Man, or whoever else we use or whether it's a slogan, we know that the consumer is not looking for a basic white T-shirt with an Under Armour logo on the left chest -- that we need to provide them a little bit more.

That's frankly across the board what we've seen with our -- all of our styles -- is that particularly on our direct-to-consumer business, when the consumer comes to us, they're not looking for the basics, but they're looking for the things that have a little more surface texture, have a little more interest, a little more technology, and frankly, higher price points, too.

Under Armour is really getting de-commoditized, I believe to some certain extent.

While we play with big volumes and big programs -- and we can make some pretty wheelhouse programs and product -- we think that the consumer is continuing to push us to add some more innovation.

Luckily, we've got an innovation pipeline that's really full.

Youth, as you mentioned Camilo, it's been really just on a tear for us.

Our youth business as a whole continues to lead the market as best we've seen.

Our product alone on the youth side is up.

It's out-pacing by almost 2X our total Company growth.

We haven't found the top.

The biggest challenge we have is finding appropriate distribution.

Our own key partners have never exactly emphasized youth departments and youth sections in their stores.

I think because of the success we've seen, we're testing that more and more.

We're looking to be creative, I think, with some of their own floor space, and some categories that categories that are more attractive to them, and saying how can we build out bigger youth sections.

That's something I think you'll see come from us.

As I mentioned in my own script where this is not a youth apparel conversation, either.

I think I made the statement of challenging somebody and go ahead and take a dozen 12-and-under-year-olds and give them a hundred dollars and tell them to walk into a sporting goods store and buy one piece of apparel and one pair of shoes; and I think there's a really good chance they'll walk out with a piece of Under Armour apparel on top.

Based on what we're seeing in the last six and 12 months in footwear, there's about as good of a chance these days them walking out with a pair of Under Armour shoes, too.

We're really resonating with that kid, and we're looking forward to doing a great job for him and growing up and growing old with him, too.

I think it has us positioned very well.

Great, thanks for that color.

Brad just quickly, you talked about assuming a similar weather pattern as last year.

How do you view your ability to meet at-once orders should weather become more favorable?

How do you think of that as a source of upside?

Finally on the gross margin, have you begun to realize the mix benefits in your direct-to-consumer business?

Does it skew more toward made for versus excess?

Yes, first on the weather site.

Yes, absolutely, if weather is in our favor there will be upside for us; but again, the part of AR business and the part of our business that is extremely weather-dependent is much less than it maybe was five or six years ago.

A lot of our Q4 product is going to be on the fleece side, which is much more versatile and maybe less dependent on weather than maybe how we looked five, six years ago.

Would there be an upside for us if weather was cold?

Yes.

But let just make sure we're prudent on how much upside there would be relative to that.

From an AR perspective, absolutely our AR fill rates are much better year over year.

We were in the high 80s last year in AR fill rates, and now we're in the mid-90s, where we probably should be.

Again, if the weather gets cold and someone is looking for that product that's an AR style, we should be able to service that demand in the fourth quarter.

Relative to the gross margin and the realization of benefit for mix, yes we're still seeing some of that benefit on the made-for mix.

It was definitely there in the third quarter, also.

It was being offset, though, by some other mix issues, specifically with the growth in footwear for us in the third quarter, also.

Yes, we are seeing significant benefit in the made-for mix and the margin upside of that.

It's just a little bit muted in the third quarter because of some other things going on in mix.

Got it.

Thanks, and good luck for the balance of the year.

Michael Binetti, UBS.

Congrats on a nice quarter.

Thanks, Michael.

Brad, since you mentioned it earlier on the international investments in the quarter, that was a big point of the conversation at the Analyst Day you guys had at headquarters this summer.

Maybe you could talk a little bit about the plan for international as you look just into 2014, in the context of what you guys talked about at the Analyst Day in the headquarter, what some of the investments may look like.

It was obviously a material component of how you guys guided operating margins, as well.

Maybe just a little bit more about how the near-term looks on that?

Yes.

Michael, let me take this and just do a sort of a big overall, and spend a minute on international for us.

First of all, I think we laid it out very well, and it was great to have the ability to introduce Charlie to the investment community, and get you to see the type of leadership that we have there.

We have a couple of basic rules here at Under Armour.

One of them is that great ideas get funded, but only great ideas with great leaders get funded.

So we're putting our money where our mouth is on that side, in addition to the women.

What we see is that international has great dividend for us, but we know it's going to be an investment that's going to take time.

Part of our restructuring was really built around that.

The movement that we did with Kip and with Henry was really to put some of our better leaders on our cash generators.

The philosophy that we're driving, I think our Corporate strategy these days, is this principle - I had it in my script.

I said our North American growth in cash creation are going to be the engine that feeds our global ambition.

Because we have the success in North America, it allows us to make these longer-term investments.

We're going to be investing appropriately internationally.

We believe we've got some really good ideas, and we believe we have some really good leadership.

Let me work my way around the world and start with Latin America, which is -- which Charlie had been working on prior to coming to Under Armour; specifically for the last eight years, but not exclusively, of course.

Mexico, we are in the process of bringing back in our Mexican -- and making them, Mexican distributor into a subsidiary by the first quarter of 2014.

We just opened our first [Stefsty] store in Mexico City on -- middle of -- in the first week of October, and it's doing very well.

I think we are seeing that we are resonating with that consumer.

Brazil is obviously a big hot topic of conversation for everyone.

The team that Charlie's assembled there is literally second to none; unbelievable amount of experience, more than 50 years of experience that we have.

That office is open now, and will be beginning to probably look to move our product -- we'll be in there by -- in time for World Cup in 2014.

It's not a huge presence, but again, it will give us traction.

I think you'll see an even bigger presence as we build up to the Olympics in 2016, also.

Chile is another office that just opened in the past month.

We announced the deal that we did with Colo Colo, who is one of the largest soccer clubs in Chile, as well.

Again, with just a proven professional who's running our business there.

Moving across the pond to Europe.

It's a place where we have been in Europe really since 2006.

We just opened a new office in Manchester to focus on the UK specifically.

Our business with Tottenham Hotspur is something that -- I think it demonstrates our commitment to being a global brand, and obviously showing up on the global stage of EPL is something that's doing very well.

Our Kit's doing extremely well in that market, also.

That being said, we still have -- we have work to do in Europe.

We're still resonating with that consumer.

We believe we like our leadership, we like our team.

We have good momentum, but we need to capitalize on it.

We need to make Europe an absolute win and a positive for the Company.

We see it.

We believe that tipping point as we sit here in year seven or eight of our existence there is something that is very close for us.

Moving to the other side of the globe to Asia, beginning in China, I talked about last week having been over there and done a tour from visiting our partners in Japan who are doing extremely well, growing close to 30% on a meaningful business there.

Again, they nearly crossed $200 million last year, and continuing to grow.

China for us, where I spent time, we've got six stores open right now.

Three of them are exclusively Under Armour stores.

The Under Armour Experience that we opened in Shanghai is just a really cool environment.

Again, I believe the first thing that we need to convince the consumer in any market, but particularly in China, is why walk by -- how do I compel you to walk by the four or five global brands you've heard of, and the seven or eight local brands, and convince you to walk into an Under Armour store or participate with our brand.

We believe that we're doing that with this new retail experience.

Something very exciting, and we think there's a lot more things to come.

In other places, Taiwan and Hong Kong, opened our first store with a new partner in Taiwan recently.

In Hong Kong we opened with a distributor there called Gigasports, a retail chain there.

Again, the product is doing extremely well.

We just launched both websites recently.

We're balanced.

It sounds like we're doing a lot, and we really are, but we believe we have it in control.

I think part of our shift is again this reorganization we just announced has as much to do with Under Armour transforming from being North American Company selling stuff in other parts of the world, to truly being a global brand that's doing business in North America, in Latin America, in Asia, and in Europe.

We're very focused on making that happen, and I think we're taking really good positive steps toward that direction.

Michael, just on the magnitude of the investment.

Although we'll be growing SG&A in Europe, to Kevin's points, I think most of the additional investment that we are looking at from 2013 to 2014, and even started in 2013, is building up the foundation of the international business globally -- making sure that we have the right people, process, and systems from an information technology perspective, supply chain, and leadership.

As Kevin mentioned, it's part of the additional investment this year and into next year.

Then probably the other big piece of the additional investment is going to be in that Latin America region as we bring Mexico in as a fully owned subsidiary, and we open up fully owned subsidiaries in Brazil and Chile.

When you're looking at year-over-year incremental investments, it's that international corporate group; and it's Latin America that are really driving the investment in international, for the most part.

Okay, thanks a lot guys.

Kimberly Greenberger, Morgan Stanley.

Thank you.

I am wondering if you can just help us with the preliminary 2014 outlook.

I know that on your fourth-quarter call you will have a lot more detail.

But what is it that you are seeing happening in the environment that would suggest that the lower end of your targets are the right place to be for next year, and if there's any additional color you could offer on that, that would be fantastic.

Thanks.

Sure.

I think you just look where we're guiding this year compared to our guidance next year relative to revenue growth rate.

Two things that we did call out, international and footwear being accelerated growth next year.

So you would look at those two things being positive from a growth rate perspective.

The one thing I think clearly we look at year over year, where we are this year versus next year, the largest piece of our direct-to-consumer business is our outlet business.

We have talked about slower growth in doors, new doors on the outlet side, although we are focusing on growing and expanding some existing doors.

Our outlet business will grow at a slower pace than this year as we start to transition also into putting more effort into the brand house side of our business on top of the outlet business.

That DTC business is obviously a much bigger business than international and footwear combined.

Again, outlet is the biggest part of that DTC business.

You have two businesses growing at a faster pace that are off a smaller base than the outlet business, which will grow at a little bit slower pace.

Okay, that's really helpful.

In terms of your wholesale, should we assume that wholesale will also be near the lower end of that range, as well?

Yes, usually since wholesale's the biggest part of our business, you would expect it to be pretty much close to the range that we're guiding to, for the most part.

Great, thanks.

Operator we have time for one more question.

Sam Poser, Sterne, Agee

Thanks for taking my question.

Brad, I was just wondering can you give us some detail on how you're looking about the SG&A next year?

Will it be this constant reinvestment, or do you expect that to open up a little bit towards the back of the year, if sales come in above where you are going?

Sure, Sam.

A couple things, just to call out on SG&A for next year.

We do see some items like marketing as an instance, that probably if I was looking at it directionally for marketing right now, I would say it is probably going to be a little bit at a de-leverage for us next year, based on where we are going to end up this year.

Again, we haven't really figured out the exact timing of that yet, so we'll give more information on timing in the next earnings call.

Something we're calling out this year will also be a little bit of an investment overall for the Company next year, and that's in incentive compensation next year, which is across all four of our SG&A buckets.

That will be a de-leverage item next year.

Consistent stories relative to again, some of the investment needs, both in innovation is an area that directionally we would look to be increasing our investments, so on the product side specifically, innovation.

Supply chain is an area again of investment for us as we are looking to expand our capabilities globally; and obviously, a continued expansion of our global business, as we just talked about specifically in Latin America with all the investment areas for us.

Relative to your question about how the investments play out versus our top-line and performance.

I think the one thing we are going to constantly balance is we are focused on driving operating income dollars and operating income dollar growth, just like we talked about in our Investor Day, over the long term.

We will always look for opportunities to help ensure successful business in a subsequent year, or do things in the current year that could benefit the current year also from an SG&A or investment perspective.

If numbers would come in better than we are planning for 2014 or the timing of that would happen differently, we would definitely look to where could we reinvest those dollars and be opportunistic to benefit 2014.

Or probably more specifically, as we get toward the end of 2014, what could we do to accelerate or ensure our success for 2015.

Thanks very much.

You talked about the mix.

In the fourth quarter, you talked about gross margin being down, but the mix of retail's going up, and the mix of footwear's going down in the fourth quarter.

Why would that drive lower gross margins?

Probably the only -- there's a couple things that are going to be happening in Q4 that maybe were a little bit more impactful than Q3.

First and foremost, if you remember the Canadian duty issue, we called them the last call.

We talked about some uncertainty around the impact of margins for that in the back half of the year.

That's still an ongoing issue.

We have not resolved that issue.

It's still in kind of the audit mode right now.

We didn't really have an impact in the third quarter relative to that issue.

We do fully anticipate that that issue is going to be resolved in the very near term here.

So there will be a fourth-quarter impact to that issue as we finish up this year.

So that would be a little bit of the difference from Q3 to Q4.

Also on the FX side, our business in Japan where this really impacts us, the change in the yen rate year over year will be a little more elevated in the fourth quarter versus the third quarter, also.

Those are two things -- two unique things that I think are going to be more elevated in the fourth quarter versus the third quarter, specifically.

Okay, thanks.

Any word on tax rate for next year?

That's it.

Tax rate for next year.

Again, that's something we have to really roll together all the numbers in -- especially the back half of the year.

But I would anticipate the two big drivers of tax rate for us right now is our ability to have comparable tax credits year over year would be one thing.

If we were able to get tax credits next year that we would have this year would be one way to look at the direction of our tax rate.

The second thing would be obviously we are pointing to incremental international investments.

We need international profits to drive a lower tax rate.

When we're in an investment mode, that will work against us from a tax rate perspective.

So my sense would be our tax rate next year will probably be a little bit higher than this year; but as we get more information, we will guide to that, obviously, in January.

Thanks very much.

Good luck.

All right.

Thanks everyone for joining us on our call today.

We look forward to reporting to you our fourth-quarter 2013 results, which tentatively has been scheduled for Thursday, January 30, at 8.30 a.m.

Eastern time.

Thanks again, and goodbye.

Ladies and gentlemen, this concludes today's program.

You may now disconnect.

Good day.

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