Under Armour Inc. Q3 2008 Earnings Call Transcript

| About: Under Armour, (UAA)

Under Armour Inc. (NYSE:UA)

Q3 2008 Earnings Call

October 28, 2008 8:30 am ET


[Alice Pettie] – Director, Investor Relations

Kevin Plank – Chairman, CEO

Brad Dickerson – CFO

Wayne Marino – COO

David McCreight - President


Omar Saad – Credit Suisse

[David Greg – Buckingham Research]

John Shanley – Susquehanna

Jim Duffy – Thomas Weisel Partners

Robert Ohmes – Merrill Lynch

[Camila Lyon – Bank of America Securities]

Thomas Shaw – Stifel Nicolaus

Jeff Mintz – Wedbush Morgan

Dan Wewer – Raymond James

[Shawn McGowen – Needham & Co.]


Welcome everyone to the Under Armour's third quarter 2008 earning results conference call and webcast. (Operator Instructions) At this time I would like to turn the call over to the Director of Investor Relations, Miss [Alice Pettit].

[Alice Pettit]

I'd like to start by welcoming you to Under Armour's third quarter 2008 earnings call. During the course of this conference call, we'll be making projections or other forward-looking statements regarding future events or the financial performance of the company. The words estimates, intent, expect, plans, outlook or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are subject to risks and uncertainties that can cause actual results or events to differ materially. Important factors relating to our business including factors that could cause actual results to differ from our forward-looking statements are described in our press release and in the risk factor section of our filings with the SEC. The company assumes no obligation to update forward-looking statements to reflect the events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

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

Now I'd like to introduce the speakers and topics for this morning's call. Kevin Plank, Chairman and CEO will address the drivers of our third quarter results and our strategy for continued growth in 2008 and beyond. Brad Dickerson, our Chief Financial Officer will then discuss the company's financial performance for the third quarter and provide an updated outlook for 2008. After their prepared remarks, Kevin, Brad, Wayne Marino our Chief Operating Officer and David McCreight our new President will be available for a Q&A session that will end by 9:30. With that, I'll turn it over to Kevin Plank.

Kevin Plank

Good morning everyone. I'd like to start by welcoming Dave McCreight our new President to his first quarterly conference call. This morning, we'd like to talk about our brand, our product and our team; the three core strengths of Under Armour and the three things that position us to dictate the tempo of our growth.

While we acknowledge the current macro economic environment, the fact of the matter is that we still control our own destiny. We've built our business of scale on our own time frame and that cadence is based on authenticity, passion and innovation. We can continue to grow because our core consumers, the ones playing football, baseball, hockey, softball, basketball, soccer, lacrosse, field hockey and so many other sports believe in our brand and the advantage we bring to athletes every single day.

These core consumers will continue to be there for Under Armour because these sports will be played every fall and every spring. As long as we continue to deliver on that promise of constant innovation, Under Armour will continue to thrive and continue to grow.

Regardless of what goes on in the world, sports are played around the world every day and we believe in the tremendous opportunity that's in front of us to extend our brand beyond its core. From a brand perspective, we affirm the trust of today's athletes. From a revenue opportunity, a distribution opportunity, and a geographic opportunity, we're still in the very early stages of becoming one of the great athletic brands.

As you look at the key businesses that will drive our revenue growth, we think it's important to understand the reasons behind our confidence. Within the footwear business we have taken very measured steps to build credibility with the athlete. We started in 2006 in the most authentic place possible with football cleats on the field of play. We came back in 2007 with baseball cleats and then this year, we took the next logical step, to training while our consumer was spending most of his or her time preparing so they could be the best when out on that field.

We've had a tremendous impact on the categories we've entered as well, bringing lots of attention to both cleats and training. Most importantly, we've raised average selling prices in both categories and have traded consumers up to better products while gaining significant market share.

And now, we're poised to take that next logical step with our move into the running footwear category, and we're communicating the Under Armour point of view to our core consumer, that team sport athlete, with a very simple message, "Athletes Run".

When you look at the development of our footwear business, it has been measured and purposeful with each step making sense of the one behind it and the one in front of it. We have proven both to ourselves and more importantly to our core consumer that we are authentic players in footwear. So we look at our acceptance of the running brand in early '09 as very achievable, a belief shared among our recent retail partners and ultimately our core consumers.

We believe it's important to look out at the short term horizon to understand where the best opportunities for growth exist to Under Armour, but we should also look to what we have accomplished in the past quarter as evidence that not only does our brand remain very strong, but our growth prospects remain strong as well.

The third quarter was the largest in company history with every category showing strong double digit growth, with men's apparel up 17%, women's apparel 27% and kids up 13%. We continue to outperform in terms of retail sell through and our consistent ability to sell through at full price. In addition to these strong revenue numbers, our ASP's also grew in both footwear and apparel.

We're confident in our ability to grow because we've been making the investments in our growth drivers and we're starting to see the payoffs from these investments, with running footwear being the most obvious example.

We will continue to invest in these five growth drivers, men's, women's, footwear, international and direct consumer business, and as our product mix grows, we have a much bigger revenue opportunity as we enter new markets and new distribution.

The final piece of the growth puzzle is our ability to manage it; to build an organization that is nimble enough to enter new categories with the speed we have over the past few years, but is constantly improving our ability to pull the operational levers that come with the growth. So I think it's informative to look at how we've managed our inventory situation over the past 12 months and how we've been able to deliver what we've promised our investors.

Our inventory grew this past quarter at a rate significantly lower than our 24% top line growth and better than we had forecast. Inventory grew only 8% year over year and was down more than $20 million from the end of the second quarter. We believe it will continue to grow at a rate slower than revenue growth through the fourth quarter as well.

This significant reduction came as we focused as a team on inventory and drove to a number that is both appropriate for our business and in line with how we want to run our business with our retail partners.

Our infrastructure is catching up to our accelerated revenue growth of the past few years and I believe that David has come aboard at a very important time for our company. David will focus on the front end, prioritizing and aligning our key drivers for long term growth while working in tandem with Wayne Marino on the back end, who will continue to ensure the support programs for these engines.

The way we see it, our future is in our own hands. Much of it was in our selling college teams to the idea a new type of T-shirt. We like where we stand right now. Our brand has never been stronger. Our product line has never been broader and despite of any outside elements, we are the ones in control of our brand. We will dictate the tempo.

With that, I'd like to turn things over to Brad Dickerson, our CFO.

Brad Dickerson

I will now review key financial highlights for the third quarter and year to date and discuss our outlook for the full year. As noted earlier, the third quarter marked another period of impressive growth for Under Armour.

Our net revenues for the third quarter grew 24% over the prior year quarter. 70% of the dollar growth in the quarter came as a result in our apparel business which increased 19% and has continued on a path of strong performance and was up 27% during the third quarter.

Footwear revenues increased from $2.2 million in the third quarter over prior year to $13.1 million and was mainly fueled by the performance trainers which were launched in the second quarter of 2008. Third quarter gross margins were 51%, an increase of 40 basis points compared to the third quarter of 2007 which was impacted by reserves and allowances related to discontinued footwear.

In the third quarter of 2008, SG&A expenses represented 31% of net revenues, a 150 basis point decrease from the 32.5% reported for the same period of the prior year. Marketing expense decreased from 11.5% of net revenues in the third quarter of last year to 10.7% this year and was the main driver of our SG&A leverage.

Product innovation and supply chain costs as well as corporate service costs also leveraged in the quarter. A meaningful portion of this improvement was driven by lower personnel costs associated with these areas. Operating income increased 37% during the third quarter to $46.5 million compared with $33.8 million the prior year. Operating margin was up 190 basis points to 20% compared with 18.1% in the prior year quarter. Again, this was driven by improvement in both growth margins and SG&A leverage.

Net other expense was $1.7 million during the third quarter versus net other income of $700,000 in the same period the prior year, primarily due to foreign currency impact in the current quarter. Our effective income tax rate for the third quarter was 42.6% compared with 41.9% in the same period last year.

Our resulting net income increased 28% in the quarter to $25.7 million compared with $20 million last year. Third quarter diluted earnings per share was $0.51 compared with $0.40 in the prior year.

The top line results this quarter are indicative of the strong results we achieved year to date. For the first nine months, our net revenues increased 26% to $546 million from $431.7 million in the prior year's period. Year to date, our diluted earnings per share totaled $0.60 compared with $0.71 in the prior year. As we previously indicated, based on the seasonality of net revenues and the timing of marketing and other investments, we expected earnings to be more heavily weighted to the back half of 2008 relative to 2007.

Now a few moments on the balance sheet. Total cash and cash equivalents at the end of the quarter were $40.2 million compared with $14.5 million at September 30, 2007. Cash, net of debt at the end of the current quarter was $2.6 million compared with net debt of $0.1 million at September 30, 2007.

At the end of the third quarter we have $15 million drawn on our revolving credit facility as compared with $10 million drawn at September 30, 2007. Currently, we have $25 million outstanding on our $100 million credit facility. At year end, we continue to expect cash net of debt to remain relatively flat from our 2007 year end balance.

Net accounts receivable increased 18% on a year over year basis which was below our net revenue growth for the quarter. In 2008 we continue to expect net accounts receivable to grow in line with top line growth.

Inventory has been a major focus for the organization and we are pleased to report the third quarter marked another quarter of delivering on our inventory improvement goals. Inventory increased 8% on a year over year basis which was well below our top line growth during the quarter.

Inventory of $163.6 million at the end of the third quarter represented a decrease from the $183.9 million inventory balance reported at the end of June. With the efforts of our team and continued discipline around new established processes, we continue to project inventory growth at a rate below our sales growth at year end.

We feel that our progress made with inventory improvements this year will plan for improved inventory turns in 2009 are key components to managing our business effectively during these economic times. In addition, greater inventory efficiency in 2009 will help our management of working capital.

Our investment in capital expenditures for the third quarter was approximately $10 million. Our full year 2008's capital investments are now planned at approximately $44 million versus our previous range of $40 million to $42 million. The increase in our guidance for CapEx is mainly being driven by a non-cash growth on our balance sheet for footwork, tooling and molding we own at third party manufacturers. This is a growth on the balance sheet not a change to our cash flow or how we pay for these drivers.

Finally, I would like to discuss our outlook for the balance of the year. As a result of prior investment in our business and successful execution of our growth strategy, we've reported strong financial results to date. Our connection with the consumer continues to be a major strength for the organization and we remain committed to making the investments in our team, brand and infrastructure to support identified opportunities for meaningful growth.

However, based on the visibility we have into our business today, as well as current economic conditions, we are revising our 2008 outlook for net revenues and income from operations. We now anticipate 2008 full year net revenues of $750 million to $765 million which represents 24% to 26% growth over 2007 compared with our previous range of $765 million to $775 million.

This is primarily driven by slower growth assumptions for our apparel business. Men's apparel is now expected to grow in the mid teens for the full year, while women's and youth are expected to grow in the low 20's.

Moving on to growth margins, we now anticipate full year growth margins to be approximately 49.5% versus our previous outlook f 50% based on the growth margins recorded this quarter. For the third quarter of 2008, our direct to consumer business was a smaller percentage of net revenues than originally planned. This occurred as a result of order processing issues, mostly impacting our web business. Those issues have since been resolved and we resumed high service levels for our web customers.

We believe we can offset some of this growth margin impact on our operating income line as we implement tighter cost management for the remainder of 2008. Our revised 2008 full year income from operations outlook is now $97.5 million to $104.5 million, an increase of 13% to 21% over 2007 versus our previous range of $104.5 million to $105.5 million.

Based on our updated projected interest expense for the full year as well as year to date foreign currency impact at the end of the third quarter, we now estimate net other income expense to be approximately $3 million for the year. We had previously anticipated $1.4 million based on our original interest expense estimate as well as foreign currency exchange impact for the first half of 2008.

Although we have hedged a portion of our foreign currency exchange risk, we are exposed to some levels of currency risk going forward and as such, the volatility of foreign exchange rates will continue to impact our financial results.

For the full year we are now estimating an after tax rate of approximately 42.7% up from 41% in 2007. This increase in the full year tax rate is mainly attributable to an increase in the state's income tax rate for Maryland, our home based state from 7% to 8.25% beginning in January, 2008. Our weighted average diluted share count is estimated to be approximately 50 million shares versus our previous estimate of 50.5 million shares.

Delivering more than 20% top line growth in current times is an achievement and testament to the critical investments we were willing to make in the past. We understand the challenges in the environment and we will answer those challenges with greater discipline around the management of the business.

Through the current climate and resulting impact to our visibility, we plan to discuss specifics around 2009 outlook at our year end call. Our growth this year and next will be driven by our diversified business strategy which positions our company for solid growth. Our planning for 2009 will reflect the reality of the world today and opportunities for our brand with prioritization of investments in the areas that will generate the greatest long term value for our company and shareholders.

At this time, we would now like to open the call for your questions.

Question-and-Answer Session


(Operator Instructions) Your first call comes from Omar Saad – Credit Suisse.

Omar Saad – Credit Suisse

Can you give a little bit more insight into how you were able to bring down inventories that surprised a lot of people, and keep margins at the level that they were; you tied it to your outlook strategy and what's been happening with inventory at retail, and how retailers are thinking about inventories in this environment.

Wayne Marino

I think first of all, the biggest thing that impacts inventory is our growth. We had really strong growth for the quarter and that plays right into helping reduce our inventory. The second thing is, we've made some very, very good progress operationally.

We talked about this at investor day. We're going to take some steps with what we would consider a sales and operation planning process and the team has done an excellent job at getting visibility into our forecast and reacting accordingly. So have to really give a shout out to the team for the great job on that, and it's one of the factors as well.

In addition to that, we set out a plan this year, and that plan was to control our destiny and put our inventory through our outlet channel. That's been very successful. Our business is very strong and we've been able to keep our profits in the outlets very well as well as making sure that that is the place when we started the outlets, it was the place where we want to put our excess through.

We made a very concerted effort not to do any major cut up programs for our outlet stores, so that was a benefit that we took this year as well.

As far as inventory at our retailers, I think one of the things we do is we look at our retail business on a weekly basis and we look at several things. We look at how we're performing at retail and we look at what the inventories are at retail. We've been very careful to start the season very clean. And also, a percentage of our business at retail represents our core product which for us, is really a pull inventory. It's not something that you ship in and you wait. It's really a pull by the consumers. So the way our model is built allows us to be fairly clean at our retail stores. It's also performance has been very strong as well, so all factors were working together for us.

Omar Saad – Credit Suisse

We know you talked a lot about the cross training, the performance trainer launch with a million units, how can we start thinking about the size of running launch? I know it's a much bigger category, potentially a broader set of distribution partners, and is that going to start shipping in the fourth quarter? Is that one of the drivers of the fourth quarter growth or is that really '09 driver.

Brad Dickerson

When we put together our fourth quarter, we did not make any assumptions about shipping running footwear in that fourth quarter. What will dictate for us whether running footwear does get shipped is whether our retail partners and our stores really want to set their floors. So that will be the driving factor. But when Brad put together the outlook for Q4, it did not include our running footwear in it.

Kevin Plank

Let me lean on the running message we'd like to get out there. We've established a pretty solid record in footwear to date that began back in 2006 with football cleats, came back with baseball cleats in '07, and then training of course this year. In every instance I think we sold it and sold through the amount of product that we planned to do.

What's happened there is really the support of some great partners that have helped us, but also some really good product and some really great stories that we're communicating to that consumer. With that, when we started, I used to use the statement that we didn't get into the footwear business to build football cleats. As much as we've built football cleats that put us in the position to sell additional categories of footwear.

We also said that training would decide our success or not by our ability to enter additional categories. So with the announcement that in the first quarter of 2009, we're going to selling running shoes is a big statement for our brand. The message there is that as you look at the market sizes of categories, and we took a lot of gaff when we first said we were going to make football cleats, and people said, "The market is so small." Football from a retail dollar standpoint is $110 million market and we took a 20% plus market share there.

Baseball and softball is a little more than $200 market. Training is about $1.2 billion market. That's currently more of a $40 shoe sold at Kohl's versus the $89, $90 and $100 product that we sold through in sporting goods. And now we're entering into the first category with a little bit of wind at its back.

It's nearly four or five times the size of the largest category to date which is training, with running shoes being $4.7 billion. We believe there's a lot of established brands there, because in these other categories we entered them. We said we're going to reinvigorate, we're going to raise ASP, and bring attention to markets that had been previously forgotten about.

People know about the running shoe market, but we believe that, and I think we're pretty confident that our consumer runs. And our consumers are going to give us the opportunity to show them our product. What I can tell you is that our product has been tested. Our product has been received tremendously by the retailers who've seen it.

We've actually had some on-site fittings and try outs at some recent marathons including our own ballroom marathon that we have here with more than 18,000 runners going through our booth and looking at some of the footwear and participating in the marathon, and the feedback so far has been great.

And most importantly, our job as a brand is to create innovation and create new stories out there. The ability to bolster our Big Box sporting goods guide and hopefully give a shot in the arm there, as well as the expansion we have with footwear for the first time about to be sold, with some of our new mall partners as well including [Flick] as well as Finish Line, and then of course run specialty.

This isn't something which is just a Big Box story. This is something that the best specialty players out there, the mom and pops are giving our brand a shot. I think from a comprehensive standpoint, we feel good.

Wayne Marino

One-third of our year over year dollar growth came from footwear. I think what I can tell you which we feel good about is 2009 that year over year dollar growth will be even greater for footwear.

Omar Saad – Credit Suisse

How many new doors is this footwear opening up for you with new channels coming?

Kevin Plank

For the most part it's where we've done business to date, but also the halo effect that's taken place. Florida is going to be big and we're basically going to be selling the product in 700 or so doors that we have apparel in today. So not big expansion. With 4,000 doors behind that partner, there's plenty of room to grow there as we look to expand.

And then of course, specialty. The addition of having running footwear has made us relevant again. Where we had difficulty getting in as an apparel only brand in some of the Luke's locker rooms in Dallas, Texas and some of the more marquis specialty retailers, it's really given us a platform to enter the brand to give people the opportunity to experience Under Armour.

We really see it as a plus. You've got to understand that from the highest end, the road runners of the world, there's a lot of people that are giving us a shot with this, so we're going to learn a lot in the first few months. But we don't believe this is a one hit. We think that we've got some wags and I think the product speaks for itself.


Your next question comes from [David Greg – Buckingham Research].

[David Greg – Buckingham Research]

Your Q4 revenue guidance is fairly broad ranged and obviously you gave us guidance for the year, but it's a fairly broad range for the quarter. Can you give us a sense of what's driving the variance? Obviously there's a lack of visibility in the environment, but is that coming from lack of retailers confirming order, potential returns on unsold product, that you're heavy in a seasonal category, is it uncertainly in direct to consumer? Can you give us more color on why it's such a broad range for the fourth quarter?

Brad Dickerson

There's a lot going on in the revenues in the current environment and also with the retailers and consumers reaction to the environment. Also, as we've talked about in the past weather is a very important factor in Q4 for us also for cold gear.

As far as the indicators we're looking at, the drivers of Q4, we're looking at a couple of things. One, our performance at retail that we've seen so far in Q4 are at one trends for our replenishment business, our booking percentages and cancellations on those booking that we've seen also in the last few weeks.

So we make some assumptions there as far as Q4 goes and maybe I can just walk you through some of those assumptions. On the low end of our outlook for revenues for the year, we basically assume that trends do not worsen from what we've seen so far, specifically around your at once business as far as replenishment business goes.

Also, we've taken a more conservative stance on cancellations of existing orders that are out there. That's at the low end of our outlook. At the high end of our outlook, we've assumed better at once trends we're currently seeing and reflects just the cancellations we've seen to date. Again, we're not counting on the weather as much. That is an important driver for Q4 though.

[David Greg – Buckingham Research]

Is it fair to say that since the third or fourth week of September is really when you've seen the slowdown and it really hasn't picked up since then?

Brad Dickerson

The visibility really has been over the last four to five weeks as far as the change in visibility that is reflected in our outlook for the rest of the year.

Kevin Plank

It's important to understand that when the weather gets cold we all get a lot smarter too. Trying decipher between we've slept on a warm October a year ago, and the market was pretty tough and we we're facing as drastic an economic climate as we're seeing and hearing about today. So when we see cold weather, I think our business reacts accordingly and I think our retailers act the same way as well.

It's been pretty chilly and walking into 39 degrees and rain this morning, that's good news for runners.

[David Greg – Buckingham Research]

On marketing expenses, you had guidance to a flat percent of sales. Can you give us some sense on how that number came in where you may have pulled back on some marketing spending?

Wayne Marino

That number for the quarter is really timing shift. It's really when we spent that marketing. We're still going to be in the same range for the full year, the high end of the 12% or 13% range. There was really no adjustment in marketing, just really timing.


Your next question comes from John Shanley – Susquehanna.

John Shanley – Susquehanna

Can you give us an update on the European business and the indication of whether or not you're about to in fiscal '09 introduce a football boot into the European market?

Kevin Plank

Europe as a whole is something that we continue to invest in our opportunity that we have there and going back to the same three points of our strategy of market entry there as it has always been. First of all, to build the right team of people to tell our story, [Peter Marr] on board now is in his 16 or 17 year tenure here at Under Armour and is really building a great team of people in our Amsterdam office and really beginning to get traction with some relationships with people we're doing business with there.

The second component is building authenticity on field and fresh off the German [inaudible] league that has been in play a little more than the last month and head over 96 is actually being competitive out there and I think they have a good shot including a win over [Byron] so authenticity begins there.

Also, this past week we really began our kick off for the WRU, the World Rugby Union in Wales. Their first game is in Cardiff next week, and we're gong to go over and see that too. So we're going to spend some time in the market. We're listening and we're learning but authenticity is something that it's amazing what happens are people not only seeing it and discovering it as a surprise packet, underneath of people's uniforms, but as we become more visible in the market I think traction is beginning to take place.

And then of course, distribution; we continue to have a little more than 2,000 doors in the market today and we like where we're doing business and I think we're seeing good traction. They're having a pretty good climate in the fall season as well.

Probably the most important thing we have is what David McCreight is doing here, is helping us prioritize this and prioritize international for a company that 90% of our revenues and that we came from in Q3, 90% plus came from the U.S. We just see a tremendous opportunity there.

Wayne Marino

Just a quick note on soccer. We've built and continue to build a very, very strong footwear team and there's no doubt that we'll continue to work on those next categories. But right now, we really need to focus the organization, and we are focused, on running. That's where we're going to keep our focus. Our team is working on new products, but running is our focus today.

John Shanley – Susquehanna

So no new boot this year, that's what you're basically saying?

Wayne Marino

There's nothing of material that I can really talk about. One of the things we always do when we put new products out, is we test. We test on field. We test with the athletes. So as we develop new categories, you may see small tests out there just to make sure we're authentic and it's working properly. But not planning our major launch, is running.

Kevin Plank

We've learned a lot of lessons as we grow this business and one of the best lessons we've learned is just a little bit of patience. As we learn and make sure that we have the product right before we do full blown market entry, we want to make sure that consumers are screaming for it. The product is tested, that durability is intact and when we enter, we enter with strength and we enter strong. That's the way we intend on that market.

The short answer is we absolutely will be in the soccer boot business, and sort of hedging the question, unlike basketball, I think the product and product readiness will dictate the time as to when we enter those categories.

John Shanley – Susquehanna

Can you give us an indication of the marketing spend for the running shoe launch? Will it be comparable to what you did when you launched the cross trainer and can you give us an idea of the size of the product offering that you're going to bringing in for running?

Brad Dickerson

As far as the marketing spend goes, I think what you can anticipate is the fact that our running launch is in the first half of 2009, similar to our performance training launch in the first half of 2008. I think you'll see the same kind of seasonality in our marketing spend year over year as far as first half versus back half.

Wayne Marino

I think what I said was that we had a very successful training launch and this year footwear in total was one-third of our year over year growth in footwear. With running in 2009 I would expect that year over year growth would be even greater as in footwear. So running is obviously a larger category. It will have a bigger impact on our year over year growth, but in terms of specific details, we're not going to get into that right now.

Brad Dickerson

It will be larger than training but also 100% allocated just like training was. I think the consumer and the market we can tell you there is more demand out there than we're putting in the market as well.


Your next question comes from Jim Duffy – Thomas Weisel Partners.

Jim Duffy – Thomas Weisel Partners

The 29% growth margin mark for this year, how do you think about that mark on a go forward basis and planning process?

Wayne Marino

We've talked in the past about a couple of levers to gross margin, first being footwear and the second being direct to consumer really having the most impact on our margins going forward.

When you look at going forward, always look at relative to the guidance we give around the growth in those categories. Obviously we're talking about a major footwear launch here in 2009, in the first half of 2009 and obviously footwear we've talked about in the past being below our historical apparel margins.

As far as direct to consumer goes, again we're looking at direct to consumer growing above our overall company growth rate in 2009, and again our direct to consumer business is very strong in the back half of the year, especially in Q4 so you should an uplift in margins from that perspective. So those two will always balance each other based on their revenue growth year over year.

David McCreight

As you can expect with a company that's growing, and as we start to become more sophisticated with our supply chain, we're going to continue to look for opportunities for margin expansion in apparel as well. So you can see three material levers for us.

Jim Duffy – Thomas Weisel Partners

On the direct to consumer, you were talking about 15% of revenue for the year? If I remember from your last call, you had expected to maintain that steady as a percent of revenue. It sounds like it's an increase on direct to consumer going forward?

Wayne Marino

Direct to consumer for 2008 should be around 14% to 15% for the year. We would anticipate, we'll give some more clarity around 2009 in our year end call, but we would anticipate direct to consumer to grow faster than our overall company and thus be an increase in percentage of revenues in 2009.

Jim Duffy – Thomas Weisel Partners

The orders that didn't ship, can you provide a little bit more detail around that? Was that just a delay in the processing of shipments or pushing revenues from the third quarter into the fourth quarter?

Wayne Marino

The third quarter is one of our largest quarters. I think it was our highest quarter ever in the history of the company. It's a very busy time for the company and the start of the third quarter particularly around our product offering, specifically in the web business where we are basically offering our spring demand and also transitioning into fall.

As a result of this, we encountered in the third quarter, we had some problems with our processing which is really our ability to put through as many units in a compressed time in our distribution house. This is mostly centered around our web business.

Although it wasn't overly significant from a top line perspective to our overall company, we did have lost line, lost sales on line. But it did impact our gross margin. As you can imagine our web business has a much higher gross margin than our overall business.

The good news is that the operational team in the quarter was able to correct it and by the end of the quarter, the service levels for our web businesses were back to normal. And equally important to note is that we still see our direct to consumer business year to date even our web business alone with service issues, is much stronger than our overall company growth.

It was a blip. We did lose revenue, but I think the impact to the company was gross margin. But good news – it's been resolved and we continue to take steps to make sure that doesn't happen again.


Your next question comes from Robert Ohmes – Merrill Lynch.

Robert Ohmes – Merrill Lynch

The revenue reduction related to slower men's growth in the fourth quarter, did you discuss existing customers by channel? Is that of a sporting goods box issue versus smaller accounts or the independents versus how your outlets performed? You mentioned tighter cost management for the guidance can you give us some examples of what you're going to be doing to keep costs down in the fourth quarter and in '09 as well?

Brad Dickerson

A couple of components I can walk you through. First of all, part of our team's compensation is tied to the company's top line and operating income so there is some offset in cost there as far as whether we hit our internal target in those two items. Also, there is some variability in our marketing spend as we talked about before.

Although we still anticipate being in the high end of the 12% to 13% range for marketing for the year, the fact that we brought our top line revenue down a little bit as far as an outlook means that the marketing spend will come down with it.

In addition, there are some other small variable costs we have; distribution and sales specifically, not a major part but there are some parts there. And probably lastly and more importantly, we've identified some specific areas just from a fixed cost perspective that we can control costs that maybe won't affect our Q4 revenues or the revenues going forward, things such as travel and so forth that we're looking at. So those are really the areas in Q4 that we're looking at from the perspective of cost management.

Wayne Marino

On the revenue side, it goes back to what we see in terms of visibility and whether it's men's, women's, youth in total. What we've looked for our visibility in terms of Q4 is really several things. One is how the retailers react to general conditions, the bookings that we have in place, our at once business. Our at once business is certainly impacted by cold gear which is related significantly to the weather and cancellations.

All those factors together make up our visibility and so we looked at it for the full year. I can't give you any specific piece on why one part of the business is up or down. I can tell you it's based on the visibility we have.

But also, equally important is what we see out there. We watch our retail business every single week and how we're performing at retail and all of our businesses continue to grow. We're pretty happy with that performance.

Again, it's all the factors that I mentioned that really has an impact.

Kevin Plank

Wherever we are performing right now, we continue to lead. We are clearly number one in the majority of places we are and at worst maybe a close two in certain categories. But for the most part, the majority of the time, Under Armour is far and away number one. I think we're very proud of the purpose that we serve for our Great Big Box partners and I think we're doing a good job for them right now and I think we're both appreciative of the businesses that we have with each other.

We've got some great new programs on the floor right now from micro fleece programs to some folded hoodie and other programs with some of our big partners and especially Dick's Sporting Goods has a great presentation of Under Armour on the floor and Sports Authority is another one of buyers so these guys are doing a fantastic job. But they're managing their own inventory trying to deal with environment that they have.

Robert Ohmes – Merrill Lynch

Is there a significant difference between your customers and them managing inventory versus the trends you're seeing in your own outlet stores or is it your own outlet stores are in line with little bit slower trends of orders for the men's business in the fourth quarter.

Kevin Plank

Our fourth specialty store just opened in the last couple of weeks so to be clear on our own specialty model, the way we're approaching retail, we don't have any more leases on schedule for the balance of 2008 or 2009. As we've mentioned all along, our specialty store model is purely a test. With the addition of David joining our team, it's going to help us make sure we're using the right metric to evaluate that test.

On the outlet side, we'll have 25 factory outlet stores by the end of the year and what we can tell you from our own indicators, obviously our web site being the most immediate, and then our factory outlet store helping us, is that our business there is pretty good. We're not seeing the effects to the extent that we're hearing about or reading about or others are preparing for, but of course that business for us is simply liquidation and expelling excess product. It's been a big help for us in helping get our inventory down and I think assortment is pretty good and I think we're giving a pretty good product to our consumer right now too.

Brad Dickerson

Our outlet business and our web business as far as what we're seeing right now in Q4 is pretty much on par with what we had planned for for the quarter. On the wholesale side, if you look at our outlook for the year and the range of our outlook, at the low end of our outlook what we're assuming there is that the current trends we see stay pretty consistent going forward, what we have seen over the last four or five weeks.

We've also taken a more conservative stance on potential cancellations with existing orders at that low end of the range. At the higher end of the range, what we've assumed there is that at once trends do a little bit better than we've seen in the last four or five weeks and then we've had to take into effect cancellations we've seen to date. That gives you an idea on the wholesale side.


Your next question comes from [Camila Lyon – Bank of America Securities].

[Camila Lyon – Bank of America Securities]

With recent drop in oil prices, what indication is that having on your cost of goods? Are you seeing any benefit in raw material sourcing costs or transportation costs?

Wayne Marino

One of the things that we've done consistently is we've been able to lock our prices in. Typically we lock our prices in almost a year in advance, specifically as it relates to fabric. We've locked in 2009 prices. As oil fluctuates, we're not necessarily seeing any big change or benefit within our cost of goods sold. There's always the opportunity to impact the transportation, but the ability to lock it in is really something we've taken advantage of.

The good news from my perspective supporting the finance side and operations side, is that we continue to hit what we consider our house targets, and for 2009 we're pegged pretty well. There's no surprises either way.

Kevin Plank

The bigger story on gross margin is going to be if we can continue to leverage the new platforms that Kevin alluded to earlier and also the company's growth. Our pencil is getting bigger. We're going to continue to be a lot smarter as we continue to invest and Wayne's team is building some pretty disciplines as it relates to leveraging that larger scale. We feel pretty optimistic about margins in the future.

[Camila Lyon – Bank of America Securities]

Could you provide a little bit of detail around how much the web order processing issues caused you on the gross margin line during this quarter?

Brad Dickerson

It probably cost us for the quarter somewhere around 100 basis points. For the year, it's about 50 basis points when you do the math.


Your next question comes from Thomas Shaw – Stifel Nicolaus.

Thomas Shaw – Stifel Nicolaus

Any color around the response to the new generation two trainers and secondarily how you would expect that product to be positioned in year two given the running launch?

Kevin Plank

The product hit the floor in the last couple weeks and the early rates that we have are great tops. One of the things that you learn in the footwear business is that if it's much more seasonal, or the product needs to turn much faster. You don't get six months on the floor when the consumer is looking for something on a weekly, at the very worst a monthly basis.

The ability for us to freshen that up in our sold through; I think we're very pleased with the shelf life we have with the Gen One training but the ability to come back and now clean out. We sold through virtually what we wanted to with the Gen One training and then come back with a new color in the holiday is important.

But for us, it's a lot of learning that's happening right now. We're going through this process of, instead of how two offers a year over a seven month time frame, begin to look and say, how are we going to compete, and more importantly begin to differentiate our important Big Box Sporting Goods partners, and the new players and existing players that we have in the mall, and then of course other categories.

What you can count on from us though, is we're not going to forget about training. We're not looking to cannibalize our training business with running. We are very aware that that's possible and we're looking for a great big pop in the first part of 2009 with the launch of running, but you'll see us come back and see us continue to tell the training story because training for us as a business is a much bigger platform at the same time too, is that training has that halo effect beyond just the footwear but really leads back to our apparel as well.

You'll see us stay consistent and make sure that we build that platform that when someone should not train in running shoes.

Wayne Marino

We expect certainly a full year of performance for trainers this year. We launched part year, so we'll get a full year in 2009. I think the other point that Kevin and Brad made consistently is there could be some cannibalization. People could actually choose the best shoe on the wall. But we've been very confident but yet not overly aggressive.

So our program for running is an allocated program and the benefit of that is to continue to keep that demand up pretty high. It's a smart way to launch a program.

Thomas Shaw – Stifel Nicolaus

The mountain category, you haven't talked a whole lot about it, how is that going to be expanded or is it going to expanded as we head into cooler weather?

Kevin Plank

We just finished our fall '09 outdoor sales meeting here and it was great. I can tell you that the product looks terrific. We are in the process of building a really great team. Of course I think a great authentic sales force, the great authentic athletes that we have out in the field for us, but just as importantly, our product team, our internal team is really very strong, especially from an innovation standpoint.

A couple of big stories that we want to own, we launched outerwear at the end of 2007 and we learned a lot in that first year and we built some pretty high price points. We didn't build a lot of product but we learned where the market sits for $400 and $450 jackets. So we've come back jacket, we've engineered better product in the market, but I think also closer to more wheelhouse price points.

We also decided as a company it's important first and foremost that we own first layer. We want to own the base layer. Our base program, we have the base layer one, base layer two and base layer three that are effectively three separate ways for replacing your old long underwear has just been out of this world.

We've had a difficult time actually keeping up with demand with that product and I think it's something we made the long term plan awhile ago, in the out years, a million plus type of unit program and we still feel confident with that being something that we'll see going forward.

Between our basic cold gear, some of the color block cold gear as well as some of our [umetal] cold gear products, we have the ability to own the mountain beginning with that first layer, and I think what you're seeing is some great outer wear as we put together a great team to own that outer wear portion as well.

Then of course our affiliation with the U.S. Ski Team is something that will play a major role there as well.

Thomas Shaw – Stifel Nicolaus

I would assume the youth business is one of the more resilient parts of the apparel and the gross is a little bit slower than we've seen in the past in the third quarter. Was there anything that went on there? Can you give a little more color on that category in the quarter?

Wayne Marino

There really isn't anything specific. It's really the timing of when we anniversary some launches. I think we feel confident that the low 20's is where we take the full year and we'll start to put in programs towards the fourth quarter.

Year to date 21% is still very, very strong growth so I believe there's nothing I can call out specifically. It's just the timing.


Your next question comes from Jeff Mintz – Wedbush Morgan.

Jeff Mintz – Wedbush Morgan

On the trainers, the launch of version two, did you change the volume that you did this year or did the volume end up being about where you expected?

Wayne Marino

The volume really didn't change this year. For us, when we launched it was an allocated program and we stayed with it. The one thing, if anything was the timing really of how we shipped. I think the way we shipped was 70% first half, 30% in the back half and we were anticipating to ship a little bit more in Q4 versus Q3 but we ended up shipping a greater amount in Q3.

If you've seen any shift, it really was the timing of when we shipped in Q3. But overall, the number itself was an allocated program and stayed that way.

Kevin Plank

Just to reiterate some of the assets that we've built around training, we really utilize, I think the sport of football is where we get the big bang from training. So we talked about our high school All American game, the Senior Bowl All American game at the collegiate level, and then we had from a marketing standpoint, we've owned the NFL Draft for years.

The thing I would mention from that is the NFL Combine, and we're happy to announce this year that we actually signed a relationship agreement with the National Football League to take over the outfitting of more than 300 plus athletes that will be invited to the NFL Combine this upcoming March.

That's something that's just a major platform for us to build the authenticity from our apparel standpoint, but again reaching back to the concept of combine, the concept of that when athletes are training and not just doing their movement. It's also about lateral flexibility and I think you'll see that authenticity bleed through the product that's on the field and also what you'll see great athletes wearing on the field when they are in training.

Jeff Mintz – Wedbush Morgan

On the move into more of a mall store, can you talk a little bit about what you're learning in terms of the different consumer who's shopping the mall as opposed to the Big Box Stores and how that might impact what you're selling there?

Kevin Plank

From a wholesale standpoint, our customer goes to the mall. What we found is that our customer in the past hasn't gone specifically for Under Armour, so there's two things at play there; a, it's the presentation that we are receiving from some of our partners and Finish Line has done a terrific job to date. Just kicking off with Foot Locker, I think they've been pretty intent on the presentation that we have there too.

We've been known in the past as just a [inaudible] and Navy brand. I think we've expanded that and we realize that in order keep people competitive, we need to be able to differentiate them. So a, we're going to learn a lot from that and we believe our customers there, we just haven't provided them the type of product that would be compelling to them in that environment.

So I think you'll see with the addition of the parka on the apparel side, you'll see our apparel offering continue to expand and become more relevant there.

David McCreight

The opportunities for this brand and the platform for growth really is tremendous for the future and you're seeing all the hard work and authentication and development of training as a platform and the expansion into footwear is one of many opportunities that the company is going to be working on.

In addition to the distribution growth in the mall, we're also continuing to develop our direct to consumer business which will be another strategic arrow in the quiver. We're going to continue to grow that at our pace and where it makes prudent sense as well.


Your next question comes from Dan Wewer – Raymond James.

Dan Wewer – Raymond James

You had noted that the low end of your fourth quarter guidance assumes that there's not any improvement from the trends in the last four or five weeks. I would not that a lot of the retailers or customers of your that we talked to are suggesting that this might be the worst holiday season since 1991. Did you consider a scenario where the environment would actually worsen heading into the holiday season?

Brad Dickerson

I think we have a pretty wide range there in the revenue guidance for the rest of the year, so we do have visibility into the first of three months for this quarter. We feel pretty comfortable with the different assumptions we've used both in the low end and the high end of that range and outlook.

In addition to that, also remember that our direct to consumer business is very strong in the fourth quarter so obviously we have a better visibility and a good idea of where we're tracking with our direct to consumer business.

Wayne Marino

One of the things that we do is we look every single week at how we're performing at retail and certainly as Brad and Kevin said, the outlook, we set that up several weeks ago. But I can tell you based on what we see, is that wherever we are, we continue to outperform in places where we sell.

I think that's one of the best indicators for us on the strength of the brand and the loyalty of the consumer.

Kevin Plank

Probably one of the greatest compliments we've received from one of our key merchants that we interact with was, "I think you have always been impressive with our sell through", and the way that we've led the market and outperformed the market when times have been good, but especially in difficult times, the fact that we still continue to drive foot traffic into stores and lead the categories where we compete, is a pretty great testament; a, to the brand, but more importantly to the strength of the brand.

I want to reiterate again, we believe that our brand has never been stronger, never a wider or broader array of products, and more importantly a never a wider, broader array of opportunities. One of the biggest challenges that we're going to face in 2009 is, times get difficult, is deciding where we do deploy the resources.

The timing of David joining our company is very helpful to us, because we've been a company that historically, we've got ten or twelve things on the list, and it's just the way it is. With the way that we're going to adjust and the way that we're going to prepare for what everybody's talking about, is we're going to take ten or twelve things and we're going to turn them into five or six things and we're going to focus and we're going to do them great.

That we believe is the key. It's not necessarily what we do but just as important the things we don't do to execute to become a great company.

Dan Wewer – Raymond James

During the months of August and September I know that you ran a few promotions on your web site offering free shipping. I was curious as to your thoughts behind that kind of promotion and why you were running that kind of promotion is you were simultaneously having difficulty in processing orders.

Wayne Marino

We've been running free shipping for over a year now. It's been part of our strategy and I think it's important to know that we've set thresholds which is very common. You hit over a certain threshold and you have free shipping. So it's not something that we did new with our business, it's something that we've been doing for over a year now in terms of how we dial that up.

Brad Dickerson

We run it over $100 from time to time on a promotion.

Dan Wewer – Raymond James

I didn't realize there was a minimum. The offers I saw, there wasn't a minimum.

Wayne Marino

The other thing is, in September I mentioned earlier that one of the things we did have, is we did have some service issues in September specifically to the web business where we were unable to process orders in what we would consider a timely manner, so we did whatever we could to process those orders, and in some cases, we probably put on some freight on our backs to make sure we got the goods to the customer and fill that demand.

Since that time, by the end of the quarter we certainly had completed what we would consider everything that we had to do to get ourselves back in high processing so we could ship an order if you need it within two days. There was a period of time where we had that order processing, so it could have been related to that.

Kevin Plank

To lose that web business in the back to school time frame is probably the worst three or four weeks that you could have asked for. We learned from that and we're in a position now where the team has reacted to it just like we did when we reacted to inventories as well.


That does conclude our question and answer session. At this time I'd like to turn the call back over to Kevin Plank for any additional or closing comments.

Kevin Plank

Thank you for joining us on the call today. I hope that we have demonstrated the continued excitement that we have for the Under Armour brand. Our connections with consumers is as strong as ever. We're getting ready for the most exciting launch in our brands' history and we've added significant depth and experience to our leadership team.

If you take one thing away from our call this morning, it's that Under Armour is a growth company, and while we did not provide specific outlook for 2009 today, we are certain that in 2009 we will grow.

Our men's apparel business will grow. Our women's apparel business will grow. Our youth apparel business will grow. Our footwear business will grow. Our direct to consumer will grow and our international business will grow.

We're focused on our consumer. We're focused on innovation, and we're focused on dictating the tempo that will enable us to execute on the growth opportunities we see ahead.

Thank you all very much.

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