Under Armour Inc (UA) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Ms. Carrie Gillard, Director of Investor Relations. Ma'am, please go ahead.

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

During the course of this call we'll 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 an 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 third quarter and provide an update to our 2016 and longer-term 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 AM. Finally, a replay of this teleconference will be available at our website at approximately 11 AM Eastern time today. And with that, I will turn over to Kevin Plank.

Thank you, Carrie, and good morning, everyone.

We are a growth Company. And with our 26th consecutive quarter of 20%-plus revenue growth, we continue to demonstrate our ability to drive a bigger and better Company quarter after quarter. Our financial results are an incredible accomplishment for any brand and something that we believe separates us from others in our business. Today, I would like to start by giving some perspective on our industry and articulate what that means for Under Armour and this moment in time.

I believe we operate in a truly resilient industry. The athletic apparel and footwear business, in a broader context, sports, has been one of the most dynamic and strongest-growing industries in our lifetime. As we continue to immerse ourselves in strategic and long-term growth, we ensure that we will continue to thrive in an industry with barriers to entry today that are much higher than 1996 when I drove my old Ford Explorer door-to-door to teams, selling T-shirts out of the back.

Our industry's collective ability to continue to evolve and make better product that improves an athlete's performance bring the passion of the sports expect to consumers through our brand story-telling. And to do so with increasing profitability on a global basis is a reflection of what has been an ever-growing demand from consumers that our industry has met with outstanding financial results. Those measures of success are not as commonplace in other industries that are sometimes viewed as more stable or secure investments. Today, brands that five years ago were viewed as leaders in their field are in danger of being commoditized, disrupted, or worse, becoming extinct, as technology and the way we live changes the way consumers need and value them.

Our industry of sport is different. Our industry's growth opportunities are global, with consumers around the world embracing athletic apparel and footwear at historic levels. It is not about what people are conveniently referring to as athleisure. It is the simple truth that consumers all over the world are raising expectations about what to expect from their apparel and footwear and it is a shift that is not going to be reversed. The macro trends favor it, not just us but all of the premium brands in our business, which is part of the reason I believe our industry will continue to gain new and loyal consumers across the globe.

In the sports industry, we represent something truly attainable, measurable, and sought after by most consumers: to live a better, healthier life. Under Armour's mission is to make all athletes better. And we are fortunate enough to be in an industry that will withstand and maintain its relevancy over time because our value proposition enriches consumers' lives and helps them reach their personal health and fitness goals. But our track record of growth and the power of the UA brand provides us with the confidence that we can do more. That track record is one of which we are extremely proud. Over the past three years, Under Armour is the only consumer brand in the top 10 fastest-growing companies in the S&P 500, with total revenue increasing 116% through 2015. We have the capacity to lead our industry over the next 10 years by continuing to take our consumer someplace new with our constant flow of product and innovation, while at the same time improving their lives through our connected fitness platform, which will pass our 2016 goal of reaching over 190 million registered users by the end of this week.

For UA, we have punched above our weight for a long time and that has been a central theme of our success. That is not going to change. We compete in an industry that is measured by a few very high standards. We are measured by the innovative products we bring to consumers, by the strength and relevancy of our brand, by the talent of our team, and, of course, by the financial results we deliver. While our business is in constant evolution, we know those standards won't change. We also know that we can't look to old models of success that have helped establish some of our competitors in their existing positions. So I want to spend some time this morning talking about how we will operate as the world evolves around us and ensure we are investing to continue to drive forward industry leadership on every front.

As I have stated numerous times on these calls, footwear and international will be key drivers of our revenue growth. Our footwear business went from $239 million in 2012 to approaching $1 billion in revenue this year. And our international revenues grew from $108 million in 2012 to more than $700 million this year. That is clear evidence that our investments in footwear and international have driven strong revenue growth to date and fuels our confidence that we are just getting started in each of these areas.

I'll talk about our focus there in just a minute, but first I want to talk about the core of our business, North America. We have built our brand and our business with the best wholesale partners in the industry. And we are incredibly proud of both our growth and our partnerships across the market. There is no doubt that the landscape globally, and certainly in our North American backyard, is shifting. As we navigate this dynamic environment, our intention is to continue to evolve and grow in the places that have built our brands while we simultaneously reach a broader set of consumers through new avenues of distribution. We believe consumers expect excellence at every touch point with our brand. And you will see us invest to ensure that we drive growth with our long-term partners at the same time that we invest in new distribution through our own direct consumer experiences.

As we think about the many dimensions of growth for our Company, we are incredibly confident in the opportunity we see for our North America business. Consider this: our two largest competitors generated approximately $18 billion in revenue in North America over just the past 12 months. So while we recognize that our trailing 12-month North American revenues of $3.95 billion is 85% of our business, it is just a fraction of the opportunity that we believe exists for our brands. Whether through share gains, market growth, new distribution or sheer brand heat, we know we have tremendous runway in our home market. We'll drive growth by the measures you'd expect: innovative products, brand strength and relevance, and the best team in the industry to drive market-leading results.

A large part of that growth in North America will come from footwear, as we firmly believe that we are the tipping point in terms of opportunities to gain market share. In the back-to-school window of July through September, our overall footwear market share nearly doubled according to industry data. While we've always understood that the size of the prize in footwear was massive, we knew coming into this year that there were a lot of consumers in the US who didn't know us at a footwear brand. So this summer we launched our, It Came from Below footwear campaign, which focused on the importance of footwork as athletes train. We started with Bryce Harper in baseball. And for running, we hosted a UA run camp, where we took experienced men and women from urban run crews and put them and their Under Armour footwear to the ultimate test in the world's toughest conditions.

With the start of the NFL season in early September, we incorporated NFL MVP, Cam Newton, with the Prince of a Thousand Enemies spot and the launch of a game on Snapchat with Cam that drove incredible engagement. The final piece of our footwear campaign Dave used today with the launch of the Curry 3. The TV spot debuts tonight on TNT during opening night of the NBA season, combined with our second tour of Asia, where we took Stephen to four cities in early September, we are continuing to build our relationship with the basketball consumer and driving awareness of UA as a footwear brand by partnering with the two-time NBA MVP.

While Stephen has been a big part of building our footwear story, we're also having success in other areas that are contributing to the growth. The highlight is the number-one football cleat in the market four years running now and continues to showcase our ability to elevate and drive premium footwear in every category we choose to be in. We made our first football cleat in 2006, and since then have changed the look of the entire category while elevating the price. This type of market evolution and positioning in cleated underscores our opportunity in other footwear categories as we gain awareness, credibility, capabilities and scale.

We are focused on the exploding running market in China and we saw great success there with the Bandit 2 running shoe, an example of how we are building key footwear platforms that will continue to scale and extend. We are improving our ability to leverage our global assets and help drive business in local markets. And we continue to focus on being a premium brand in footwear with a goal of having more than 50% of our volume in running footwear over $100 by just spring of next year. We saw incredible demand for our Slingride product offering during the third quarter. Slingride is our second running shoe, utilizing a full knit upper to deliver comfort and fit where you need it. Priced at $100, it did extremely well in the market and we believe there is great opportunity in what knit can mean for Under Armour running.

We'll continue to invest meaningfully in our footwear business, with a focus on talent as well as infrastructure that will help improve the profitability in our business as we scale. We believe we are at a moment in time where we can gain share in footwear, and we are prepared to make investments that will drive long-term profitable growth. That same focus on the long-term opportunity holds true for our investments as we build out our international business. We continue to post strong growth across all our geographies. While our business in EMEA continues to be strong, it's our greater China market that remains the biggest growth story for our international business, posting revenue in the third quarter equal to the entire first half of the year and firmly on a path to more than double their business from $80 million just a year ago. We're making incredible inroads in China that we believe will drive our position in this critical market.

With sports and fitness being promoted strongly by the government, we continue to be viewed by the Chinese consumer as the performance brand, or referred to often as the professional brand. Some of the things we're doing in China include focusing on building premium brand houses with a controlled retail environment and a sustainable full price business model where we have already opened over 100 doors this year; driving a strong e-commerce channel presence; and utilizing and Asia-for-China and local-for-local model to reduce costs and improve fill rates and on-time delivery.

But we are just getting started in China, much like we are in new markets around the world. We've rolled out e-commerce platforms in four new markets this year including Mexico, Australia, New Zealand, and Chile. That is after doing the same in 14 new markets in 2015, bringing our total global e-commerce site to 30. We're building a global organization for the long haul. As I said earlier, funding these growing international markets may require additional investment in the short term. However, we believe they are essential to our long-term goal of market leadership.

In addition to footwear and international, we're making investments in other key growth areas that will contribute and drive our ability to become a bigger and better Company, including retail, where we are ensuring that we deliver a great presentation of the brand wherever our consumer decides to transact. With SAP we're creating efficiencies in our systems as we continue to grow and scale. In category management, where we are organizing around nine sport categories and executive leadership to create focus and alignment across our business. And finally, merchandising, which enables us to differentiate our product to create unique experiences for our consumers across our points of distribution and now gives us the ability to reach more athletes than ever before.

The third key, where we will continue to over-invest in the near term, is connected-in fitness. We're doing so because we believe strongly that it will prove an important differentiator in our relationship with the consumer. With nearly 190 million registered users in our community, we continue to gather critical information to help us change the way athletes live. We firmly believe that going forward, brands without substantive communities will be at a deficit when it comes to building a relationship with our consumer. We are investing in our single view of the consumer through our partnership with SAP as we look to continuously drive a better business as we scale, knowing that much of the benefit will not be seen immediately. That said, we expect to see return on these investments starting in the near term with tools like self service consumer comparison reporting, where we can quickly compare the demographic profiles, workout habits, and purchase behavior of any group of consumers.

We are growing our analytics capabilities and moving from backward-looking reporting to predictive and prescriptive analytics which allow us to establish and drive growth in a more meaningful way. We will be able to personalize our e-commerce home page, driving off your demographic profile: which four categories are important to you, your exercise, how frequently you exercise, sleep, weight, diet and the makeup of your household. Going forward, we will continue to dive into the data and leverage the insights to deepen and expand our relationship with athletes as their needs change.

Our brand continues to evolve and shift with the changing demands and needs of the consumer. And as I said earlier, we are an incredible industry where sports and health and fitness are driving forces in our success. Our investments, the ones we have made in the past and will continue to make in the years to come, are critical for us to realize the true potential of the UA brand. We are confident we are making the right investments and our track record of investing for growth is exceptional. Our investments are all about expansion of the brand, about opening the aperture of what we're capable of and never being satisfied with our past successes.

Recently I pulled together the top leaders in the Company and discussed the strategic growth and direction of Under Armour. We came away with three key areas of focus that I want to share with you today. First, getting big fast. Second, making retail a core competency. And third, getting more shoes on feet. To be clear, get big fast does not mean at all costs. It means prioritizing our growth and making the right decisions for the brand. It means growing the right way. As I said earlier, we have succeeded over the past 20 years by consistently punching above our weight and that will not change. But our growth now gives us opportunities to move up in weight class and we find ourselves well-positioned at this moment in time to compete for long-term relationships with athletes, teams, and league affiliations that we previously could not justify. Now, with the flexibility to lock in 10- to 15-year deals, we can make investments on a global scale that will help drive authenticity, awareness, and revenues for our brand.

It is not going to be easy. The mix of our business is evolving and so must we, which is why making retail a core competency is critical to our future success. We'll do that by answering the call to consumer, who is asking us to give them more in the places they expect to find our product. We are no longer just a North American apparel company. We are a retail company across multiple consumer touch-points and will look to be best in class. And when we know how to be a great retailer, we can leverage that expertise to help us be a better wholesale partner and therefore continue to elevate and meet our consumer where and how they want to engage with us.

To summarize where this nets out, both international and footwear are growing faster in the near term than we had originally planned. And as a result, we remain confident in reaching our 2018 revenue target of $7.5 billion. While this mix shift will create margin pressure, we have a significant opportunity to offset the sales mix impact by continuing to improve our footwear product margins over time, and we will. But the market share opportunity cannot wait. We will remain focused on getting more shoes on feet, because we see footwear being as big, if not bigger, than apparel one day. And as we drive footwear revenue, the dynamics of the business do change. But that is a good thing, because we are truly just getting started in footwear.

Before I pass to Chip, I just want to reiterate my confidence in the future of our industry, and more specifically, how Under Armour, with the right investment and incredible brand momentum, will continue to lead and outpace the competition. As I said during my opening, I believe we operate in a resilient industry with strong competitors who will build global businesses over the course of many years. And while their sheer size poses consistent challenges for us, and challenges we have consistently met and beaten, we believe that the monumental shift that is taking place in both the manufacturing of shoes and apparel, and the way consumers buy our products, is leveling the playing field, and will enable us to build a bigger and better global brand.

We've delivered great results on the path that has led us to this moment in time, 26 consecutive quarters of 20%-plus revenue growth. During that stretch we've established a culture of growth that equips us for this next chapter in our story. And today we are reiterating our target of $7.5 billion of revenue for 2018. Our challenge is that we need to continue investing on multiple fronts in categories, geographies, and the talent and infrastructure required to capture those growth opportunities. And that's why the dollars we are committing reflect a broader investment strategy. In the short term, these investments will impact our operating income growth which Chip will walk you through in a moment. We understand that the path to industry leadership grows more complex as we expand in categories, channels, and geographies. And I am confident we will remain the market leader in growth by delivering innovation at every touch-point a consumer has with our brand.

Thank you, and now I will pass it over to Chip.

Thanks, Kevin.

I would now like to spend some time on reviewing our third-quarter 2016 financial results, followed by our updated outlook for the remainder of the year, as well as our long-term outlook and initial guidance for next year. Our revenues for the third quarter of 2016 increased 22% to $1.47 billion. On a currency-neutral basis net revenues increased 23% compared with the prior year's period. Our ability to deliver another quarter of consistent growth is a direct result of continued investments we have made in the business to meet consumer expectations through categories, channels, and geographies. As we continue to navigate through the changing dynamics of the North American retail landscape, we remain focused on solving problems for athletes all over the world and meeting the consumer with premium compelling product wherever they are interacting with our brand.

During the third quarter our wholesale revenues grew 19% to $1.01 billion. Our direct-to-consumer revenues grew 29% to $408 million, representing approximately 28% of total revenues for the quarter. During the quarter, licensing revenues grew 21% to $29 million and connected fitness revenues grew 40% to $20 million. On the product category front, apparel revenues increased 18% to $1.02 billion compared to $866 million in the prior year's quarter, led by consistent growth in our sports categories, including men's training, women's training, golf, and team sports. Third-quarter footwear revenues increased 42% to $279 million from $196 million in the prior year's quarter. Within running we saw strong global demand for the brand, led by two of our new $100 price-point product offerings, the Bandit 2 and Slingride, showcasing our continued focus on investment in this key category of long-term growth. In basketball, the Curry signature line continue to drive strong growth for the Under Armour brand. Our accessories revenues during the third quarter increased 18% to $122 million from $104 million in the prior year's quarter, primarily driven by bags and headwear.

On a regional basis, North American revenues in the third quarter increased 16% to $1.23 billion compared to $1.06 billion during the same period last year. Within our direct-to-consumer channel, our North American store count at the end of the quarter included 162 Company-owned stores, comprised of 145 factory stores and 17 brand house stores. With the opening of three new brand houses in the quarter including Philadelphia, New York City World Trade Center, and Madison, Wisconsin, we continue to invest in building and creating the best premium retail expression of our brand.

International revenues increased 74% to $226 million in the third quarter, to reach 15% of total revenues. On a currency-neutral basis, international revenues increased 80%. Within our international wholesale channel, the store count at the end of the quarter included 282 partner stores. Within our direct-to-consumer channel, our Company-owned international store count at the end of the quarter included 63 stores, comprised of 32 factory houses and 31 Brown House stores.

Looking at our international regions, starting with EMEA, we continue to pose strong growth in the region as we expand our presence with key wholesale partners and distributors while building out our direct-to-consumer business. In the Asia-Pacific region our premium performance brand strategy continues to resonate with the consumer, driving strong growth in the quarter. As Kevin mentioned, we continue to see strong growth in basketball, led by the Stephen Curry signature line, and believe we are well-positioned to capitalize and scale the business in our fastest-growing region. In Latin America we drove incredible brand awareness in the region and around the globe through the strong performances of our Olympic athletes. We remain focused on the long-term growth opportunity of this region as we continue to build and expand our distribution.

Moving on to margins, third-quarter gross margins decreased 130 basis points to 47.5% compared to 48.8% in the prior year's period. The following items contributed the majority of the margin contraction this quarter. First, liquidations negatively impacted the quarter by approximately 80 basis points versus the prior year. Second, product margins negatively impacted gross margin by approximately 30 basis points versus the prior year, driven by product mix, higher discounts and promotions, partially offset by continued improvement in product input costs. Finally, foreign currency exchange rates negatively impacted gross margin by approximately 30 basis points. In the quarter, gross margin declined more than planned, driven predominantly by higher-than-expected promotions, both the volume and rate of liquidations, and foreign exchange rates. Despite liquidations having been a headwind on margin rates for most of this year, we now believe that our inventory position is healthier and liquidation should not have the same negative impact moving forward.

Selling, general, and administrative expenses grew 20% to $499 million compared to $416 million during the third quarter of last year. Growth was predominantly driven by investments in our direct-to-consumer businesses, both retail and e-commerce, along with the infrastructure and people necessary to support our growth and strategic initiatives such as product creation, innovation, and sport category management. Selling, general, and administrative expenses were less than planned in the quarter due to lower incentive compensation and the timing of marketing activations. A portion of the expected marketing spend shifted from the third quarter to the fourth quarter to better align with key initiatives, including the launch of Curry 3 that Kevin mentioned earlier.

Operating income for the third quarter increased 16% to $199 million compared with $171 million in the prior-year period. Interest expense for the third quarter increased to approximately $8 million compared to $4 million in the prior year's period. Within other income and expense we recorded a loss of $1 million in the current year versus the loss of $3 million in the prior year. In addition, the tax rate in the third quarter was 32.6% compared to 38.8% in the prior year, largely due to improved international profitability in the current-year period and a tax benefit related to our prior-year acquisitions. Our third-quarter net income increased 28% to $128 million compared to $100 million in the prior-year period.

On the balance sheet, total cash and cash equivalents for the quarter was $180 million compared with $159 million at September 30, 2015. Inventory for the quarter increased 12% to $971 million compared to $867 million, while total debt increased to $1.07 billion as compared to $902 million. Looking at our cash flows, our investment in capital expenditures was $73 million for the third quarter compared to $71 million in the prior year's period. We now expect to spend approximately $450 million 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 the year. Based on our current visibility, we continue to expect full-year 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 decline approximately 80 basis points compared to last year, driven by the same factors that we have experienced through the year. Based on our outlook of $4.925 billion in revenues, SG&A is now expected to grow approximately 26%, 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 $30 million in 2016. In addition, we now expect a full-year tax rate of approximately 35.5% and fully-diluted weighted-average shares outstanding of approximately 446 million.

I would also like to provide additional color on the fourth quarter. For the fourth quarter, we expect revenues to grow approximately 20%. We believe the strength of our brand and increased breadth of head-to-toe product offerings position us for another quarter of strong growth in what has been a challenging North American retail environment. With strong momentum and footwear and international, we remain focused on delivering key products and assortments for the holiday season. Gross margin is expected to be relatively flat versus prior year. With SG&A, as I mentioned earlier, the timing of certain marketing activations, along with continued investment in long-term growth opportunities like connected fitness, international, and direct-to-consumer, will drive the growth in the quarter. For the fourth quarter we expect operating income in the range of $186 million to $191 million, representing growth of 5% to 8% over the prior year.

Before we turn it over to Q&A, we would like to briefly discuss our long-term outlook and associated guidance for next year. At our 2015 Investor Day, we announced our goals of achieving $7.5 billion of revenues and $800 million of operating income by 2018. We are on track to achieve our 2018 revenue goal of $7.5 billion and expect to grow full-year revenues consistently in the low 20%s in both 2017 and 2018. At the same time, we expect annual operating income growth in the mid-teens each of the next two years, as we focus on investing to get big fast. As Kevin highlighted earlier, the landscape for our business in our industry continues to evolve. In any fast-paced world we must be willing to adapt, make game-time decisions and drive our brand forward.

North America apparel growth is slowing across the industry. While we expect to continue to significantly outpace the apparel industry, the growth rate going forward will be less than expected from our Investor Day in 2015. This is a moment in time. We could choose to optimize for more near-term profits, but we believe it is more prudent to invest to maintain superior growth rates while gaining both share and scale. Growth, share, and scale are the priorities for our brand. With that said, we will invest more heavily in areas that we can grow faster, such as footwear, direct-to-consumer and international, as well as more aggressively enter sport fashion like UAS and the much broader sport lifestyle category.

In footwear, that means doubling down on creating great product through innovation and design, scaling and extending our pinnacle footwear franchises, and investing in a complete market strategy from merchandising to in-store marketing. In direct-to-consumer we are driving investment in mobile, the optimization of the factory house store footprint, and building out premium brand house expressions to help us drive market share. International growth includes being more aggressive in key markets where we are gaining significant awareness, such as Asia. In the sports lifestyle category, we are accelerating investment in the people necessary to design relevant and brand-right product. And finally, we will continue to make key investment in assets that promote the brand.

Beyond 2018, we believe we have opportunities across categories, channels, and geographies to consistently deliver superior revenue growth relative to our industry. We also believe that as we approach $10 billion in revenues, the scale it provides, along with the investments we have made in people, infrastructure, and systems will begin to pay off in the form of increasing operating margin rates. As Kevin stated earlier, we have delivered great results on the path that has led us to this moment in time. The dollars we are committing reflect a broader investment strategy that will enable us to build a Company as big as our brand.

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 Instructions)

Michael Binetti, UBS.

Hey, guys, good morning. Kevin -- let start with a question for you, Kevin. Can you help us better understand, within the context of the longer-term guidance, why you don't think you will be able to hit the $800 million in operating profit income? And what has changed that gives you confidence in hitting the $7.5 billion in revenues, but not the $800 million in operating income?

Thank you, Michael. This is obviously an area that I want to spend a little time on and go deep. So give me a few minutes to craft this for you.

Chip just ended his commentary. We talked about building a business as big as our brands. We've had our eye on $10 billion; that is the way that we see our Company. I think it is the way that people view and judge us, with $7.5 billion being our next milestone to be hit by 2018. And again, we want to reiterate that we're on track to hitting that goal.

There are a few factors that led to the decision to modify the operating income for us since Investor Day, September 2015. What's happened and what's different? First of all, in North America, it is a place that provided incredible air cover for our brand for a very long time. And I think, like we are seeing in a lot of places, that is modifying and it's changing.

The investments that we've made over the past 11 years as a public Company, we have seen that our business thankfully has evolved from being strictly a North American wholesale apparel brand, into a global sports brand. That also is to go to the claim international and footwear as probably two of our largest and greatest opportunities for growth.

And all the while, I want to be clear, with apparel remaining incredibly profitable and still growing, like to the tune of 18% in just the third quarter for us. There's not an entity North American apparel story. The continued to march on for us as well. We just have other opportunities that are outpacing some of that growth.

Some of those opportunities, like footwear and international, they are exceeding what we're putting up in 24%-plus top-line growth as a Company. And that change in mix is modifying our gross margin story in the short term. That means, while we're doing better in foreign international than we thought we were capable of doing, that we're fortunate to have these levers to pull, and frankly attack, as we maintain our industry-leading growth on the top line, as well as continue to drive what we can in making the right investments in the right part of our business.

So what also has changed is our distribution. The fact that we've had three bankruptcies that have occurred in just the last 12 months in sporting goods, that account for more than $4 billion in lost revenue for the sporting goods industry in North America. And compare that, relatively speaking, that going all the way back to 2008/2009, there was just $170 million of bankruptcies of lost revenue in our industry. So we saw something pretty big happen that we've thought about, but it definitely has been eye-opening for us, especially recently.

We want to be clear, our demand is still there. This doesn't mean that the demand for the Under Armour brand has disappeared. But it certainly hasn't reappeared dollar for dollar in our immediate distribution. We believe that the opportunity is also still there. We just have to be more thoughtful about how to capture the consumers and their dollars, including replacing with our own direct-to-consumer controlled retail, as well as expanded distribution by doing things like Kohl's which will carry the Under Armour product beginning in 2017.

We also plan to make additional investments in the places where we know that we can win. Right now that moment in time is a very important message, I think, for obviously our shareholders, but frankly for our team and our consumer.

Footwear and international are going to continue to be staples of our investment strategy. because we think the opportunity for us now is to strike, and strike hard. And we take the momentum of things like Curry with what is launching tonight, and I think you'll be pretty excited by what you see. And most importantly, the consumer is going to be pretty excited about what they see.

We also have opportunities like lifestyle that, as we have talked about before on these calls, represents roughly a third of the revenues of our two largest competitors and today less than 5% of the business for Under Armour. Thirdly, connected fitness is continue to going to be an area that we will invest in, where we believe that defining the expectation the consumer has of a sports brand with our data, will give us perspective on our consumers that will be truly unmatched in our industry.

Another factor we have seen recently has been the escalation in the price and frankly, the duration of sports marketing assets. The length of these deals have gone from the standard five-year deals, arrangements to now 10- to 15-year deals. UCLA, one that we just wrapped up recently this past spring, was the largest collegiate deal in history, but it is a 15-year partnership. At the same time, we also locked up Cal Berkeley and giving us a true position in California, which frankly, prior to that we really didn't have. If we deem them strategic, the ability of what is happening in the sports marketing as these assets are being wrapped up, is either act now, or lose them for, frankly, the mid to long term.

This, of course, does not mean every deal. And I want to be clear, is that the shift in operating income for us is not about creating a bigger marketing budget so we can go buy more stuff. It is about truly investing in our brand, our systems, our infrastructure and especially our team. I'll give you another example of that in just a minute.

All those things are just some of the tasks but not to be ignored long-term strategic issues, new issues, that we are facing since September of 2015. And when you grow a business 20%-plus a quarter for six and a half years, it builds the unique profile that we find ourselves in today. Which means adding $1 billion and growing a year in revenue and it requires significant resources and investment.

But I want to be clear is that the growth remains intact, it just costs more short-term investment dollars to achieve. And the belief is that greater efficiency can come later, and that the growth that we have over the short-term EPS is a priority for our long-term goal of becoming the number-one sports brand in the world. And I want to reiterate that; we are in this for the long haul. And the opportunity that we see is to be the best in the world.

And that does require investment. And we know that people aren't going to like the way it sounds. But I don't know if there's ever been another model like ours at six and a half years with the growth that we have seen, particularly in consumer. The book isn't written anywhere; and if it were, we'd have read it. This is what we are telling you, is that from our purview of 11 years public and what I've seen in our business, that now is the time for us to strike because I think the upside so much greater on the other side.

On a relative basis, we believe the short-term dollars are better spent building our infrastructure, ensuring that we capture that 2018 goal of $7.5 billion, especially once we achieve the scale of a $10 billion growth Company. Which will be when we can truly begin to leverage our model to optimize expanding gross margins, our SG&A investment and ultimately shareholder value.

One of the issues that I know people know this, but I think it is worthy of us to say, that you face as a superior growth Company, which Under Armour has always demonstrated its ability to be, is that operating growth of 15% for virtually any S&P or Fortune 500 business, would be outstanding. But because our business is growing in the 20%s, a profile that only very few rare companies in either the S&P or Fortune 500, and frankly, not from our industry from either forma or tax share, and where we still expect to deliver more than $0.5 billion of operating income profit in 2017 alone. So we're not saying we're losing money, we are moving and marching forward.

In growth terms, that more than $0.5 billion is more than nearly two times the total revenue we delivered in our IPO year of 2005, proving that our investments in things like footwear, women's and international have all paid off. At the end of the day, look, we believe that by making these investments, the ability for us is to mature into a business as big as our brand. And we want to drive best-in-class profitability as our business hits scale, our growth rates become more measured and we have got the people, distribution, systems and infrastructure to optimize. Today, we have pieces of it, but frankly, it is just incomplete and that is why we must continue to invest.

I want to give some perspective here for a second, Just on where we are. Under Armour's -- we just got dropped into the sporting brand pond about 20 years ago. And we jumped in and there were a lot of players, 20, 30 players or brands, as many as you want. Today, we are the third-largest brand in the world. We're the second-largest brand in North America. And our two largest competitors have more than 20,000 points of distribution each in North America alone, compared to just our 11,000, which speaks to some of the runway that we still have in front of us right here in our own backyard.

They are also six and four times our size, respectively. Let me give you a real-time example of what that means. It means in an area like women's footwear, where we currently have just six teammates on our women's footwear team based in Portland, who are doing an amazing job for us, and is building best-in-class product, our competitors who we could compared to on a one-to-one basis, have dozens or even hundreds of people covering the same category. It is our responsibility to our long-term growth objective of being number one in youth, in men's and of course, women's across all categories to continue to invest to meet that long-term goal.

So I want to be clear that we have a saying around here, it's called no loser talk. And it's the last thing we would ever do. And I want our shoulders to know how hard this Company fight for every single dollar at the bottom line, but how we are looking honestly at this moment in time and saying it is time for us to invest. We have the best team, and we have got the best brand. And we expect to continue to grow.

Thanks for all the detail, Kevin. I will requeue with my other question. I appreciate it.

Thank you.

John Kiernan, Cowen and Company.

Good morning, Kevin. Thanks for taking my question.

Thank you.

It seems like product flows into the retail channel and your wholesale channel are changing pretty dramatically. And we have heard it from some of your competitors. It seems like there is a need for speed out of the supply chain and the sourcing from all of the brands. Can you talk about the change in product flows and how it's going to affect your business going forward?

Product flows for us, there's a lot of ways for us to think about it. First of all, we are seeing a tough story that, as we look or think about North America, you have heard a couple of people talk about it. And again, it is not nothing is going but it's definitely been reflective in some of the bankruptcies and the other things that we have seen recently.

The people we're doing business with, I believe are doing very well and they are getting very smart about the way they're managing, they're running their business. It's definitely, it's -- you are not finding our accounts that are taking big inventory positions and betting on the cold weather. So those are things that are leading for us, it's requiring us to run and to drive a better business.

Today I would define Under Armour as a great brand, and as a great brand with a -- but probably a good Company. The opportunity that we have is things like what we see with some of the speed to manufacturing. Things like, recently we announced our partnership at City Garage here in Baltimore, where we talk a local-to-local strategy, which means bringing manufacturing back to the United States.

And again, that is not a Made in the USA initiative as much as an initiative for us about making great products anywhere. The people of America want product made in America. The people of Europe want the same. The people of Sao Paulo want product from Brazil. We're going to continue to answer that and look to drive on that answer.

There is a lot of investment on the front end and the good news is that the sad thing about our industry is that a shirt and a shoe are still made the exact same way they were 100 years ago. And we see a massive opportunity for that to improve.

Some of the things I've talked about in my script and my comments was how that we have the ability, I think, to accelerate the speed at which innovation can happen there. Right now to make a single shoe, for instance, it takes upwards of 300 pairs of hands to make a single shoe. We think there's a lot of room for innovation. We're finding out a lot about ourselves and I think that continues to move for us as well.

Okay and I can just sneak one more in. I think longer-term, what people see is they see one of your competitors out in Portland with a mid teens operating margin. They one of your other competitors in Germany with a mid single-digit operating margin.

Where does Under Armour fit in long-term? What is the true driver of market expansion long-term? Is it really falling more through about better SG&A leverage or gross margins and products margins can move higher? What pushes the operating margin longer term when we think beyond just 2018?

Hey, John, this is Chip. A couple of things, as we start to get to $10 billion, there's a couple things that will happen. One, the gross margins, we should start to get expansion on the gross margins. And we will start to get that because we won't be faced with as much of a mix shift that we're faced with today and the improvements we're seeing on the cost side of the house, we are seeing those today and they will continue.

But over time, as we start to gain more and more scale, we will see that gross margin improvement. And on top of that, as we get more into lifestyle, we will see more gross margin as well. So once we start to get towards $10 billion, we will see gross margin.

At the same time, that is when we should really start to be able to leverage our expense structure. We're investing across the world. We are investing in offices. We're investing in IT systems. We are investing in distribution capacity. All of those things are happening today and will continue to happen over the next couple of years. But we will start to see that leverage.

So it becomes a perfect storm once we get to $10 billion and we will start to see operating income margin expansion. And I think we will head towards more the premium level, versus the other person or the other competitor that you are speaking with.

Okay, thanks. Best of luck.

Erinn Murphy, Piper Jaffrey.

Great, thanks. Good morning. On the last point, Chip, for you on the gross margin, at the Analyst Day you talked about 49% gross margin and now it sounds like you are saying that you need to get bigger scale towards that $10 billion mark to really see that gross margin pick up. Can you help us think about, at least over the next couple of years from a planning horizon perspective, how should that gross margin line metric look?

Yes, Erinn, first off in any given quarter there will be noise around liquidations or FX, so that can happen in any given quarter. But over the course of the next couple of years, we as a Company will probably see flat gross margins.

We are going to have mix as a headwind as we continue to grow our footwear at 2 to 2.5 times our apparel and accessories business. And the disparity between those gross margins creates a mix shift for us.

At the same time, we are already seeing improvements in our footwear margins, and we will continue to see those improvements. And so net net, we think we can overcome that mix shift through the improvements we're seeing on the costing side, for the next couple of years. But net net, it will be flat.

Then, as we start to approach $10 billion, as I mentioned earlier, that is when we believe that we will have the scale, and we will have a much more significant mix at that time of footwear, that you'll start to see an expanding gross margin, come $10 billion.

Okay, that helps.

Erin, I think it's good to drive home the point about footwear and the opportunity we see there. So Under Armour today, we are in the low to mid 30%s when it comes to our footwear gross margin that nets out compared to our competitors which are 10%, or roughly 1,000 bps in front of us. We have made great strides in the last couple of years, actually taking hundreds of points of gross margin of clawing that back, and we see great opportunity as well.

There is no secret sauce that someone else has that we don't. It's been time, it's been energy and experience. And frankly, having just gotten back from a trip from Asia about four or five weeks ago and seeing the reinvestment that our manufacturing partners are making us throughout China, but also through Vietnam and the Philippines, where you are seeing a lot of these new facilities going up, there is a great belief in a Company and a brand like Under Armour, that just a couple years ago, I think floor is important to lay out. Last year we made 30 million pairs of shoes. 2016 we'll make 40 million pairs of shoes. Obviously you hear how bullish we are in footwear, so that number is increasing.

And again, that is impressive, but it still compares to the hundreds of millions of pairs of shoes that are made by our competitors. So as we build scale, this will naturally come on board as well as will help with people like Colin Browne, who is our new President of Sourcing and some of the things that we will do driving some of these initiatives.

We see there is great opportunity in gross margin, and this is nothing that we are laying back. There is no excuse for what we are doing with operating income as it relates to -- or the way that we're attacking gross margin across the board.

Okay, that's helpful. And then on inventory, up 12%, so fairly lean. Do you feel like you have enough inventory as you go into the holiday season? I think you're still planning for 20% growth in that Q4 and early part of 2017. How should we think about that at the end of the quarter as well?

Hey, Erinn, it's Chip. We feel like we're in really good shape from an inventory perspective. We did have very large growth rates over the course of late last year and into the early part of this year. That growth rate has come down. But the inventory is in great shape. And the inventory we have, we do have availability in an event that we all hope that it gets cold and it's be nice and we do have the inventory to supply for that.

Okay. And then last, Kevin, for you on women's. I didn't hear you talk much on this call on the women's opportunity. Can you flesh out where we're at now and where you see that as you think about your 2018 $7.5 billion goal. Is that still unchanged in terms of the opportunity?

Yes, completely. I want to be clear that women's remains one of our brightest opportunities for growth in our business. Women's was still growing in the quarter, up to 17%, I think, 18%.

And again, at the heart of this is category management. I spoke about it in my prepared remarks. And we've done that with women's, specifically call it out and make sure that it gets the emphasis it needs. Pam Catlett is leading that. She's an industry vet and has been a complete pro in bringing the pieces together. But there's a lot of pieces to bring together.

Probably the best thing I could say is when you talk about our women's business, we have $1 billion women's brand. It's taken us one heck of a long time to get here, but we're incredibly proud of what that means. I think probably looking at women's through the lens of -- I gave the example about footwear in one of my earlier answers. And we have six people in our women's footwear team. We just built our first women's last, last year for the first time.

Those are the things from an operating income standpoint, I want to say, is that when people say you don't have enough -- people dress toe to head. They start with their shoe. But if the shoe isn't right, if the fit isn't right, if the color isn't right, if we don't have the right team, the reason we didn't build the women's last before is because we were focused on the ability that we couldn't afford it.

So we are making a lot of those small decisions right now that we truly believe that looking at 2017, 2018, making the investment, as unfortunately because our growth rate is so great, it creates that drag. Making this right investment in footwear is important.

So let me go back with women, is that one thing we think is incredibly important is that the football cleated opportunity and what we're doing being the number-one cleat there isn't doing much for the women's category. But the confidence that we are demonstrating in running, from our knit products, again, this will be the first year in the market that will have that women's last on people's feet, on women's feet.

And we also think that's as we continue to drive better product for her, driving both performance styles, strength and beauty, the focuses we will have. I think we have got a terrific team in place. We are investing in our women's team as well. We think footwear will be one of the catalysts for it, but achieving a $1 billion business in women's is a pretty big feat and it is something we're certainly not stopping or satisfied with.

Thank you. Best of luck.

All right, operator, that is all the time we're going to have today for questions.

Okay, I'd like to turn the call back to Ms. Gillard for closing remarks.

Thank you all for joining us today on our call. We look forward to reporting to you our fourth-quarter and year-end 2016 results, which tentatively have been scheduled for Tuesday, January 31 at 8.30 AM. Thank you and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.