Under Armour Inc (UAA) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Under Armour, Inc.

first-quarter earnings webcast and conference call.

At this time, all participant lines are in a listen-only mode.

Later, we'll conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr.

Tom Shaw.

Sir, you may begin.

Thanks, Teresa, and good morning to everyone joining us on today's conference 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.

We wish to caution that such statements are subject to risk and uncertainties that could cause actual events or results to differ materially.

These risks and uncertainties are described in our Press Release and in the risk-factor section of our filings with the SEC.

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

Joining us on today's call will be Kevin Plank, President, CEO, and Chairman, followed by Brad Dickerson, our Chief Financial Officer, who will discuss the Company's financial performance for the first quarter and provide an update to our 2011 outlook.

After the prepared remarks, Kevin and Brad will be available for Q&A session that will end at approximately 9.30 AM.I will then close with a tentative date of our second-quarter 2011 earnings call.

Finally, a replay of this teleconference will be available at our website at approximately 11 AM Eastern Time today.

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

Thank you Tom, and good morning everyone.

After surpassing the $1 billion revenue mark in 2010, we are truly at the beginning of a new era at our Company.

And the great news is that as we enter this next phase of our growth, our business is as robust and our revenues as broad-based as at any time in our history.

And most importantly, it's our core business and US apparel that is driving our growth.

We are proud of the growth culture that we have instilled at Under Armour, and that was evident with revenue growth in Q1 of 36%.

Some of the highlights included our wholesale apparel business, with strong growth across women's, youth, and of course, men's.

A strong launch for Charged Cotton with great consumer acceptance, and awareness of the technological benefits of the Under Armour approach to cotton.

Direct-to-consumer, which continued strong growth of 53% over 2010 and represented 20% of revenues in the quarter.

20% footwear growth in the quarter, highlighted by solid sell-through for our Assert running shoe, amongst others.

Taking our Hats and Bags business in-house, which helped drive 213% growth in our Accessory business.

And increasing our brand strength and visibility with athletes like Tom Brady and Cam Newton, as well as the global signing of the Tottenham Hotspurs of the English Premiership League.

We are a growth Company.

The continued strength of our US apparel business provides a great platform for our investments in growth drivers like footwear, where our team is in place and starting to develop great products.

In International, where we are still building the teams and foundation for Under Armour in key markets, including China.

While we are in investment mode in those areas, we are funding that spending by being in strong execution mode in apparel, growing our business across categories, gender, and distribution.

Under Armour remains a growth Company, so let me take a minute to give you some examples of where that growth is coming from.

On the category front, our overall training, Golf, and Running Apparel businesses were all extremely strong in the quarter, with training accounting for almost half of the incremental revenue.

We saw great consumer acceptance of our Charged Cotton product that hit retail shelves last month.

For Under Armour, Charged Cotton represents the type of innovation we expect to deliver.

It's innovation that starts on the field and in the lab for the elite athletes, but innovation that will also find its way into every athlete's closet.

Our mission is to make all athletes better, and Charged Cotton is off to a great start on helping us to deliver on that promise.

It's important to point out that Charged Cotton is not a one-item introduction as much as a platform for Under Armour that increases our dress-full market from the $2 billion to $3 billion Synthetic market we have played in to date to the more than $11 billion active-use Apparel market that cotton now gives us.

Charged Cotton will of course live on into the fall season and will be bolstered by the introduction of Storm Cotton, a heavyweight, water-resistant sweatshirt that includes all the Under Armour performance benefits that consumers come to expect from us and unlike any similarly position product in the market.

At the same time, we had strong growth in our core base layer.

Great evidence that the core Under Armour athlete continues to invest in and prefer our brand as we step into new categories like Charged Cotton.

On the gender side, we consistently talked about opportunity in women's since we've been a public Company, and it's very satisfying to see that piece of our Company really coming together from a product perspective.

And while we're very excited about the opportunity around women's with Charged Cotton, we are equally excited about how our young women's consumer is adopting the technical fabric that is the heart of our brand.

This gives us great confidence that we can build a long leadership position in women's athletic apparel over the long term.

Our success in women's is just one part of the growth we are driving in the US apparel business.

Our strong performance in men's this quarter came primarily from our big categories, including training and golf, great evidence that there's still plenty of runway to grow with our core consumer here in the US within our core distribution.

On the wholesale distribution front, we continue to outpace the industry growth rates across our full spectrum of retail distribution.

Under Armour revenue growth within our key accounts was broad-based and speaks to the critical position we now ask occupy, both on the floor and the future plans of our key retail partners.

And beyond this strong growth, our key retail partners, our direct consumer business, continues to grow with revenues up 53%.

There is runway there as well, as we continue to add factory house stores to our existing base and invest in the next generation of our e-commerce platform.

Given the current focus on material costs and our experience with surgical price increases late in 2010, we are very encouraged by our ability to communicate the value we build into our products and maintain our premium brand position as a result.

Brad will provide additional detail later, but we are gaining confidence in the ability to better navigate these types of challenges as we grow.

So after this solid quarter, it's fair to ask what are we doing for the next nine months, and I think our plans for Charged Cotton is a good example of how we're evolving as a Company entering this next phase of our growth.

In the past, we looked at all opportunities in front of us as a rapidly growing brand and were anxious to get after all of them.

We focused a lot of energy into our launches to create awareness and drive revenues but then were quick to move on to the next opportunity.

With Charged Cotton, we understand how it provides us with a great opportunity to dimensionalize the brand and bring Under Armour DNA to what has traditionally been a commodity business.

As a result, we are being patient with our growth strategy in reaching this new consumer and are staying focused on building that relationship for the long-term with great product and consistent communication.

We are focused on building this long-term asset for our brand and will gradually roll new product out within the Charged Cotton platform over the next few months.

So while we were pleased with the selling of cotton products in the first time in Q1, I want to spend a moment on a product that we didn't sell any of yet.

At this year's NFL Combine, we introduced the E39, which stands for Electric 39, the style number of our first product, the world's most innovative athletic evaluation and improvement tool, all contained in our compression base layer.

The electronics in this shirt measure different data points of the athlete including horsepower and G-force, body temperature, as well as breathing and heart rates.

One of the benefits of our sports marketing strategy is being able to showcase this level of innovation on a stage as authentic as the NFL Combine.

When the next generation of great football ballplayers wore the E39 at the Combine in February, it was a great example of us demonstrating our thought leadership in the absolute right environment.

And if you weren't hard core enough to watch the Combine for the full week, you can you'll see a lot of footage of the players wearing the E39 during the NFL draft coverage that starts this Thursday in Primetime on ESPN.

So as I said at the outset, we are in strong execution mode.

But as we enter this next phase of our growth, the definition of strong execution is evolving as well.

When we were a $100 million brand, executing was about developing great product, getting it made and shipped, and ensuring it sold through.

That process remains the core of what defines our success in 2011.

But the UA lens has widened, and we are now equally focused on the financial and human capital needed to fund our long-term growth drivers.

Pushing hard on both of those fronts will ensure we strike the right balance that will enable us to fully capitalize on the promise of what we have built to date.

So much like the E39, the investment we now -- in March about our partnership with the Tottenham Hotspurs Football Club and the English Premier League generated no revenues for us in the quarter.

But it does put us squarely in the middle of the pitch in the world's best soccer league starting next year.

We feel strongly that our relationship with this championship-league-level North-London based club will accelerate our business, and not only in the UK, but everywhere that soccer is played.

Tottenham is an Under Armour kind of team.

Like the Auburn Tigers in the SEC, they come with a great tradition in the top league, and we hope that our partnership will help bring the same level of success that Auburn saw this past year.

And finally, one last investment we are making that really speaks to the possibilities of the Under Armour brand.

Later this week, we are scheduled to open the first UA retail presence in China.

As we always do, we will initially be in test mode, with a stop-and-shop store in the Grand Gateway mall in Shanghai.

We'll be telling the UA gear-line story in this initial retail location, and our primary goal will be to learn about the Chinese consumer and how we can bring our performance story to them in the years to come.

As I said earlier, it was a great quarter, and innovations like Charged Cotton and E39, our new partnership with Tottenham, and taking our first step in the China later this week are great examples of the investments we are making now to ensure more great results in the years to come.

And with that, let me turn it over to Brad.

Brad?

Thanks, Kevin.

Kevin having taken you through some highlights and strategies for our business, I would now like to spend some time discussing our first-quarter financial results and updated 2011 guidance.

Our net revenues for the first quarter of 2011 increased 36% to $313 million, reflecting momentum in both our apparel and direct-to-consumer businesses.

Apparel grew 34% to $230 million during the quarter.

Category strength was once again broad-based across each of our men's, women's, and youth categories.

Our training category continues to lead the way, accounting for nearly half of our net revenues growth.

Included in our training category was the launch of our Charged Cotton products in March.

Overall in 2011, we expect a mid-single-digit total growth contribution from Charged Cotton off of our 2010 net revenues base.

Our direct-to-consumer net revenues increased 53% for the quarter, representing 20% of net revenues, compared to 18% in the prior year's period.

We opened nine new factory house stores during the first quarter, increasing our factory house store base to 63, up from 39 locations at the end of last year's first quarter.

We expect approximately 16 additional factory house stores to open in 2011, bringing our total store count by year-end to 79.

Our e-commerce business also remains robust as we continue to capture higher traffic and take deliberate steps to drive conversion.

Footwear net revenues during the first quarter increased 20% to $51 million, from $43 million last year.

Growth was predominantly driven by new basketball offerings and strong performance in slides.

While our expectations for footwear growth in 2011 are unchanged, we now see the majority of growth balanced between the second and third quarters, compared to the second-quarter concentration indicated on our last call.

Accessories net revenue during the first quarter increased 213% to $24 million from $8 million last year, reflecting the addition of our Hats and Bags business, which we brought in-house in January.

International net revenue increased 22% to $17 million in the first quarter and represented approximately 5% of total net revenues.

First-quarter gross margins were 46.4%, compared with 46.9% in the prior year's quarter.

We had several factors contributing to the 50-basis-point gross-margin contraction.

First, higher footwear sourcing costs negatively impacted margins by approximately 100 basis points.

In offset to this, we experienced lower footwear sales returns and mark down reserves, positively impacting margins by approximately 40 basis points.

Second, less favorable apparel product mix negatively impacted margins by approximately 50 basis points.

Third, we continue to generate a higher percentage of net revenues from our higher-margin, direct-to-consumer business, positively impacting margins by approximately 60 basis points.

Selling, general, and administrative expense as a percentage of net revenues decreased to 39.6% in the first quarter of 2011 compared to 41% in the prior year's period.

Details around our four SG&A buckets are as follows.

First, marketing costs declined to 13.3% of net revenues for the quarter, from 13.6% in the prior-year period.

During the quarter, we incurred incremental marketing expenses related to the Auburn Tigers national championship game.

However, overall costs were lower than planned, giving a shift in timing of approximately $2 million related to retail marketing spend for Charged Cotton from the first quarter to the second quarter.

Second, selling costs increased to 8.9% of net revenues for the quarter, from 8.6% in the prior-year period, primarily driven from the contained expansion of our factory house stores, which as we have said carry better gross margins but also incur higher SG&A expense as a percentage of revenue.

Third, product innovation and supply-chain cost decreased to 9.3% of net revenues from 9.6% last year.

We continue to invest in these areas to support our long-term growth but were able to show modest leverage, giving our top line strength.

Finally, corporate services decreased to 8.1% of net revenues compared to 9.2% in the prior-year period.

We leveraged corporate personnel and facility expenses.

Operating income during the first quarter grew nearly 56% to $21 million, compared with $14 million in the prior year.

Operating margin expanded 90 basis points to 6.8%, from 5.9% in the prior-year quarter .

Our first-quarter tax rate of 39.5% compared favorably to the 42% in the prior-year period.

We continue to expect our full-year effective tax rate to approximate 40%.

Our resulting net income in the first quarter increased 69% to $12 million, compared to $7 million in the prior-year period.

First-quarter diluted earnings per share increased 64% to $0.23, compared with $0.14 in the prior year.

Now shifting over to the balance sheet.

Total cash and cash equivalents at quarter-end decreased 33% to $111 million, compared with $166 million at March 31, 2010.

We have no borrowings outstanding on our new $300-million revolving-credit facility, which we recently expanded from $200 million.

Inventory at quarter-end increased 68% year-over-year to $249 million, compared to $148 million at March 31, 2010.

As we indicated on our last earnings call, we expected inventory growth during the first and second quarters of 2011 to exceed the 45% growth experienced at year-end.

Two notable factors contributed to our inventory growth during the quarter.

The transition of our Hats and bags business in-house, and as discussed at our last earnings call, an earlier plan build of our ColdGear apparel for the 2011 fall-winter season.

Excluding these two factors, inventory would've increased approximately 45% versus the prior-year period, a position that reflects our efforts to better service anticipated demand.

We will provide more detail on our inventory positioning shortly.

Accounts receivable at quarter-end increased 48% year-over-year to $163 million, compared to $110 million at March 31, 2010.

This increase was largely based on the timing of our wholesale apparel shipments, which were concentrated more toward the end of our first quarter.

Our investment in capital expenditures was approximately $12 million for the first quarter.

We are now planning capital expenditures for 2011 in the range of $45 million to $50 million, up from our prior guidance of $40 million to $45 million, partially reflecting incremental in-store marketing initiatives with key retail partners.

In addition to our normal operating capital-expenditure plan, and as previously disclosed, we have an agreement to purchase the Tide Point office complex, home of our corporate headquarters here in Baltimore.

We now expect this deal to close in May, subject to certain closing conditions at a purchase price of $60.5 million.

Now moving on to our updated outlook for 2011.

Previously, we anticipated 2011 net revenues of $1.33 billion to $1.35 billion, an increase of 25% to 27% over 2010, and 2011 operating income of $143 million to $147 million, an increase of 27% to 31% over 2010.

Given our current visibility, we are raising this full-year 2011 outlook.

We now anticipate 2011 net revenues in the range of $1.37 billion to $1.39 billion, an increase of 29% to 31% over 2010, and 2011 operating income in the range of $149 million to $153 million, an increase of 33% to 36% over 2010.

Our current guidance implies full-year operating margins between 10.9% and 11%, leveraging 30 basis points to 40 basis points from the 10.6% level achieved in 2010.

Below the operating line, we continue to see an effective tax rate of approximately 40%.

In 2011, although it's discussed in our last call, there may be opportunities to capture certain tax credits throughout the year, enabling us to improve on this rate.

Finally, we anticipate fully diluted weighted average shares outstanding of approximately 52.5 million to 52.7 million for 2011, a slight increase over our prior guidance of 52.3 million to 52.5 million.

We would also like to provide some additional color around our outlook for 2011.

First, with respect to gross margins.

Our visibility around 2011 gross margins and the puts and takes remain relatively the same from our last earnings call.

The transition of our hats and bags business from a licensing model to in-house, although accretive to operating income dollars in 2011, will negatively impact gross margins, as will near term challenges around apparel and footwear sourcing costs.

These gross-margin pressures will be partially offset by the continued strong growth in our higher-margin, direct-to-consumer business.

From a seasonality view, we continue to expect the largest year-over-year decline in gross margins to occur in Q2 and Q3, with a modest improvement to gross margins year-over-year in Q4.

We anticipate full-year 2011 gross margins to be down approximately 100 basis points from 2010.

We also want to provide some early insight into 2012 gross margins, where we continue to evaluate product costing and pricing.

We are facing the same challenges as the rest of the industry, where near-term input cost pressures having intensified for both cotton and oil-based synthetics.

As a result, in addition to select retail price increases in fall-winter 2011, we are looking at more broad-based pricing increases commencing in spring 2012 to help mitigate some of these pressures.

We believe our premium position in apparel gives us unique opportunity to mitigate much of these pressures.

In addition, similar to 2011, we anticipate our continued growth in our higher-margin direct-to-consumer business will also play a part in offsetting product costs pressures.

Will give updates to our progress as we get more visibility into 2012.

Now some additional color on SG&A.

As we previously mentioned, we shifted approximately $2 million of retail marketing spend for Charged Cotton from the first quarter to quarter.

We continue to expect a higher weighting of marketing costs in the first half of 2011 as compared to 2010.

Given the cadence of new factory house openings, we would also expect more pressure in selling costs in the first half of 2011 compared to the second half of the year.

As experienced in the first quarter, corporate services expense leverage is expected to be the primary driver of improved operating margins in 2011.

Regarding inventory, the same factors that impacted the first quarter, carrying ColdGear apparel into the fall-winter 2011 season and the transition of our Hats and Bags business, will continue to impact inventory levels the next two quarters.

In addition to these two items, our ongoing efforts to manage inventory effectively must be balanced with our desire to meet consumer demand.

Over the last few years, we have discussed many investments in systems and technology to designed to achieve this balance.

Although we expect these investments to be a significant part of improving inventory turn efficiency over the longer term, we must be careful in our expectations of how quickly this will occur, especially in balancing this with meeting consumer demand.

We believe in the near term, forward inventory turn of 3 times and a 90% to 95% fill rate are realistic goals for our team.

If we look back to the first half of 2010, our forward inventory turns were well above a 3 times turn rate.

In Q2 of 2010, they jumped as high as 3.6 times, and as we discussed last year, our fill rates became challenged.

To put it more simply, in the front half of 2010, we believe we were under-inventoried to meet demand.

This led to our decision to start making incremental inventory investments in the second half of 2010, which have continued into the first half of 2011.

Included in these investments are greater positions in core auto replenishment inventory, or safety stock, and also higher levels of seasonal products.

Regarding seasonal products, we feel this gives us greater ability to meet anticipated demand with a backdrop of an efficient and highly profitable factory house close-out vehicle, which will produce 80 doors by year-end.

With all of these factors taken into consideration for inventory, we expect the year-over-year inventory growth rate will peak in the second quarter before moving more in line with our net revenues growth in both the third and fourth quarters.

We also wanted to provide a few comments on the business in Japan with our licensing partner, Dome.

As a reminder, we receive a royalty payment from this $100 million plus business, which equated to less than 1% of our net revenues in 2010.

While revenues end up, our royalty improved significantly in the first quarter of 2011, the environment has clearly changed since the March earthquake and tsunami.

Our thoughts are with the people of Japan and with our friends and partners at Dome.

We will continue to work closely with them to monitor the impact to their business and our royalty revenue.

In summary, demand for our brand remains robust, and we are off to a great start in 2011.

While unprecedented sourcing challenges present a greater challenge to the industry through 2012, we believe that we can deliver strong top line performance while improving our operating margin rates, which we see as a compelling combination in this environment.

Now we'd like to open the call for your questions.

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

Thank you.

(Operator Instructions)

Robby Owens, Bank of America Merrill Lynch.

Thanks.

My two questions would be first, on the Charged Cotton distribution as you gradually roll it out, can you give us a little more detail on whether it's sort of gradual rollout of expansion into existing customers like a Dick's Sporting Goods, or do you see it going further into the Foot Lockers and Finish Lines of the world?

Any more color on is it more SKUs and different styles beyond T-shirts and shorts that we should be looking at?

And then the second question may be for you, Brad.

I just want to clarify.

The guidance I think implied by what you're saying on footwear is we should expect footwear revenues to be down in the second quarter?

Any help on that would be great also.

Thanks.

Let me jump on the cotton question.

First of all.

I think that we view cotton as opening us up to a whole new consumer, that this has given us a totally new dimension to the Company.

And while we're not trying to be as explicit as saying this is giving us new distribution, we think this really acts as our existing distribution but takes into the hearts and minds of a, into an existing consumer, as well as opens us up to a new consumer.

We've been pretty clear about how going from the $2 billion to 3 billion dollar synthetic market that we play into today to more than shipping of that going into active use is that something that will really expand our [adjustable] market.

But more importantly, we see this being broad-based, and everywhere where we sell Under Armour, we see acceptance of having Under Armour Charged Cotton.

Some of the things we're dealing with, though, is that getting into a program like this, this is millions of units.

And so it's a new manufacturing base for us.

It's a new supply chain.

It's a lot of new pieces.

So I wouldn't say we are cautious, but we are definitely -- we tempered ourselves getting going, making sure that we could keep the fixtures we invested into putting in stores, keep the fixtures full, and making sure the supply chain's in place to serve that.

We've been very pleased with the sell-through.

It's actually exceeded expectations where we sold it, exceeded expectations for our retailers as well.

And you look at where we're starting to see this product really come into play.

Our entry price point in the past has been what we call our [tap fee] of $20.

And we're seeing the consumer who looked at that, again without cannibalizing that category for us, but if a consumer's going to buy a tap fee at $20, still we're seeing by the tap fee, but more importantly, we're also seeing them trade up and spend money on a $25 cotton T-shirt as well.

I think in one fell swoop, we've got a new product category, a new market, and also taking [AFPs] up for our retailers.

Yes, Robby, on the footwear question.

Sorry for the confusion there, but our highest dollar volumes quarter for footwear are going to be Q1 and Q2.

However, our highest growth rate for footwear this year will be Q2 and Q3.

So you will see footwear revenues up in Q2 and Q3.

Obviously, Q1 footwear's driven by run and baseball.

And Q2 is driven by football.

Also, year-over-year, last year, we shipped our running footwear a little bit late in Q3 for back-to-school.

We'll get more of that out in Q2 this year, so you will see some good growth in Q2.

Got it.

Thanks very much guys.

Thanks, Robby.

Sharon Zackfia, William Blair & Company.

I had a bigger question on the international business.

As you are investing in some of the other kind of sponsorships overseas, should we think about the international business becoming less profitable before becoming more profitable?

How do you expect the sales ramp there to really occur over the next five years?

Kevin, I think you made comments about wanting to make a slash at the next World Cup.

I think we're tempering that as well.

We recognize that 90% plus of our revenues are coming from home base.

The theory that we use we deploy the resources, and that means time, money, and people, our number-one protector we have, and that is the 90% plus of our business is coming from here at home.

But the second criteria we use is making sure that every decision we make has global implications.

The decision to go after something like cotton, you look at places where frankly, the deals we didn't do, and whether it's additional colleges, whether it's broader or expanded deals that we potentially do with the bigger leagues in the US.

Our dollars that we had said decided to deploy off outside the United States.

So I think that we are -- we believe as being a global business, which our definition of that means that half our revenues will come from outside the United States.

The way that we're thinking about doing that is pretty measured.

We are very fortunate to have the success that we do right now in a growing direct-to-consumer business up over 53% for the year.

Our largest business, more than 70% of what we do, is in apparel, up over 30% for the quarter as well.

I think the those two successes allow us to really fund the longer-term investments.

The more near-term longer-term investments that we see is footwear.

We've seen success in footwear that's coming on in the back half of this year.

As we said, we had some success with the Assault running shoe coming out, and we've got some one-off styles.

But fall '11, we feel very good about what the running category's going to look like for us.

But really as we get into '12 and we get into '13, we see that business coming on.

But longer-term investments that we're making right now is what's happening with international.

The seeds planted more than 10 years ago in Japan that netted us $100 million plus business in 2010.

And again, once things normalize there, we see continued growth in trajectory.

The recent opening that we're having in China, finding the ability to deploy dollars of that will get us started.

We see that those thing, not unlike -- keep comparing it to a good bottle of wine -- but something that will begin to come on for us in three or four years.

So, we feel very good about I think Europe.

As we're sitting here in year five or year six of being in Europe, the timing for making the investment in Tottenham is something that's proven.

And I think it's a worthy investment.

In fact, we think it's even bigger and more global than just the UK.

Can you talk about how much of your SG&A is dedicated for non-US this point?

Sharon, we don't really break that out.

But again, I think to Kevin's point, I think as 90% of our business is here in the United States, then you would expect that the majority of our investments are really focused on protecting what's here in the US and protecting what our near-term growth drivers are around apparel and direct-to-consumer.

Okay.

Thank you.

Eric Tracy, FBR Capital Markets.

Thanks.

If I could focus on the gross margin.

First, just from the quarter perspective.

Brad, I think you mentioned the less favorable apparel mix.

I want to get what exactly was going on there.

And bigger picture as we go through the balance of the year, the 100 basis points down year-over-year.

Is it possible to quantify those buckets because you had talked about the input costs, how the direct-to-consumer helps to offset and then the level of pricing.

I know it's been surgical to date, but the level of pricing you put through, and then you quantify how we should think about that building in fiscal year '12.

Sure.

On gross margin for Q1, in apparel, really the mix there is just some lower-margin product mix.

Cotton obviously, we talked about having some cotton in Q1, some growth there.

And cotton's going to be a little bit less margin.

As we saw, the product pressure, costing pressure around cotton came in a little earlier than the oil-based synthetics.

So, just a little bit of mix issue there on apparel, which created 50 basis points down for the year in the quarter.

For the full year, not really to break out and categorize the individual things I called out, but obviously, as you look at the 100 basis points in total, one of the things is brining the hats and bags business in-house, which is a business model change from a licensing model to an in-house model.

So, more dollars to the bottom line, but it does negatively impact gross margins this year on a comp basis.

You'll see the biggest pressure there on Q2 and Q3, where we're comping the highest royalty revenue last year in hats and bags.

So you'll see the biggest impact there in Q2 and Q3.

Footwear in general, again, returning to growth, and some obvious sourcing pressures in footwear also that's facing the industry too.

You'll see some pressures there, again, as I just answered the question before, specifically around Q2 as we saw in Q1 with footwear.

Towards the back half of the year, footwear becomes the smaller number in total, so it's not as impactful in the back half of the year.

On the apparel side, although we did see some pricing pressures in Q1, most of the pricing pressures we talked about in our last call really were focused more towards the back of the year as we started getting into fall-winter.

And that's where we did take key programs up in fall-winter.

It was really just a few select key programs.

It was not broad-based at all.

It was areas that we thought we had some room in any event to raise prices based on our premium position.

So they'll come into play in the back half of 2011.

Really all that wrapped up with direct-to-consumer on top of it.

Obviously, direct-to-consumer growing faster than the overall business will help mitigate a lot of that, especially around Q4, where we have a high volume in direct-to-consumer year-over-year, obviously with growth too.

Okay, and Kevin, as you think the direct-to-consumer business, obviously the outlet format has been highly successful.

And you've tested some of the full-line stores in the past.

Any kind of thought to bringing that back into the mix, or how should we just think about that longer term in terms of an opportunity to carve out your own distribution?

We have 63 outlets today.

We're anticipating roughly 80 by the end of the year.

I think that gives us a lot of versatility as a brand, with the opportunity for liquidation to move inventory when we need to.

We've obviously seen the benefits of what having controlling your own distribution can mean.

I want to reiterate we have great partners, and we still see great growth within the existing doors that we are in today that we have been in for many years.

So at the same time long term, we see from a factory base standpoint about 110 stores to 120 stores is the opportunity that we have.

But we also see the ability to test some different concepts because the goal and the reason that we have our own distribution is to supplement where our current partners are not in.

We mentioned places like Sevierville, Tennessee that we talked about a few times, but I think there is one or two sporting good stores within an 80-mile or 90-mile radius of that store.

And of course it's outperforming from an outlet standpoint because that proves to be the only place the consumer within that range can find our brand.

We still believe we are under-distributed as a Company.

I think that we will continue to test different options that will give us the ability to satisfy those needs for our consumers.

There's nothing that we're looking to do to cannibalize existing distribution.

Our goal remains if we can find the right opportunities with the right presentation.

Frankly, I think there's an opportunity to have a comprehensive presentation of the Under Armour brand that we're still pushing that a, within retail partners and I think that we also have the ability in, someday, to do that ourselves.

Great.

Thanks, guys.

Best of luck.

Thanks very much.

Pamela Quintiliano, Oppenheimer.

Thanks so much.

Just had a quick question on your approach to the escalating sourcing costs.

Between the apparel and the cotton and the oil component which you talked about, and also footwear, if you could give us more clarity on where you're seeing the most pressure and what you're forecasting going forward.

And along those lines, are you becoming more aggressive or thinking about becoming more aggressive taking ownership of safety stock?

Yes, Pamela, this is Brad.

If we break out the sourcing from apparel and footwear and look at that separately.

First, on the footwear side, the majority of our footwear manufacturing is being done in China right now.

There's been a lot more pressure in not only commodity price but also labor price in China.

So, like a lot of other brands, I think heavily more weighted towards China manufacturing, we see some pricing pressures there.

How we're approaching that is trying to mitigate this going forward by maybe moving some of that manufacturing out of the coastal areas in China where we see most pressure on labor, either to inland China or other parts of southeast Asia where labor is less of a price pressure.

That'll take a little bit of time.

We'll continue to see some of this pricing pressure in footwear in the near term for this year.

As we look to get into the back half of 2012, maybe start to have some more impact around moving some of those manufacturings to different parts of the world.

On the apparel side, now, you have the same issue that everybody's talking about, commodity-price pressures.

But also labor in China is an issue people raised also.

But the good news for us in apparel is that less than 10% of our apparel is manufactured in China, so that's not as much of an issue for us.

On the commodity pricing side I think everybody kind of saw the impact of cotton come into play a little earlier than the impact of oil-based synthetics.

For us, I'm a little less pricing pressure in the front half of 2011 because we're more obviously heavily weighted to oil-based synthetics.

As we get the back half we started to see those pricing pressures come into play, too.

Obviously, as we talked about taking some key styles up in fall-winter '11 will help to offset and mitigate some of those pricing pressures.

As we look forward to 2012 with apparel, much more broad-based increase in prices.

We had talked on our last call about a mid-single-digit increase in the back half of '11 in product costs.

And we saw -- we're seeing a similar type of increase as we get into spring-summer '12 on top of that fall-winter '11 increase.

But as we've stated, we're looking at analyzing more of a broad-based view of our products in spring-summer '12 and how we can increase prices to help mitigate that.

And just as a follow-up on that.

Given you're so early in your Charged Cotton launch, do you see that as an opportunity to potentially -- from the pricing perspective, how do you view that?

Do want to try to attract new customers, so you're going to not take the opportunity to take pricing there despite demand, or is that something where because it's an open field, there's more of an opportunity to take pricing?

Yes, I think again, I don't want to speak for fall-winter '11 but for spring-summer '12 and forward, I think again, more broader-based view around our products in total.

See where we think we think we have that premium position to increase prices, and that would include cotton product.

I think we see enough value in our products, oil-based synthetics and cotton, where we have that ability to increase prices, again based on our premium position.

And just to add on that, too.

I think there's a little bit of wait-and-see from our manufacturing base as well, as to how big can this program be.

We're coming in with a pretty good checkbook around the side that this cotton product can be for us.

We don't believe we have maximized the supply-chain yet with being in the best shops.

And we have some great partners, but we think there's more opportunities within that.

So, I think from the increased demand and the increased production that will be driving, there'll be opportunities there, as well as I think the consumer really like the product.

So we won't be restricted to being tapped out on the price of the topside either.

We have a lot of flexibility both top and bottom.

Great.

Best of luck.

Thank you.

Michael Binetti, UBS.

Congrats on a nice quarter, guys.

Thanks, Michael.

Just to follow up on that last line of questioning.

You did comment on some new components in the supply chain around Charged Cotton.

Sounds like demand has been good initially.

Do you feel like you've been able to ship enough product at this point to meet demand, or has there been a governor on your ability to chase sales because of some new supply-chain components, specifically?

You know, I think the same thing we talked about in the back half of this year has come into the front half of '11.

The conversation that we had around inventory and increasing safety stock levels and also taking some more positions in the seasonal product is really starting to come to fruition in the front half of this year in Q1 and Q2.

From a cotton perspective, for the most part for 2011, we've capped our position as far as how much cotton we're going to put in the marketplace based on our current forecasts.

But again, from a core auto replenishment safety stock level for again, our oil-based synthetic products, we're increasing that investment in the front half of the year to better be able to meet demand for the back half of the year.

As far as fill rates and service levels have gone, we've seen those improve with that investment as we got into the back half of 2010 and the front half of 2011.

It appears obviously the investment is paying off for us.

Okay then, is there any way we can get some incremental color on what the increasing CapEx is for?

Can we expect to refresh in some of the Under Armour pads in some of your big sporting goods retailers later this year, and how that will flow quarter-to-quarter?

Yes, I think there's not much of a timing I think issue relative to that.

It's more seasonal for spring-summer versus fall-winter, but on the CapEx side of the retail market, there is refresh going on.

But there's also some ability for us to take extra floor space of some of our key retail partners, and we need to have some fixturing to do that.

And obviously that make sense for taking more floor space.

Okay.

If I could ask one last question on the gross-margin impact from footwear there.

The negative 100 basis points is probably going to be somewhat of a surprise for people today.

Is that -- do you feel like that's a bigger impact than you were expecting last time we talked to you guys?

And do you think that that's still fluid and something we need to keep an eye on for the rest of this year at this point?

Yes.

Although we didn't really quantify the full-year impact of gross margins on the last call, our view of gross margins for the year remains relatively the same as the last call.

There really wasn't too many surprises there year-over-year.

The interesting thing in footwear, too, though is the offset of some of that 100 basis points from the costing side is the benefit we're seeing from really being clean at retail with our inventory levels for footwear.

That's helped reduced our mark down and return reserves, which had a 40-basis-point improvement to offset the 100 basis points.

I think you have some sourcing costing pressures there, but you have overall cleaner and more healthy position of footwear going forward.

So, I think you're going to see a similar type thing in Q2 as you see in Q1 relative to four because Q1 and Q2 are the highest-volume quarters for footwear.

As we get to the back half the year, footwear becomes a smaller component of our business.

Okay.

Thanks, Brad.

Jim Duffy, Stifel Nicolaus.

Thank you.

Brad, a couple of follow-ups on the pricing line of questions.

First, will you be taking price in footwear as well?

And then as you look to the spring-summer '12 price increase in apparel, and many in the apparel industry are talking double-digit price increases, as you think about your pricing strategy, are you pricing to the increase in cost of goods to protect margin, or are you following the pricing trends of the industry?

Yes, first on footwear.

Again, I think we're going to have a broad-based approach across all of our categories, and we're in the middle of that right now and analyzing where we think we have the ability to do that.

So footwear will be open to that analysis just like hats and bags and the apparel would be.

So that will be included in the analysis, and again, we'll get more color on that later in the year as we have more detail around that.

On the apparel side, I think along the lines of what Kevin was saying too, it's not just about raising prices.

Our ability to look at where we can save in costing is important to us.

Our ability to maybe move some lower-margin products to higher-margin products is also important to us.

Also, I think reaching out and maybe making a little bit longer-term commitments to some of our key factory base, especially around some of our core auto replenishment type products, I think also can help mitigate some of those costing pressures too.

Raising prices is one tool we have with our premium position, but we're looking at all different types of things we can do relative to mitigating some of those pricing pressures.

Jim, I'd jump on there, too.

Innovation is the greatest validator to price.

So I think from -- we were the first Company to sell a $25 T-shirt at volume more than 15 or 16 years ago.

As we continue to come back and lead the industry with from a thought leadership standpoint, the products we had and the shirts that we had at Combine I think was just illustrative of our commitment to innovation.

Probably more importantly, we're going to sell a lot of $25 cotton T-shirts because of it and frankly it's not just another basic cotton T-shirt.

It's a cotton T-shirt that dries five times faster than anything else on the market.

That is something I think the consumer has demonstrated the ability and willingness to pay for in the past.

And I think it is as we maintain that premium positioning, we'll have a lot more flexibility than most.

We don't see ourselves driving in.

This is not how are we going to keep up with a $12 of $13 cotton T-shirt business but how are we taking $25 and expanding this price point as well.

I understand.

And you guys have done a great job with innovation.

I guess I'm thinking from the standpoint of the consumer seeing the backdrop of double-digit increases in apparel.

Even with those cost savings that you're putting in place, could you potentially use pricing as a source of margin as you look to 2012, or is that not a lever you'd pull?

We don't like it.

We have a very consistent model when it comes to gross margin.

And it comes to our approach to margin for the consumer basically as we build it, we've said this before, but we find what's the problem in the market, then we find what's the best solution to solve that problem.

We source the ends of the world to find the most efficient way to make that on behalf of our consumer.

Whatever that costs us to build, we effectively double the cost of that, sell it to our wholesale partner, and allow them to double it again.

So whether a $20 T-shirt or a $200 jacket, that model stays pretty consistent.

I think that's something that keeps us in favor with the consumer and frankly builds that trust that will keep Under Armour here and relevant for the next five, 10 years and beyond.

That approach is something that we want to make sure we keep doing when we source, frankly, we see ourselves sourcing on behalf of our consumer to deliver as much value back to them as possible.

Of course there's opportunities where you can take advantage because we like our gross margins in those high 40s, in that 50 range.

That is a long-term target for us as the brand.

Okay, great.

That's helpful.

Thanks.

Michelle Tan, Goldman Sachs.

Great.

Thanks.

Hey guys, sorry if you addressed part of this earlier, but I had a couple of questions on the full-year guidance.

First, I was wondering if you are expecting the contribution from the new cotton platform to accelerate in the second half versus the first half as you introduce the things like Storm Cotton.

And then as you look at the guidance raise from three months ago, can you give us a sense of exactly what drivers are shaping up better than you expected at the start of the year?

Yes, Michelle.

On the cotton seasonality, really don't see any significant fluctuations in cotton seasonality compared to our overall apparel business.

It should flow through relatively the same as our overall apparel business.

Obviously, as we get into the back half of the year, the cotton product will have higher AFPs than the back half of the year as well as all of our other products, too.

So there's not really any seasonality impact of cotton as it flows through our business.

As far as the color on the outlook, not surprisingly is the two things we keep calling out is strength in our business right now in the near-term.

That's apparel across all channels and direct-to-consumer via the growth in our factory house store base and also some good strength on our e-commerce business.

Those are the real drivers there that are giving us the ability to call our numbers up for the year.

And on the cotton question, when you look at that -- understand the seasonality is similar -- are you expanding the level of selling or distribution more significantly with the expanded product line?

The seasonality on like-for-like product is similar, but there's actually more product out there in the second half relative to your total?

Yes, I think we're taking a more proactive approach on price as well.

The good news is that we are just entering this market, so we have a lot of styles that will be coming on to market.

That where we haven't set price or established a precedent with the consumer of something they are expecting.

There's obviously that supply-and-demand curve.

One affects the other.

We want to be commercial product in the market.

We want to be premium product available to most.

And as we approach that, we think there's opportunity.

Storm Cotton is a great example of that.

We're entering what is seemingly a pretty dry and a pretty boring category of business.

We're going to go in at a premium price, but frankly, from innovation standpoint, a product unlike anyone has ever seen before.

We think there's going to be a lot of hype and a lot of excitement, and I think as the consumer demonstrates in any market, that if you put a great product out there and you communicate a great story about the product, it frankly just works.

The consumer will always be there for you.

So we feel pretty good about that.

Okay, great.

Thanks guys.

Good luck.

Thanks, Michelle.

Kate McShane of Citigroup.

No question please.

Hi, thank you.

Good morning.

To go back again to the sourcing side of the discussion.

I wondered if you had any issues or encountered any issues with availability of capacity at the factories.

Based on the demand for your product, have you had to air freight any of your products?

Yes, Kate.

Obviously, last year, as we started talking about demand, servicing demand issues, air freight became a bigger component of our story.

In total, from a margin perspective, it wasn't really a huge impact last year.

And we're seeing similar levels this year in the front half of '11.

I think obviously with our ability to complete our investment in getting safety stock levels up, that as you get to the back half of the year, that should help mitigate some air freight numbers.

But again, those really aren't that significant to our overall gross margins.

On the capacity side, we've got pretty good bench strength right now and some new factories for us coming online.

And I think capacity is always a challenge when you're trying to meet demand.

But we feel pretty good about where we're at right now with capacity, especially from our larger suppliers, and feel like there's pretty good bench strength coming forward.

Okay.

Great, thanks.

And then my second question is a little bit longer term, about your strategy about pushing more into Europe.

And I know you mentioned in the past that the '11 Olympics were going to be a leveraging point for you.

What can we expect to see?

Is there any update with that strategy?

And when will we start to see the selling for that event?

Well, I think were you'll see is that we'll continue to leverage the big assets we have .

We did a pretty good job at the last winter Olympics with bobsled and US skiing and of course we have our ongoing relationship with Michael Phelps as well.

There's a lot of big stories.

One of the things we're looking to do and one in particularly is to leverage the new deal that we have with cotton.

I think we're clear to say that our strategy globally, it's more of a 10-year and a 20-year plan ,and that we don't want to try to bite off more than we can handle today.

Because again, as I said earlier on the call, our first priority is protecting what we have, which is 90% plus of our business here at home.

But of course of our long-term goal is driving that relationship to being more than 50% of our revenues are coming from outside of the US.

Olympics is more of a key to that.

Frankly, the investment that we're making in cotton -- I think the hype that will be in London in summer of 2012 when this deal commences is going to be a great platform for us as well to utilize and to be able to leverage.

So you're not going to see official [rings] from Under Armour today, and I don't think that's a proven spend of our dollars.

But you'll see us being thoughtful and strategic about places where we can be impactful utilizing the assets that we do have, like a Michael Phelps and some of the other places.

But we'll have relationships at the Olympics, and we'll be a little more forthcoming as some of those deals come in the future.

But I think you're not going to see Under Armour blanket the Olympics, but you'll absolutely know that we're there.

That'll be very telling of where we are at the moment in time in Europe and particularly in international.

We demonstrated a pretty good ability I think to probably come across bigger than we are.

And I think we'll anticipate doing that with over-spending and making $1 spend like $3, a favorite analogy that we use around

Thank you.

Operator, we'll take one more question.

Sam Poser, Sterne Agee.

Thank you for taking my question.

I guess I wanted to just clarify what you said about the footwear plans for the balance of the year.

So, Q2 is going to be the largest quarter, then Q2 and Q3 are the largest quarter as a percentage increase over the prior year?

Yes if you look at the full year for footwear and the seasonality of footwear, Q1, Q2 are the largest volume quarters in 2011.

The largest growth quarters year-over-year are Q2 and Q3.

And you've talked about running, so where do we stand with basketball?

Where does that fit in?

And I would think that could be some opportunities for the back half of the year.

We got it a big push.

I think a lot of the growth we saw in the first quarter, a lot of it was coming from basketball because obviously that was new business for us.

We are staying pretty consistent with the [thing] that we have.

We're very tight with the distribution.

We're very tight with the number of doors we have out there.

We're still learning a lot about the product.

We have some products that we like very much, and we've seen some really good success and some buy-in.

The one thing we are looking for is that the kid going to accept us as a footwear brand?

Is the kid going to accept us as a basketball footwear brand?

We're not getting and of that reluctance.

As we continue to become more important in the social conscious of this consumer, who not only on court -- I think we've demonstrated our ability to be a great on-court supplier within basketball.

I think we need to just keep moving that exposure.

So, one thing I will tell you that you will see from us in the back half of the year, you will see great storytelling from us around the sport of basketball in the back half of the year.

People will know that we are in the basketball business.

And frankly, today, Sam, I'm not sure that we've gotten that message out yet.

What I'll tell you is that there will be an emphasis around the messaging that we are making there.

And then -- thank you.

Then going to that messaging question.

As a marketing spend as percent of sales, how should we think of that on a full-year basis this year, given the numerous new initiatives that you really have this year?

Yes, consistent with our previous outlook around marketing, it should be relatively flat as a percentage of revenues year-over-year right now, based on our view.

A little more front end of the year weighted as a percentage of total marketing spend compared to last year.

Again, similar percentage in total for the year.

Around 12%?

Yes, last year we were 12%.

Correct.

All right, and then you already answered the question about the Olympics.

Thank you very much.

Continued success.

Thanks very much, Sam.

Appreciate it.

Thank everyone for your time today.

Thanks for joining our call today.

We look forward to reporting to you our second-quarter 2011 results, which tentatively has been scheduled for Tuesday, July 26 at 8.30 AM Eastern Time.

Thanks, and goodbye.

Ladies and gentlemen, thank you for your participation.

This concludes the conference.

You may disconnect, and have a wonderful day.