Under Armour Inc (UAA) 2008 Q1 法說會逐字稿

Good day, everyone.

Welcome to the Under Armour first quarter 2008 earnings results conference call and webcast.

Today's call is being recorded.

At this time I'd like to turn the call over to the director of investor relations, Alex Miyamoto.

Please go ahead.

Thank you and good morning, everyone.

I'd like to start by welcoming you to Under Armour's first quarter 2008 earnings call.

During the course of this conference call we'll be making projections or other forward-looking statements regarding future events or the future financial performance of the Company.

The words estimate, 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 our press release and in the "Risk Factor" section of our filings with the SEC.

The Company assumes to obligation to update forward-looking statements to reflect the events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Before we begin I'd 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 address on the call.

Now I'd 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 2008 and beyond.

Brad Dickerson, our Chief Financial Officer, will then discuss the Company's financial performance for the first quarter and provide an outlook on key balance sheet items.

Wayne Marino, Chief Operating Officer, will conclude the prepared remarks with an updated outlook for 2008 financial projections.

After that we'll have a Q&A session that will end by 9:30.

And with that I'll turn it over to Kevin Plank.

Thank you, Alex, and good morning, everyone.

Today I'd like to talk about industry leadership and how we are using our position as the athletic brand of this generation to ensure that we are building large scalable businesses that will help drive growth in our industry for years to come.

Industry leadership for Under Armour means several things.

First it means being a leader in driving sales, both for Under Armour and for our retail partners.

This past quarter we continued to outpace the market in revenue growth and retail sell through.

I will give you the meaningful numbers on that in a moment, but know that our business is strong.

Second, industry leadership means understanding where market opportunities exist in driving growth in those categories, both here in the U.S., and across the globe.

And third, industry leadership means taking the athletic consumer some place new and recreating categories as we are doing with Performance Training footwear.

We believe the long-awaited footwear debut we're about to make this Saturday, May 3rd, will not only breathe life into the long dormant category of cross-training, but also deliver excitement to the athletic shoe category and sporting goods as a whole, the likes of which has not been seen in nearly a decade.

For Under Armour this leadership requires the appropriate level of investments to drive industry growth and excitement, and equally important to deliver long-term benefits to our shareholders.

I'd like to briefly address the first topic of driving sales growth.

Wayne and Brad will provide more detail later, but the key takeaway is that we continue to outperform the market in athletic apparel growth and continue to lead the shift from cotton to performance.

Our apparel category grew 25% in the first quarter.

Men's was up 20%, youth up 29%, and women's -- the Under Armour women's business was up 36%.

We also reiterate that full-year 2008 revenue growth will be in the 26% to 28% range.

Most importantly, we believe our proven ability to drive growth within existing categories and the power that our brand gives us in enter categories, such as Performance Training footwear, gives us confidence to continue to invest in the growth opportunities we see for this year and beyond.

Two existing areas that we have identified as key growth drivers are women's and direct-to-consumer, which includes our outlet stores, our website and our branded store in Annapolis.

From a short term perspective I'm pleased to report that both of these two businesses showed large increases year over year in Q1.

In women's we proved once again that we are moving beyond being just the compression brand for female athletes.

We believe our connection with the female team athlete and our focus on innovation has provided the opportunity for Under Armour to lead the industry.

In Q1 we saw enthusiastic consumer response to our stronger color pallets and as strong retail sell through in women's, including some of our key fitness items retailing in the $60 plus range.

Our women's training revenues were over 30% and we saw strong sell through on our sports bras.

It's important to note that our strength in women's from a distribution perspective span across the board, from our national sporting goods retailers like Dick's Sporting Goods and the Sports Authority, to regional partners, like Modell's, Academy, and Hibbitt's, to our business at Nordstrom's.

Our direct-to-consumer net revenues were exceptionally strong in Q1, which we believe is a direct reflection of two key measures; the strength of our brand and the positive impact from our new prototype campaign.

From a brand perspective we believe that 57% growth in our online revenues is tied in part to the growing loyalty of the Under Armour consumer.

Our core consumer has grown up shopping online and we recognized early last year that upgrading both our product assortment and our web capabilities was essential if we were going to continue to grow with our consumer.

Our online presence from the content for athletes to the shopping experience is a key measure for today's consumer.

We have built brand loyalty on the field and we have begun to build it online, as well.

The third area where we believe it's our responsibility to show industry leadership, and probably the most critical for our long-term growth, is in new categories.

Whether it's creating the category, as we did with compression, or reinventing the category, as we are doing with Performance Training, our proven ability to bring consumers someplace new and create excitement for both our retail partners and our consumer is at the core of what we do.

And I think there is no better evidence of this ability than the launch this Saturday of our Performance Training footwear.

While media has been playing a major role in priming the pump for the past few months, the ground swell has been growing in true Under Armour fashion in the field.

It started with the Under Armour High School American football game on ABC in early January and it continued with the Under Armour Senior Bowl, the true showcase with the top NFL-bound seniors, then shortly after unveiling Under Armour footwear to more than 100 million viewers who tuned into the highest-rated Super Bowl in history we saw our web traffic more than triple any of our holiday peak periods.

The intended results of the initial phase of the launch came true as our apparel sales increased online and in store as thousands preorders their pairs to make sure they wouldn't miss out come May 3rd.

And for all you folks on the call who preordered, thank you for your business and you'll see yours in just a few days delivered right to your doorstep.

All along we've been on the road, testing the shoes with high school players at the Under Armour football combines.

These combines, held in 15 cities across the country at NFL facilities, host the same type of best athletes and team leaders who told us 18 months ago that there was a lack of true training footwear out there.

Now we have several hundred of these athletes in every city we stop in trying out the shoes and providing invaluable feedback before heading back to the schools to spread the word about the new Under Armour training shoes.

Meanwhile, members of senior management, myself included, are hitting the road and teching up sales staffs and the shops we've built within our biggest retail partners.

Sales teams as large as 100 associates or more are now armed with digital downloads of the commercials, interactive technology displays, stickers, pamphlets and posters based on one simple message to sell our very complex footwear technology.

Stop training in running shoes.

You could probably tell how excited I am about the lunch.

We've been building the buzz around our Performance Training footwear for five months now.

The commercials have been running, the message is being told on every media platform and we've connected with the kids on the field, in the gym, and throughout the campus.

We didn't reinvent the cross-training category just because we saw the opportunity, we did so because it's at the heart of what we do well, and it's the right step for us in building a large scalable business.

We have invested much to get us to this point of launching our footwear this Saturday, and we need to continue to invest if we are to realize the opportunities for growth that we see in new categories and new geographies.

You've heard me say it before, and I'll say it again; Under Armour is a growth Company, and the most exciting growth is still in front of us.

We believe substantial opportunities exist in our key growth drivers of apparel, footwear, retail and international.

In apparel you just need to look at our women's business, which finished the quarter up 36% and still today only represents 26% of our total apparel business.

From a channel perspective we believe that there is significant white space in the mall channel.

We are currently in top Finish Line doors and will be placing limited apparel assortments in a few stores within the Foot Locker group throughout 2008.

This obviously positions us for what we believe could be a differentiated apparel approach and provides us with appropriate distribution for our largest future growth engine, footwear.

We have launched our first retail store, and we will continue to test this direct distribution in multiple venues, allowing us to be strategic with where we place the brand in the future to compliment our existing distribution.

The best indication of our future strength is that with all of this continued growth we have only just begun to extend into other world markets.

We're growing our European business authentically with the recent signings of the Welsh Rugby Union and the Hannover 96 Football Club in Germany.

And our Japanese business, which is presently run by a licensee, seems to have just crossed the tipping point with a revenue model that we expect will grow nearly 75% this year.

Meanwhile we've been able to move people from cotton t-shirts to Performance apparel, from regular cleats to Click-Clacks, and soon from running shoes into Performance trainers.

And the good news, the greatest opportunity I'll mention this morning is that we've done all of this without having sold a single t-shirt in China or India, or South America yet.

I'll finish by saying this.

We're cognizant of the present challenges in the U.S.

retail environment.

That's a reality.

But with more than 95% of our current revenues coming from the U.S.

we're proud to be able to post a growth rate in excess of 25%, while simultaneously building a platform of businesses for our future, both domestically and abroad.

As we make the transition to become a truly global brand, we are excited about the white space that lies ahead, yet remain focused on investing in our growth drivers.

That means in addition to the framework, we're building outside of this country, we're counting on growth from our all of our engines and, of course, the successful launch this weekend of Performance Training footwear.

Our big box sporting goods partners, like Dick's and the Sports Authority, are positioned with the shoes and based on the early feedback, we believe that the launch looks promising.

As we have stated in the past, the way that we will define success with our Training launch is how we are positioned at year end to enter additional footwear categories.

This is more than a campaign, more than a new product line.

We believe this launch will change the athletic shoe industry forever.

On a larger scale we believe we have redefined once again how athletes prepare and dress for training and competition, and it's Under Armour's duty and privilege as the industry thought leaders to deliver this Performance product to all athletes at all levels.

And with I will turn it over to Brad.

Thanks, Kevin.

I would now like to provide some information around our first quarter income statement as well as some key balance sheet items.

First our income statement.

Our net revenues for the first quarter grew 27% over the prior-year quarter.

This was largely driven by 25% growth in our apparel sales, highlighted by 36% growth specific to our women's apparel.

In April we successfully implemented a new warehouse management system in our distribution center.

As a result of the system switch, some of our customers elected to take shipments in March that were originally scheduled for the first weeks of April.

As part of this shift, and in preparation for our upcoming launch, a small portion of our new Performance Training footwear also shipped in March.

In the first quarter, gross margin decreased 110 basis points to 47.6% from 48.7% in the prior year.

The gross margin decline was a result of inventory reserves, primarily on excess glove inventories identified this quarter.

In addition, the margin impact of Performance Trainers in the first quarter was more than offset by the strong growth in direct-to-consumer revenues, which had a growth rate of 77%, continues to grow at a faster rate and achieve higher gross margins than our overall business.

SG&A as a percentage of net revenues for the quarter was 44.9%, compared to 35.8% in the prior-year quarter.

On television, in print, and in store, our new prototype campaign has been ramping up in anticipation of our Performance Training footwear launch this Saturday.

In line with our previously-announced plans, we are shifting a greater portion of our marketing dollars to the first half of the year to support the campaign, and this was a major driver of the year-over-year increase in SG&A.

Marketing increased from 11.1% of net revenues in the first quarter of last year to 17.8% this year.

Also contributing to the increase in SG&A growth were increased investments in product innovation and employee equity compensation costs.

Our operating income for the quarter was $4.3 million compared to $16 million in the prior year.

Operating margin for the first quarter was 2.7% compared to 12.9% in the prior-year quarter.

This decrease in operating margin was driven by our lower gross margins and the planned increases in SG&A as previously discussed.

Our effective income tax rate for the first quarter was 40.3% compared to 40.6% in the same period last year.

We benefited from a one-time true-up in the first quarter and expect our full-year 2008 effective income tax rate to be approximately 42.3%.

Our resulting net income for the quarter was $2.9 million, compared to $9.9 million in the same period last year.

First quarter diluted earnings per share was $0.06 compared to $0.20 in the prior year.

Our previous guidance was $0.03 to $0.05 in total for the first half of the year.

Now I'd like to move on to the balance sheet.

Total cash and cash equivalents at the end of the quarter were $17.6 million compared to $40.6 million at December 31, 2007, and $57.2 million at the end of the first quarter of 2007.

The year-over-year decrease was primarily the result of investments in inventory and capital expenditures, which I will speak about shortly.

For the full-year 2008, we continue to expect cash to remain relatively flat from our 2007 year-end balance.

Currently we continue to have full availability on our $100 million line of credit facility.

Net accounts receivable increased 21%, or $17.4 million on a year-over-year basis, which was below our net revenue growth for the quarter.

In 2008 we continue to expect net accounts receivable to grow in line with top-line growth.

At the end of the first quarter inventory increased $167.9 million compared to $166.1 million at December 31, 2007, and $80.1 million at March 31, 2007.

It is worth noting that the inventory balance at the end of the first quarter included nearly $14 million of Performance Training footwear in preparation for our launch this coming Saturday.

We expect our year-over-year inventory growth rate to decelerate as we move through the year, beginning with the second quarter.

By the end of the third quarter we expect inventory growth to be in line with sales growth, and by the end of the fourth quarter, we are projecting inventory to grow at a rate below our annual sales growth for 2008.

One item to note is that although we expect our year-over-year inventory growth rate to decelerate, in the second quarter we expect our highest absolute dollar inventory balance of the year as we prepare for the start of our fall season in the third quarter.

Wayne will discuss some of our inventory initiatives in more detail shortly.

As we move to capital expenditures we always like to point out that we are building the foundation for large scalable businesses.

Our investment in capital expenditures for the first quarter was approximately $9 million.

Our full-year 2008 capital investments are still planned at approximately $40 million to $42 million and will include approximately $14 million in our branded concept shops and in-store fixtures; $10 million in upgrades and improvements to our information technology infrastructure, which is an increase over our previous estimate and includes additional SAP modules specific to inventory and financial planning as well as additional investments to our website; $5 million in upgrades and improvements to our existing distribution facilities; $10 million for the build out of new outlets and additional full-price test stores; and the remaining balance in general corporate improvements to support our growth.

Now Wayne will take you through our remaining outlook for 2008.

Thank you, Brad, and good morning, everyone.

Before I discuss our outlook for 2008, I would like to spend a few minutes on our inventory strategy.

Kevin spoke earlier about the strength of the Under Armour brand.

The brand connects with the consumer, even in the face of a difficult economic environment, and all of us in the organization are focused on protecting and growing this brand.

One component of this is controlling the presentation of our brand at retail.

In order to more quickly address current and future seasonal access inventory, we have put a plan in place to sell more of the seasonal excess product through our own outlet channel.

As a result of this strategy, we have lowered our target gross margin for the outlets.

Doing so allows us to move units through our existing outlet base at a faster rate, but has a negative impact on our full-year gross margin outlook in 2008.

I should point out that our outlet gross margins are still well above our overall Company gross margins.

In addition to this tactical decision to more efficiently sell our excess seasonal product, we are now planning to open nine retail outlet stores in 2008 as compared to our original plan of five stores.

The combination of this outlet strategy, along with the initiatives we already had in place to reduce the safety stock levels on core auto-replenishment items, is expected to result in a slowdown in the rate of inventory growth as we move throughout the year.

In addition to these technical initiatives that I just outlined, we are at the same time putting measures in place to improve our operational efficiency.

Specifically we are putting systems and processes in place to improve our production planning process.

We have recently implemented an S&OP, or sales and operations planning process, that gives us added visibility and control to better manage our inventory.

This process allows us to better link the forecasting and sales sides of our organization with the production planning functions.

To complement this process we are also investing from an IT infrastructure perspective.

Coming off the heels of a successful warehouse management system implementation, we have also invested in SAP's inventory and financial planning modules.

The combination of new internal processes and new technology will help us operate faster, smarter and more efficiently as we continue to strive to be a great growth company coupled with strong operational efficiencies.

We have confidence in the skills and talent of our team, and we believe the approach we are taking will not only allow us to achieve the inventory targets Brad outlined earlier, but also lead to greater inventory efficiency in 2009 and beyond.

Now I'd like to move on to our outlook for 2008.

First, I would like to remind you that our long-term growth targets remain at 20% to 25% for both our top and bottom lines.

As you can tell from our first quarter result, the Under Armour brand continues to resonate.

Even with over 96% of our 2008 revenues coming from a challenging retail environment in North America, we continue to be a growth leader in our industry.

We are able to do this because consumers are still trading up to Performance products and selecting our brand.

As a result, we are reiterating our 2008 full-year net revenue guidance of $765 million to $775 million, which represents 26 to 28% growth over 2007.

The outlook for our strategic growth initiatives remains the same.

We continue to expect our men's apparel business to grow in the range of our long-term growth targets of 20% to 25%.

Additionally, our women's and youth businesses are expected to grow at an even faster rate, much as they did in the first quarter.

As Kevin mentioned, we are preparing for the launch of Performance Training footwear this Saturday.

We continue to project this to be a one million unit program in its first year, but what is most exciting is the opportunity we see to grow this category while positioning us to introduce additional Performance footwear categories in 2009 and beyond.

We remain excited about the opportunity in Europe and the progress we are making in diversifying our account base, which has grown to over 1,700 doors.

From a distribution perspective we continue to focus on authentic sports-specific distribution, and our goal with big box specifically is to further develop our share of shelf space with existing partners.

Additionally, we recently announced signings with the Welsh Rugby Union and Hannover 96, a German soccer league club.

These sports marketing deals are our first official kit supplier deals in Europe and they give us an authentic presence on field in two our key markets, the UK and Germany.

Given the retail component of these deals we believe these signings are sound investments.

However, some of the best reaction we have gotten is from our customers who have shared their excitement about the impact that this could have on our brand presence in Europe.

While our international revenue in the first quarter was impacted by one of our major accounts in the UK, we continue to expect our rate of top-line growth internationally for 2008 to outpace the Company's overall year-over-year growth rate.

I want to point out that international is -- is in an investment mode and we are willing to be patient to grow this business for the long term and be authentic.

Our direct-to-consumer channel continues to be a strong performer across the board, whether you're talking about the web, outlet, or the single full-price store we have in Annapolis.

We continue to believe in the opportunity this brand has to communicate and connect directly to the consumer.

For 2008 we are planning to test at least two additional full-price retail stores.

For the first half we continue to project top-line growth in line with our full-year growth targets of 26% to 28%.

Based on the updated outlet strategy I laid out earlier, along with the gross margin detail Brad provided regarding the first quarter, we now anticipate our 2008 full-year gross margins to be approximately 50%, or 30 basis points lower than 2007.

We expect any gross margin impact from the increase in footwear to be largely offset by the growth in direct-to-consumer business.

We will continue to make investments to drive the growth of the brand in 2008 while also investing in initiatives that will drive our long-term growth.

Part of what has made this Company great is our belief in the opportunity of this brand and our willingness to invest to capitalize on that opportunity, and for 2008 our plans have not changed.

Consistent with what we have stated for the last two quarters we are still planning to invest at the high end of the 12% to 13% of net revenues for marketing in 2008.

This investment will support the launch of our Performance Training footwear, the installation of additional concept shops, and also encompasses our most recent college signings in the U.S.

and our professional team deals in Europe.

This 12% to 13% of net revenue range, although in line with our previous outlook, is higher than 11.7% of net revenues we invested in marketing for the full year of 2007.

However, we still expect to offset much of the increased year-over-year investment in marketing by leveraging certain fixed components of our SG&A.

Therefore, consistent with our previous outlook, we are anticipating a 40 basis point increase in SG&A as a percentage of net revenues for 2008.

Although our top line and SG&A investment outlook remains the same, the impact of gross margins I mentioned earlier, results in a revised outlook for the income from operations.

We now believe 2008 income from operations will grow 20% to 21%, for a full-year range of $103.5 million to $104.5 million.

For the full year we now estimate our effective tax rate to increase to 42.3%, up from the previously projected 41.6%.

Our weighted average diluted share count is still estimated at 50.5 to 51 million shares.

We are excited about the future of this brand and the opportunities available to us in apparel, footwear, international and direct-to-consumer.

For 2008 we will remain focused on executing our plans to drive growth, while lying the foundation for growth in 2009 and beyond.

While the business environment may change, our belief in our brand opportunity does not.

This belief drives our conviction to make an investment in our business each and every quarter, each and every year.

At this time, Kevin, Brad, and I would like to open the call for your questions.

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

Melissa?

Thank you.

(OPERATOR INSTRUCTIONS) We'll go first to Jim Duffy with Thomas Weisel.

Thanks, hello, everyone.

Good morning, Jim.

Morning, Jim.

Can you help me out and kind of itemize the factors that are resulting in the change in the gross margin guidance.

As I hear you talking about your outlet revenue being higher margin and increasing the number of outlets that you're having, it's kind of counter intuitive that gross margins are going the opposite way.

Yes, Jim, this is Brad.

As Wayne said, two things are really are causing that.

One was, of course, first quarter results.

And two, on the outlet side it was more or less what we anticipated the outlet margins to be in our original outlook compared to our change in strategy a little bit to push more units through the outlet at a lower margin.

So it's not more or less the year-over-year outlook on the outlet business as much as it is a change in what we expected.

Okay.

And Brad, can you detail what the write-down on the gloves was?

And where do you see the inventory reserves at the end of the first quarter?

Sure.

On the excess glove issue, Wayne talked about some of the initiatives that we're working through to fix our processes going forward -- continue to improve our processes going forward, and a lot of these improvements are going to have positive effect on some of these issues, like the excess gloves.

But in this issue it was really around the fact that there were some capacity issues around our factories that manufacture these gloves and what that did was it caused us to have to order these gloves to a sales forecast that really didn't have bookings behind it at that time because of the capacity issues we were ordering well in advance.

As we got more visibility into the sales number and bookings that sales forecast came down after a lot of the items were built already.

That really caused us to have some excess gloves over and above what our sales forecast was at better visibility.

Typically we would use our outlet strategy to liquidate some of this excess inventory, but this is a kind of item that doesn't really move very well through outlet so we'll continue to attempt to work the balance of these items down through our normal channels going forward.

How much was the impact in the first quarter?

On the inventory?

Yes.

If you think about it there's two -- three things --

On the gross margin, actually, Brad?

And then a question on where you see the inventory reserves?

Okay.

As far as the effect on gross margin in the first quarter, pretty much the whole difference in the quarter year over year was due to this inventory reserve, because the Training footwear and the positive impact of the direct-to-consumer pretty much offset each other.

That's first of all.

Second of all, as far as inventory reserves go, our inventory reserves, if you remember with our outlet channel and the apparel side of the business; there's a lot less of a need for inventory reserves on our apparel business because we have a good avenue to liquidate that product.

So most of our inventory reserves that we have right now would be for specific things that we would think would be difficult to move through our outlet channel, like the gloves.

Jim, this is Wayne.

Our outlet strategy has not changed.

The strategy is in place to move through seasonal excess inventory.

So in the past I talked to you about our core strategy and our strategy around core has not changed.

Our core product right now sells through at full price.

And we've been on a plan to reduce the number of weeks of safety stock in our core product, and we're continuing to do that successfully.

I think one of the drivers towards reducing our inventory to lower levels that Brad mentioned by year end is achieving that initiative.

In terms of seasonal excess -- and this is one of the reasons why we don't have an inventory reserve that we would increase is because the outlet channels, that's the sole purpose of their existence, but there was the glove issue, and this glove issue was something that did come up in the quarter.

We addressed it immediately.

We feel like right now we've looked out for the year and wouldn't need to make any further adjustments to inventory reserve.

Okay, very good.

Thanks.

Okay

We'll take our next question from Jeff Klinefelter with Piper Jaffray.

Yes, thank you, my question is on sourcing.

If you could just update us on your current sourcing structure?

I know a few quarters ago we were looking at shifting some of that here back over to Central South America, and just wanted to know where we stand today.

How much of it is actually coming in China.

And any trends you seeing out there in the inflation of your product, either the petroleum-based nature or more importantly just inflation coming out of the countries, the FOB destinations?

Jeff, hi, it's Wayne.

First of all, good news is that for 2008 our sourcing group has locked in the prices.

So we feel very comfortable that for 2008 what we have planned, what we have forecasted is real and it's good.

2009 at this point is a little bit too early to tell, but there is -- as far as our apparel is concerned, we probably have at this point less than about 6% of our apparel comes from China.

So we're fairly diversified throughout the world, and the group will continue to look for other areas outside of the main hub of China to be able to source.

So we think we're pretty well position in terms of our sourcing.

Central and South America has been a large sourcing base for us.

I think about 20% in Central and South America.

Mexico's been about 15%.

So that's how we see it and I think 2009 would be too early to call right now.

Okay.

So at this point, your product itself and your labor contracts or manufacturing contracts are locked in for the balance of '08?

That's correct.

Okay, and then just one other question on your women's product.

I understand that you're having great success this year in terms of growth rates and is there anything in particular that you could point to?

I know you pointed out a couple of key categories, but anything else in terms of feedback from retail, changes you have made in the styling of the product, the color of the product, or any flow initiatives that they're pointing to as saying this is really helping us help you grow that category that would point to that accelerating or continuing to the balance of the year?

Hey, Jeff this is Kevin.

I think probably more than anything it's just the fact that we've been doing it for a period of time now.

That whole mentality that we probably began the women's business with four or five years ago of shrink it and pink it is something that we've evolved into being a legitimate women's brand.

I think that's coming to light with the pallet that you see on the floor.

And, frankly, that consumer she's always been there for us, she's just been walking over to our pad and say give me a reason to buy.

And I think when you look at the assortment that we have out on the floor right now in Q1 and which you'll see really through 2008, and especially with the addition of Suzanne Karkus, who's now on board heading up our apparel group as a whole, I think you're only going to see that get better.

We were out making some account visits in the past week and the excitement on the floor is something that -- they're starting to give us that head nod that says, looks like you guys are finally starting to figure it out.

So I think we're pretty proud and this isn't a one-quarter wonder.

Okay, thank you.

We'll take our next question from Omar Saad with Credit Suisse.

Thanks, good morning.

Good morning, Omar.

Can I ask two quick housekeeping questions?

One, how much with the Performance Trainer shoe shipments got pulled forward from 2Q to 1Q?

And then could you give the inventory breakout, the core versus seasonal that you usually give?

Omar, it's Brad.

As far as the Performance Trainers that were shipped in Q1, if you recall we said we would do about a million pairs in 2008 of Performance Trainers and the amount that shipped in Q1 was a little bit less than 10% of that.

Okay.

And secondly -- I'm sorry, what was the second question again?

The inventory breakout, core versus seasonal.

It's a metric you guys have been giving the last couple of quarters.

Yes, pretty much -- it's pretty consistent with the previous quarters.

Okay, okay.

On the marketing spend.

You guys actually spent a little bit less than I expected in the first quarter, but you're still looking for that third -- high end of 12% to 13% for the full year.

Can you talk about -- is it a still kind of a 60/40 first half, second half and what's the strategy there behind the Performance Trainer launch?

Should we expect more coming in the coming weeks as the stuff hits the stores?

And how do you think about -- if you have any launches planned for early next year, how do you ensure you've got enough investment to support those launches later on this year?

Yes, Omar, I'll start off -- this is Wayne.

Just some clarity around the timing of the marketing spend.

We'll be looking more at a 50/50 first half, second half and how we spend those dollars.

In terms of how we'll apply those dollars in the launch, I'll let Kevin take you through the Performance Trainer and how we're going to talk that story over from early in the year until now.

Omar, so what you saw was us really kick off a year-long campaign that began with Super Bowl, right?

And that wasn't something that was meant to be this is the campaign summed up in 60 seconds as much as you're starting to see that penetrate through.

I mentioned in my script how we started with the Under Armour High School All-American game, then it's the Under Armour Senior Bowl.

Now probably one of the neatest things we're doing is this 15-city Under Armour combine tour, which is basically we go to -- we've done about five of them so far.

But we pull off -- for instance, two weeks ago I was down in Dallas at our Dallas combine.

We're at the Dallas Cowboy's training facility in Irving, Texas.

We had a little more than 200 athletes that were at this facility.

200 of the -- invite only, the top 200 to 300 high school kids in the area.

And we dressed them out; give them a shirt, a pair of shorts, a pair of socks.

And what we bring is really the theater to this event and we're timing them the same way that the college kids do and the pros do to this combine.

And we pull up, we've a 40-foot bus wrapped in graphics, we've got 18-wheelers that are wrapped in graphics, and really the only thing that's inside of these 18-wheelers -- they're basically empty, but it's about creating the theater that happens in and around these events.

So what we would do -- I think that's been something really exciting and more importantly we're getting our product on these kids, we're getting the shoes on kids' feet.

The next thing we're doing is -- that parlays, obviously, into launch this weekend.

Like I mentioned, we're actually -- we're out at stores and all of these things happening throughout really the first half of the year are positioning us I think to tell a great story, which is that stop training in running shoes.

Another thing that you'll see we're doing is, not only in addition to our own money is we're also -- we're partnering with some of our accounts.

One of the things we have out on TV right now is a cobranded spot with Dick's Sporting Goods promoting, again, the launch.

And you'll see that through not only what we're doing in the front half of the year, but you'll also see more of that type of cobranded marketing that'll take place in the back half of the year.

So really in addition to the dollars we spend, which to Wayne and to Brad's point we see staying consistent with that 12% to 13% and it will be much more balanced in that 50/50 type of balance, front half, back half.

We finally think that we'll be able to bolster not only the Training launch -- and again, we've got a launch 5/3, we've got a next iteration coming out in July, and then we've generation two product that'll be launching November of this year.

All of those, we feel good about having the right amount of dollars reserved and ready to launch and tell great stories around that product.

Okay.

In terms of moving from a 60/40 target to more of a 50/50 target, is that -- what drove that slight shift in the allocation there?

Are there launches we should be thinking about for the beginning of next year, or is it just looking at a more even way to layout the communication with the consumers?

Let me drive home the point is that, again, the way that we're going to define success in Training footwear is how we're positioned at year end to enter additional categories.

So I think that the opportunity is there for us to enter additional categories, but we're going to know a lot more after Saturday.

And to be clear, as we think about success and define that, I'd say that Click-Clack was probably one of the more successful campaigns in the last five or ten years and it wasn't something that took place from the opening Saturday that we launched the product.

It took four, six, and eight weeks for us to really to get a handle and for the consumer to buy in to the program.

I just want to make sure that I set people's expectations of what -- how we're defining success is that it's really going to be into June and really the first part of July before we say, hey, how did we do?

And as we come back with the next generations of product, again that will position us.

And yes, I think there's some other big categories out there.

And if we do things right, and as we say our focus right now is making sure Training's successful, but without question, those larger categories of running and basketball, they're out there and it's a matter of our brand being ready and most importantly the product being ready.

Okay, thank you.

Thanks a lot, Omar.

We'll go next to Dan Wewer with Raymond James.

Good morning.

Question on footwear, and start off on the cleats.

If during the first quarter you shipped a little bit less than 100,000 units of Performance Trainers would that imply that cleat sales were essentially flat year over year?

Dan this is Wayne.

One of the things that we start off with is in the cleat business out at retail, we're very, very happy with how we're performing.

Football cleats, 24%, 25% market share, baseball cleats, 14% to 15% market share.

One of the things we did after the initial launch is that as a wholesaler we shipped what we believe is a little too much product into the market and as a result we had to let the market wind down with that product to our customers.

Hasn't changed our position in the market as number two and we're very happy where our position is.

However, to be prudent and not put too much product in the marketplace we certainly have been tempering down those shipments and that's what you're seeing in Q1 as far as our cleated footwear.

But I want to really remind you that the success we've had at retail, specifically in the youth shoes, have been very good and our market share is consistent year over year.

And, Wayne, I believe that this year you're due for a new model in football cleats.

Is that correct?

Yes, what we typically would do is we'd one our cleats for two years, we'd have two-year styles, and so we'll introduce new models and that's the way we'll keep fresh.

And then the good news with that is if you have a two-year style and you put it out, there's an opportunity to have those sales run more than just one season.

For the most -- for those shoes, for the part, that's -- that's where the cost is and you can still spin new uppers, so for instance, one of our most profitable shoes on the kids side is a product we have called the Hammer and we're using the same outsoles for same molds.

We're continuing to amortize those molds, as well as we're spinning new uppers that are giving it a fresh look for kids when they come back at retail.

Well, Kevin, I guess just one of the questions I had regarding the Performance Trainer and thinking about the performance of the football cleats and the baseball cleats is that one would think that Under Armour would have stronger competitive advantages with on-the-field cleats than off-the-field cleats.

So what do you do differently in how you allocate Performance Trainers so that we don't see this drop off in unit growth like we had cleats in the last couple of periods?

Well, I think it starts with us beginning with a fixed and an allocated number of units.

We've been pretty disciplined about that and I think our answers have been pretty consistent, as well, as to the approach we're going to take to the amount of product we're going to put in the market.

More importantly, though, you can sell a football cleat to a football player, you can't sell it to somebody who used to play or wants to play or it's -- and most people they have one pair and it sits in their closet.

We believe that not only is, A, our athlete training in a different way, but more importantly, the reason that this campaign has moved to this concept of stop training in running shoes, we believe there's a lot of people out there that are looking for, frankly, a brand like Under Armour to tell them how to train.

Again, the scenario we use is walk in to a gym and if there's ten people in there count the number of people that are training in running shoes.

And then I'd challenge you and say if it's 16-year-old kids, ask how many are doing just a linear motion like an elliptical machine or a tread mill.

These kids are training today side-to-side lateral mobility and that idea calls for a different type of shoe.

And so the fact is nobody knows what a training shoe is.

Today's 16-year-old has no idea what cross-training even was or was it a category.

Again, it's been relegated to that 45-year-old who's spending $50 at Kohl's on a basic training shoe.

So I think our ability to redefine that space and redefine that category for today's athlete, it's something that -- again, this is only a launching point for us, that we think, A, it provides credibility in the marketplace and shows that we can sell product -- a non-cleated product to the consumer, but like I said, it also positions us to head in to additional categories as we move forward.

Kevin, just the last question I had for you.

You noted that you were visiting with a lot of your customers in the last few weeks.

What are you learning about the retailer's response to the weakening economy and what they're doing with purchase orders and requests for return privileges?

Well, first of all is let me reiterate that there's no question we're in a different economic environment, particularly for the Under Armour brand where 96% of what we're doing is here in the U.S., yet even with that type of headwind, we're able to put 27% growth on the board.

We're very proud of that.

So as we look at 2008 our approach is we want to make sure that we're dealing with all of our operational issues and that's why I think you've seen some of the adjustments that have been made around inventory and our being more aggressive in 2008, as well.

So 2008 will be a long year, but more importantly we think that we're going to get through it just fine and be able to reiterate that fact that we are a growth Company.

Under Armour's a little unique.

We've got a lot of different levers for growth and you're going to see that in A, what we put up in Q1 and you're going to see that again in what we put up in Q2 as we reiterate that 26% to 28% growth, and that the value and the importance that Performance Training is going to play to our growth story.

Now that makes us pretty unique.

Our retailers, they have made adjustments throughout the first quarter, but frankly, we think that we've seen all of the adjustments throughout the full year.

The environment out there it's not that it's getting easier, but we're not necessarily seeing it getting any more difficult either.

So the thing that probably gives us greatest strength is, A, when you are out in stores and you're talking to consumers and you're watching them shop and buy, when we're hearing the excitement that's building out there for our Training program -- and frankly I think that's going to be real asset to the sporting goods channel as well is that, remember, we've got this launch is excluded to the sporting goods channel, and it's going to give a real point of differentiation of hopefully helping to driving additional foot traffic in their stores, as well.

And then you know again, the one thing I think we sort of glazed over was our own direct-to-consumer business, which as a total was up nearly 77% for us.

Our web business alone up 57%.

Our consumer's looking, they're shopping for our brand.

It's not to say that we're excluded from these times, but we are doing a heck of a lot -- I think we're leading the charge when you look at the performance of Under Armour, again, and what's defined as a pretty difficult market out there.

Okay, great.

Thank you.

Thanks very much, Dan.

We'll go next to Kate McShane with Citi.

Hi, good morning.

Hi, Kate.

Not to beat a dead horse, but I'm just trying to better understand why you are pushing product through your outlets at lower prices.

Did retailers ship back product to you during the quarter or have you seen a cancellation in orders?

Or is it just a matter of having too much inventory on the books this year?

Kate, in is Wayne.

First, retailers definitely, as Kevin said, they're being cautious with how they manage their inventory and they should.

For us, what we've always had is our outlet store strategy has always been to move through our seasonal excess and that hasn't changed, but the one thing in this environment today that we think is prudent is looking at our current and future seasonal excess is not to let that get backed up.

We think it's smart to be able to move that seasonal excess through our outlets.

So what we've done this year is nothing different than the past except we've accelerated that through our outlet stores.

Again, we're taking into account the current environment, the fact that our retailers manage their inventories a little bit tighter this year, and we're looking at a channel that protects our brand, operates at a profit, and has a higher overall margin than our business.

So it is a strategy for us not to hold that seasonal excess for a long amount of time and that's the driver behind it.

I think the other point is that in last call and I've talked about our strategy around core, that strategy has not changed.

Our core inventory, which we sell through at full price in our retail stores, that strategy has been to reduce safety stock and we've been successful at reducing that safety stock for our heat gear, and in a few months we'll be successful in reducing that safety stock around our cold weather gear.

And the result of that core inventory strategy is really going to be impacted in the third and fourth quarter, as Brad elaborated on in our inventory levels.

But, Kate -- this is Kevin.

You're not going to find -- we built these franchise businesses, we call them wheelhouse businesses here, like our $25 (inaudible) t-shirt, our $50 cold gear mock, but no, you're not going to find those basic products in white, black, and navy blue marked down either in our own retail stores or, frankly, anywhere.

These are consistent, really staples to our product line that, frankly, we just -- we have a lot of it.

And so what we're doing in the outlets is we're moving through more of that seasonal product and you're not finding additional of those core basics.

We're not making as much, frankly, which is -- it's a little bit tighter on some of our manufacturers, but that's what partnership's all about.

So we see, again, using 2008 to put ourselves back in line and heading into 2009, as we come out of this thing, we think we're going to be really positioned well and for strength.

Okay.

Going to some of your comments about Europe, you've said in the past that Europe is going to contribute more significantly to your business in 2009.

Are you still expecting this and how does the macro environment change this perspective?

And then finally, can you give us a little bit more detail behind what happened to one of your accounts in the UK that you had mentioned in your comments?

Yes, Kate, let me just -- let me start off on that.

Again, let me reiterate for what our strategy is in Europe is and it's in three parts.

Number one, building the right team of people.

We've got Peter Mahrer in place and, again, Peter just joined our Company in July and so as he sits here, eight, nine, ten months into his tenure we feel really good about the future for the brand.

The second thing is building our authenticity on field.

The signings in Germany of Hannover 96 and the Welsh Rugby Union, these are big deals and I don't think we're giving enough, really, credit to.

Just the fact that our brand is accepted.

These aren't deals that were done because we wrote the biggest check.

These were deals that were built on relationship and really what we can bring -- our brand can bring to these sports assets.

And the third piece is the appropriate distribution.

Now, 2008 for us in Europe, I don't know if there's much headwind that we're feeling really on a macroeconomic standpoint coming from the UK.

Although it's -- or Europe in general, although it's been just primarily a pretty difficult retail environment on any front.

At the same time we've got positioning.

As we said, we've expanded our door count to nearly 1,700 doors now, so we're in the places that we want to be.

And I think what you'll see is as we continue evolve our merchandising mix, and you can see us continue to evolve our European sizing, the most telling thing for me, when I was in -- when I went and did some market visits with Peter, and we were actually in Toulouse, France.

And we were in a Go Sport and we're in about 20 doors -- I think they've got about 130 or 140 stores total -- and we were testing at about 20 of their stores and just talking to the store manager there.

There's about four or five brands that are selling performance or technical product and frankly, we don't spend a lot of money in France.

We don't have the assets there, but we're the second-selling performance brand in that market, and literally, there's one and two and there's nobody else, and we just -- we haven't really gotten it right yet.

And what I can tell you, and I guess that's why the message that I brought and as we think about our growth is the places that we haven't been as much as the places that we are, and what we're doing now, and that as we apply focus and really get our arms around Europe and particularly those markets of France, Germany and UK, I think we feel really good about the acceptance of the Under Armour brand and really what that can mean for us going forward.

And, Kate, this is Wayne, just to jump in.

We're not going to talk about a specific customer, but the one thing with Europe is we have to be patient and it's in the early stages and we're going to have quarterly fluctuations.

But some of the good news for us is even having that quarterly fluctuation relating to one customer in the UK, when we signed the two teams that we did this year, we noticed a substantial pickup in revenue that makes up for that change in the UK in Q1.

So there's going to be movement either way, but I think the one thing I wanted you to take away is that Europe is an investment for us.

We have to be patient with it.

It'll be an investment for 2009, but the foundation is right where we want it to be and each and every year we should start to see good strong growth coming from Europe.

Okay.

Thank you.

You're welcome.

Thanks, Kate.

We'll take our next question from Jeffrey Edelman with UBS.

Thank you, good morning.

Getting back to the gloves, just one question, if we think about the markdown or the reserve you took in the first quarter and then we look at the volume of accessories done first quarter, second quarter, it seems like an unusually large reserve for the amount of volume.

Am I correct or am I missing something here?

Jeff, this is Brad.

No, you're right.

What we did is we took a look at the whole year, basically, so not just the first quarter or second quarter, so we're looking out over the whole year and the excess of inventory that we have over what we projected as for sales for the year.

Okay, so it was over and above gloves then?

There were some other smaller items, but mostly the gloves was the primary driver.

But again, when we look at our excess inventory we look out 365 days, not just the current quarter or the next quarter.

Okay.

So when you look at gloves there's excess inventory in excess of what we project sales would be for 365 days.

Okay, fine.

Secondly, are you maintaining your first half guidance of $0.03 to $0.05?

Jeff, this is Wayne.

We feel good about $0.06 in the first half of the year, so we're maintaining that top line 26% to 28%.

For the first half?

Based on our visibility today.

Okay.

And then finally, of the million shoes you expect to ship this year, how much of that will be in the second quarter and what do we look at for the back half?

Jeff, it's Wayne.

The way we have it set right now, we have a delivery in May and another delivery toward the end of June, so it would be about 60% of the full year would ship in Q2.

Okay.

Great.

Thank you.

Okay.

We'll take our next question from John Shanley with Susquehanna.

Thank you and good morning.

Good morning, John.

Kevin, I wonder if you can talk about the -- all the investments that you made in the team deals in Europe?

Can you effectively grow your European business without being in the actual football footwear business in that market?

Well, I think first of all, it's really regionally driven and that's the way that you'll see us side our assets.

For instance, we're not necessarily back loading our teams in one particular area and that's why ideally we were looking for an asset that we could have in Germany and ideally an asset that we could have in the UK and the greater region there.

So we thought that those two teams were appropriate, and there's also -- there's a revenue economic model that plays on the other side.

We've been in Europe now for four, nearly five years of sending sports marketing people over there.

We set up our office a little more than 2.5 years ago, we just put a new president on the ground there in the last, like I said, seven, eight, nine months, and we feel that the traction is there, it's just a matter of timing.

Now, as much as we've been doing basically the grass roots the same way that we did here in the United States, not giving it to teams, but selling it to teams, selling it to athletes, and building up this credibility, that's taken place but it was a different environment that we walked into than we did in the U.S., where it was our idea, we were the originators, and other people have gotten in to the concept of performance.

Now, the idea of authenticity, that bleeds through.

And so when people are given a choice, we win, but we need to tell them that story.

And so the easiest way for us to do that is that in Germany to be able to say, who's Under Armour, I've never of it before.

And you say have you heard of the Hannover 96 Football Club?

We make their uniforms.

And the same thing with the Welsh Rugby Union and that sort of exposure.

So I think it's -- what we're looking for it's not only assets that can be relevant on a local basis in Europe, but also like Welsh, that's really a global deal for us that will give us great exposure through things like the six nations and rugby and really position us.

But yes, I do put a lot of weight on what the value of football or soccer and rugby and cricket will mean to these different regions that we'll attack over the next several years.

Will you eventually have a football footwear line in Europe?

Is that your game plan?

Like I said, we're going to judge training successfully by how we're positioned in our other categories.

So the thing is -- the three most important words in life or business or anything else I believe are point of view.

And I tie it back to every -- our brand is a story with beginnings, middles and ends, and every product that we build like a chapter in the book and each chapter needs to make sense to the one before it and the one after it.

The way that we're approaching our product entry strategy, whether it's here in the U.S.

or frankly any international country, is making sure that we're relevant, making sure that we have a point of view.

Yes, to answer your question, I do believe that we have an opportunity to build a better football boot for the European consumer, frankly for the American soccer consumer, as well.

But again, our timing for that is dictated at the point in which we are ready with unbelievable product that has a unique point of view and differentiation to what's currently out there in the marketplace.

So that'll all come, I believe, in good time, John, but right wear testing and product and brand will allow us to accomplish that.

All right, fair enough.

Turning to the U.S.

market, the same basic question, what additional performance footwear products are you envisioning launching in 2009?

I think Wayne mentioned that there were some products coming into the marketplace, can you give us any insight in terms of what they may be?

I don't know what Wayne was talking about but I think, again, we're pretty focused on 2008 and making sure that Training's successful.

When you think about this launch you've 5/3, 7/1, so May 3rd, July 1st and November 1st are the three innovations of gen one product, gen one color up and then generation two Under Armour training shoes that'll be in the market, and we will be coming back in 2009 again.

Look, we really believe that -- we don't like just pushing water uphill, we believe there's a real opportunity with training and we believe there's a way to get people to stop training in running shoes, and particularly for today's athlete.

So there's a need for this product out there.

But as we do that we believe there's also other legs of sort of a training component.

Our athlete does more than just lateral stability in a gym.

They do run in a linear motion, so we think that in time, and again, given the fact our brand is ready and most importantly that the product is ready, we'll be able to enter additional categories.

Specifically we think that running could potentially be a possibility and that basketball could potentially be a possibility, but we haven't made any claims or set any definitive dates as to when exactly that would happen, John.

Fair enough, thank you very much.

Thanks very much.

Operator, we have time for one more question.

And we'll take our last question from Paul Swinand with Stephens, Inc.

Good morning.

I had a question on our your direct business, you said it was up 77% and the web up 50%.

Can you give us a little more color on the drivers there and breaking out the retail dollars?

And could you also on that comment say how much of the footwear you're selling direct of the total buy?

Yes.

Hey, Paul, this is Kevin.

So first of all let me start with -- not a great percentage of it is actually what's being sold direct.

We just -- A, we're not offering the footwear in our outlet channel, which again we have 18 outlets today and we only have the one full-price store in Annapolis.

So let me come back to the first question.

There's three ways to think about our direct-to-consumer business, there's three parts to it.

The first is our full-price retail, second is our web, and third is our outlet channel.

Our full-price retail, again, the strategy there is that we believe that we are underpenetrated at retail.

We believe there's a consumer out there who's looking and shopping for Under Armour.

In fact they don't have an opportunity to do that in some of the A malls and other properties.

Our strategy as to where we want to attack and where we want to place stores, first and foremost it's not to cannibalize our existing businesses, it's not to cannibalize our existing retail partners, and that's why we continue to reiterate the fact that this is a test, and it will be so for the next two to three years for us to understand.

Wayne mentioned in his script, as well, how we've committed to two additional locations this year, and hopefully we're going to learn from that, right?

There're places that, frankly, the Under Armour brand cannot be brought in specifically -- Tyson's Mall is an example I use.

You can't buy Under Armour Tyson's -- Tyson's Corner, Tyson's I or Tyson's II.

Now there's one or two retailers that may be carrying a few -- I think there's like a Liz that may be carrying some hats of Under Armour's, but for the most part you can't find and you can't buy our brand.

We believe that our competition, on the other hand, there's multiple distribution points, ten, 12 places you buy their brand and you think about all of that opportunity that we're walking.

So, A, most importantly is the ability for us to be strategic is what we want to learn.

The second component is our web.

Our consumer we find more and more is young.

And, frankly, the information that we gather online really backs this fact up is that our consumer is young, they're growing up technical, and they shop online, and they want it -- more importantly they don't just shop online, a lot of times they're just exploring online and they're finding out what do they want to buy.

So being, really, a thought leader on the web business is very much important to us.

The third component is that outlet strategy I mentioned.

We had 17 outlet doors at the end of 2007 and we opened our 18th one, and again, we're going to open more in the back half of this year, adding a total of nine for 2008.

So I think we feel good about what that business is going to mean.

And again, the idea there is we do not cut for that outlet business.

Right?

This is something we just consume our own seasonal product.

Again, you're not going to see any of our core basics or core business products in that channel distribution either.

Okay, thank you.

Okay, Paul, thank you very much.

And that does conclude the question-and-answer session today.

At this time I'd like to turn the call back to Mr.

Kevin Plank for any additional or closing remarks.

I just want to remind all of you to hopefully go out this Saturday -- and many of our retailers are opening up and at 8:00 a.m.

this Saturday as well -- and be sure to pick up your $80, $90 or $100 of incredibly valued-priced Under Armour Performance Training shoes.

So look forward to seeing all you great athletes training in a new way.

Thanks very much.

And once again that does conclude today's call.

We do appreciate your participation.

You may disconnect at this time.