Under Armour Inc (UA) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

I would now like to introduce your host for today's conference call, Ms. Carrie Gillard.

You may begin.

Thanks, and good morning to everyone joining us on today's second-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 date on which the statement is made, or to reflect the occurrence of unanticipated events.

In addition, as required by Regulation G, we need to make you aware that during the call we will reference certain non-GAAP financial information.

We provide a reconciliation of non-GAAP financial information in our earnings release and in the electronic version of portions of the script from today's call, both of which are available on our website at UAbiz.com.

Joining us on today's call will be Kevin Plank, Chairman and CEO, followed by Chip Molloy, our CFO, who will discuss the Company's financial performance for the second quarter, and provide an update to our 2016 outlook.

After the prepared remarks, Kevin and Chip, along with our Senior Vice President of Corporate Finance Dave Bergman, will be available for a Q&A session that will end at approximately 9:30 a.m.

Finally, a replay of this teleconference will be available at our website at approximately 11 a.m.

Eastern time today.

With that, I'll turn it over to Kevin Plank.

Thank you, Carrie, and first of all, congratulations on your new role.

Most of you already know Carrie, who has been part of our IR team here at Under Armour for over four years.

I am excited that she has taken this leadership role, and am pleased to introduce you to those in the UA investment community who you have not yet met.

That will change quickly.

Carrie is the best person to both tell the Under Armour story and keep our strong shareholder base informed on our business.

Congratulations, again, Carrie on this new role for you.

Now, good morning, everyone.

Under Armour is a growth Company.

The dictionary defines opportunity as a chance for advancement or success, and the business of sports provides us with abundant moments where our brand can stand apart among our consumers.

But there are times like now when this power of sport reaches monumental levels, and we find ourselves right now in the midst of a 60-day period where sport transcends its normal place in the conversation.

Starting back in June with the NBA Finals, the Copa America, and the Euro Champs in global football, the US and British Open in golf, the MLB All-Star Game, and Wimbledon.

In a few weeks we'll have the global spectacle of the Summer Olympics.

Each of those moments provides opportunities for our consumers to experience the emotion and thrill of sports, and for the apparel and footwear we make to shine on a global stage.

Whether it's Stephen Curry receiving his second MVP and being named the first unanimous MVP in the NBA, Andy Murray taking the Wimbledon crown in front of the home crowd in London, or Michael Phelps and the US gymnastics team preparing for the Olympic spotlight in Rio next month, these athletes have helped Under Armour achieve a new level of awareness and demand.

As we grow within both our core apparel and footwear businesses, we have steadily and strategically expanded our distribution to reach more athletes who are demanding our brand.

We remain focused on helping the world's elite athletes perform at their very best.

But our mission is broader, to make all athletes better.

This morning I want to talk about some of the strategic steps we are taking to reach more athletes in three key areas: Channels, categories, and geographies.

Our second-quarter results are strong evidence that demand for Under Armour has never been higher.

Total revenues grew 28%, with our apparel business up over 19%; footwear up 58%, and international up 68%.

Chip is going to take you through the key drivers of those growth numbers in a bit, but I want to map out some of the opportunities we are executing against to widen the playing field in terms of access to our brands.

We have built our business over the past 20 years through great retail partnerships within the sporting goods channel, with partners like Dick's Sporting Goods and Academy; and in department stores and malls with partners like Macy's, Foot Locker, Champs, and Finish Line.

The authenticity we've gained with consumers through those partnerships has helped us become who we are today, and positioned us to bring Under Armour to an even broader set of consumers.

What you will be seeing over the next 12 to 18 months in terms of expanding that consumer access is part of a measured effort to widen the playing field, with each element having been in the works for at least 18 months, and in some cases even much longer.

The first such agency is UAS, Under Armour Sportswear.

The first products from the line will be available this September.

UAS is not just a category play or distribution play, it's about bringing a new consumer into the Under Armour brand.

UAS will bring a young, fresh, and modern voice to sportswear, and reflects the insights we've gained as a performance brand now applied to the every day wardrobe.

This is not about being on trend are capturing the athleisure market; consumers have the expectation that performance product is not just functional, but is fully executed through fit and style.

We don't believe that Under Armour technology should be exclusively for on-field; we don't see it as an either-or thing.

UAS is forged from the field, and built for life.

Last month we announced the hiring of Tim Coppins, Executive Creative Director of UAS.

Tim's reputation in the fashion world is compelling, with his existing line already carried at premium retail like Barney's.

UAS will have a narrow range of distribution, available in new premium retail, as well as a limited rate of Gucci stores.

But UAS is a business that's built for the mobile native consumer.

While we are partnering with select high-end wholesale partners to showcase a best-in-class expression of the collection, the launch of UAS is predominately a DTC offering.

This initiative represents an ambitious step for our brand, and provides a great amount of daylight between it and our existing product range.

The next step in our strategy to reach new consumers is the partnership we're announcing today that will bring the Under Armour brand to Kohl's starting in 2017.

One of the top retailers of active wear in the US, Kohl's has a large, loyal consumer base, the majority of which are women shoppers.

This decision to reach new consumers through Kohl's is not a channel consideration, but a consumer consideration.

We want to reach our consumer where they expect to find Under Armour product, and we will continue to partner with the retailers that provide us the opportunity to showcase the Under Armour brand.

Great brands are iconic and inspirational storytellers, especially where product meets the consumer.

For Under Armour, an important piece of that story is the retail experience we create and drive with our own brand houses.

Now, I am incredibly excited to announce today the newest location, the former FAO Schwarz space on Fifth Avenue, at the base of the GM building in New York City.

The approximately 53,000-square-foot space is one of the most recognized and high-traffic areas in all of New York, and our plan is to build the most breathtaking and exciting consumer experience ever conceived at retail.

In addition to using landmark retail space to help tell the Under Armour story, we are equally focused on creating the best mobile shopping experience as the consumer continues to move to device-based purchasing.

Last month we introduced the UA Shop app.

It's a way to better navigate shopping for our products through our connected fitness platform.

With consumers spending 85% of their time on mobile devices in an app, we want to better use the new oil that is data to refine and recommend products based on your activities.

We believe this will help drive more frequent shopping, bigger baskets, and better conversion throughout the platform.

Shifting the growth story now from distribution to categories, we have been capturing new basketball consumers almost by the hour with our signature Stephen Curry footwear.

Sales of Curry footwear have been extremely strong, and with the Curry 3 coming this fall, we are anticipating our business will continue to post incredible growth.

Many of these new UA consumers are finding the brand in Foot Locker doors, especially at Kids Foot Locker, not surprising given Stephen's growing popularity with the younger generation.

While the numbers he is putting up for Under Armour are record-setting, we continue to be blown away by what Stephen has accomplished, and incredibly excited for what is to come for both of us as a result.

The third area of powerful growth is in our geographies, and specifically in greater China.

Our team continues to drive great revenue increases, especially in e-commerce, with year-to-date revenues up 157%.

Our growth is driven by consistently being viewed as performance by the Chinese consumer, who actually refers to us as the professional brand.

We are accomplishing this through premium brand houses and a full-price business model focused on basketball, running, and training.

Amid increasing support for sport by the government, the Chinese consumer is getting more serious about training.

Our women's business in China continues to over-deliver against our plan, with women's apparel currently 34% of total apparel revenues, up from 24% just last year.

Our men's and women's running businesses combined has more than doubled compared to last year.

Not surprisingly, Stephen Curry's growing global awareness continues to help drive our business in greater China.

The social media impressions for Stephen during the NBA playoffs reached over 2.7 million during that time, and helped drive extremely high sell-through rates in the Curry 2 throughout the first six months, making it our top-selling item in China year to date.

This is a great example of what the opportunity and what the future looks like for UA in greater China -- great product and great marketing that is laser-focused on the consumer, combined with the hottest athlete in the NBA.

We are planning our second tour of China with Stefan later this summer, and remain incredibly bullish about the future for both Stephen and our brand.

One of the key vehicles for our dialogue with consumers is our connected fitness platform, and we continue to make great strides in delivering insights that make athletes better.

With a growing community that's now over 175 million registered users, with continuing over 100,000 users signing up each and every day, we are learning more about our consumer every single day.

Mike Leigh, the founder of MyFitnessPal, who joined us in early 2015, is now leading our strategic vision for the connected fitness business.

Our team is becoming more knowledgeable every day about our consumer.

With areas like sales, merchandising, and product innovation now utilizing single view of the consumer, we are just getting started at implementing these powerful insights to drive every aspect of our business.

Some small but important wins for the brand have been our ability to number one, quickly tailor our communications and content to our consumer based on their activities, giving us the opportunity to tweak our product mix, and to get it more precise to the consumer showing up at our stores; secondly, utilizing the data to create a heat map of run activity around a consumer's location, just a drop of what's to come in terms of personalization.

I mentioned up front that this 60-day window of global sports activity culminates next month with the Olympics in Rio.

Our presence will be significantly higher than it was in London in 2012, with four times as many athletes representing national governing bodies from more than 30 different countries competing in Under Armour apparel or footwear, and in some cases utilizing our great connected fitness platform to measure their performance.

In addition, we sponsored some of the most visible icons in Rio, like Michael Phelps, recent Wimbledon champ Andy Murray, and the US gymnastics team.

We also have a great story in Olympic gold medal winner Natasha Hastings, who will be running the 400 this summer in Under Armour footwear.

In Europe, we're making some great strides in global football, as well, with Tottenham Hotspur qualifying for Champion's League play this coming season.

Our new signing, Southampton, will be playing Europa League football in their first season in UA kit next month.

We also announced that one of England's storied clubs, Aston Villa, will be wearing Under Armour when the season kicks off in August.

We will have another high-profile player, Granit Xhaka, in our boots when the EPL season starts.

In one of the largest transfers in club history, he joined Arsenal football club, and last month went on to lead his national team Switzerland to the round of 16 at Euro this year.

The great news is that our marketing efforts are paying off in the UK, where revenues more than doubled in Q2 year over year.

I should add, the UK is far and away our largest market in Europe, so we're driving awareness into places that move the needle for our business.

Driving brand awareness where we can benefit most is a key initiative for us, and here in North America we've been most challenged from a regional standpoint on the West Coast.

That's critical for us, because if California were a country, it would have the sixth largest GDP in the world, with roughly 12% of the United States population.

We recently signed two sports marketing deals with great iconic brands in key North American geographies, specifically Los Angeles and the Bay Area.

Bringing both the UCLA and Cal Berkeley athletic programs into the Under Armour family raises the profile in California that we already have through great partners in sporting goods, mall, as well as existing and even new department store partners like Kohl's which has over 100 stores in California.

This is a great example of how we are thinking all the way through all the assets that we could bring to bear to get after the opportunity in that very key market.

When we add Cal Berkeley to the existing assets that we already have in the San Francisco area, like Stephen Curry, Buster Posey, and one of our connected fitness offices with over 100 employees and growing, you can see how we are planning for the long runway of growth that exists for the Under Armour brand.

In UCLA, we are partnering with one of the most recognizable brands in college sports.

Not only the alma mater of the great Jackie Robinson, but the school with more championships than any other in the history of the NCAA.

UCLA has won a total of 113 national team championships, including 11 in basketball, more than any other school.

As you've heard me say consistently for over 10 years now as a public Company, Under Armour is a growth Company.

Now more than ever we appreciate the challenge of growth, and believe we are well-positioned to continue to expand our access to more consumers around the world.

That's what makes us extremely proud of our record of 25 consecutive quarters of 20%-plus revenue growth.

Fortunately, our formula is well-defined.

We will maintain our long-term vision of making all athletes better, and continually approve on our execution of strategy around channels, categories, and geographies.

With that, I'll pass it over to Chip.

Chip?

Thanks, Kevin.

I would now like to spend some time on reviewing our second-quarter 2016 financial results, followed by our updated outlook for the remainder of the year.

Our revenues for the second quarter of 2016 increased 28% to $1 billion.

As we continue to navigate through the changing dynamics of the retail landscape, the consistent growth across our diverse product lines and channels delivered another quarter of strong results.

During the second quarter, our wholesale revenues grew 27% to $635 million.

Our direct-to-consumer revenues grew 28% to $321 million, representing approximately 32% of total revenues for the quarter.

During the quarter, licensing revenues grew 16% to $21 million, and connected fitness revenues grew 73% to $23 million.

On the product category front, apparel revenues decreased 19% to $613 million, compared to $515 million in the prior year's quarter, led by many of the same factors as the first quarter, as we continue to see new innovation platforms like Micro-fit gain momentum in key categories like running, as well as continued growth in men's training, women's training, and golf.

Second-quarter footwear revenues increased 58% to $243 million, from $154 million in the prior year's quarter.

Our basketball category, led by the Curry signature basketball line, posted another quarter of strong growth.

Beyond basketball, we continue to make strong gains in our running and cleated products within our golf and team sports categories, as we remain focused on providing premium Pinnacle products for our customers in more styles and price points than ever before.

Our accessories revenues during the second quarter increased 21% to $101 million, from $83 million in the prior year's quarter, primarily driven by our new lines of bags and head wear.

On a regional basis, North American revenues in the second quarter increased 22% to $827 million, compared to $681 million during the same period last year.

Within our direct-to-consumer channel, our North American store count at the end of the quarter included 160 Company-owned stores, comprised of 146 factory house stores and 14 brand house stores.

International revenues increased 68% to $150 million in the second quarter to reach 15% of total revenues.

On a currency-neutral basis, international revenues increased 72%.

Within our international wholesale business, the store count at the end of the quarter included 239 partner stores.

Within our direct-to-consumer business, our Company-owned international store count at the end of the quarter included 52 stores, comprised of 26 factory house stores and 26 brand house stores.

Looking at our international regions, starting with the EMEA, we continue to grow our presence within key sporting goods accounts and expand our direct-to-consumer business, with second-quarter openings of new factory house stores in the UK, Germany, and the Netherlands.

In the Asia-Pacific region, we now have more than 230 stores, comprised of both owned and partner stores, as we look to continue to drive our premium positioning as the performance brand in the market.

In Latin America, we remain focused on building and expanding our distribution.

Moving on to margins, second-quarter gross margins decreased 70 basis points to 47.7%, compared to 48.4% in the prior year's period.

Sales mix negatively impacted the second quarter by approximately 130 basis points, primarily driven by the continued strength of our footwear and international growth.

Partially offsetting this negative impact were continued favorable product margins, benefiting gross margin by approximately 50 basis points.

Selling, general, and administrative expenses grew 32% to $458 million, which includes the previously announced impairment related to the Sports Authority liquidation, compared to $347 million during the second quarter of last year.

In addition to the impairment, growth was predominantly driven by investments in our direct-to-consumer businesses, both retail and e-commerce, and overall head count to support our growth and strategic initiatives such as product creation, innovation, and sport category management.

Marketing expenses grew 20% for the quarter.

Operating income for the second quarter decreased 39% to $19 million, compared with $32 million in the prior-year period.

The decrease was primarily driven by the $23 million impairment related to the Sports Authority liquidation.

Interest expense for the second quarter increased to approximately $6 million, compared to $4 million in the prior year's period.

Within other income and expense, we recorded a loss of $3 million, versus a slight gain in the prior-year period.

This loss was primarily driven by foreign currency exchange rates.

In addition, the Company tax rate in the second quarter was 40.5%, compared to 46.7% in the prior year, largely due to a one-time tax benefit related to our prior-period acquisitions.

Our second-quarter net income decreased 58% to $6 million, compared to $15 million in the prior-year period.

In the second quarter we completed a $59 million, one-time stock dividend to our Class C shareholders, related to our shareholder litigation, which resulted in a different earnings-per-share calculation for the quarter for our Class A and B stock as compared to our class C stock.

The dividend was allocated only to our Class C shareholders, resulting in a different numerator when calculating EPS for the Class C stock.

Our earnings release included a non-GAAP presentation of EPS, backing out the impact of the dividend.

This is a one-time event, and will only cause a difference in earnings per share for the three classes of stock for this quarter and year end.

On the balance sheet, total cash and cash equivalents for the quarter was $121 million, compared with $171 million at June 30, 2015.

Inventory for the quarter increased 30% to $1.1 billion, compared to $837 million at June 30, 2015.

As we noted last quarter, we are beginning to anniversary the strategic inventory investments that we implemented in the second quarter of last year, and expect the growth in inventory to remain relatively in line with sales throughout the remainder of the year.

Total debt increased to $1.2 billion, as compared to $712 million at June 30, 2015.

During the quarter, we completed our first public bond offering of a $600 million investment grade-note, which was well received in the market.

The net proceeds were used to pay down outstanding revolver borrowings.

Looking at our cash flows, our investment in capital expenditures was $149 million for the second quarter, compared to $93 million in the prior years' period.

We continue to expect to spend between $450 million and $475 milliion for the full year, including investments in our global offices around the world, including our headquarters in Baltimore, our distribution centers, our SAP platform, and global direct to consumer.

Now moving on to our guidance for the remainder of 2016, based on our current visibility, we continue to expect 2016 net revenues of approximately $4.925 billion, representing growth of 24%, and operating income in the range of approximately $440 million to $445 million, representing growth of 8% to 9%.

Gross margins for the full year are expected to be down slightly compared to last year, and based on our outlook of $4.925 billion in revenues, SG&A is still expected to grow approximately 28%, as we remain focused on making the right investments today to drive our long-term global success.

Below the operating line, we expect interest expense to increase to approximately $32 million in 2016.

In addition, we now expect a full-year tax rate of approximately 36.5%, and fully diluted weighted average shares outstanding of approximately 448 million.

For the third quarter, we expect revenues to grow approximately 20%, as we begin to lap our strategies to better service our customers, and as we navigate through the impact of the Sports Authority liquidation.

In addition, we expect our gross margin percentage to decline slightly compared to the prior year.

For the third quarter, we expect operating income in the range of $180 million to $185 million, representing 5% to 8% growth versus the prior year.

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

Similar to our last earnings call, Dave Bergman, our SVP of Corporate Finance, will be joining us this morning to provide additional assistance with 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)

Omar Saad, Evercore ISI.

Thanks, good morning, guys.

Hi, Omar.

Quick technical question on the Kohl's announcement.

I know you said 2017.

Do any of the shipments come this year or is it really all -- the shipments start next year?

I just want to make sure we understand the timing of when that rolls out.

Some of that will be a little bit of mix, but we are looking to be set by the time they start their first quarter.

You'll see nothing out of the ordinary or extraordinary, but this is a 2017 initiative for the brand.

Okay, cool, thanks.

On the sportswear piece, I thought it was an interesting hire, as well, for that.

Can you talk a little bit about the styling, the aesthetic.

You mentioned Kevin.

There's a big amount of daylight between what the sportswear is going to be and the current offering.

Help us think through how that product is going to look and feel, and be different than the rest of the offering?

What are the key value-added components to it?

Sure.

First off, it began with the consumer.

I think people are asking and trying to figure out how to wear the brand beyond the pitch, the field, the court.

We've just seen that over and over again.

When we look at the market opportunity, our two competitors claim that their sportswear businesses are somewhere between 20% to 30%, so the aggregate number there is roughly $50 billion.

We assume there's about a $15 billion market opportunity that today Under Armour is playing in just a few percentage points of our overall growth.

We think there's a massive opportunity, there's a massive appetite for those in our space to really be effective in sportswear.

We also recognize that there's a shift that's happening in the consumer work place right now.

I don't know how many people on the call have people in their offices that are wearing suits and ties.

There's this massive shift to casual and comfortable.

I think what we've done to establish our brand is that our shirts aren't just -- they don't just look great, but they actually do something.

Whether it's wicking, moisture management, stretch washability, all the things that I think are more practical than the way we frankly have dressed ourselves to this stage.

I think our taking advantage of that opportunity and that shift is very important for us.

The way we want to do it is a couple ways, because what UA sportswear is meant to be is more like a flag in the ground that's placed out there.

We think there's frankly a little bit of room for us to fill in over time between where we're going with that flag and where we are today.

It'll be a bit of an evolution.

You'll see that number one, through things that are branded UAS as sportswear.

You'll also see us being more aggressive with some lines we have in some of our more proactive and aggressive retailers, as well.

The lines you'll see at Foot Locker and things that are more street ready, where as well as things we'll be doing in our traditional sporting goods distribution.

We see styling in the Company being more important.

Of course, we're not going to give up on what we've done to establish ourselves as authentic in on-field, on-court et cetera.

But we do see there's an opportunity for us, for kids not just to wear us when they're playing sports, but to wear us to school, out at night, and other wearing occasions.

Getting Tim Coppens on board is a big deal.

He is a big deal.

With it, we're creating this -- as we move into this sport category focus -- we actually have nine or 10 divisions now.

Sportswear is going to be one of them, and very important to us, headed by a guy named Ben Pruess, who is an industry veteran, and someone who knows how to do it.

This is also answering just the signature athlete lines that we've had.

All of a sudden we woke up one day, and we recognized that we had athletes likes Stephen and Jordan and Cam and Tom and all these household names, and what are we really doing to leverage this?

Do we think there's a bigger opportunity on the Signature side?

We think there's a specific opportunity in sportswear that we can play in, and we think A, we can take market share, as well as the ability for us to grow that.

We think it's somewhere about a $15 billion pie today as we think about it, at least.

We think there is -- we're really excited about it.

Frankly, I'm sitting here wearing Under Armour sportswear today, and I think I look great.

We're working on it.

Do you think the logo will be a big part of it, Kevin, or is it really more about the materials, the technical performance, with the street look?

I think the story is going to be the biggest part of it, meaning that everything does something.

We're not just going to start making stylish clothes.

They have to be stylish clothes that do something.

You'll see some of the features, whether it's a button-down that actually has a sleeve that has spandex in it or elastic in it so you can pull your sleeves up without having to fold them; a bit more ready-wear, washability.

Everything will have the Under Armour DNA in it.

That's most important, whether it is stain resistance or waterproof or some of the other things that you'd expect from us -- a little more stylish.

You'll see the branding, and I think -- what I've challenge the team to do is lean on the brand when you need to.

The first reaction is we don't need the branding anywhere; but I think the consumer As we get there you will see the brand.

The UAS will have its own unique, distinctive brand.

From time to time, particularly in things like the footwear, you'll some more starting use of the logo.

The logo will be on every piece, whether it's on the inside of the collar or the outside of color is a bit of the question.

Great, thanks.

That's really helpful.

Thanks, Omar.

Matt McClintock, Barclays.

Hi.

Yes, good morning, everyone.

Kevin, follow-up on Kohl's.

I was wondering if you could maybe discuss your product segmentation strategy as you think about entering new channels such as Kohl's, and thinking about addressing the women's category more broadly.

What other distribution points or channels, or other ways can you reach women that you are currently not in today?

Thank you.

Women is a great segue for that.

But I want to be clear, as we talk about Kohl's, first and foremost we have an amazing distribution group of partners that have enabled us to get to this point.

I think we've been incredibly prudent with the way that we've rolled out our distribution.

It has been thoughtful, it has been patient.

It has been 20 years in the making.

I want everyone to know the first of all, Kohl's is -- there's nothing reactionary about Kohl's.

It's that this was a proactive move for us that has been in the works for the last several years.

You're right, the thing that allows us to be in this position is that we have built a merchandising expertise in the building that frankly really just a couple years ago we didn't exactly have, and not specifically.

The goal and the role of merchandising when we Kevin Eskridge, who heads up our merchandising now, back from China, and gave him that task for us more than a year ago, it has us really in this position that we think we're ready for it in 2017.

We're very thoughtful about our existing distribution, because the differentiation in the lines is critical.

Number one is we've become more expert at differentiating within channels, differentiating our existing retailers, as well as between -- within their own partners, as well as we look at between the mall, between department stores, and between sporting goods.

We think Kohl's is a great evolution for us.

We think the female consumer that she's there, she's shopping, and she's buying.

We think there's a big opportunity.

At the end of the day, we think -- again, as I said in my comments, this is a consumer decision, it's not really a channel decision.

We believe that there's a massive opportunity with the consumer that's walking into those stores and looking for the Under Armour brand.

Frankly, they just haven't been able to find it.

We think we'll continue to have elevated product in there.

The goal is that from a price point standpoint, we continue -- we'll of course be aggressive.

But we think that there's a consumer that's looking for our brand, and we think there's a great market opportunity.

We don't anticipate a big impact to our -- to the balance of our other businesses, because of the merchandising, time, and effort and energy that we've put in.

We think we're ready for this moment, and we're incredibly excited about it.

Again, this is just another part -- this is one of the single chapters in our larger growth story.

Thank you very much.

Camilo Lyon, Canaccord Genuity.

Good morning, guys, how are you?

Good, thank you, Camilo.

Following up on the Kohl's topic, Kevin, I wanted to get your sense to -- does this expansion into Kohl's allow you to expand your product offering in pre-existing department store relationships?

Previously you've been pretty measured in how you've assorted those stores like at Macy's and Belk and some of the other -- Lord and Taylor sort of relationships.

I'm curious to know, all the segmentation work that you've done for Kohl's, does this offer an opportunity to equally expand your presence in your previous relationships?

I think one thing we have done in the last year is we've added over 200 women's shops within our existing department store distribution.

I don't know if it's new doors, as much it's new opportunity.

When we give door counts -- 11,000 in North America -- I think a lot of times the saturation level is a but misunderstood with how we fare against, say, our competition.

We do believe when we talk about North America, we're bullish on North America.

We continue to see opportunity and expansion within existing doors.

That's a story that we see of course in apparel; but frankly, when we look at things like footwear, we're barely scratching the surface there.

We see really great opportunity for us.

As we think about distribution for us across all of our channels, all of our partners, all of our -- everywhere we do business -- our job is to be important as an iconic brand.

When I say that, that really speaks -- talking about the things we are opening in the future.

Again, this won't be for a couple years, but taking over the space -- the old FAO Schwarz space at Fifth Avenue -- I think it's definitive of the brand that we expect to be for consumers, creating environments that are unique and unlike anything else anyone has ever seen or experienced before.

I think as we think about what defines the brand, our job is to be iconic.

The consumers can have places where they choose to interact with our brand, where they choose to purchase our brand.

Our job is to meet them at that transaction.

One thing we know is certain.

Particularly we've learned over the last 12 months or even shorter than that is that that moment in time and that place will always be shifting.

We need to be ready for that.

We need to be prepared for that.

We certainly don't want to limit the opportunity that we have.

We feel pretty good about the way that we're set up with some of the new announcements that we're making today, be it a Kohl's or talking about something like Fifth Avenue.

Frankly, not to be forgotten, this is the continued double down that we continue to do in our existing distribution from sporting goods to the mall to department stores.

Great.

Then just to understand a little bit about the pace, can you just talk about are you going to be in all doors in Q1, or is there going to be a more measured roll-out?

I'm assuming that it's apparel then footwear, so is there any sort of margin implication as we should think about that new department store channel coming on line?

We'll be in about 600 doors or so to kick things off, and then beyond that -- you're not going to see any margin implications.

You shouldn't see any margin, because the mix is generally going to be in line with the mix of the Company.

Understood.

All the best, guys, thanks.

Thanks very much.

Matthew Boss, JPMorgan.

Thanks, guys.

Kevin, can you talk about athletic inventory in the channel today?

It sounds like inventory for you guys will be in line with sales by the end of this quarter.

Nike expects to be clean by August.

Are you comfortable with the promotional backdrop you see out there today?

Larger picture, what would you say to those calling for a top in the athletics cycle out there?

Yes, I'm not going to say I'm comfortable with the promotion out there in the market today; but I don't know if it's that's different than what we've seen over the last several years, either.

When you look at holiday these days, it's an incredibly -- it is promotional environment out there.

What we all have found is the barbell effect continues to really accentuate itself, with either going to one or two extremes.

A, the consumer chasing price, and you'll see that with obviously some of the digital pure-plays out there; or you'll see it with -- or people finding that at retail; or they're chasing premium and they're chasing brand.

We, of course, expect to be on the right side of that barbell.

I think we've continued to define that for the consumer as to where they find us.

I don't think it's a top-out.

I think there's a shift happening.

I think the way people are dressing is changing, and it's altering.

I don't know if it'll be as extreme as just women's buying black tights, and whether people can make a career out of that.

Obviously there been a lot of people jumping in the boat on women's, specifically in the athleisure trend.

But the good news is that we're not grounded in trend, we're grounded in sport.

That will keep us here and the trends will come and go; but we're also watching our core base continue to grow for us, as well.

We see women's as a burgeoning opportunity for us.

One thing I just want to be clear about our women's business, I think people look and say are we taking enough advantage, are we taking the opportunity?

We've done some great things in the women's space, beginning with the fact that this year we're going to hit a massive milestone.

We're going to have a $1 billion women's business.

Just our women's business alone, a $1 billion this year.

To be clear, that is primarily women's apparel.

A few things about our women's is, as I mentioned, going to the sport category.

Women's is going to be specifically one of the sport categories.

Of course, they'll be involved across the other nine categories directly, but we need a driver for that.

We want a leader for that.

We hired industry veteran Pam Catlett, who's been here for about six months, and really doing a terrific job, just correlating the pieces and applying merchandising and marketing and product and sales, and really getting everybody on one page.

What we recognize is that we are competing against people that are only in the women's space, and there's a bigger opportunity for us there.

We feel like we're incredibly well-positioned right now.

I mentioned apparel, but I'd be remiss if I just didn't give you -- as I climb into the women's conversation here -- just talking about women's footwear.

So much of our business is that we are a young business.

While we turn 20 this year, and we're incredibly proud of that milestone as a Company, we are really just getting started when you look at the things that we're doing.

Women's footwear is a great example.

I say this, and I'm not proud of it, but not even two years ago, the same person who handled women's for us also handled our outlet merchandising supply, as well as our youth.

It was one person, she was incredible, and she did an amazing, herculean job.

But if you look at any of our competitors, there's probably 60, 80, to 100 people that would have those three collective jobs.

Since that time, we've actually split them off.

Our women's today, we've got roughly half a dozen people in our women's footwear team.

The fact is we need about 20.

We're in investment mode; but what you'll see is that first line from that women's footwear team we'll be delivering in spring of 2017.

I don't know if people have seen the best stroke from Under Armour yet from a women's standpoint.

But what we can tell you is we're incredibly proud of the points we've put on the board.

That's echoed by the sheer size and scale of that $1 billion business.

What you will see is you'll see a continued, concerted effort for us to be premium, and for us to be number one in women's.

We're proud of what we've done, but there's meat on the bone, and we expect to go attack it.

Great.

Then just a follow-up.

On gross margins, your guidance for this year implies material expansion in the fourth quarter.

Could you walk through some of the drivers of the inflection in the fourth quarter?

Then as we move to next year, is it fair to think about a return to expansion of gross margin?

Any help on the near term and multi-year puts and takes on gross margin would help?

Hi, Matthew, this is Chip.

I would think about it more in the medium to long term is we are going to have a head wind called mix in front of us.

As we continue to out-grow our business in footwear, and we continue to grow internationally at an accelerated pace, that is a head wind.

On the flip side, it's our job to improve the cost side of the house, and bring product to the table so that we can offset that head wind.

I think in the longer term that's our job, and we're probably looking at a push.

In the near term as it relates to this year, we are looking at some meaningful impact in Q4.

We have less of a mixed challenge as the year progresses, and we will see notable improvements in the actual product margins in Q4, and anniversarying a negative number last year.

Great.

Best of luck, guys.

Lindsay Drucker Mann, Goldman Sachs.

Thanks.

Good morning, guys.

I wanted to ask about the North American wholesale business.

Maybe you could give us an update on how you're thinking, now that we've moved a little bit further in the year, how The Sports Authority dynamic is going to affect your sales for the year, if there's any change to your thinking on actual dollar impact, reverse cannibalization, and the timing of that?

My second question is on looking at North American operating profit for the quarter, which was relatively flat despite pretty good sales growth, and how we should be thinking about incremental margins for that division across the year?

It's Chip.

On the TSA side, so the TSA we did ship product in the first quarter and second quarter to TSA.

It is an impact predominantly in the back half of the year.

It is about 300 to 400 basis points of our growth in the back half of the year without shipping to TSA.

We have made up some of that, but not all of it.

Then as it relates to North America when you're looking at the segment, there have been some costs that have removed from Connected Fitness.

They were head count costs in the marketing side of the house for Connected Fitness that are more for the overall North America segment or all-in segment, and those cost have shifted.

Approximately $5 million have shifted from Connected Fitness to North America, so that's why that segment looks that way.

That's an annualized number for Connected Fitness?

Dave?

That was Q2.

The $5 million relates to a Q2 impact this year versus last year.

Right.

Okay, and how should we thinking about the margin drivers for North America for the second half of the year?

For the second half of the year, the margin drivers -- I would go just at the corporate level, since North America is predominantly our business.

In the back half of the year, you're going to look at the third quarter we're probably going to be slightly down again.

Then in the fourth quarter we'll see some material impact.

Mix is a challenge throughout the year once again, with footwear growing at 2X apparel.

You have higher margins there, that's going to be a challenge.

But then on the product side, we're going to see improvements on the product side which should help the margins -- product cost side, especially in Q4.

Great.

Thanks, guys.

Robby Ohmes, Bank of America.

Good morning, guys.

Good morning, Robbie.

Kevin, I was hoping you could talk a little bit about -- a little more about China.

It sounds like things couldn't be going better for the brand.

Can you guys talk about the outlook for store growth, and maybe accelerating it?

Yes, of course.

China, as we think about the opportunities we have, we've got about opening over 150 owned partner stores in 2016 as we look at it.

The majority of those are actually going to be in China.

We feel like we've found a really -- it's an interesting model.

As you look at the way they do it in China, you're either A, going with a partner, or you're effectively -- you're renting space like a landlord in a larger department store.

China for us is something, just recounting some of the history, we spent a long time trying to figure it out.

We started manufacturing there in 2000, and we started selling there in 2010, where we did $1 million -- $1.2 million or $1.3 million in a one store.

By 2012 that was $3 million, and then we really amplified it by I think bringing in great senior leadership, and really defining a point of view for ourselves in the market.

From $3 million in 2012 to $7 million in 2013, $30 million in 2014 to $80 million in 2015, to this year we're looking at north of $150 million business.

Really, we're seeing that inflection point for the brand in China.

We have great leadership on the ground over there.

We have seasoned leadership on the ground -- our office, our headquarters in Shanghai.

We think there's a really good momentum.

We're going to be following up on some of that momentum at the end of next month or the beginning of September with another Stephen Curry tour that we'll be taking through Asia.

Really, it's a bigger story than just Stephen.

Again, as I said in my comments, Under Armour is known as the professional brand in China.

Grounding ourselves in authenticity is one of the formulas in any market we've gone to around the world.

We've found where it really is required for us to win.

It's beginning with that authentic approach, having the consumer see us there, start really at the tip of the spear, and then really creating a bit of that trickle-down.

I think we're getting some of that net affect, and then you add in some of the star power with some of our global superstars.

Whether it's this month being able to highlight Michael Phelps, whether it is what we're doing with Jordan or Stephen, but the brand is definitely known in China.

We're not as famous as we will be, but we're definitely proud I think of the inroads that we've made in a big opportunity.

Putting stores behind it, putting distribution.

The other thing is our e-commerce over there.

Our e-commerce in China has basically exploded for us, as well.

This is not just a bricks-and-mortar story.

Frankly, China may actually end up being the palate that we're able to write the script of what is that balance?

I think one of the questions that everybody is having in this space right now is where some of our competitors specifically, they talk about the power of their growth in terms of the number of retail stores.

I think that's one indicator for it, but I'm not sure that all the retail stores that are open today are going to be open in the future.

I know the best ones will survive, and we think that e-commerce can be a great supplement to that.

We're pretty bullish on China, and I'm looking forward to that second Stephen Curry tour in a few weeks.

That sounds great.

Thanks very much.

Thanks, Robby.

Kate McShane, Citi Research.

Hi, thanks for taking my question.

I had a question about the New York City store, just in terms of when it opens?

Also, just since it is fairly expensive real estate and there will be remodeling, how long will you be paying rent and investing in the building before the store opens?

Thanks, Kate.

We expect to be in somewhere around 2019, end of 2018, beginning to the middle.

It's a little unclear, but we've been open with the landlord, but probably by the middle of 2019 at the latest in doing that.

They've got -- someone else is going to go and use the space as temporary space for a period of time, and then we will be taking over.

Again, I think that space for me, it solves lots of things for the brand.

Number one, I think it's a flag in the ground for first and foremost our product teams.

Putting out there for our teams and telling them the way and telling every designer in putting the world on notice and every designer and every builder and every product manager that wants to build greatest product for the corner of Main and Main of beyond the United States, but really the world.

Being there at the mouth of Central Park on the opening of Fifth Avenue, we think it's a great platform for the brand.

We're really going to be able to define ourselves of the Company we expect to be.

There's going to be a lot of Imagineering that's going to happen as we look at this.

Experiential is going to be at the pinnacle of what we're going to try to create here, and really how we drive retail.

We think as we continue to add retail stores -- we finished the year with some 400, again opening over 150 this year -- we think that as we -- it is, whether we like it or not, we are retailers at some level.

We never want that to be competitive with our existing wholesale distribution base; but we think the more excellent we become as retailers, the better wholesaler we'll be, as well.

It will end up being a net effect for all of us.

Again, driving the idea of iconic, what I said is I made some bold statements in my written remarks about how big I think this idea of the store can be; but effectively the goal that we have is to build the single greatest retail store in the world.

We know that's a big statement with a big Company, but I think that's the opportunity that we have.

I expect to put together an incredible team of people that will help us think through what that means.

I think it will really position the brand again in the iconic place where we believe that we belong.

Okay, that's helpful, thank you.

My one quick follow-up question is just with regards to your long-range guidance.

How does Kohl's fit into that?

Was that already figured into your long-range guidance for revenue growth that you gave in September, or can we be expecting an updated figure over time?

This is Chip.

Long-range guidance was given last year in 2015.

As we said, 25% top line, 23% bottom-line growth.

As part of that, there's always going to be things that are going to go in that long-range guidance -- points of distribution, expansion overseas, et cetera.

I would suggest that Kohl's would be part of that long-range guidance.

Operator, we have time for one more question.

Michael Binetti, UBS.

Hi, guys, good morning.

Congrats in a very tough quarter.

One quick modeling question.

Could you -- Chip, would you mind helping us think about how FX will impact the gross margin in each of the next two quarters, so we can compare to where we were in the first half?

Yes, sure.

Hold on just a second on the FX.

FX in the last back half of the year is going to be slightly negative for the back half of the year, a little bit more in Q3 than Q4.

Okay.

Then Kevin, obviously it was a very tough quarter for US athletic retail with The Sports Authority bankruptcy.

It sounds like you guys have figured out a plan to plug that hole with distribution.

But if we look at the guidance for revenues to decelerate to 20% here, in the third quarter you called out we're lapping some fulfillments strategy we put in last year, and then The Sports Authority thing.

Again, it sounds like you have a plan.

Then you're going to be re-launching -- you're going to be launching big retailers like Kohl's as you get into 2017.

As we think about the cadence of how our models now start to transition in 2017, should we look at that slow-down to 20% handing off to a growth rate closer to the 25% long-term growth rate that you guys have outlined as we get into the first half of next year?

Any other color you can help us try to think about the shape of -- I know next time we hear from you on the third-quarter call, you guys traditionally like to give us the 2017 numbers.

Just trying to think about our model for a little bit longer-term here?

Yes.

No, I think we're going to have a much better picture in 90 days, to be clear, to give you guys -- and we want to be as close as possible to that.

But I think the first thing that when you look at the strength of the brand is that we're not -- the hardest thing is accepting a question that says tell us about decelerating revenues.

We're still projecting with 25 quarters north of 20% in a row, over six years of doing that, we see that trend continuing for us, number one.

We do continue to see it to project 25%-plus growth for the full year.

I just want to level-set that.

If I can maybe think about how we're looking at the world these days, I think this quarter it really is -- it's illustrative of the brand that we've built.

With 28% top-line growth in -- if you look at how it's coming for other brands in this market, we're incredibly proud of the ability to put that number up -- 58% footwear growth, 68% international growth, 19% apparel growth, launching Under Armour Sportswear this quarter, expanding meaningful distribution by having built out a merchandising function that puts us in position to do that, creating statement retail and signing something as ambitious as Fifth Avenue that I think will elevate the entire industry in addition to our own brand.

You will see people look and get worried and concerned about what we're going to build there, without question.

All the way down to the assets we signed, and without beating them over the heads of all the first names from Jordan and Lindsay and Misty, to Andy Murray's win at Wimbledon recently.

Then anchored by the Cal and UCLA signings.

I think we're firing on all functions as a Company right now.

I think regardless of what the tape looks like outside, we still expect to be the rising tide that's with all the other boats, and we expect to be one of the highest boats in the room.

From a record standpoint, this is a growth Company.

There's a reason why I typically start my scripts with that and end my scripts with that, is that we think growth is incredibly important.

We have an opportunity to put ourselves and really separate ourselves from many into a very exclusive Company that puts Under Armour I think in the stratosphere of where we belong.

Look, it's not God-given.

We've got a go to work every day.

Hopefully you see and feel that from our brand.

We've got an unbelievably committed team that's doing that each and every day here in Baltimore and our 26 offices all over the world.

The global expansion that we've been able to enjoy, something we're really excited about.

We expect to be a global brand.

We're proud of what we've done in North America.

We're proud of what we've done in apparel.

Things like footwear, things like women's, things like global and international are all going to be the hallmarks of what will be defining for Under Armour going forward.

We're just getting started.

If I could sneak one in, since you're talking a little bit longer-term, I know a couple years ago you laid out a big mapping exercise that you did in North America that showed where the opportunities were regionally.

It seems like a lot of the moves you've made on the West Coast lately between UCLA and Berkeley and obviously Golden State can go a long way to shoring up maybe productivity on the West Coast versus the East Coast.

I think sportswear is a much more important category on the West Coast.

Have you guys -- is there -- can you help us think about how big of an opportunity that is, if I'm still right that that's an opportunity from the mapping analysis we saw a few years ago?

It seems like the marketing assets are moving in (inaudible - technical difficulty) opportunity there for you?

Yes, of course.

We think there's a big opportunity.

One of the challenges that we had, being primarily a sporting goods wholesale account, there wasn't a large sporting goods presence on the West Coast with the exception of Sports Authority, which had 63 doors that went away.

One of the things, frankly, that even we see in Kohl's is they've got over 100 doors in the state of California.

We looked at California as an opportunity for us.

Again, it is the world's sixth-largest economy, and something that we don't feel that we have been aggressive enough on.

That's why you saw us make two very bold bets in terms of a new partnership with Cal and a new partnership with UCLA.

Those are about as certain as things get, when you talk about investing in really in the community.

Northern and southern California in one fell swoop, backed up of course with what Stephen Curry is doing there.

One of our key Connected Fitness offices, where Mike Lee, the head of Connected Fitness, is based at up in San Francisco, as well, and we've got a new 50,000-square-foot office being built there right now, also.

We're in the state of California.

We do think it's an opportunity for us.

But we think it's also -- that is a top market globally, and something we think is also a bit of a leaping board for us as we look to Asia and other markets abroad, too.

We like the opportunity.

Again, many of these deals that we made recently were really the deal about geography, as much as anything else.

We feel like we accomplished that point.

Now we have to prove it out, and there's work to be done.

You'll watch our team run hard.

Thanks, guys.

Great quarter.

Thanks, very much.

Appreciate it.

Ladies and gentlemen, this does conclude today's Q&A portion.

I'd like to turn the call back over to Carrie Gillard for closing remarks.

Thanks for joining us on our call today.

We look forward to reporting to you our third-quarter 2016 results, which tentatively have been scheduled for Tuesday, October 25, at 8.30 a.m.

Eastern time.

Thanks again, and goodbye.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect and have a wonderful day.