Under Armour Inc (UAA) 2008 Q2 法說會逐字稿

Good day and welcome, everyone, to the Under Armour second-quarter 2008 earnings results conference call and webcast.

This call is being recorded.

At this time, I would like to turn the call over to the 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 second-quarter 2008 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 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 factors section of our filings with the SEC.

The Company assumes no obligation to update forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

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 address 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 second-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 second quarter and provide an updated outlook for 2008.

After the prepared remarks, Kevin, Brad and Wayne Marino, our Chief Operating Officer, will be available for 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, everyone.

Under Armour is a growth company.

Once again, we delivered very strong top-line results with revenues increasing 30% in the second quarter.

These are strong numbers that any brand in our space would be happy reporting.

But while these results reflect our consumers' continuing commitment to our brand, we believe it understates the overall progress we have made in the past 12 months.

We believe that in all three key areas -- brand, product and team -- that we are a much stronger company today than we were one year ago.

So before Brad reviews our results over the past 12 weeks, I would like to provide an update on the past 12 months and share our confidence in our progress.

First, let's talk about the strength of the brand.

The athletic industry stood up and took notice when we launched Performance Trainers in the second quarter.

In short, our launch was everything we hoped it would be -- the most successful launch of performance athletic footwear by a new brand in as many years as most people can remember.

From a brand perspective, our launch of Performance Trainers via the new prototype campaign was very successful on two major touch points.

First, we delivered innovation and product design to our consumers who have long needed a performance footwear solution to match their performance apparel.

Now, I am proud to say that performance doesn't stop at the ankle and as we said in our advertising, the new prototype of athlete can stop training in their running shoes.

Secondly, as part of our strategic rejuvenation of the training footwear category, we were able to create a new performance training protocol for serious athletes through our TNP training website.

This website is designed by the true authority of professional personal trainers -- the members of our Under Armour Training Council.

Our online community is more robust than ever and we continue to communicate with athletes of all ages.

The response to our Performance Trainer launch has been tremendous.

Our retailers did a great job of educating their customers about the shoes and we have been thrilled with the response to our product and its sell-through across our distribution.

However, our best partners continue to deliver the best results.

Our retail concept shop initiative continues to be a priority in store and the ability of key partners like Dick's Sporting Goods, Sports Authority and East Bay who have helped us leverage our authenticity from apparel and carry that through to footwear beyond just cleated is an asset for our brand in the market.

We have no color on the floor for back to school and we will be reinventing the product for holiday as well.

Our core consumer with whom we have an ongoing dialogue online has given us the most positive feedback on our footwear.

We are aware of what happens when brands lose focus on their core consumer, understand the importance of keeping them at the heart of our product innovation efforts.

And it is that success with our core consumer and our proven ability to deliver product that exceeds their expectations that gives us the confidence to enter the running footwear business in the first half of 2009.

We intend to bring a younger, more authentic team approach to the running category.

We aim to provide these athletes with new innovation and design in their running shoes.

This is not about merely putting an Under Armour logo on an average shoe.

It is about building a better shoe, about delivering performance to all athletes and about connecting with an entirely new generation of athletes who run.

We are confident that we can create successful launches like we did with Performance Trainers and we can enter large, new categories like running because we have built a trust with our consumers who now expect us to deliver a higher standard of performance apparel and footwear beyond our compression product and provide a fuller range of product for all their athletic needs.

That is why we are confident our brand is much stronger today than we were 12 months ago.

We are not just a compression brand.

We are not just an apparel brand.

We are a performance brand and we believe our consistent approach will enable us to become a truly global performance brand.

The strength of the product.

In addition to the continued strength of our brand, our consistent ability to create compelling product stories for our consumers has kept Under Armour outperforming the other brands in our space and helped us drive 30% growth in the second quarter.

It is also why we are confident in our ability to achieve the full-year guidance we have laid out and why we believe we are building the foundation for long-term profitable growth.

While the second quarter has historically been our smallest quarter from an apparel revenue perspective, our third and fourth quarters have traditionally been strongest as we introduce many of our new apparel products in the back half of the year.

We believe we have some of the most exciting new athletic apparel in the market with the introduction of our fitted ColdGear.

Consumers have embraced our ColdGear brand and we are the market leader in the category, but we understand that not all of our consumers need the added benefit of compression technology.

Our new fitted ColdGear provides a looser fit at a higher ASP with the same level of performance that athletes have come to expect from our brand.

In addition to this major new program, we have greatly expanded our Armour Fleece and MicroFleece programs and expect to make continued inroads into basketball apparel, another category where players view us as an authentic brand.

We continue to make great progress in women's with sales up 15% in the second quarter and up 27% in the first half with retail sell-through of women's outpacing both our men's and youth businesses in the quarter.

Overall, women's will continue to see accelerated velocity due to big programs, better colors, improved fit, better flow and an improved presentation at retail.

In addition to the strength in our productline, our confidence in the second half of the year comes from three main areas.

First, our [at-once] business continues to be strong and the percentage of our second-half business already booked is similar to the level of bookings we had at this time last year when we delivered strong revenue growth in the back half.

Secondly, retail sell-through of Under Armour apparel in the second quarter was higher than the sell-in to our major accounts.

This reinforces our view that retail inventories of Under Armour are in good shape across our distribution as we enter the important back-to-school season.

And third, the fact that our direct-to-consumer business, which is growing at a faster rate than our overall business, is expected to make up nearly 25% of our growth in the back half.

This business has already grown at a 75% rate through just the first six months of the year.

Now let me take you through the strength of our team.

The third key area where I believe we have significantly improved our position from a year ago is within the Under Armour team.

Improving depth and breadth of our leadership team has always been a priority and the area that will be most critical to achieving our goal of 25% CAGR through 2010.

We have invested in infrastructure to support all of our growth engines, including our expanding apparel, footwear, direct and international businesses.

But the most important investments we have made our in building the team that will help direct our growth and execution going forward and ensure that we have the right mix of Under Armour experience and industry expertise.

Beginning this time last year, we brought Peter Mahrer aboard to run our European operations, then followed that by hiring Suzanne Karkus late last year to head up our apparel team.

And now with the addition of David McCreight as President of Under Armour, I believe we have strengthened the foundation of leadership that will complement the Under Armour veterans that have driven our growth to date.

David will oversee our front-end business units and his broad experience will bring a new perspective on developing our organization, building internal efficiencies and will help us as we continue building out our global distribution strategy.

For me, David's experience, efficiently managing growing companies, will enable me to focus more of my energy on leading our long-term strategy, which includes driving innovation throughout our apparel business, as well as our rapidly expanding footwear business and our opportunities outside the US and Europe, Japan and down the road elsewhere in Asia.

We did more than 90% of our business in the US this quarter and there are a number of large markets like China, Brazil, Russia and India where we have yet to sell our first shirt.

It also enables me to spend more time with our innovation team to ensure that we stay true to the Under Armour universal guarantee of performance for all consumers and especially how that reflects with our authenticity on field.

We have yet to produce our defining product as a brand.

And I am intent on delivering that to our demanding core consumer in the seasons to come.

With Peter, Suzanne and now David having joined us, we have added over 50 years of industry experience to the Under Armour leadership team in the last 12 months.

With David running the front end and Wayne Marino, our Chief Operating Officer, running the back end, I know that our Company is in better hands than it was 12 months ago and with their participation and leadership, I am confident in our ability to deliver against our ambitious, long-term growth plans.

We made significant progress over the past 12 months and the past 12 weeks as a microcosm of that.

During just the past 12 weeks, we have had a tremendous launch of our Performance Trainers and brought excitement to what was previously a dead footwear category, announced our entry into the running footwear market in the first half of 2009.

We grew revenues 30% in the quarter, 90% based in the United States.

We saw significant deceleration in our inventory growth and we hired a President to come and help us lead our business.

Our brand is stronger, our product is stronger and most importantly our team is much stronger than we were a year ago.

We've stayed on task through the first half of 2008 and I believe our focus and brand strength will enable us to achieve our goals in both the balance of this year and beyond.

Thank you and with that, I would like to hand it over to Brad Dickerson, our CFO.

Thanks, Kevin.

I will now take a few moments to review some key financial highlights for the quarter and year-to-date and then discuss our outlook for the full year.

Beginning with the income statement, our net revenues for the second quarter grew 30% over the prior year quarter.

The growth was largely driven by our successful launch of Performance Trainers during the quarter.

Year-to-date, our total net revenues increased 28%.

This is at the high end of our previously provided outlook of 26% to 28% growth for the first half.

Our apparel business was up 10% in the second quarter with our youth segment showing the strongest percentage growth at 29%.

As discussed during our last earnings call, in April, we successfully implemented a new warehouse management system.

In anticipation of this, some of our customers elected to take shipments in March that were originally planned for early April.

This impacted the apparel growth in our second quarter.

However, year-to-date, our apparel net revenues were up 18%, which is more closely in line with our full-year projection of over 20% apparel growth.

Our direct-to-consumer channel continues to be a strong performer across the board, whether you are talking about the Web, outlet or our newly opened specialty retail stores.

This channel grew more than 75% during the quarter.

Additionally, we opened our second full-price specialty store in Fox Valley Mall in Aurora, Illinois and are opening our third store in Natick, Massachusetts very soon.

While international revenue in the first quarter was impacted by one of our major accounts in the UK, our growth rate in the second quarter was strong, bringing our year-to-date growth ahead of our overall company growth.

As anticipated, our second-quarter gross margins were impacted by the launch of our Performance Trainers.

In fact, 310 basis points of the 370 basis point decline was related to footwear.

Footwear represented 29% of our net revenues during the second quarter of this year compared to only 17% in the prior year's period.

The balance of the decline in gross margin was the result of several factors, including product mix, higher transportation costs and a discount to customers on a few discontinued styles limited to the second quarter.

This was partially offset by the gross margins associated with our direct-to-consumer revenues.

SG&A as a percentage of net revenues for the quarter increased 100 basis points from the prior year quarter to 43.2%, driven by our previously announced plans to shift a greater portion of our marketing dollars to the first half of this year to support our Performance Training launch.

Marketing expense grew from 13.5% of net revenues in the second quarter of last year to 14.4% this year and was a main driver of our SG&A deleverage.

Selling costs also deleveraged in the quarter due to costs incurred to support the growth of our direct-to-consumer business.

However, it is worth noting that our corporate service costs leveraged in the quarter.

Operating income for the quarter was $3.3 million compared to $8.2 million in the prior year.

Operating margin for the second quarter was 2.1% compared to 6.8% in the prior year quarter.

The decrease in operating margin was driven by the previously discussed decline in gross margins and the planned increases in SG&A, specifically marketing.

Our effective income tax rate for the second quarter was 44.7% compared to 40.9% in the same period last year.

This increase in our tax rate is due to an increase in the Maryland state income tax rate beginning in 2008 and additional one-time true-ups occurring in the second quarter of 2008.

Our resulting net income for the quarter was $1.4 million compared to $5.7 million last year.

Second-quarter diluted earnings per share was $0.03 compared to $0.11 in the prior year.

Year-to-date, our diluted earnings per share totaled $0.09 compared to our previous outlook of $0.06 for the first half of the year.

The continued demand for our products, along with visibility and controls around spending, allowed us to exceed our original earnings outlook for the first half.

Now I would like to move on to the balance sheet.

Total cash and cash equivalents at the end of the quarter were $13.3 million compared to $40.6 million at December 31, 2007 and $25.7 million at the end of the second quarter of 2007.

The year-over-year decrease was primarily the result of investments in inventory and capital expenditures.

Consistent with prior years, the seasonality of our business typically results in the second and third quarters having the lowest cash balances of the year.

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

At the quarter-end, we had $95 million available on our $100 million line of credit facility.

Net accounts receivable increased 24% 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.

Now let's talk about inventory.

During previous calls, we have discussed various operational initiatives that we are putting in place to drive improvement in our inventory management.

Those operational initiatives are in process and have begun to pay off.

At the end of the second quarter, inventory increased 43% year-over-year to $183.9 million compared to $128.8 million at June 30, 2007 and $166.1 million at December 31, 2007.

As we projected, this 43% year-over-year inventory growth rate in the second quarter marked a deceleration from the inventory growth rate reported for the first quarter.

We continue to anticipate incremental improvement in the inventory growth rate as we move through the year.

As we previously stated, 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 sales growth.

Our investment in capital expenditures for the second quarter was approximately $13 million.

Our full-year 2008 capital investments are still planned at approximately $40 million to $42 million.

Now moving to the outlook for the remainder of the year.

Our outlook is a reflection of how we think our business will perform based on the strength of the brand, the strength of our product and our investments balanced with sensitivity to the current macroeconomic environment.

For the first half of 2008, we met our top-line projections, reported strong deceleration in our inventory growth rate and exceeded our EPS outlook.

Our results in the first half and our visibility into the second half give us continued confidence in our top-line projections for the year.

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

Additionally, our women's and youth apparel are projected to grow at even a faster rate, much as they did in the first six months of 2008.

In addition, we continue to expect our international top-line growth to outpace the Company's overall year-over-year growth rate.

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

We continue to expect our full-year 2008 gross margin to be approximately 50% or 30 basis points lower than 2007.

We believe in the opportunities for this brand and are committed to making investments to drive our future growth.

Additionally, we are still on track to invest at the high end of the 12% to 13% of net revenues for marketing in 2008, up from 11.7% in 2007.

However, based on our results in the second quarter and controls around planned investments for the year, we are now anticipating only a 30 basis point increase in SG&A as a percentage of net revenues versus the 40 basis point increase previously estimated.

As a result, we are raising our income from operations outlook for 2008.

We now believe full-year income from operations will grow 21% to 22% for a full-year range of $104.5 million to $105.5 million compared to the $103.5 million to $104.5 million previously anticipated.

Based on projected interest expense for the full year and the foreign currency exchange impact to date, we estimate our net other expense to be approximately $1.4 million for the year.

For the full year, we are now estimating an effective tax rate of 42.6%, up from 41% in 2007.

This increase in the full-year tax rate is mainly attributable to an increase in the state income tax rate for Maryland, our home-base state, from 7% to 8.25% beginning in January 2008.

Our weighted average diluted sharecount is estimated to be approximately 50.5 million shares.

Now that we have discussed our full-year outlook, I would like to provide some color on the seasonality of our business in the back half.

First, starting with net revenues.

During the first six months, we shipped about 70% of the approximately one million pairs of Performance Trainers planned for the year.

Over three quarters of the balance left to ship for the year will go out in the fourth quarter.

As Kevin stated earlier, our direct-to-consumer revenues are expected to make up 25% of our incremental growth in the back half of the year with the biggest impact in the fourth quarter due to the holiday shopping season, as well as the timing of new store openings for our full-price specialty and outlet.

Because of the timing of the remaining Performance Trainer shipments and the growth in our direct-to-consumer business, net revenues for the third and fourth quarters are expected to be similar, which is a change in seasonality from prior years.

Although the majority of the remaining Performance Trainers are shipping in the fourth quarter, the impact of direct-to-consumer revenues in that quarter is expected to lead to year-over-year improvement in our fourth-quarter gross margins.

In the third quarter of 2008, marketing as a percentage of net revenues is expected to be similar to the percentage in the third quarter of 2007.

We are still planning marketing for the full year to be at the high end of the range of 12% to 13% of net revenues.

Therefore, marketing in the fourth quarter is expected to decrease year-over-year as a percentage of net revenues.

Based on the timing of investments, largely around our direct-to-consumer growth initiatives, non-marketing SG&A expenses for the remainder of the year are expected to be comparable in the third and fourth quarters.

In 2007, the third quarter showed the highest earnings of any quarter during the year.

However, as a result of these items related to both the top line and expenses, the fourth quarter is now expected to be our highest net income quarter in 2008.

We hope that this discussion has helped you understand the timing differences impacting our second half of the year.

Our Company remains focused on executing our growth plan for 2008 and investing in our future.

Like the athletes we build products for, we continue to challenge ourselves to find ways to make incremental improvements to the way we operate.

With the growth initiatives we are currently investing in, the strategy we are building and the additions we have made to our executive team over the last 12 months, we are building the foundation for large, scalable businesses.

We are a culture of growth balanced with a culture of profitability.

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

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

Operator?

(OPERATOR INSTRUCTIONS).

Robbie Ohmes, Merrill Lynch.

Guys, can you hear me okay?

Yes, Robbie.

Terrific.

How are you?

Actually just one sort of broader question.

I was hoping, Kevin, we could get you to talk a little bit more about 2009 and the potential for really opening up your mall distribution, both on the running side and also expanding your apparel business in the malls and maybe a little more detail, if you're ready to release it, on how big the launch could be?

Could it be well over a million pairs for the running shoe and could it be a big program with Footlocker, as well as Finish Line?

Whatever you can give us on that would be great.

Thank you.

Sure.

Well, first, let me start and give the first credit where it is due and that is our key sporting goods partners.

None of this happens frankly without the [authentification] I think that these guys have provided us with the ability to be successful with great programs like, A, launching football cleats more than two years ago and then, of course, attaching Trainers this past May.

We have obviously developed ourselves and laid out the foundation for being I think a great footwear brand.

What you're going to see about Under Armour speaking on a couple of different levels is us evolving to a great footwear company.

With that, our distribution is not unlike our product where we view it like chapters in a book.

Every chapter needs to make sense to the one before it.

It needs to make sense to the one after it.

What we have always said about mall distribution is that we only want to be in places where we can be important.

Unless you have a footwear component, we never felt that that was possible within the mall.

That obviously changes with the advent of Trainers, non-cleated footwear and of course, our announcement of getting into running.

We are I think very excited about what the mall means and from a door standpoint, we are looking to expand into additional Footlocker doors.

We will have roughly about 600 to 700 doors by the end of 2008 and that will be apparel only and beginning in 2009 in some of those stores, we will begin to carry athletic footwear.

At the same time, just speaking of getting into the footwear side of the world, I think the consumer has told us that they want more and expect more from our brand.

Again, the response that we heard around the Training launch was pretty overwhelming.

Just four weeks into it, we had sold through more than 30% of our product, which was far and away ahead of where we expected to be.

We still -- I think the metrics are pointing to the fact that the consumer accepts us as an athletic footwear brand and are asking us to go into more places.

At the same time, we are also seeing the fact that we have been able to leverage I think our apparel authenticity in places like where we have been authentic in running and frankly in some places that we haven't been able to get into with our running line.

We are pretty pleased I think on not only with the mall players or the way that they are viewing Under Armour as a footwear brand when we look at new categories like running, but we are also pretty excited about what it means by the authentic distribution -- the athletic specialty, the run shops, places like Road Runner Sports and more of the hard-core authentics like a [Luke's] Locker Room down in Dallas -- that are bringing our productline on.

So all in all, I think it is a pretty tremendous opportunity for us and again, from a size or a product standpoint, Robbie, Training was a completely allocated program for us.

We are going to attack running the exact same way.

It will be completely allocated, but what I can tell you is it will be larger and a good bit larger than our Training launch.

Terrific.

And I just wanted to ask one quick follow-up question.

I think you mentioned on the call that the sell-through rates -- at one point, I think somebody said that sell-through rates on the women's and kids was stronger than the men's.

And I was hoping you could go into more detail on that comment and if we should be worried about men's slowing or just what that means.

Robbie, hi, this is Wayne.

What we talked about was in total, and what we are saying is that, in the second quarter, our sell-in to the accounts compared to how our retailers sell through, that delta was about 15%.

Let me just tell you that we get that information weekly.

We look at five of our top accounts.

We look at our business -- both men's, women's and youth -- and that is one of the reasons that we feel very good about our back half is that our inventory levels at retail are very clean as we go into that back half.

So it is a sell-in versus sell-through number.

Got you.

And then last question and I will let you guys go.

Does any running ship in the fourth quarter of this year or is it all first-quarter shipped?

This is Kevin.

We are not anticipating shipping running this year and if I can maybe hedge the next question too is we are not anticipating chasing any of the Training business.

So the number that we put out there in athletic training is the one that we are going to stick to in 2008.

All right.

Hey, terrific.

Thanks, guys.

Omar Saad, Credit Suisse.

Thanks, good morning, guys.

Wanted to follow up on some of your kind of forward-looking comments.

There has been a lot of speculation in the marketplace.

We're in such a difficult consumer spending environment.

Everybody is feeling pressure from inflationary issues and just obviously the headlines too are impacting how people are spending their discretionary dollars.

What is your early back-to-school read?

Can you talk qualitatively how retailers are approaching the fall?

It sounds like a lot of your order book is kind of on track from where it was last year.

Can you kind of give your state of -- from your view what the state of the Under Armour consumer is and the retailers that you work with as well?

Omar, hi, this is Wayne.

I will start off.

Our outlook that we put together is a reflection of how we think our business performs in the current environment.

It does not assume any turnaround this year.

So I just want to set the stage for that.

And like we have always done, we have taken a balanced approach on how we looked at our business, but there are several factors that I think I would like to share with you.

The number one thing, and I mentioned this a second ago with Robbie, is that we do gauge very closely how our products are selling through at retailers.

And right now, based on that information and what we have seen in the second quarter, what we see to date, we feel that we are going into the back half of the year with a very, very clean inventory at retail and a very productive product at retail.

We continue to sell through at full price at retail.

Another point is that we have -- we launched into the non-cleated business and I think as Kevin mentioned and Brad, 70% was shipped in the first half, but we still have 30% of that business to go out mainly in the fourth quarter.

So that is an additional piece to us.

We have also had some very, very good reads with our direct-to-consumer business.

Kevin mentioned it has been up 75% year-to-date and in addition to that, the back half of our business, which is typically more weighted with direct-to-consumer, Brad called out that about 25% of our back-half dollar growth is relating to direct-to-consumer.

And for us, that is a very good indicator of how we are doing.

And in addition to that, one of the other things is we have got additional distribution at Footlocker group.

In addition to that, we have additional doors.

With our existing retailers, they've pretty much planned their door growth more or less in the back half.

Kevin called out some new programs that are back half.

We also have a holiday delivery in Q4.

So there is quite a view metrics that we see, which give us excitement about the back half and also going in very clean.

Kevin?

Yes, hey, Omar, so building off what Wayne touched on, I will just jump on the apparel piece, which is some of those bigger programs that we have.

And typically we are bigger and we are launching our bigger programs in the back half of the year, but that fitted ColdGear fits right in the whole good, better, best concept and we are taking a wheelhouse program -- several million unit program -- and turning a $50 ASP and adding a $60 and $70 complement to it with something that the consumer frankly has been asking, if not begging, us for, which is like many of the older bodies in the room here is Under Armour ColdGear that is isn't compression.

So that fitted component we think is really going to pay dividends out in the marketplace and we think we are going to see a good response there.

We also have -- we are getting a lot more serious around men's basketball.

First of all, you are going to see that in places like Dick's and Sports Authority and our key sporting goods partners, but you're also going to see us driving and building authenticity throughout basketball with some of our new mall partners as well.

So that and then an expanded MicroFleece program as we talked about.

You are definitely going to feel the Under Armour brand throughout sporting goods distribution in this fall and we are pretty I think excited about the product itself and what that is going to mean to the back half.

Okay, great.

And then just a quick question on marketing.

Kind of any big programs coming up should we be thinking about as we plan our models and SG&A hit ahead of the footwear launch, kind of like we saw in '08?

Is there going to be a big campaign around that launch?

How should we be thinking about that and how are you thinking about marketing that brand over the next six to 12 months?

Yes, Omar, this is Wayne.

I will start off with -- kind of my view of it is one of the things we have learned is that, as we start to launch new product, which we will over time, that we will send that marketing message out a lot closer to when we introduce that product to market.

And for us, that really is, as Kevin mentioned and Brad, we are looking at a first-quarter run launch and we would expect that our marketing and our message around that and for the consumers will be closer right to when we launch.

So unlike this year when we started a little bit earlier, we think it is better to get closer.

Tactically, Omar, we talked this at Investor Day as well, but that campaign, that concept around athletes run is something we are very, very excited about.

I can't reiterate enough, our big story in 2009 is going to be around Under Armour getting to athletic footwear with not just a brand entering the market, but we think we have got better product and of course, we are going to do a great job of telling the story about that product.

Great.

Thank you.

Dan Wewer, Raymond James.

Good morning.

I was attempting to pencil through the margin rate on the incremental footwear and it appears it's somewhere around 30%.

I know that footwear margins are lower than apparel, but I was under the impression that non-cleated footwear margins will be higher than cleated.

I am curious as to what may have been impacting the margin rate on the Performance Trainers?

Okay.

Dan, hi, this is Wayne.

First, we want to mention that, just like apparel margins, our footwear margins will improve over time and for example, we have our [Generation 2] Performance Trainer, which will launch in November and we will start to see an improvement in those margins.

Our main focus when we launched Performance Trainer was to develop the right product for our consumer and create a buzz in the category and as important as ever is to deliver on time.

We know we are going head to head with some very, very strong brands and we wanted to put the right product out in the marketplace at the right price point.

So when we look at our checklist, we feel very good that we have hit all our goals.

And there is no doubt that there is opportunity for us to continue to improve our footwear margins.

And like I said earlier, that opportunity starts to take hold as we see Generation 2 in November.

And Danny, if you look in the marketplace, we went head to head with some pretty tough competition out there and if you check both the outlet stores or if you check full-price retell, you'll find that the Under Armour brand, the Under Armour product and new color ups and some new uppers is going to still be selling through at full price at $80, $90 and $100 and you can't say the same thing about our competition.

So I think our initial goal all along has been authenticating ourselves and proving I think to the consumer and especially to the Company that we have the ability to be an authentic footwear brand.

And as I mentioned just a little bit earlier, I think what you're going to see is the Company evolve into, as we improve supply chain, as we improve efficiencies, is that building athletic footwear -- it is not really a business that leverages off of apparel.

We have effectively -- we have had to build a completely new company around footwear and we are continuing to build and get better there too.

And so whether it is the categories, as we say, training margins will be better than cleated margins, running margins will be better than training margins.

In the same way every year we get better as we get more depth and breadth of our assortment, our manufacturing base and continue to build and just become a great footwear company.

That's helpful.

I guess my other question is regarding the third and fourth-quarter guidance.

It appears that you are lowering the third-quarter expectations.

I was just curious as to when you began to recognize the change in seasonality.

Did this occur after the analyst day?

Yes, we haven't given quarterly guidance in the past, Dan.

This is Brad by the way.

So we really looked at the first half and the back half of the year, so we weren't giving quarterly guidance.

So really as we are getting into the back half of the year right now, we are just trying to get some added flavor to maybe some of the change in the seasonality from the prior years.

But we are still looking at the full year being just in line with what we said all along, 26% to 28% growth.

We are calling our operating income up for the year right now.

So again, we really didn't give any specific guidance for the quarters, but we thought it was important to call out as we get into the back half of the year some of the timing differences from the previous years relative to the footwear shipments in the fourth quarter and the continued strength in our direct-to-consumer business, especially in the holiday season in the fourth quarter.

I guess just a last question, you had noted that the Performance Trainers shipments would increase in 4Q.

Are you also assuming running shoes shipments beginning in 4Q as well?

No, Kevin just stated that before that we are not anticipating any fourth-quarter shipments of running shoes.

That would be a Q1 2009.

Okay, great.

Thank you.

Jim Duffy, Thomas Weisel Partners.

Thank you.

Hello, everyone.

You mentioned that direct is growing faster than the remainder of the business.

I am hoping to get some perspective on where you see the direct-to-consumer revenue as a percent of the overall revenue for the year and if you could, perspective on how large the online contribution would be within that.

That would be helpful.

Thanks.

Jim, this is Brad.

As far as a percentage of revenues right now for the full year, we are anticipating direct-to-consumer to be right around 15% of the overall Company's revenues for the year.

Last year it was in the low teens -- or actually the low double digits, I should say.

So you can kind of get a flavor for the difference year-over-year as far as direct-to-consumer.

We really don't look at -- we kind of talk about our Web and our retail stores together in the direct-to-consumer number.

We really don't break out our online number as a percentage of revenues.

Jim, hi, it's Wayne.

The other thing I want to point out is that when we look at direct-to-consumer, I really want to drive the point home that it is definitely more back-half weighted as well.

And I think Brad just drove this home, but over 65% of our annual direct-to-consumer business is done in the back half, and really 32% the balance in the front half.

So that is the other reason that we start to see that back half look a lot stronger, both in terms of growth as well as in terms of margins.

And are you tracking the plans in terms of the store openings?

Yes, I think one of the things we said last call is that we were going to open up two to three stores this year.

We are on track to hit that.

Our stores are on plan for us.

We have opened recently outside the Chicago area, and we are pretty excited about the stores so far.

But I want to mention that we are still in a test mode, and for us opening the full-price stores, specialty stores, we are going to learn from that.

And we are going to try different concepts over time and try different merchandising plans within the store, but for us we are going cautious, but we are very happy with what we see so far in terms of results.

Jim, this is Brad.

Just to add some flavor to that too on the outlet side, we began the quarter with 19 stores, and we anticipate opening another five to six stores the back half of this year, which will put us around 25 stores by the end of the year on the outlet side.

Not to be underplayed is, A, we like the percentage, we like the 15% percentage of our direct-to-consumer business today and we think it makes for a pretty healthy wholesale business.

But I can't understate enough I think the addition of David McCreight joining our team as well and what that is going to mean for us on a direct-to-consumer basis.

So those three components of Web, full price and outlet.

We have been really pleased I think with our outlet business, not having to liquidate or dispose of product in unsavory channels or places where we would not want to be.

So the ability to control that is something that has become a brand strength and then, again, we are learning a lot.

We have got two doors open right now and I will say that, until David gets on here and gets on board, we are going to reserve judgment for what the future of Under Armour full-price retail looks like and really let him sink his teeth in and make sure we have a model that first and foremost drives and authenticates and helps grow our key wholesale businesses like big-box sporting goods.

Great.

And a quick one for you, Kevin, if I may.

You mentioned the importance of the basketball product in the second half of the year.

Should we expect kind of basketball-specific marketing programs?

I didn't follow that up with nudge, nudge, wink, wink, did I?

No, I think where we are looking at, Jim, is we believe that basketball is an important sport that we have yet to attack.

We are not anticipating any other launches on the category side, but with the addition of the mall channel, we think that we have got a great vehicle to speak to that basketball consumer and we are going to attack that pretty aggressively.

But more importantly again, going back to our wholesale distribution, is that these guys do a great job of selling basketball products to begin with and you will see a pretty heavy in-store campaign around basketball for us in 2008 and carry through to 2009 as we continue to build credibility there.

Thanks and good luck.

John Shanley, Susquehanna.

Thank you and good morning, everybody.

Will the launch of the running line in the spring of '09 entail about the same degree of marketing effort that you put into the launch of the Trainer program?

In other words, are you going to frontload a lot of your marketing efforts to the spring season in order to get the line launched the way you did with the Trainer line this year?

John, hi, this is Wayne.

I think, first, we want to make sure that it is really clear that our marketing for us has always been a discipline.

We will stay within that 12% to 13%.

We think that is the right number to support our business and to support our launches.

The one thing we will do is when we do have launches, we are going to have to have those launches and those marketings essentially be in the same quarter.

So we are going to have our marketing dollars very close to the launch because we think it is important.

We did it this year.

We had a very successful Performance Training launch and we think that is the formula to be able to get out there and tell that message, especially as we introduce new categories.

I see.

Okay.

Can you give us a little bit of an update on the international business, specifically Europe?

You mentioned that it is growing at a much faster rate than the domestic market.

Are you prepared yet or are you yet in the planning stages of the introduction of football cleats for the European market or is that something that is still going to be down the road a bit?

Well, John, let me go back and just start with our strategy as we have attacked international, specifically Europe.

Number one was building the right team of people.

Peter Mahrer just crossed the one-year mark in terms of his contribution to the Company and he is doing terrific and we are really building headway there as we are building out our plan there.

The second component was building authenticity on the field and within that, we have -- the recent signings of the Welsh Rugby Union and Hannover 96, which is the Bundesleague of First Division German Club, we had a great response.

We actually just kicked off our uniforms, did a whole presentation.

The first day, we had 4000 kids there walking through the Under Armour set.

We had 10,000 fans greet the team for the unveiling of the new uniforms.

So I think the reaction to authenticity is something that you will see us continue to build on and invest in over time.

And then from a distribution standpoint, we have got just over 1700 doors in Europe today and we are, we are seeing growth and we are seeing headway.

But we need to reiterate the fact that Europe is a long-term investment for us and one we will continue to drive.

And what gives us confidence there, as you look across the globe, is Asia is another growth opportunity for us and tangibly our success that we've seen in Japan.

And I don't know if I can underscore enough, our Japanese business and we don't typically call this out, but it is one where we did $38 million in 2007.

That business will nearly double in 2008 for us.

So we really feel like we have crossed the tipping point and again, it just reiterates the fact that the brand translates.

And then, of course, as I mentioned in my script, we are really heavily focused -- I mean that data point of 90% plus of our business being done in the United States today, we feel that there is tremendous opportunity, A, in the confidence we have and that the brand does translate, but in time, we are going to develop into a global performance brand and not just a US one.

Would you agree, Kevin, that you really have to have cleats in order to make inroads into the European sector?

Yes, we haven't -- publicly speaking, I can tell you from a product development standpoint, we have been working across many categories and I would absolutely agree and you can look in 2009 for some product to begin showing up on athletes and again this wouldn't be logos on the feet, but you will probably begin to see product out in the marketplace or at least authentically on-field on teams, not necessarily for sale, but put on the right teams the right way in 2009 as well.

But yes, I would agree that we need a great soccer boot and a great football boot if we are going to compete internationally.

I just have one last question.

We have been interviewing a lot of retailers recently and they indicated that there was a falloff in demand for the compression product, but a renewed interest in the loose fit product.

Are you seeing that across the board or is this just unique to some of the retailers that we have been talking to?

I think it speaks to probably the diversity of our brand is that Under Armour is not just a compression brand, like we are not just a footwear brand or an apparel brand for that matter.

We are a performance brand.

The ability for us to take that is -- it goes back to when we slammed the table and say cotton is the enemy.

It shows that, frankly, our brand is growing.

We always gauge maturity by the balance between compression versus loose and it was actually in 2008 when loose product finally surpassed compression product as being dominant within the Company.

And going back to the European question, it is a good gauge that still 80% plus of what we do in Europe is still the compression product.

So I think it is probably a positive sign that the brand, A, compression is still growing.

It's important I think to call out for us, but I think it is a positive sign that loose product to consumers seeing us not just as compression, but giving us the benefit of the doubt on performance being loosefitting as well.

Yes, this is Wayne.

Some of our bigger growth categories that we have seen recently -- golf has been a great growth category.

Kevin called out that basketball apparel has been very strong for us.

The training category has been good and apparel in running has been extremely strong for us.

So we are starting to see that there are end-use categories that start to really have accelerated for us in the last year and they've become, they have become part of our big drivers in our apparel growth.

That is great.

Can you give us an update in terms of what the divide is between compression and loose fit currently?

It is roughly 50/50 and it is a little actually favoring loosefitting product versus compression product.

Great.

Thank you very much.

I appreciate it.

Kate McShane, Citi Investment Research.

Hi, good morning.

Can you tell us or are you able to tell us what men's and women's apparel growth would have been during the second quarter if you didn't have that sales shift to the first quarter?

Yes, it's kind of tough to say, Kate.

This is Brad.

Typically, the shift with the warehouse management system, we are really looking at the first half of the year, not quarter-to-quarter.

It is really tough to determine the dollar amount that shifted between quarters.

So we really look at the whole first half of the year as far as our 18% apparel growth.

And Kate, also, this is Wayne, and one of the things Brad called out, which I think is good point, is looking at half the year, we are still very comfortable with the men's growing in that 20% to 25% range and women's and youth exceeding those points where we stand today.

So we are very comfortable with the metrics that we are looking at.

One thing, Kate, I think we have done a pretty good job in what is a well-publicized, pretty difficult environment out there is, again, I don't view us as an apparel brand, as a footwear brand, as much as we are a performance brand and we have built this model that gives us multiple levers.

We talked about those four or five growth drivers that we have and in any given quarter, when we look at things on a full-year basis and in any given quarter, we have the ability to pull on one of those growth levers.

It is fortunate for Under Armour that we have the growth lever of launching performance footwear that helped drive us.

But again, to reiterate the fact that we do see apparel growth for the year, for the full year at 20% to 25% plus growth.

Okay, thank you.

And one final question, in terms of gross margin pressure that you saw during the quarter.

I know a large amount came from the footwear mix, but can you talk a little bit about what you are seeing on the sourcing side?

There has been a lot of talk by all manufacturers about higher inflationary sourcing costs.

I just wondered if you could talk to that for a few minutes.

Kate, this is Brad.

A couple of things there.

We are reiterating our outlook for the year for gross margins to be approximately 50%.

So a lot of what we are also seeing in the marketplace is already kind of baked into the back half of the year for us.

We have talked publicly before about -- from a product cost perspective, we have locked in our pricing through the spring/summer season of 2009.

So again, for the back half of the year, our pricing is pretty much in place.

Probably the two biggest drivers that we have consistently talked about when we look at gross margins at least going forward -- footwear, we continue to call out will be below our apparel margins, but will improve over time, but still be below our current margins over the long term.

And also our direct-to-consumer business had a positive impact on margins going forward.

So I think those two items will still be the major impacts to gross margin when you look at the future quarters.

Obviously, as we talked about, direct-to-consumer is very strong in the back half of this year, especially in Q4 around the holiday season.

So we should see some benefit to that in the back half of the year gross margins.

Yes, and Kate this is Wayne.

We are not immune to raw material and labor costs in certain parts of the world increasing.

But I have to give a call out to our supply chain team.

They have done a good job leveraging the growth that we have and quite frankly, there are still a lot of opportunities for us.

We are a young company and a growing company and there is many more efficiencies that we can take out of the process to help offset some of the increase in costs.

And when Wayne gives that call out to our team, you have to understand that we continue to operate in the business as well.

A good example in the past quarter that we did, it's something we call reinventing the core.

We took our core women's HeatGear product, which is our top two or three styles in the line, and we actually -- we have updated and reinvented that product and we have brand new women's product out on the floor.

And it is doing terrific.

Again, this wasn't something that declining sales told us we had to do as much as it is the evolution of our brand and we believe it is important to evolve our product.

You have got to remember, the first men's HeatGear T-shirt that I built was nearly 12 or 13 years ago.

And so having the benefit to reinvent that product is something we think is going to be pretty compelling and will ensure that these franchise businesses for us, like our HeatGear products, will continue to pay and continue to grow for us in the years to come.

Okay, thank you.

Operator, we have time for one more question.

Paul Swinand, Stephens Inc.

Good morning.

First question just on the -- following up on one of the last questions.

The men's business is supposed to grow 20% to 25% in the second half or excuse me, for the full year.

You are up 18% for the first half.

Can you give us some color on how that is going to accelerate in the second half?

Is it styles?

Is it core business versus new business?

Can you give us any more color on that, please?

Paul, hi, this is Wayne.

Actually there are several factors to that.

One we looked at and we called out earlier, our direct-to-consumer business in apparel is more back-half-weighted.

That would include both men's, women's and youth.

So there is also a factor in terms of the timing of when we see that percentage of our business grow.

In addition to that, there's additional distribution in the back half.

The Footlocker group has additional distribution, which includes apparel.

Our existing retailers, when they start to add more doors, much of the doors are planned in the back half.

New programs Kevin called out such as fitted ColdGear, 100 gram weighted MicroFleece and we actually have a new shipping window, which we would call holiday window to freshen up the floors.

And all of these pieces together will give a nice jump to our men's business and in addition to that, something Kevin said earlier, was that we do have visibility into our business.

There are two factors -- one, going into the back half very clean at retail with inventory and secondly, looking at our futures and our bookings being somewhat comparable year-over-year.

So the confidence that we have and the confidence that our retail partners have in our business as well.

So that's what gives us the confidence to be able to say 20% to 25% in the back half of the year.

Paul, you are going to continue to see us loud and proud in the marketplace as well and not only with our own dollars, but I think we have demonstrated the ability to leverage some of our partners' dollars as well.

We have a current campaign in the marketplace out right now cobranded with The Sports Authority that is bolstering our footwear in the marketplace and you are also going to see, in back-to-school, or in holiday rather, us partnering with Dick's Sporting Goods with more creative on television.

So we're going to continue to make sure we reinforce that with our key partners in the way that we show up on their floors and of course, them doing a great job for us in stores.

So with that, we feel pretty good about the outlook that we provided and ready to attack the second half of the year.

And is women's kind of the same story?

I know at the Analyst Day, you talked about some of the new initiatives or new cuts really not hitting the floor until fourth quarter.

Well, I think, first of all, our women's business is doing really very well.

It is up 28% for the first half and again, we anticipate women's being up over 30% for the full year.

So our women's is on plan.

Again, Suzanne Karkus is really driving that business for us and we are going to begin to really see a movement of change that's beginning in 2009.

But our performance in 2008 on the women's side has been very good.

I think we are very happy and pleased with it and it is only going to get better.

Thank you.

That concludes the question-and-answer session today.

At this time, Mr.

Plank, I will turn the conference back over to you for additional or closing remarks.

If I could, we opened this call by stating that Under Armour is a growth company and that is one thing I hope you take away from the conversation that we had today.

There's a lot of pieces to the growth, but we continue to make the progress that we expect from ourselves.

We grew revenues 30% in this quarter.

We had a great launch of Performance Trainers and we are set up to enter the running footwear category.

We made great progress in managing our inventory and we hired a new President to help us execute our growth strategy.

We are going to continue to build out our large, scalable businesses, setting the stage for profitable growth in the second half of 2008 and beyond.

With that, we thank you all for your time today and hope to see you in about 90 days.

Thank you.

That does conclude today's conference.

Thank you for your participation.

You may now disconnect.