Under Armour Inc (UAA) 2007 Q1 法說會逐字稿

Good day, and welcome everyone to the Under Armour first-quarter 2007 earnings results conference call and webcast. This call is being recorded. At this time I would like to turn the conference over to Director of Investor Relations, Alex Miyamoto. Please go ahead.

Thank you and good morning, everyone. I would like to start by welcoming you to Under Armour's first-quarter 2007 earnings call. During the course of this conference call we will be making projections or other forward-looking statements regarding future events or the future financial performance of the Company. The words estimates, intend, expect, plan, outlook, or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially.

Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in the press release and in the Risk Factors section of our filings with the SEC. The Company assumes no obligation to update forward-looking statements or reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Before we continue I would like to direct you to our website, investor.underarmour.com. There you will find this morning's press release and on our webcast page images of a number of the products and initiatives we will discuss on the call.

Now I would like to introduce the speakers and topics for this morning's call. Kevin Plank, Chairman and CEO, will address the drivers of our first-quarter results and our strategy for continued growth in 2007 and beyond. Brad Dickerson, Vice President of Accounting and Finance, will then discuss the Company's financial performance for the first quarter. Wayne Marino, Executive Vice President and Chief Financial Officer, will conclude the prepared remarks with updated information related to our outlook for 2007. After that we will have a Q&A session that will end by 9.30. And with that, I will turn it over to Kevin Plank.

Thank you, Alex, and good morning. We are proud of the results we have to report for the quarter and, more importantly, for the opportunity Under Armour has created for itself in regards to long-term profitable growth.

Some 12 years ago with one employee and the ambitious concept to create the ultimate T-shirt, Under Armour was born, and a shift toward performance began. This shift away from cotton and into performance fabrics has grown into a full-blown movement throughout athletics and beyond.

We continue to establish ourselves as the thought leaders of the performance category by innovating with new product technologies, categories, and price points. We continue to lead and shape the industry, and with each success we build momentum and further solidify our position as the athletic brand of this generation.

The scoreboard is once again full of positive news based on the first quarter, most notably the increase of revenues, posted at 42%. This marks our largest Q1 in the history of our brand. Our focus on delivering great product with a simple story has resulted in a 50% increase in revenues on a trailing 12-month basis. We continue to build strength and breadth across our business.

We believe this leadership in the performance apparel market is driving growth for our retail partners and the industry overall. The Sporting Goods Manufacturing Association reported that 2006 US athletic apparel sales were up more than 8%. More importantly, 3 of those 8 percentage points came as a result of increased pricing.

Our results over the past 12 months reflect Under Armour's ability to move the consumer to better product with higher ASPs. In fact, 10% of our apparel growth in the last 12 months is the result of higher selling prices.

Our consumer is loyal to our brand, and they have shown their willingness to pay higher prices for better product as we bring new technologies to the market through our good-better-best product strategy.

Wayne and Brad will give you the details on all of our numbers, but I can tell you that we are proud about the start to 2007, and we remain on track (technical difficulty) progress we have made investing what we believe to be large, scalable businesses like women's, footwear, mountain outdoor, and Europe.

In that vein, I'd like to focus this morning on the Under Armour brand and specifically the product and marketing stories that have shaped our brand globally and will continue to be critical as we focus on our drivers of growth.

The Under Armour brand operates at extremely fast-pace [to support our quick] growth. We stay disciplined in our investment in marketing, yet aggressive in capitalizing on opportunities, with quick decision-making and unparalleled service and turn time. All product creation, creative strategy, and advertising are done in-house to maintain complete control on how the brand is portrayed in the marketplace.

This past quarter we continued to reinforce our year-round ownership of the team sport athlete, not only during the season, but through their training as well. Our presence in football -- from the Pop Warner leagues and Friday night lights through college Saturdays and the pro game on Sundays -- is stronger than ever because of this strategy. I invite you to our website, www.underarmour.com, to view the media campaign we launched this past weekend during the NFL draft. Click-Clack II features Wisconsin tackle Joe Thomas, the number-three draft pick overall, along with the number-11 overall pick, Patrick Willis of Ole Miss, San Francisco 49er Vernon Davis, and Steve Spurrier, the head ball coach of the South Carolina Gamecocks, who recently joined Maryland, Auburn, and Texas Tech as Division I programs who will dress head-to-toe in Under Armour this fall.

We have strengthened our connection with the football athlete by claiming the title sponsorship of the Senior Bowl, the final game of the collegiate year, comprised of the 100 top seniors headed for the NFL. Our reach now extends through the combines and pro days, through the college spring games, and culminates on NFL draft weekend. Then for the athletes and for our marketing, the focus goes back to training for competition.

First quarter showed our similar approach to the sport of baseball, as off-season and spring training requires more styles with both compression and loose-fitting performance apparel. We are successfully balancing our lineup from what began as a compression business to where we finished Q1 with our apparel split nearly 50/50 between compression and loose styles.

Preseason training and early games also sparked cold-weather sales throughout most of the country, where our basic $50 ColdGear Mock continues to be one of the most versatile choices for athletes regardless of sport. ColdGear Mocks were up nearly 60% in the first quarter for Under Armour.

Our presence in major league baseball is on field and authentic. Under Armour batting gloves and wristbands are seen every night on high-profile players such as Ryan Howard, last year's National League MVP, and Alfonso Soriano, the All-Star outfielder of the Chicago Cubs. Meanwhile, (inaudible) contracts with stars like Tim Hudson and Jeff Francoeur of the Atlanta Braves, and Orlando -- El Duque -- Hernandez of the New York Mets, continue to showcase our baseball Click-Clacks on national television and in some of the country's most widely-read publications.

More visible is the signage opportunities we have created in places like Wrigley Field in Chicago, where Under Armour is the first and only brand among the historic ivy on the outfield walls. Atop the Green Monster in Boston's Fenway Park, as well as center field in our hometown Oriole Park at Camden Yards, we have continued to establish UA as authentic landmarks within the major league's most well-known and widely-televised ballparks.

This reinforcement of year-long ownership of team sports continues with lacrosse, on both the men's and women's sides. On the collegiate field, lacrosse powerhouses like the University of Maryland and Navy, as well as the Johns Hopkins and Maryland women's squads tell the UA story head to toe in our elite uniforms and lacrosse Click-Clacks.

After debuting the very first Under Armour All-American Lacrosse Classic last June for the top national high school players, our Senior Showcase and Underclassmen Games have become benchmarks for top-notch recruits and athletes, as recognized by coaches and media. Like the Under Armour Senior Bowl, the term Under Armour All-American is a phrase this generation has begun to use to describe the very best players in each sport. Look for similar Under Armour All-American games in baseball, softball, and football in the next 12 months.

The first quarter also saw our first major marketing push to the mountain and outdoor athletes through our exposure during ESPN's Winter X Games and ESPN Bass Master Classic. Our brand strategy hasn't changed off the traditional field. We remain authentic first with technically-advanced product. We only use real athletes, and we wrap our messaging in our typical intensity and authentic imagery.

Not only is the vertical opportunity promising in each of these categories, but we have been able to connect back to our team athletes as well. In the hunt/fish category, for instance, we have been able to create authentic crossovers out of our team athletes, like Joe Thomas, who decided to forego the trip to New York City's Radio City Music Hall this past Saturday for the NFL draft, for the chance to go fishing at home in Wisconsin. Live network coverage instead showed him fishing in Under Armour gear as the Cleveland Browns selected him with their first pick.

What we remain most excited about is shaping up to be our largest coordinated marketing initiative in our brand history, the launch of our women's campaign in the second half of this year. We had great success with targeted women's print and digital campaigns this past quarter in publications like People, and Shape Magazine, which reach more than 10 million readers. The female athletes from college down to junior high school have responded to this mainstream approach. Now we look forward to speaking to these athletes specifically with a multiplatform campaign which features all the intensity of Click-Clack yet is targeted exclusively to the female team athlete.

We talked on our last call about the continual emphasis of telling the Under Armour story at retail. We believe in-store marketing represents the most vital link into bring the commercials, marketing, and product placement to the consumers at the same time they can see and feel the gear in person.

With our major retail partners we have begun to construct a new generation of branded concept shops where the Under Armour story is told completely and authentically in the emotional, high-intensity manner it demands. The goal for the design of the in-store visuals and fixtures is to imitate an atmosphere that provides the shopper with the experience of physically entering into an Under Armour commercial.

We aim to create that same passion and emotion while still convey our very simple and succinct story for the shopper. Partners like Dick's Sporting Goods, The Sports Authority, and Cabela's will be some of the first to support these floor-to-ceiling UA shops, which will start to roll out this summer.

As we invest significantly to help our partners provide a great retail presentation of the Under Armour brand, we believe there is a tremendous opportunity for us to deepen our connection with the loyal UA consumer and brand band through an increased focus on what we call our direct-to-consumer business. This business, which includes our catalog, Web, and outlet stores, grew 87% in Q1 and more than 100% in the past 12 months. We plan to continue to invest in this business as a driver of profitable growth, as well as for the positive branded experience that it creates for our core consumer.

With the success of our retail initiatives both online and in our outlet stores, we believe the next logical step for Under Armour in retail is to test a full-price retail store in Q4 of this year. We expect to open one store this holiday season close to home.

The opportunity is to create another unique connection with our loyal consumer, as well as learning more about how they absorb our brand messaging. Our goal is to profitably build better internal competency around store merchandising that we believe will help drive our presence and performance with all of our retail partners.

As we continue to grow our direct-to-consumer business we are confident that this will become a consistent, profitable growth driver for the Under Armour brand.

Growth. To summarize our growth strategy, it is as simple as making our women's apparel business larger than our men's apparel business; building our footwear business to be larger than our men's, women's, and youth apparel businesses combined; then taking those product stories country by country across the globe with the right retail partners, bolstered by our own direct-to-consumer business.

So let me take you through our key growth drivers. Men's remains a top priority for our brand, as we see continued strength at retail across virtually all key categories. In fact, we recently became the number-one selling men's apparel brand at Hibbett Sporting Goods.

We continue to see growth in our core compression business as it delivers results to our top line. In the first quarter compression drove one-fourth of our growth in men's. We are not only growing our market share in the face of increasing competition, but expanding the overall compression market.

We are also finding ways to extend the reach of the brand. This spring we saw a lot of success with new products in golf and baseball. With only its second year in our product line, golf grew to be our third-largest category for men's apparel this quarter, with baseball not far behind. As we extend our presence for the growing consumer base through these sports-specific products, we see increased demand for our core compression as it is adopted as a layering piece for these sports.

We will continue to use our authenticity as a performance brand to enter new categories this fall, with our introduction to the mountain and outdoor space, highlighted by our new base layer and outerwear launches planned for later this year.

Let's talk about our women's business, which continues to be one of our largest immediate opportunities. As we have said, our women's business should be larger than our men's business in the future, and we are following our words with action. With the launch of our women's campaign on deck, we remain confident in our ability to speak to the female athlete and grow our women's business.

Demand at retail for our women's product is strong, and the retail sales of our women's products at our key accounts outpaced their inventory growth. Our success this quarter with introductions of additional team colors at retail tell us that our female team athlete is shopping for our brand in our distribution. We will continue to balance a core team-oriented offering with appropriate seasonal silhouettes and colors to expand the reach of the brand.

Additionally, as our women's business matures, we will look to leverage entrances into new categories by equally bringing both men's and women's product to the market. This is exactly what we have planned with our mountain base layer and outerwear launches this fall.

Now let me update you on footwear, where there is more great news to report and plenty to look forward to on the horizon. Last year when our Click-Clack campaign launched us into the football cleat business, the doors were open for Under Armour to become a footwear brand. After capturing more than 20% market share in the football cleat category in just our first year, in 2006, baseball Click-Clack seemed to be on a similar trajectory with acceptance from our consumer.

Our launch of baseball cleated footwear has been successful by not only achieving double-digit market share since launching in January, but also in driving sales of our baseball apparel. Baseball apparel in Q1 was up 127% as a beneficiary to the halo effect of our cleated entry. We intend to continue to leverage our strong Click-Clack presence at retail to build momentum around our apparel, and vice versa.

Our football Click-Clacks will hit the market again in June of this year. We expect to build on last year's success and increase our market share beginning with the new campaign we launched this past weekend.

Most exciting is our future plan for non-cleated footwear. What I've alluded to in the past is that we will launch our first true line of non-cleated performance footwear in 2008. We realize the anticipation surrounding this product launch and will provide more details in the coming months.

Globally, Under Armour continues to find its first home with the elite athletes of every country we open for business. This past February we officially announced our global presence at ISPO, the world's largest sporting goods tradeshow, to much success in Munich, Germany. Just over a year after the opening of our office in Amsterdam, we continue to establish ourselves on a similar and even faster pace than we did here in the States.

We view the US and European opportunities very differently as it relates to timing. The roadmap we have for establishing ourselves in Europe is the same as we had in the US several years ago. We have begun organically, on the field and pitch with the athlete. But where today in the US our compression versus loose business splits 50/50, our assortment in Europe is roughly 80/20 in favor of compression.

This is indicative of the core message that we are committed to establishing with our brand in the short-term, while positioning ourselves for long-term, healthy growth. We are focused on continuing to drive the US business while investing for the long term in Europe.

Europe is still in its infancy but has seen tremendous headway from both the consumer and our premium retail partners. The media continues to provide great exposure in game telecasts and print coverage. We have been recognized with the European Sport Industry's award for the best marketing launch of a sports product in 2006.

In the UK, 19 of 20 teams in the English Premiership have players who wear Under Armour product. We are the official base layer supplier to the Reading, Wigan, and Fulham football clubs.

In Germany, 11 of 18 teams in Bundesliga One have players who wear Under Armour. Finally, on one of our largest world stages in sports, the Cricket World Cup, 14 of the 16 teams wore Under Armour, including three of the teams in the final four -- Australia, South Africa, and New Zealand.

Our brand recognition on the field has translated well into the retail marketplace. We have begun to capitalize on the consumer's hunger for our brand and their desire to learn about our technical advantages. We now have more than 950 retail doors carrying the Under Armour brand, and we will finish 2007 with more than 1,200 total doors in Europe.

Most importantly, we have established relationships with the best of the best sporting goods accounts and now have the ability to expand our line as the marketplace demands more.

In several of these new European doors we plan Under Armour branded concept shops to match what we are doing here in the States with our key retailers. We have opened our first UA concept shops with Sport Arena in Germany and Stuttgart in Heidelberg. Several more Sport Arena shops are scheduled for the back half of the year. These shops will align with those we have in other stores throughout Europe in major shopping areas of cities like Paris, Berlin, (technical difficulty) Barcelona by the end of 2007.

As we focus our international efforts on Europe in the short term, we continue to systematically grow the entire European team on both the front and back ends. We are finding experts in the business country by country, and immersing them in the Under Armour culture so that we have the right people in the correct roles as we continue to move on key global strategies.

Our business remains focused on building large scalable businesses for the long term. Profitable growth while staying nimble and fast enough to take advantage of the opportunities we are creating. We aim to keep our business steady throughout the year. We will continue to invest in our business as we capitalize on these opportunities and broaden the reach of the Under Armour brand through our women's, men's, and youth apparel businesses in footwear and around the globe.

For our core consumer, the athlete, we will continue our year-round communication. They need our products, and they are inspired by our marketing. We will be with them through training and off-season sessions, all the way through playoffs and championships, as we continue to reinforce our position as the athletic brand of this generation.

With that, Wayne and Brad will take us through the numbers. Brad?

Thanks, Kevin. We want to take a few minutes to provide some information around our first-quarter income statement and balance sheet. First, our income statement.

Our consolidated net revenue growth in the first quarter was 42%, well exceeding our 2007 targeted top-line growth of 30% to 35%. This was driven by 27% growth in our core men's, women's, and youth apparel sales, along with growth in our accessories business and the addition of footwear, which was not offered in the first quarter of 2006.

We are also seeing benefits of an expanded product assortment and our good-better-best strategy, with average selling prices in apparel up 8% compared to the first quarter in 2006 and average selling prices including footwear up 11%.

Men's apparel growth for the quarter was 28% compared to the prior year, and was driven by our compression, golf, and baseball products.

Women's apparel growth for the quarter was 18% compared to the prior year and was primarily driven by our compression products. As we look at our women's growth it is important to note that the core reflects the timing of shipments, specifically seasonal styles, and demand outpacing our supply for certain items. As Wayne will discuss later in our full-year outlook, we fully expect our women's business to continue to grow at a pace in excess of 30% for 2007.

Our youth apparel growth for the quarter was 49% compared to the prior year, driven by our compression and baseball products.

In addition to the 27% growth in our core apparel business, in the first quarter we continued our baseball and softball cleat launch which helped drive an additional $11.8 million of net sales in our footwear business, representing 9.5% our consolidated net revenues.

Now moving to gross margin, for the quarter gross margin was 48.7% compared to 50.5% in the same period last year. There are several puts and takes impacting the margin for the quarter. I will take you through some of the significant highlights right now.

First, as we previously have stated, margins in the first quarter are impacted by footwear, which launched in the second quarter of 2006. Our footwear margins, specifically cleated footwear, generally have margins lower than our apparel products. 175 basis points of the decrease in the first-quarter margins were driven by the effect of our footwear sales.

Second, during the quarter we were also able to service additional customer demand by temporarily shifting our sourcing to shorter lead-time suppliers. While this allowed us to capitalize on strong demand for our product, this temporary shift in source base also led to a 75 basis point decrease in gross margin.

Finally, as we discussed in the previous quarter, beginning in 2007 we began to shift dollars previously given as customer discounts to in-store marketing and SG&A. This shift, which represented an 80 basis point improvement in gross margin for the quarter, along with growth in our direct-to-consumer business, helped offset some of the decrease in gross margin discussed earlier.

SG&A for the first quarter totaled $44.5 million, an increase of $14.4 million compared to the same period last year. SG&A as a percentage of net revenues for the quarter increased to 35.8% from 34.3% in the prior year. Increased investments in our newer growth initiatives, which include international, footwear, and direct-to-consumer, accounted for approximately 40% of the year-over-year dollar increase in SG&A.

Within SG&A we continued to invest in our brand during the quarter by increasing investments in marketing. Marketing costs represented 11.1% of net revenues in the quarter compared to 8.6% during the same period in the prior year.

This increase in costs for the quarter was driven by increased print advertising around our women's product; increased cost associated with our NFL, Auburn, and Texas Tech sponsorship deals; and as discussed in our gross margin highlights, increased in-store marketing costs. Marketing costs, exclusive of those included in our newer growth initiatives, represented 35% of the growth in the first-quarter SG&A compared to the prior year.

We were able to leverage fixed cost during the first quarter, allowing us to invest three-quarters of our incremental SG&A on growth initiatives and marketing, all of which we believe have a direct impact on our top line.

Our operating income for the quarter increased to $16 million compared to $14.2 million in the prior year, an increase of 13%. Operating margin for the first quarter was 12.9% compared to 16.2% in the prior year, reflecting the increased marketing and investment spending during the quarter, along with lower gross margins assessed with our footwear sales.

The effective income tax rate for the quarter was 40.6% compared to 40.5% in the first quarter of the prior year. Our resulting net income for the quarter increased to $9.9 million from $8.7 million in the same period last year. First-quarter diluted earnings per share was $0.20 compared to $0.18 in the prior year.

Now moving on to the balance sheet, inventory at quarter end increased 50% to $80.1 million compared to the prior-year quarter end. In addition to increased inventory needed to support our top-line growth, the rise in inventory was also partially attributable to the buildup of inventories needed to support our European third-party warehouse, which became operational in June 2006.

We continue to use our existing retail outlet strategy to profitably sell our excess inventory. Year-to-date we have opened three additional outlet stores, bringing our total outlet store count to 14 stores. During the remainder of 2007 we plan to expand our retail outlet strategy with an additional two to three outlet stores. We believe this investment has been and will continue to be successful in protecting the brand, improving our liquidity, and raising gross margins and operating margins.

Net accounts receivable increased 34% or $21.3 million on a year-over-year basis and grew at a slower rate than net revenues for the quarter. Total cash and cash equivalents at the end of the quarter were $57.2 million. Cash net of debt increased $900,000 compared to the same period last year to $50.8 million.

Our investment in capital expenditures for the quarter was approximately $8 million. These expenditures were mostly related to infrastructure needs to support our continued growth and primarily include the following three categories.

First, approximately 3 [point] million of CapEx related to capacity expansion and improvements in our existing warehouses in anticipation of growth in our apparel and footwear businesses, along with continued investments in our warehouse management system implementation. This system will become partially operational during 2007 and fully operational in the first half of 2008.

Second, information technology investments of approximately $1.9 million, relating mostly to continued improvements and investments in SAP to support our growth, along with other general technology needs.

Third, the balance related primarily to in-store fixtures and the build-out of our new retail outlet stores. Now I will turn it over to Wayne who will take you through our outlook for the remainder of 2007.

Thank you, Brad, and good morning, everyone. I am going to spend time on our outlook for 2007 as well as several key elements of our strategy going forward. We will also include some color around our estimates for Q2.

First, our long-term growth targets remain at 20% to 25% for both our top and bottom line. As we have said previously, for 2007 we believe we can grow both net revenues and income from operations between 30% and 35% for the full year. We plan to accomplish this by executing on strategic growth drivers, continuing to expand on our men's and women's businesses, ramping up our footwear, continuing to build our international business, and expanding our direct-to-consumer business.

Kevin spoke earlier about some of the product and marketing stories that will help drive our core apparel business in 2007. In addition to the new categories that he mentioned, we believe our core growth in men's, with a broader product offering in golf, baseball, and outdoor, and women's, including our ColdGear and compression programs, will benefit from the continued growth in our footprint within our existing distribution.

Our focus on the build-out of concept shops with our retail partners will also help us secure this floorspace and tell an impactful story at retail.

As Brad said earlier, our product line expansion efforts are proving successful, with average selling prices in apparel up 8% compared to last year and overall average selling prices including footwear up over 11%.

In 2007 for the full year, we expect our men's business to grow at a pace greater than our long-term growth target of 20% to 25%, with our other businesses growing at an even faster pace.

The consumer's appetite for our women's products remains strong. As Brad commented earlier, the 18% growth in our women's business for the quarter reflects the timing of our shipments, specifically seasonal styles, as well as demand outpacing supply for certain items. We continue to invest in inventory and infrastructure to improve our service levels to the level of demand that the consumer has for our product. For the full year, our women's business is on track to grow at a pace exceeding 30%.

On the international front, we continue to focus on Western Europe with particular emphasis on the UK, France, and Germany. We currently sell to approximately 950 doors in Europe and are planning to grow that number to 1,200 by year end. We continue to believe that the opportunity for the Under Armour brand internationally is as large as the opportunity in the US. We will make the appropriate investments in 2007 and beyond to reach that goal.

I also want to point out that although our footwear and international businesses will be investments in 2007, combined they are projected to contribute approximately 20% to the year-over-year dollar growth in 2007.

Our direct-to-consumer business, which includes our online and catalog business as well as our outlet stores, will contribute approximately 15% of our year-over-year top-line dollar growth and an even greater percentage of our year-over-year operating income growth.

As Kevin mentioned earlier, with the success that we have had to date with selling our product directly to the consumer, we are planning to open one full-price test store in the fourth quarter of 2007. This 4,000 to 5,000 square foot store will be close to home and will allow us to capitalize on one of our strengths -- communicating with the consumer -- and test new products and new retail concepts. Although this is a test store, we are planning this store to be profitable in its first year of operations.

Now I would like to provide you with some highlights of our strategy for 2007. First, we continue to expect both revenues and income from operations to grow between 30% and 35% for the full year. We are projecting our year-over-year operating margin to increase once again, for the fourth consecutive year.

Our gross margins will have puts and takes, but overall we are projecting gross margin improvement for the full year. Our fixed costs will leverage in 2007. Marketing will be at the high end of the 10% to 12% range.

We will continue to make the right investments to support large, scalable businesses. We will invest in working capital, specifically core inventory, to meet demand. We will invest in our warehouse management systems, in-store fixtures and concept shops, IT infrastructure, and our direct-to-consumer business.

Now let me take you through some of the detail. First, our gross margin. In our initial outlook we provided for 80 to 100 basis point improvement in gross margin. With better visibility into the year and simply just better forecasting, we are projecting an improvement of 10 to 20 basis points.

Here are some of the puts and takes. First, the improvement that we have seen in gross margin from our sourcing initiatives will moderate in 2007 as we temporarily shift some of our production to shorter lead-time manufacturers in an effort to fill demand.

Secondly, we anticipate that our higher-margin direct-to-consumer business will grow at a faster rate than our overall business. We will also have a positive benefit to our gross margin from the shift in spending from (technical difficulty) in-store marketing.

A significant portion of these improvements will be offset by our anticipated growth in our cleated footwear business, both football and baseball, which carry lower margins than our existing apparel margins. I would like to point out that as we increase our volumes in footwear and expand our sourcing base, we anticipate gross margin improvement in our cleated footwear business.

Once again, taking all this into account, we are planning gross margin improvement of 10 to 20 basis points for the full year.

Now moving on to SG&A. Our fixed costs, specifically other costs, are expected to leverage at an even greater rate for 2007 than we originally anticipated, with the majority of this leverage coming in the back half of the year where historically our volumes are greater.

Marketing is a variable expense. For 2007 we are planning to invest at the high end of the 10% to 12% range for the full year, compared to 11.2% in 2006. For these reasons we are planning our full-year operating expenses as a percentage of revenues to remain essentially flat to the prior year.

Taking all this into account, we continue to project 2007 operating income to be in a range of 74.5 to $77.5 million. We are forecasting our net interest income to be approximately $2 million for the full year and our effective tax rate to increase to 40.8%.

Weighted average diluted share count in 2007 is expected to be approximately 50.5 million.

Now turning to the balance sheet, first inventory. Our inventory strategy is simple. Be in stock on core offerings to meet consumer demand while improving our inventory efficiency over the long term. Ship seasonal product at the start of the shipping window. Earmark any seasonal excess for our 14 outlet stores, and operate those stores at a profit.

Our core items such as ColdGear, Tech-T, and compression tops and bottoms drive over 50% of our business. In 2006 we took receipt of fall merchandise earlier than we did in the prior year to support an increased number of product launches in the third quarter. That strategy paid off with over 40% growth in apparel for the third quarter in 2006.

For 2007 we are looking at a 30% to 35% growth and are planning a similar strategy, where we will invest in core inventory -- specifically, fleece and ColdGear -- in the second and third quarters to position ourselves for anticipated strong consumer demand in the back half of the year.

Now moving to CapEx. 2007 is still an investment year for Under Armour as we implement the infrastructure to support large, scalable businesses. Previously we provided a plan to invest between 20 and $22 million to accomplish this goal. Now with better visibility, confidence in our ability to execute infrastructure projects, and greater investment in concept shops at our larger accounts, we are raising our CapEx number for 2007 to 34 to $36 million.

Let me take you through some of the details. To support the growing scale of our apparel and footwear business, we are investing one-third or approximately $12 million of our CapEx in our distribution house, where we will add new equipment to improve our shipping velocity and expand our warehouse capacity in anticipation of future growth.

Just a couple of weeks ago we completed Phase I of our warehouse management project and went live with our footwear. Our teams have done a great job with implementing systems, and we are confident with our ability to complete our projects on time and with minimal risk to our businesses.

Making these investments now helps ensure that we are able to execute on the growth we have planned for 2007, as well as build capacity for new businesses such non-cleated footwear expected in 2008 and beyond.

Additionally, as we work with our customers to make a more impactful statement on the floor, we continue to shift discount dollars to concept shops. We now plan to invest approximately $11 million in our in-store fixture and concept shop program. We believe that this has a positive impact not only on the productivity of the floor space, but on our brand image as an authentic athletic brand with a premium product.

We will also invest approximately $6.5 million in our direct-to-consumer business, which for 2007 will include our Web and catalog business, one full-price test store projected to open in the fourth quarter of '07, and five to six new outlet stores to be opened for the full year. The balance of our capital will be invested in IT initiatives and general corporate improvements. We are confident that these investments support both our long-term infrastructure needs, as well as secure critical space at retail to offer our products.

Cash flow. Taking into account these strategic investments, including our expected investment in working capital, specifically inventory, and our additional capital expenditures in 2007, we are expecting to use approximately $12 million of our $70 million-plus cash balance that we had on hand at year end.

Now for some color around our second quarter. Similar to 2006, the second quarter of 2007 is projected to be our lowest volume quarter, with a similar percentage of revenue in the quarter coming from our lower-margin cleated footwear business.

In addition, as a result of the timing of our marketing initiatives such as Click-Clack II, our marketing spend will exceed the high end of our range in the second quarter. As a result, we expect our second quarter diluted EPS to be between $0.02 and $0.03.

For the full year we are planning our marketing spend to be at the high end of the 10% to 12% range, with Q4 marketing planned to be below the 10% to 12% range. Once again, for our full year, income from operations is expected to increase to 74.5 to $77.5 million as previously provided.

We remain proud of our accomplishments for the quarter. We are confident that the investments we are making for the growth of the brand will yield large, scalable businesses. We are excited about the opportunities we have created for the future long-term success of the Under Armour brand.

This concludes our remarks. Now Kevin, Brad, and I will take your questions. Once again I will ask that each of you please limit yourself to one or two questions each, so we can hear from as many of you as possible.

(OPERATOR INSTRUCTIONS) Jim Duffy, Thomas Weisel Partners.

Question for you guys on the sourcing and doing more, I guess, closer to need. Can you provide a little more detail about the specifics of where that sourcing is happening and the decision to shift the balance? Is it a forecasting challenge that you found that you had? That it is harder to predict the products that you will need in advance? Or any more color you can provide around that would be helpful. Thanks.

This is Wayne. In a perfect world our ability to match the consumer demand with our internal forecasting would be great, if we can get those two in sync. But with our growth sometimes we do have that challenge.

We remain very focused on getting the product to our loyal customers. That is number one. With doing that, we have found that this year we had to shift some of that sourcing to sources that had shorter lead times. If you really think about it, it is almost [a sum of] our domestic sourcing that we did last year to service our businesses.

So we are confident that we will be able to get the product and service our business. But on a temporary basis -- and I think the key point here is it is a temporary basis -- we will have to take some higher prices for our costs.

So blended all together, we still see gross margin improvement. Over the long term we believe that as we continue to improve our supply chain we will be able to take advantage of our volumes as they increase and improve our margins. But in the short term, again, filling customer demand is very important to us, and it is going to be to more local contractors, and in that case higher costs.

Wayne, where do you see the mix of domestic sourcing over the course of the year?

Well, in the past we've continually moved our sourcing base to now where we have close to 40% in Asia and a good balance of it in Central and South America. I know that in the past we had less than 5% in the US.

We are going to probably have to move some of that back into the shorter lead-time, which would be the US, to accomplish this goal of satisfying consumer demand. Good news is I don't know how high is high, and I don't know where the top is, and we are going to find out.

Okay. Very good. I will let someone else jump in.

Robby Ohmes, Banc of America Securities.

Thanks, guys. I'm sorry; I hopped on the call late, so if this was already asked, I apologize. I was hoping you could give us a little more detail on the women's side of the business and your confidence in hitting a 30% or better revenue growth for the year. Sort of put it in the context of if you are seeing some of your competitors get a little more aggressive, especially on that women's side. Is it becoming more of a battle for floorspace, especially on that side of the business, with your key customers?

Then a follow-up to that would just be -- again, I apologize if this was asked already -- but a little more detail on how you expect the outerwear launch in the back half to play out. You mentioned the buildup of inventories. How significant could this be? Could it significantly reaccelerate your US business in the third quarter? Thanks.

This is Kevin. First of all, we feel great about exceeding that 30% number that we've given out in the growth of our women's business. I think it is important to remember we've got a women's business that is only three or four years old. So what Wayne just mentioned in the last answer was -- how high is high? I think that is one of the things we are trying to figure out for women's.

One thing I think it's important to note is that last year, what we are comping over, is a quarter where we had a Q2 launch of SAP. So we had a lot going into the first quarter of last year. I think that you probably would see that number a little bit greater.

But to be perfectly clear, in line with SAP, I don't think we did a great job of servicing our accounts. That is one of the new things that we found as being in the women's business, where we have been a business that has built on basics -- which are 10 core styles driving nearly 40% of our product line that sell 12 months out of the year. It is not quite the case in women's, with flowing color and things.

So I think we learned a valuable lesson in Q1 in the women's business. I think that position that we are taking in inventory, and I think getting ahead of the supply chain with people like Jim Calo, our new Chief of Supply Chain, are really going to have an impact on us being able to service that business.

Again, around women's, I talked a lot in my script about the women's campaign that we have planned for the back half of the year. I think in the past that we have truly talked the talk, but I'm not sure that we walked the walk in terms of what we were doing with the women's business. We are absolutely committed to making women's a priority in this business in the upcoming balance of 2007.

Let me skip over to the outerwear and just touch on that. I think the launch that we have -- again, the way that we are going after outdoor and with outerwear, I think the thing to focus on is the new program we have like Base, those Base layers -- Base 1, Base 2, Base 3.

The goal there is to effectively become the brand. There's a lot of niche players that are dominating this space right now. So the way that we are really going to define the back half of this year with this launch is around Base, which is I think much closer to where our brand is today.

Our goal there I think is building the credibility. Because we found that the consumer is taking our product to this outdoor space, to the mountain space, and wearing our brand and accepting our brand. That we've got the capability of getting into outerwear as well.

We are very conservative with the number of units that we have projected for the back half of the year. We are very tight with the allocation of product, going pretty much to bottom of the mountain retailers, specialty, and some key big box partners that you will find that will be carrying the product. But it will all be specialty. It will all be very mountain and outdoor focused.

Terrific. Sounds great. Thanks a lot.

John Rouleau, Wachovia Securities.

Kevin, you've always been very protective of the brand and very supportive of your retail partners in their distribution. I am just kind of wondering what sort of discussions, if any, you've had with them regarding the opening of a full-price store.

Then maybe you can share with us what sort of location you would expect this in, like a power strip, or a strip, or something like that. Anything else on the store would be helpful.

Well, first of all as we've said in the past is that we like our distribution, and they like us very much. So the first people that we talked about with this was, of course, our key retail partners.

Like anything I think that they saw the opportunity that we described for them. Which is basically, there are key retail destinations in the US and abroad where our brand is currently not being sold. We would like to tell them an Under Armour story with a profitable, controlled distribution. So as we weighed the alternatives, I think the best solution for us was to have that ability for full-price retail.

We know how to speak to the consumer. We've done with our product and our marketing. You see the opportunity in-store, not unlike [going] online with eCommerce and our brand experience sites. I mentioned we've got 100-plus of these branded shops going up within our key retailers this year, and we're committed to that.

So we believe that we know how to connect with the consumer. Again I can't emphasize enough is that this is something that has been communicated and that our goal -- being to truly become the athletic brand of this generation -- we think it is important to tell them a wholly branded experience in a store environment.

Where that is going to be, like I said is that what we've communicated right now is it is something that we would like to have close to home. That would effectively mean within 50 miles of our headquarters here in Baltimore. We [have] announced yet where exactly that store is going to be at this point.

Okay. But initially some locations or a location where the brand is not well represented from a distribution standpoint?

Absolutely. Again, the goal that we have is not to -- is the places where we are currently not being sold. Where we are [walking] that consumer because we don't have the opportunity to tell him a branded story.

So I think having the laser focus and capability to go in there and open up the Under Armour brand, I think that is what our ultimate intent here. It is not opening anywhere near, ideally, where our key retailers are.

Okay. Then just as a follow-up to another comment you made in answering the question, it sounds like about 100 what you are calling floor-to-ceiling type in-store shops by the end of the year. How many do you have now? Just roughly when those shops have went in, what sort of an increase in sales -- either on a per square foot or per store type basis -- have those locations experienced?

We've done this in the past. Let me let Wayne (multiple speakers).

Yes, this is Wayne. I just want to give you some color around what we currently have right now in the marketplace. (multiple speakers) What we have in the marketplace are fixtures. We've had them where we have Under Armour dedicated fixtures in areas within stores that have been fairly productive.

When we talk about the concept shops, they will be designated, anchored, branded space which -- when I mean anchored and branded, I mean anchored and branded with floor and with walls. So the concept shops will be what we would consider longer-term space dedicated to both men's and women's.

So right now it is a step up to have a better branded experience. What we've seen with the concept shops or with the fixtures is that, A, there is more productivity; and you could actually have more product within the space itself. So two very positives with that. And in terms of --

Correct me if I'm wrong. There are a couple of concept shops, floor-to-ceiling concept shops, out there now? Or are there really none out there and you are just calling them fixturing?

No, no, no. We've done that in some of the large format; for instance, Dick's. We've done that in (multiple speakers) large format stores as well. The impact -- and I'll be careful what I say here -- but that is a top 10% performing store. It, A, has to do with location; but without question has to do with the shop itself.

So where we've tested this -- and there is different experiences that we've had of putting in, quote unquote, concept shops. Which means committed space, committed fixturing, men's and women's, I think, homes or branded pads for us. The results have been -- it difficult to quantify, other than to say that the results have been extremely positive for us.

So I think without question there is an impact to those stores [where] we will have shops, and there is a reason why we're making the investments. To be clear, this is a cobranded investment. So this is not something that we are going out and just writing the check ourselves. These are co-op dollars partnered with our accounts that are effectively redirecting monies that they had had committed for other components, i.e. circulars or in-store et cetera. That [I think] our retail partners are showing their commitment to our brand by wanting to tell that type of a branded store experience.

Right, and the timing of those? Will all 100 be in kind of by end of the third quarter, beginning of third quarter, end of fourth? What's the timing?

We're looking to get all the stores out this summer. So when we talk about it is 100-plus, in that range, total stores that we will have out. It is effectively just coming back to our capacity.

So we recently went in and we did -- we have effectively now completed three-year deals with all of our accounts. That is so the way that we look at or take this approach is not just on an annual basis. But we can look at these guys and say -- we are thinking about the business for the long term; we are thinking about for the next three years.

So this is more of an integrated approach over the next three years. So as fast as we can get them up in the right locations, that is effectively our plan.

(multiple speakers) One last piece I want to add. In addition to the concept shops, we will also continue to have our outposts. So if we have an outpost in golf, that will still be there in addition to the concept shops.

Got it. Thank you.

Omar Saad, Credit Suisse.

Kevin, wanted to get your thoughts as you take the -- as you think about how you use the -- leverage the great asset in terms of the Under Armour brand and go into new categories, what have you learned about your cleated? Your experience in the cleat category that makes you comfortable to go ahead and take the next step into the non-cleated category next year?

I think cleated is -- probably -- it is pretty definitive of our brand is that we like to go where we can win. I said before that we like sick categories. At that time we believed that football cleats, for instance, were a pretty sick category. Dominated by one brand, low ASPs, very short window or selling season.

I think that a lot of the success that we had in the summer of 2006 really changed a lot of that. Now there is excitement. You've got people marketing and talking about cleats, higher ASPs. I mean, the ASPs increased over 30% last year.

That is effectively the way that we look at the non-cleated market of non-cleated footwear. We have not disclosed yet exactly which category we are going after. Again, the timing on this is something that we've limited to saying we're going to come out with footwear in 2008 because we want to make sure the product is right, first and foremost.

But I think not dissimilar to what we saw with attacking football cleats first is what we see in the non-cleated area. That there are some pretty sick categories out there that Under Armour can come in; and with the power and the ability frankly to leverage our brand, we believe that we can win and reinvigorate certain categories.

Thanks. Wayne, wanted to ask you on the gross margin line -- I know you gave some of the detail there. But when I think about the impact that the footwear business had on the overall gross margins, having I think it was -175 basis point impact, if I look back the last couple quarters, you were still able to get meaningful gross margin increases while also maintaining footwear (inaudible).

How do I reconcile those two kind of dynamics on the margin line?

On the puts and takes, as far as the footwear, the point I want to make is, yes, footwear had a fairly large impact in the first quarter versus the prior year. Because obviously as Brad said, we started it in Q2 of 2006. Footwear will continue to have that impact of lowering our margins.

But the one thing we will do is, as each season goes by, we will continue to increase that margin, push it up as our sourcing and volume get better. So there is definitely going to be a little bit of a take as far as the footwear, but overall we see that continuing to increase.

I think the big difference that helps reconcile for me would be that in this year, due to the demand that we are trying to fill, we've had to temporarily shift some of our sourcing base to contractors that were able to turn it quicker, and to keep up with the demand that is out in the marketplace, specifically in some of our core items.

When we have done that, what we've done is on a temporary basis we are not going to see the benefit that we've seen in the past year with volumes increasing and sourcing to our margins. So where that starts to moderate in 2007, then you have the take from the footwear which continues on.

As far as footwear, you are going to have footwear obviously in the first quarter where last year we didn't have it. So that 175, if you play that out for the full year, that will have an impact on our margin.

Omar, this is Brad. Also on top of that, on the direct-to-consumer business, in the back half of the year you got remember the direct-to-consumer business has a much higher sales volume. That helps increase the margins in the back half of the year versus the first quarter.

Great. Thanks for such an informative call.

Dan Wewer, Raymond James.

Wanted to follow up on the footwear discussion, make sure I understand. We're expecting at someday footwear to be a larger portion of revenues than apparel?

That is correct.

After you change the sourcing strategy in footwear, do you have any sense as to where gross margin rates will compare to your apparel margins?

I'm going to let Wayne answer that, but let me just jump on the front half of it. Which is, when we launched into footwear we made a proactive decision to make a pretty big bet with a big partner. We started with one supplier that we could focus our manufacturing, and have a partner that could help us get into the business, and do it with the right product, which was our number one concern. We did that a year ago with Yue Yuen.

We continue to I think broaden the sourcing base that we set up in 2005 in preparing for that 2006 launch. We now have two other additional manufacturers that are up and running. So I think you will see it improve.

But probably the biggest point is that when you talk about getting into the footwear business you don't do it to build football cleats. We started -- footwear margins are typically lower than apparel margins and cleated margins are the lowest of them all. So I think we are seeing the worst of the storm at this point. Our anticipation is that from a margin standpoint it will continue to get better. But let me let Wayne dive in a little (multiple speakers).

The only things, Dan, I would add to what Kevin had said is, as we increase the margins ongoing, as we get smarter about our sourcing, and we increase our volumes -- just the way we did with apparel -- we also are leveraging some of the overhead of the Company. So even though gross margins are lower and will increase, they are still somewhat of a challenge for footwear to be greater than apparel one day in margins.

But I think the other point to make is that operating margins would be fairly positive. Because, again, we have an infrastructure in place in the back office. We have an infrastructure in place in terms of our distribution channel, where we are able to take advantage of that. So from an operating margin percent, I would say that we will have plus.

Wayne, a separate question on the inventory growth with a target of 30% to 35% top-line growth this year. Is that where you are expecting inventory growth to stabilize? Or do you continue to see it running faster than revenues to meet the fulfillment needs of your customers?

We're going to be very focused on getting product to our customers. Like we did last year, there is a timing. First thing is our core product. About 50% of our business is core product. For the second and third quarters we're going to take a higher inventory position than top-line growth to be in a position to take advantage of that consumer demand.

Earlier I said that I am not sure what the top is. But secondly, with 50% of our business being core items, I feel somewhat safe in getting our inventory in early, starting at the beginning of the shipping window.

Over time with Jim Calo and the supply chain, we will take a longer-term look at improving the inventory turn and also reducing lead times. But in the near term, Dan, I want to be in a ready position. So inventory should lift up in Q2 and Q3. By year end I think it gets close to normalizing with our top line.

Wayne, last question I had. Or Kevin, it could be for you as well, the marketing plan for the fourth quarter. As I recall last year that was around, what, 13% of revenues?

Yes.

And we're running talking about it running below 10%, I guess, this year?

(multiple speakers) the 10% to 12%, that is correct.

(multiple speakers) get a logic of reducing the number of impressions with your customers heading into the most important season of the year.

First of all is that on a dollar basis we are still going to spend more in Q4 than we will in, frankly -- in the back half of the year than we will in the front half of the year. So there is nothing changing from that standpoint, nor is that our commitment.

I think we've also demonstrated -- like we launched in Q4 of 2006; we actually did a cobranded. We found ways to leverage our brand doing a cobranded commercial with one of our key partners in Dick's Sporting Goods, which launched around Thanksgiving for holiday.

So I think we will continue to be innovative, and I don't think it is any reflection of having any less of an impact from our brand in Q4 of next year. It is just simply the way the dollars fall.

So we have talked about prioritizing what we are doing, for instance with our women's campaign. We talked about our prioritizing our Click-Clack II launch, which we have going on right now. So we feel pretty good about where we are spending the dollars. If our marketing people were talking to us, they would probably just be asking for more, but.

(inaudible) Thanks and good luck.

We have time for one more question.

Jeff Klinefelter, Piper Jaffray.

Just a very quick question to follow up on the international business. You have commented on the doors that you currently have open; with your plan for I think 1,200 by year end from, I believe, 950.

Could you give just a brief breakdown of essentially where those 950 are today; where the 1,200 would be in terms of spreading geographically? You talked about many key international markets going in. Are those all part of the 1,200 by year end?

Then any just color on the category performance differences or variances with the US business, what you're learning there versus your launch here.

Let me go there, Jeff. First of all, so we got 950 doors today. About 150 of those currently are in JJB. We have plans to add about another 50 in the next month or so.

We have talked about and we mentioned in the last call, I think, that we are going to go to 300 doors by the end of this year. So we are looking to be very prudent with the way that we open up those stores within JJB. Of course it is supported -- having the support from fixturing and POP and the other things we want to ensure that we are communicating a good story.

I mentioned in my script as well just the Sport Arena shops that we have up. We are opening six more there. [Carshott Sports], we are in all 35 of their stand-alone doors and putting concept shops around to support them.

Sport Chek again in Germany; we are in two of their 13 stores and looking to roll out to more. Go Sport in France, who is the premium player in France; we've just rolled out to 20 doors there. They've got more than 100-plus stores, as well.

So a lot of what you're seeing and hearing from us is that we are picking our partners right now. We are not necessarily in all doors within these partners, but have the ability to scale and leverage.

The other big partner there is the Intersport and Sport 2000, which combined represent more than 8,000 doors really across Europe with their smaller, independent. It kind of works like a buying group. So we are committed to what those guys and the support that we are getting from them, what they are doing.

If I can talk about just kind of where the European business is versus where the US business is, I tried to get that point across in my script, too. In saying look, congratulations to the US business. We have now effectively balanced our business from 50% compression to 50% loose. I think bearing that stereotype of Under Armour being just a compression brand is what that statement tells us.

Well, where we are in Europe and the idea of showing that we are 80% compression, 20% loose, it is because we are so committed. Before we run out and start selling a bunch of great-looking fashion styles and colors and other products we believe we could probably sell, we are not sure what that does to establish the DNA of our brand in Europe, though.

So again, when Wayne talks about Europe being a long-term investment for us, it means that we are being patient, we are being prudent about the way that we are establishing our brand and presenting ourselves to the consumer in Europe.

Great. Thank you.

That does conclude the question-and-answer session for today. At this time I would like to turn the conference back over to Kevin Plank for additional or closing remarks.

My remarks are thanks everybody for your time today. Have a good May Day. Thank you.

That does conclude today's conference, ladies and gentlemen. Again, thank you for your participation on today's conference call. You may disconnect at this time. Have a great day.