Under Armour Inc (UAA) 2012 Q3 法說會逐字稿

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

third-quarter earnings webcast and conference call.

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

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

(Operator Instructions).

As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Tom Shaw, Director of Investor Relations.

Please go ahead.

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

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

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

These risks and uncertainties are described in our press release and in the risk factors section of our filings with the SEC.

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

Joining us on today's call will be Kevin Plank, Chairman, CEO, and President, followed by Brad Dickerson, our Chief Financial Officer, who will discuss the Company's performance for the third quarter, provide an update to our 2012 outlook, and introduce our preliminary 2013 outlook.

After the prepared remarks, Kevin and Brad will be available for a Q&A session that will end at approximately 9.30 a.m.

Finally, a replay of this teleconference will be available on our website at approximately 11 a.m.

Eastern time today.

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

Thank you, Tom, and good morning, everyone.

Ten consecutive quarters of 20-plus% topline growth, 12 consecutive quarters of 20plus% growth in apparel, third quarter revenues up 24%, and EPS up 23%.

Inventories down 2% year-over-year.

These numbers speak to the level of consistent execution that you have come to expect from an industry leader like Under Armour.

We are a growth Company, one that in seven years in the public markets has proven our ability to patiently unlock the power of the next great global athletic brand.

So while I will start with some commentary on how we achieved our strong third-quarter results, I believe the most compelling piece of our growth story is our patience in developing our brand and the opportunity that provides us to continue to grow at this accelerated pace into 2013 and beyond.

But first the scoreboards.

The external financial scoreboard is full of Ws with balanced contributions on the revenue side from our three key apparel drivers of men's, women's, and kids.

When we spoke after our first-quarter results earlier this year, we talked about two key themes that were critical to our success in 2012 and beyond.

First, when we innovate and add value for the athlete, we win.

Second, our success in balancing the need to improve operationally in critical areas like supply-chain, planning, and design while executing to deliver that 20-plus% growth.

So looking at our innovation in operational scoreboards, the results were equally strong.

First on innovation, the strong acceptance we saw this past quarter for our Spine footwear technology and the fact that the Cam Newton Highlight Cleat was the single most compelling on-field product at retail in 2012 is great evidence that our thought leadership has raised consumers' expectations for Under Armour footwear.

So what opportunities does this success provide us?

We have talked extensively about getting the cadence right in our footwear business and these strong launches will be followed up with a UA Cam Highlight Trainer, a $150 training shoe inspired by the iconic look of the game shoe.

And our Spine platform, we will expand with more accessible products that incorporate the same technology found in our premium running shoe.

In our women's business, our key spring introduction of the Armour Bra and our Studio line continue to track very strong at retail.

Our Sweat Every Day I Will Campaign, the latest incarnation in our What's Beautiful marketing efforts and our team's heightened focus on fit and design is helping us bring new female consumers into the Under Armour brand every day and expand our addressable market.

As part of that goal, we are adding to our strong leadership team in women's with the addition of Leanne Fremar, who is joining us as Senior Vice President Executive Creative Director for Women's.

Leanne comes to Under Armour from Theory, where for 10 years she served as creative director.

Leanne will be spearheading our presence in New York City where we will be able to benefit from not only the cultural influence but also the great talent pool that exists there for both apparel and footwear.

So with women's, much like footwear, our ability to innovate provides the opportunity to expand beyond our core athletes with relevant products for a slightly different consumer.

She demands the same level of functionality as the elite athlete and our innovation agenda is focused on bringing that level of performance to a broader range of consumers.

I mentioned our operational scoreboard earlier and I believe our results in this area speak to the tremendous focus and investments we put into our supply chain.

Growing at a 20-plus% rate for the past 10 quarters has of course challenges.

We have had to grow with our existing suppliers while adding new ones and quickly become experts as we innovate our way into new product categories.

However, timely investments and strong leadership in our back end has helped us deliver this consistent growth.

We have added to our apparel sourcing base and are making strides in our ability to balance inventories with demand.

Now in our seventh year in footwear, we have developed a solid footwear supply chain team in Asia and here in Baltimore that will allow us to keep up with the demand that we are generating.

In addition, our growing presence in the category has enabled us to develop strong factory relationships critical to us reaching our long-term goals.

So great quarterly and year-to-date results, some big Ws on both the innovation and operational scoreboards, a lot for the Under Armour team to be proud of.

But what excites us as a team is the opportunity ahead.

Because when we look at all the components of our business, whether it's a product category, geography, a point of distribution, we believe we are consistently in the early stages of growth.

That is the lens through which we view the opportunity and why we are confident about our ability to grow.

I spoke earlier of our continued expansions in footwear, up almost 30% year-to-date.

We are in our seventh year in the cleated business and while our market share is very significant, it still continues to grow.

Our share in running us in the low single digits but we are in the early stage of growth and just now finding the right cadence in this $6 billion category in the US alone.

So it's that opportunity, the chance to combine the power of the Under Armour brand with our endless pursuit of innovation that drives us as a Company.

And we are fortunate that those opportunities exist everywhere for us.

They exist in nascent categories for our brand like women's Studio, mountain, lacrosse, outdoor, and soccer.

We have the opportunity to be a meaningful brand in every sport category, so while we don't discuss these businesses on these calls, you should know that there is a team at Under Armour living and breathing these opportunities, ensuring that we are authentic and focused on the Under Armour consumer in each of them.

They exist in new geographies, in markets where consumers are not yet aware that they must protect their house.

They exist in markets like the UK where we do a large percentage of a fairly small European business, so we have planted the seed with our new relationship with Tottenham Hotspur football club in London, and it's off to a great start as we again bring the Under Armour brand to a completely new range of consumers.

We have a wide path to develop the Under Armour brand outside of North America and we have the additional benefit of reaching these new consumers through not only a physical retail presence but a visual one as well.

Our challenge internationally will be setting the right priorities, determining which markets are the best fits for our brand and investing to drive that growth.

We are laying the foundation with steps like our Tottenham relationship and our first stores in China but again, we are still in the early stage of growth outside of North America.

Here in the US, we understand that a key element of our brand strength has come as a result of selling our products in authentic sports retailer buyers like Dick's Sporting Goods, The Sports Authority, Academy, Inhibit.

So as the breadth of our products expands and our distribution continues to evolve here in the US and globally, we will always be rooted in this authentic sporting goods distribution where our brand has been built.

Our existing team has much to be proud of.

Ten consecutive quarters of 20-plus% revenue growth is a testament to their work.

As we prioritize around all the opportunities facing us, we are supplementing this team with new leadership in some critical areas.

These new leaders -- Charlie Maurath in International, Jim Hardy in Supply Chain, and Leanne in Women's bring numerous years of industry experience to their new positions.

Beyond that experience, they also bring new thinking and a new dimension to how we approach these opportunities.

So in summary, we remain a growth Company.

The right balance of aggressive execution and strategic patience has helped us deliver very strong financial results but what brings all of us to work each and every day is the knowledge that that opportunity for our brand remains vast and that we are in the unique position of being the next great global athletic brand.

With that, I will turn it over to our CFO, Brad Dickerson.

Brad?

Thanks, Kevin.

I would now like to spend some time discussing our third-quarter financial results followed by our updated 2012 outlook.

I will conclude with some initial thoughts in 2013.

Our net revenues for the third quarter of 2012 increased 24% to $575 million.

Apparel grew 22% to $445 million during the quarter, representing the 12th straight quarter of at least 20% growth for our largest product category.

We continue to see strong results across our men's, women's, and youth categories.

Men's was led by training, hunting, and underwear, with underwear driven by the category's introduction to over 500 department stores year-to-date.

On the women's side, we are experiencing strong results in our Studio line and sports bras as we continue to deliver a better balance of performance and design.

In youth, we more than doubled our graphics business year-over-year while also expanding into more than 250 department stores.

Our direct-to-consumer net revenues increased 31% for the quarter, representing approximately 24% of net revenues compared to 22% in the prior-year period.

In our retail business, we opened four new factory house stores during the third quarter, increasing our factory house store base to 96, up 26% from 76 locations at the end of third quarter in 2011.

We plan to open five additional factory house stores in the fourth quarter, bringing our total factory house store count by year-end two 101.

In eCommerce, we have seen improvements in site, speed and functionality in the last quarter and the conversion gap band year-over-year has narrowed.

Third-quarter footwear net revenues increased 21% to $63 million from $52 million in the prior year representing approximately 11% of net revenues.

As you will recall, we shipped nearly 5 million in introductory footwear product to Japanese licensee Dome in last year's third quarter.

Not counting this one-time shipment, our footwear growth was closer to 33% year-over-year.

The new 2012 running product led UA Spine continues to be a largest contributor to category growth.

Our accessories net revenues during the third quarter increased 37% to $54 million from $40 million in the prior year period led by strong performance in headwear and bands.

International net revenues were roughly flat in the third quarter at $32 million and represented approximately 6% of total net revenues.

Adjusting for the previously mentioned footwear sales to Dome, international net revenues grew approximately 18%.

Moving on to margins.

Third-quarter gross margins expanded to 48.7% compared with 48.4% from the prior year's quarter.

Three factors primarily drove this performance during the quarter.

First as expected, we're starting to see some relief in input costs.

Lower North American apparel product costs partially offset by higher North American footwear product costs positively impacted gross margins by approximately 30 basis points.

Second, more favorable year-over-year sales discounts and allowances also benefited our gross margins by approximately 20 basis points.

Finally, following some delivery challenges, we had to air freight some products to service demand which negatively impacted gross margin by approximately 20 basis points.

Selling, general and administrative expenses as a percentage of net revenues delevered 60 basis points to 32.9% in the third quarter of 2012 from 32.3% in the prior year's period.

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

First, marketing costs increased to 11.4% of net revenue for the quarter from 10.4% to the prior-year period.

Expense deleverage during the period was primarily a function of increased advertising in connection with our key media campaigns for footwear and women's.

Second, selling costs held steady at 7.9% of net revenues.

Third, product innovation and supply chain costs decreased to 7.5% of net revenues from 7.7% in the prior-year period driven by an overall expense leverage in these areas given our topline growth.

Finally, corporate services decreased to 6.1% of net revenues for the quarter from 6.3% in the prior-year period.

Operating income during the third quarter grew 21% to $91 million compared with $75 million in the prior-year period.

Operating margin contracted 30 basis points during the quarter to 15.8%.

Our third-quarter tax rate of 36.1% was slightly favorable to the 36.3% rate in last year's period.

Our resulting net income in the third quarter increased 25% to $57 million compared with $46 million in the prior-year period.

Third-quarter diluted earnings per share grew 23% to $0.54 compared to $0.44 in the year-ago period.

Now moving over the balance sheet, total cash and cash equivalents at quarter end increased to $157 million compared with $68 million at September 30, 2011.

We had no borrowings outstanding on our $300 million revolving credit facility at quarter end.

Long-term debt including current maturities decreased to $72 million at quarter end from $80 million at September 30, 2011.

The inventory at quarter end decreased 2% year-over-year to $312 million compared to $319 million at September 30, 2011, driven by success around our inventory management initiatives along with some supply chain challenges that delayed the receipt of some products.

Our invested operating capital expenditures was approximately $16 million for the third quarter and we now plan for 2012 operating capital expenditures toward the higher-end of our previously provided range of $60 million to $65 million.

Now moving onto our updated outlook for 2012.

Our prior outlook goal for 2012 net revenues of $1.8 billion to $1.82 billion representing growth of 22% to 24% and operating income of $205 million to $207 million representing growth of 26% to 27%.

Based on our current visibility, we are updating both our net revenues and operating income guidance to the high end of our prior guidance.

Our updated net revenues outlook of $1.82 billion represents growth of approximately 24% while our current operating income outlook of $207 million represents growth of 27%.

With this updated outlook, I would like to provide some additional color on several items.

First on net revenues, the drivers of our net revenue guidance remained relatively unchanged from our prior guidance and assumed similar winter weather patterns as last year and more moderate expectations within our e-commerce business.

Moving on to gross margins, we now expect full-year gross margins to decline as much as 40 basis points off of last year's 48.4% level.

This compares to our prior full-year outlook of flat to down slightly year-over-year.

We continue to see similar dynamics as outlined last quarter, improved North American apparel product margins primarily through easing product costs, offset by more aggressively moving through excess inventory at our factory house stores and a less advantageous mix, giving our footwear growth and e-commerce assumptions.

Regarding the gross margin guidance change, we've talked in the past about finding the right balance between inventory management and servicing customer demand.

While demand for the Under Armour products remain strong, as demonstrated by our year-to-date 24% net revenue increase, we continue to have some supply chain challenges fulfilling this demand.

The near-term impact will come in the form of incremental air freight costs.

Despite these costs, we believe core improvements continue to be made across our supply chain and see no change to our longer-term opportunities from a gross margin perspective.

Shifting to SG&A, we continued to see consistent year-over-year expense rate and marketing and the greatest expense leverage in corporate services.

In aggregate for the year, we expect SG&A leverage will more than offset gross margin contraction and drive modest operating margin expansion off of last year's 11.1% rate.

Below the operating line, the only change to our prior guidance is the full-year effective tax rate which we now see at approximately 37%, slightly down from our prior guidance at the lower end of a 37.5% to 38% range.

Finally on the balance sheet, we continue to make positive strides with inventory management including better aligning our buys with our forecasts and reducing the creation of excess inventory.

We expect inventory growth will remain below our net revenues growth during the fourth quarter.

Before we turn it over for Q&A, we would also like to provide you with our preliminary outlook for 2013.

Based on our current visibility, we anticipate 2013 net revenues to be at the lower end of our long-term growth targets of 20% to 25% and operating income growth to be closer to the midpoint of our long-term growth target of 20%, 25%.

We will provide additional details in our 2013 guidance in future calls after we gain a clearer picture of full-year bookings which to some degree are predicated on a consumer environment heading into the upcoming holidays.

Several factors to consider for 2013 include the following.

First, we anticipate opening approximately 10 factory house stores in 2013 representing 10% door growth compared to 26% door growth expected to close in 2012.

Second, we expect higher gross margins given a continuation of the favorable product cost environment particularly in the first half of the year.

Third, we expect gross margin gains to be partially offset by continued SG&A investments in areas such as innovation and supply chain.

Overall we expect moderate full-year operating margin improvement.

We would now 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.

Operator?

(Operator Instructions).

Omar Saad, ISI Group.

Good morning.

I wanted to -- Kevin, two questions.

You mentioned in some of your prepared remarks the importance of the authenticity of the sporting goods channel and how critical that has been for the brand and will continue to be for the brand.

Can you talk about the channel distribution options for you guys as you think about some of the new areas where you want to grow international women's?

Is that still the right channel and especially internationally are there sporting goods, authentic sporting goods retailers available that you can partner with?

Also how does that make you feel about own retail?

Are you thinking about -- to the extent there is not a great sporting goods channel in some of these opportunities, are you guys revisiting the idea of maybe doing a little bit more own retail outside of the factory channel?

Yes, I think it definitely forces our hand as we look outside the United States.

Beginning here, I don't think we can reiterate enough the strong partners that we have, the relationship and partnership we have with Dick's Sporting Goods because really is clearly our largest customer and has been a real advocate for our brand from the beginning, so you will continue to see large investments in their doors and what we are doing on a partnership level at that level.

And it's not limited to just Dick's though either.

Throughout sporting goods is a channel for us, so we're very proud of our relationship there.

I think we're demonstrating with things like the 20-plus% apparel growth that we're still continuing to grow there too.

More productive floor space, more compelling shops and better storage and then we continue to come back and I think be a driver for those doors as well as demonstrating with innovation and winning.

And then we are also leveraging again our core basic for the sporting goods guys with helping us with footwear, getting our market out there and so what we really reset in 2010 was the idea of selling product above $100.

That's typically not where sporting goods is selling footwear either, so it's been challenged but we found success beginning with our roots in things like the Highlight fleet at $130 this past football season was something that was great.

And that's leading over to the new Cam Highlight trainer that we have coming out in a few weeks.

So we will continue to set the mark of what we are doing with -- at sporting goods.

At the same time, you're watching the brand evolve and again, I'm speaking domestically but many of the players I'm talking about can help us overseas as well, at least one in particular.

So as we move to the mall channel, that has been a new challenge for us as well on the footwear side but really a big opportunity and I think the first thing you are seeing is the commitment that we have and one of the things are looking with a partner like a Foot Locker for instance, is somebody who gives us the ability to find distribution outside of the United States.

We haven't found the right court, again speaking outside the US, I think you are finding consistency.

Again, we are in about 250 Foot Lockers today.

We are in a similar number of Champs today, so we are nowhere near the 4000 plus stores that Foot Locker has capability to but again, that's opportunity as you watch us become more appropriate with the consumer who is shopping there.

And we're going to continue to make those kind of investments to find out how we can be important out of the United States also.

Distribution, what you are seeing and take a category like (technical difficulty) women's wear department stores that become important to us and we are expanding our distribution there.

We're going into it and we've added about -- we are in about 300 Macy's right now as well as going into about 150 Dillard's and women's is important for us in those stores.

Women's -- I'm sorry, underwear is a huge leader in defining for us in those stores as well.

And then we are also doing -- footwear is important.

The partnership that we have with Finish Line right now and what they are doing of taking over the Macy's format is something that's very exciting for us where I think it's going to give us the ability to really story tell.

So in short where you have a very core company that began with roots in the sporting goods, I think we're finding ways to translate our story beyond sporting goods but using and leaning on that authentic base.

And so I think we're doing a pretty good job of streaming out toward doing that.

As far as it goes with our own retail from that standpoint, without question in some of these markets its -- the sporting goods, it doesn't really exist as a channel or it's completely polluted as a channel.

It's really difficult in some of the places that we have looked at -- and the UK is probably a great example of that with JJB recently going out of business also.

So we have some ideas and I basically believe with -- I don't know if there is one strategy or there's one channel we are looking at as much as I believe that Under Armour should be everywhere.

And I'm not saying that discounting the brand and the other things that you've seen pervasive in some of these other markets but we need a strategy in every place where the consumer is shopping and thinking about sweating.

And so that's how we are approaching it and I do believe that our own retail will play a role in that and what we have not established yet is the flagship mentality or idea of going in and trying to buy our way into high street retail but I do think there's a good compromise where we can create a physical presence in store not unlike the way we've let ourselves into China that we now have three stores in the Shanghai area.

We have a couple more opening in Beijing and you're really seeing a nice space but again, it's performance.

But the consumers is beginning to get it.

Probably the last thing I would end with is why we need those physical presence.

I think that we have the unique opportunity to redefining the way that we take our product abroad and that digital is going to play such a critical role and that being there and maxed out on the e-commerce side is something where we think we can really be important.

So I think it's really fairly balanced and if I tried to sum up my answer to you, Omar, I would say it's going to begin with first of all, we're going to protect.

We are going to defend.

We're going to attack in our core sporting goods distribution.

We're going to use that here in the US, continue to double down on the plays we have made expanding to the mall with key important partners like Foot and Finish and the things we are going to do there, letting them as we watch them expand to department stores and what again Finish is doing with like a Macy's as well as taking our own core products like underwear and some other things that we can do to expand the brand.

So I think that we are playing -- we've got a lot of cards out there.

I don't feel like we are spread too thin though.

I think our message is consistent and I think that the chapters of our story makes sense right now.

So I think we feel pretty good and we have a lot of upside in the math as we look at the future right now.

Thanks, Kevin.

I appreciate it.

Kate McShane, Citi Research.

Thanks, good morning.

I was wondering if we could have a bit more detail on inventories.

Can you break out any areas in terms of what categories where inventories are maybe higher than the corporate average?

What product are you finding you have to airfreight and how inventories are as your retail accounts?

Sure, Kate.

I think the first and foremost of things, the message to get across is obviously demand for our brand is very strong, obviously -- 20% growth in apparel proves that out.

With that growth, supply chain is always going to be challenging.

Last few years, this year, even into next year we know there's going to be challenges to support that strong demand for our brand.

Our job is to execute and manage to these challenges and our teams obviously have done that.

The back half of this year though, we do have a little bit of some challenges on the apparel side of the business really relative to the onboarding of a couple new factories and it persisted in Q3 and it will persist a little bit in Q4.

Again, our team did a great job managing our way through some of those challenges to deliver the demand.

One thing I think to notice though in prior years, we have had similar challenges to support the growth of our brand that we're having this year.

However, the change probably being is in prior years we have had a lot more inventory kind of as a backstop to offset some of those challenges, and obviously we talk a lot about our inventory management initiatives over the last 12 to 18 months.

We've seen a lot of success in those initiatives.

And the one thing we've talk about is the analogy of the pendulum in that we know that when we manage inventory that the pendulum will continue to swing.

It's an imperfect science.

Our job is to make sure that pendulum swings in a very, very narrow range.

Right now when we look at our current inventory balance being down 2% year-over-year, a lot of that is due to some great successes we have had.

An example of that is the creation of excess inventory, where year to date we've created 9 million units less of excess inventory and sold 2 million units more.

So that is a great job by our team to managing inventory.

However, that does create some challenges when you have some delivery challenges on the supply chain side where you don't have that backstop of inventory to help you out through that.

So because of that, the balance of inventory management initiatives and some delivery challenges really was more important for us to deliver the goods we were manufacturing for the current demand.

That's what caused some airfreight in Q3.

It will persist a little bit in Q4.

That was kind of the cull down of our gross margin a little bit as our job is to manage our way through this.

Our job is to meet demand and we will have to pay a little bit of a price to do that.

Overall though I think the big message, big takeaway is longer-term progress is still on track.

Even though it will take a few small steps forward and backwards in a short period of time, it's really important to know with the people we've brought on board, and the leadership we brought onboard, the process improvements we are putting in place, the system enhancements we're putting in place, longer-term progress is still on track.

Okay, great.

Thank you so much.

Michael Binetti, UBS.

Thanks for taking the question, guys.

Brad, can you just help me really quickly walk through the math on how the supply chain challenges you point out in the third quarter resulted in higher airfreight but that you did see favorable impact from allowances and discounts year-over-year?

Really liking it, Michael.

If you look at last year, if you remember, what we were talking about last year, again we've had supply chain challenges pretty much every year to support our growth.

It is our team's job to manage through that.

If you remember our conversations last year was some of those conversations were we were trying to sell some stuff to customers and get some customers to take some product.

Sometimes it was a little bit late; sometimes it was exchange type product to deliver to them to keep the shelves full because of the demand for our brand.

And that cost us sometimes a little bit in the discount side, mostly around the areas where we weren't getting stuff maybe on time last year and we had to give them something else in exchange for that.

So we called out those sales discounts and allowances last year, again, to meet demand.

This year the change being a little bit is that we don't have that backstop of a lot of excess inventory, so it's really important that we are delivering exactly what we plan to sell on the retail floor.

So the need for sales and discounts is reduced this year because we are not selling -- we are basically selling exactly what they wanted.

The challenge for us, though, obviously without that backstop of inventory is to get that product there on time.

Therefore, you are seeing more of an airfreight pressure this year to get that product we're manufacturing on time.

That's really the difference year-over-year if you look at sales discounts and allowances versus airfreight.

Michael, too, I just want to give a callout to our team as well is that good companies even in tough quarters, they do what they said they are going to do.

And this is I think a really good case of really the way our team came together, is that when we do see challenges is that we make things happen.

And more importantly, we do it the right way.

And we are very, very proud of that and it always begins with leadership.

This quarter what Jim Hardy has done to our supply chain and coming in now here and just a shade under six months has really jumped in; first and foremost bought into the Under Armour culture in a way that is unique and more importantly leading the team.

So we saw that; that was evident this quarter in the things that our team did to ensure that we got the product to our customers that they were looking for.

And the good news is that they are still hungry for a lot more, so we will make that happen.

The things we've done as well just building out our supply chain from a system standpoint, we continue to participate there with a great partner like SAP and building that out in some of the systems we're adding to or ERP system, and our planning systems as well.

Physically we have added a new warehouse in Rialto, California that has just come online.

It will be nearly more than one million square feet that will give us more capability and servicing, getting our product from the Far East into the US as well as we just continue to become more sophisticated there.

Our factory base, building new relationships.

In 2012, we found ourselves really in this kind of tweener phase where we are a good smaller company or becoming a bigger company and realizing that we frankly started out growing many of our suppliers and so we initiated a lot of new relationships in the last 12 and 18 months and frankly those sometimes just take a little time.

And factor that with a planning group that Brad has really championed in building out on our side with again good senior leadership that we brought from Black & Decker and some other companies that really understand and are best in class at doing this, it just takes a little bit of time.

That mantra of seven years that I use, it's pretty defining for us celebrating our seventh year as a public company in November, seven years in footwear and a few other things that you see us just beginning to understand the cadence and becoming a little more professional.

But first and foremost, we are going to have adversity.

We're going to have things where we get challenged but I think we're very proud of our team that 10 straight quarters of 20-plus% growth is demonstrative of the type of leadership we're putting in place and the fact that we are getting -- we're certainly -- we are not declaring victory.

We don't have everything solved yet but we sure are getting a lot better.

Kevin, can I ask you a quick follow-up?

Sure.

Just on the 2013 initial guidance, you pointed to the retailers ordering now, we'll have a better look at how the year will go next year as you get through your bookings for next year, but we have seen all year these guy went through winter last year, then the spring was warmer than expected early on.

We've seen the retailers ordering pretty close to what they are actually seeing on the floor at this time.

Obviously the weather is off to a slow start this fall.

What's your sense as to how -- the early orders that you are seeing, how you are strategic partners are feeling about the year ahead.

Do you feel like they're still ordering -- looking at right now follow-up to a slow start or how much conservatism do you feel like there is out there in the early orders that you are seeing at this point?

I think that begins with us being prudent in the way we approach the year and the same approach we took is we basically weren't looking for any upside from a year ago.

So I walked outside this morning, it's 65 degrees and you saw people walking down the street in Bermuda shorts and you are going what's going on?

It's late October.

So the good news is we have had a couple cold pops and when we see that like traditionally we've seen over the last 17 years in business, business screens and we get -- it's 30 or 40 degrees outside and kids are running to their local sporting goods store and buying their cold gear mocs.

But frankly we've evolved as a Company where we are not dependent on that anymore.

So the way that we are approaching 2013 in general, again I think when we started to see this last year, we made a decision actually fortunate for us a couple years ago, we decided we no longer wanted to be weather-dependent as a company but we wanted to become innovation-dependent.

Where we can control it and we could define our space and not waiting for Mother Nature to get cold or anything else.

So innovation for us is going to continue to be a focus and I will take a second and tell you about 2013.

You know, we're going to continue to grow in the core categories like men's, women's, youth, apparel, and then our direct to consumer channel continued to be a force for us as well.

You are also going to see continued expansion of key platforms that we have, things like Charge cotton and Storm cotton, giving the consumer a reason to buy is that whether it's a long sleeve shirt or a short sleeve shirt depending upon the weather, we've got an answer for them which is a best in class products, whether it's a T-shirt that dries five times faster than any other T-shirt out there or it's a sweatshirt that frankly you can wear in a rainstorm.

You know, those types of things where -- and again, their category of cotton as a whole, it will be roughly a $200 million business for us as we look in 2013.

It didn't exist in 2009 for us.

So we are continuing to do that.

Take again Storm, which is the Storm Cotton product as well.

It's another franchise and to be clear, there's some crossover between Storm Cotton and just Storm as a finish that will be in much of our outerwear and a few other things, but that will be nearly a $200 million franchise for us as well.

So again, these are technologies that we didn't even have in our vernacular as recent as 24, 30 months ago.

The good news is that we've got in innovation pipeline with these things that are filled.

And so our job as a brand is to edit and make sure that we are picking the right technologies that are going to have the breadth and the bandwidth to be able to go and expand with the size and scale of the size of the brand I think we can become.

We've got some great things coming with our base layer business.

Sonic HeatGear on the women's side is going to -- something that is going to be great for us.

And again, I can't emphasize enough expanding these franchises.

ColdBlack is in there as well, but Storm and Spine on the footwear side that you are seeing as something that began as a running shoe that this week we're launching Spine footwear in basketball that will start hitting retail this week as well.

Taking franchises that we have like the Highlight and that aesthetic which is something that is iconic again on the footwear and translating that over into a training shoe.

So I think the heightened focus that we have on newness and innovation means that we are going to begin to exit some of the -- we have the ability to evolve and move on.

2013, we're going to continue to position footwear with the results.

International for 2014 and beyond, it's great having leadership here on that side and we are going to keep growing.

Thanks, Kevin.

Camilo Lyon, Canaccord Genuity.

Thanks, good morning, guys.

So just going back to the inventory question, do you feel that you guys have enough -- what is your ability to meet the auto replenishment demand in the fourth quarter if weather does get colder given that your inventories are now down 2% and you had some supply chain challenges?

Obviously again, we are going to see a little bit of those challenges in the Q4 also and that's why again we are going to lean a little bit on airfreight to make sure we can meet that demand.

So especially around seasonal products I think that is where the need will be to get that seasonal product in on time.

Specifically around some of the products that Kevin was talking about outside of maybe our ColdGear moc product.

When you look at auto replenishment, we tend to lean a little bit heavier in Q4 on auto replenishment and some of those areas that you do lean on are some of those areas that maybe are a little more weather-dependent and coming out of last year's warm winter, I think the retailers obviously had some stock of that very cold weather-dependent product and we do too.

So I see less risk in the auto replenishment side because I think we are well-positioned from an inventory perspective to satisfy that demand, that need if the weather behaves for us.

So that outlook on the source of upside from that part of the business doesn't sound like it's changed.

Is that correct?

Yes, from an [outside] perspective, I think you looked at the same thing that we talked about last quarter in Q4 and that one is weather.

Two is our e-commerce business and we talked about taking a more moderate approach to our e-commerce business last quarter.

We've seen some positive trends in the third quarter but such a large volume of our e-commerce business is done in the last few months of the year and we want to be careful how much we guide and anticipate that the benefit to be too much during the last two months so we're still taking kind of a moderate view towards our e-commerce the last two months.

Okay, got it.

Thanks and good luck for the rest of the year.

Joseph Parkhill, Morgan Stanley.

Wondering if you could talk about given the lower levels of excess inventories, how you are thinking about your outlet business next year.

Will that impact sales at all?

Are you planning to supplement that with more made for product?

Then maybe how that impacts your margins within the retail segments?

Good question, Joseph.

Obviously the level of excess we have as a company, outlet is going to be a big part of the release out for that excess.

So we talk this year a lot about leaning on our outlet business this year and that having obviously negative impact to our gross margins because we are going to lean on them from an excess inventory perspective especially in the back half of the year which we're doing right now.

Obviously creating a lot less excess units this year even more so than we had planned to create less, that does impact the business a little bit next year, so we have had to look at next year's business and know that we are going to lean a little bit more on the made for side to fill in the gaps on outlet.

There's good and bad to that.

The good being obviously that that gives us a good ability to control the product in the space in outlet.

The challenge to that obviously is we have to go out and make more product versus having the products here in the warehouse.

So our teams are working on that right now.

To your point, the results of that should be trying to get the right balance of made for versus excess as we move throughout the year.

The percentage of made for should be higher next year versus this year there should be a positive impact to gross margin next year on that also.

Great, thanks.

Just big picture around footwear over the next several years, do you think that footwear will outpace apparel growth in the next several years?

Is there kind of a market share that you look for targeting or think that's achievable within the subcategories that you compete?

Thanks.

As Brad said, the first one was a good question.

That was a great question.

So let it take a minute to actually get into footwear for a second.

Coming off of Spine, I think there's a lot of speculation of how do we feel about our Spine launch.

We made a big deal about the launch in New York City with Tom Brady and Lindsay Vaughan and Kemba Walker.

So we had a lot of excitement going into it but we learned a lot too.

This is really exciting for us because it's truly it is our first really commercial midsole technology that gives us a platform to build on.

And so we want to be clear that where we are starting with Spine is not exactly where we are going to end up.

This isn't a -- we threw it against the wall and try it, but we are going to come back and we're going to commit and we're going to market.

We're going to tell the story of what Spine is and most importantly, you are going to watch the product evolve.

You are going to watch the product evolve and continue to get sleeker, continue to improve aesthetic, continue to become more conducive to what the athlete is looking for, and we're starting to see that.

So Spine 1 was a great learning experience for us and what we have hitting retail so far is the update to that, which is actually Spine Storm playing into that Storm technology of that water resistant capability that frankly that makes any product Under Armour and that begins to hit retailers in December.

It is something that's going to be really exciting for us.

But when you look at where we come from going back to 2009, 2010 when we quote unquote said we were going to reset footwear.

Our goal is to sell product above $100 so with Spine at that $100 price point we are finding out the consumer will pay for Under Armour footwear at $100 and coming back with Spine Storm, it will be a $110 shoe as well.

It plays into the Charge RC franchise to really set the tone with at $120 shoes, but having what we are, what we have with Spine is something that will give us a great place to go.

I want to reiterate that we are committed to the Spine platform and again what's exciting is that we also have Spine 2 is going to be coming in early spring of 2014 for us as well.

There's an update to the upper and you will see again a few things refined in the midsole as well but you will see us continue to tell the story of giving the consumer something they can expect in footwear from Under Armour to see on a consistent basis.

I'm actually going to take liberty and I'm going to go into a couple more aspects of footwear as well.

But we are really pleased I think with where we are right now particularly coming off of the cleated side and I think I don't think we give credit for our cleated business because everyone sort of relegates it to being a smaller category and not that large.

But the fact is we're making great gains there and the authenticity and credibility that we are building there is something that we believe we can prove will help take us off court and into the larger markets like running and training and other places where we can be successful.

But we had great success in 2012 in particular around football and baseball, the on field, to the tune of roughly -- depending on who you talk to -- if you look back maybe 18 months, Under Armour was in the 20s, the mid-20 range in terms of market share and today depending on who you look at, we're in the 25% to 30% range.

So we have made gains in a big way and more importantly, we are just starting to hear from our consumers, our athletes is that the specificities they are looking for is our in-line product is something that is good and qualified enough to be on an NFL field to the likes of Tom Brady or any of the stars that we have playing for us right now.

I will take a minute for this but I don't know if anybody watched the World Series last night but we actually had eight players in the game between both sides playing last night and most importantly on the Giants side behind home plate was Buster Posey, who was in the Comeback Player of the Year in the National League and for a second, we also had the American League Comeback Player of the Year in Fernando Rodney of the Tampa Bay Rays.

But Buster I think is one of the favorites for MVP and with the big Under Armour logo behind home plate is something that made us very proud.

Probably last night not as proud as Pablo Sandoval, the Big Panda, as they call him, who hit three home runs in a game in the World Series, which is a pretty extraordinary thing and something we are really excited about.

On the football side, the Cam Highlight cleats, I think it was the most exciting product at retail this year at $130, a look that no one has ever seen before.

Really defining for us and the product frankly that sold basically out by the end of July there was no product left in the market.

So we are coming back.

We're going to build on that in December with a couple key partners with the Cam Highlight trainer that's going to launch in December at $150.

It's a product I think that again it's going to continue to add texture that will be one of those reach and statement products that A, we think we can sell with the pairs we're going to put out there but more importantly, it's going to continue to help position Under Armour footwear for something bigger.

Beyond that, innovation and newness, as we think about 2013, we are not done with Spine.

We're not done with the Highlight.

There's a pipeline of midsole technologies, innovation in footwear and the committed team that we have working on it is pretty extraordinary.

We have lots of athletes wearing and authenticating Under Armour right now.

We have iconic-looking premium price performing product, i.e., things like Highlight, etc.

and we are committed to the franchise as things like Spine.

We're committed to it for the long haul and you will continue to see us cross pollinate with things like the Storm platform as well.

[Started out buying franchises], playing out in basketball and of course, we are going to continue to expand it in the $6 billion category of running.

But I will tell you there's more footwear innovation to come in 2013 as well.

So you walked into a loaded question with that one there.

So thank you for asking.

All right, good luck.

John Zolidis, Buckingham Research.

Good morning.

I was wondering if I could ask a little bit more about the department store launches.

Can you talk about what products you put in the department stores, how it has gone so far, and in particular, if you think there's been any impact on either the DTC business or the traditional distribution channels with the sporting goods partners?

And then kind of how you see that evolving over time?

Thanks.

Yes, we've entered a little more than 500 new points of distribution year-to-date so throughout all of 2012.

And so we've been pretty thoughtful and strategic as I mentioned about 300 Macy's, about 150 Dillard's, and beyond that, there's a few other key partners that we've had in there.

But really the story that we have led with the majority of these have been our underwear story on the men's side.

You've had a limited or maybe a little more than a limited display on our women's product because again just finding out the appropriate distribution for where women shop is part of what our goal is there.

But we are still in the introductory phase.

Take Macy's for instance.

We've learned that prints and colors perform better than basics and things like underwear for us there, we are testing a few things like our tech fleece in November and a few of our basics.

But golf I think is something that at least stylize is something that gives us an opportunity there.

But use is something where again, we are constantly struggling for use distribution and so the department stores give us good access there.

And on the men's side, we are pretty limited I think with the display that we have in men's.

For Dillard's as well, it's led by underwear and boys, much smaller assortment in girls, women's and men's.

So we are really -- we are biding our time.

We're making sure that we have success and that we have wins.

We are making sure that it's appropriate and that it works and that the brand is relevant there.

To the answer to the tune of how it affects any of our own stores or our own DTC, we haven't seen any cannibalization there.

Our DTC today from a bricks and mortar standpoint is defined as -- it's 96 outlet stores today, so there's not a lot of crossover with that and we haven't seen any cannibalization of our more importantly, our existing core distribution.

So we feel very good about it and I think what you will notice with 38% growth in 2011, with 24% growth this quarter and where we are trailing for the year, we feel like we've got the five growth engines we're talking about since our roadshow, men's apparel, women's apparel, footwear, international, direct to consumer.

We're very fortunate to have the ability to lean on any one of those when we need to but -- you know, to generate or drive more growth, we are not desperate for distribution.

And it gives us the ability to be selective with not only the partners that we choose but then the assortments that actually put in those partners as well, so we want to protect our current partners first and foremost.

Great, thanks very much and good luck.

Mitch Kummetz, Robert W. Baird.

Brad, you talked about -- earlier you talked about how ColdGear replenishment is heavier in the fourth quarter or replenishment in general is heavier in the fourth quarter.

Can you give us some sense as to what that percentage is in terms of your overall apparel business in Q4 of that ColdGear replenishment?

To give you some context to that, overall for the year it's probably in the 25% to 30% range on replenishment.

When you get into the fourth quarter, you're probably more in the 35% range for punishment, so in general it's definitely higher but it's not significantly higher.

Could you remind us how that business performed last year in Q4?

I assume it was not very strong.

Again, there's a balance there in auto replenishment so it's not all cold weather dependent products.

Obviously our cold weather dependent products are going to be heavy in Q4 and also early Q1 but there's also some more versatile product in auto replenishment also that wouldn't be as cold weather-dependent.

So there's a little bit of a balance in those numbers.

So obviously when we look at last year's numbers in a warm weather environment, our versatile product, our fleece product, did very, very well while obviously our cold weather-dependent products did not perform as well.

So again, in this environment this year, it's kind of the same balance.

We are kind of forecasting and planning our business in the same weather environment as last year so we would expect our versatile product, our less weather-dependent product to perform well and our cold-weather product would not perform well if the weather was warm.

Okay, quickly, one last question.

In terms of carryover inventory at retail, you alluded to it in your comments.

You've talked about it before.

Can you tell us what impact that's having in terms of how your deliveries are flowing in the back half of the year?

Did that put a little pressure on Q3 that maybe helps you a little bit in Q4?

How should we be thinking about that?

I think that's a good way to look at it is obviously when you see that cold-weather kind of replenishment cycle start, that will usually start in September so from that perspective if you carry inventory into this year from last year, you would expect the start of that cycle would be really servicing demand from that cycle would be from product you already have in stock.

So to your point, it definitely impacts the beginning of the cold weather auto replenishment cycle which that would be September, October timeframe for the most part is I think where you would see the most impact from last year's weather in the inventory stock.

Okay, that's helpful.

Thanks, good luck.

We have time for one more question.

John Kernan, Cowen.

Thanks for squeezing me in.

I just wanted to -- wondering what you're planning in terms of international growth into 2013, what's embedded in your assumptions?

And what you are learning about that soccer and European consumer following the launch of the Hotspur partnership in the summer?

Thanks.

On the international front, Charlie is just getting here and what he is doing is of course doing a deep dive on what Under Armour is and what it looks like.

With 90-plus% of our business coming from North America today first and foremost, we are going to protect that.

We are going to drive it against that as well.

But we see the opportunity abroad is extraordinary.

It's led by the example of our business in Japan.

First and foremost, those guys are going to do close to $200 million this year and we're looking at a business that will grow north of 30% to 40% as well looking at 2013.

So we've got great upside and belief there.

I talk about leadership because what we have in Japan is a guy named Shuichi Yasuda who runs Dome Corporation, our partner there.

He runs that company.

There's 300 people or 400 people that they have at Dome today.

They work for shoe.

They work for Under Armour and they believe in their mission.

So we know how critical it is to get that right in the other regions that we have around the world.

So finishing off to Asia from what shoe is doing in Japan to appointing leadership in China as well will be the next thing as we are building out our office in Shanghai and really getting things going.

So you will see a little bit of a shift in taking some people that understand the DNA and the way that things work at Under Armour here in Baltimore and how they can use that to their advantage of not feeling like just an office in another city halfway across the world.

We have done frankly the same things in Europe that Charlie just got back and spent the last couple weeks over in Europe and I met them actually last week and we went and saw the Spurs play Chelsea.

It didn't work out as well as we thought with the game, but I'll tell you having that partnership and being in that league and playing probably the best team in the world, and Chelsea is a really big deal.

I think we enjoyed it, and more importantly it's very good enough to win a game like that, which is kind of the view and I guess a way to think about the way we look at Europe, is that we believe we are good enough to win as well.

It's just going to take a little bit of time and it's going to mean having the right leadership there.

But the strength we have in our growth drivers here, it allows us to make these longer-term investments.

The Tottenham deal as launching for the future is that we are exposing the Under Armour brand to a consumer that hasn't had any impact or hasn't seen us before.

So being and just watching the activation around that and people really getting to know and see Under Armour is pretty cool to happen, and more importantly we realize it's still going to take a little bit of time.

In Europe, we are still in investment mode.

In Asia, like I said, the success that we have in Japan is something that is profitable for us and working.

In China, we are still in investment mode where we are building there.

And then frankly on a global stage, we've got a couple other places that are some really nice opportunities for us that are making a difference that you wouldn't think about, such as Latin America and places we have been investing for three or four and five years that are beginning to come back for us.

So we've always talked about international being more of a 2014, 2015 story for us.

We feel really good about that, bringing in a pro who has seen the big movie like Charlie before is really going to help us.

But, of course, it's not one person.

Charlie has also brought a team with him, and frankly we're giving him some of the best assets we have in the Company that will help them round up and we're doing abroad as well.

So I think it's going to start with logistically, also.

It's going to be important for us, so we need supply chain and a few other things.

But we're going to use 2013 not as a reset but we're going to drive.

We think we can make great strides there, but we're going to put ourselves in a position to be as we say the world's number one athletic performance brand.

Sounds great.

Then if you don't mind squeezing one more question in.

The cash flow performance this year is going to be up given, given the improvements in working capital, Brad.

How are you thinking about capital allocation next year, CapEx, and maybe additional uses of that cash?

Thanks.

We are still rolling some ideas up around that right now, so we will give you some more guidance on that as we get into our January earnings call.

But obviously, cash flow for us is tied to inventory and the management of inventory.

So when you see us be successful in managing inventory, the benefits of that flow to the free cash flow metric.

When you see challenges in inventory, you see vice versa for us.

So cash for us right now is all about inventory.

Our job is to put ourselves in a position to have cash on the balance sheet.

It's important for us.

It's important for us from a competitive perspective to position ourselves to have that strength in our balance sheet.

So we want to manage inventory efficiently the best we can without the pendulum swinging too far.

That will benefit our cash and we think at this point in time, it's important for us to keep that cash in the balance sheet and/or use it for appropriate investments to continue to drive growth in our long-term brand.

Thanks and good luck.

Thanks for joining us on the call today.

We look forward to reporting to you our fourth-quarter 2012 results, which tentatively is scheduled for Thursday, January 31 at 8.30 a.m.

Eastern time.

Thanks again and goodbye.

Ladies and gentlemen, this does conclude today's conference.

You may now disconnect, and have a wonderful day.