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Under Armour, Inc. (NYSE:UA)

Q1 2009 Earnings

April 28, 2009 8:30 am ET

Executives

Alex Pettitt - Director, IR

Kevin Plank - Chairman and CEO

David McCreight - President

Brad Dickerson - CFO

Wayne Marino - COO

Analysts

Michelle Tan - Goldman Sachs

Chi Lee - Morgan Stanley

Robbie Ohmes - Banc of America

Tom Shaw - Stifel Nicolaus

Omar Saad - Credit Suisse

Jim Duffy - Thomas Weisel Partners

David Glick - Buckingham Research

Sam Poser - Sterne Agee

Dan Wewer - Raymond James

Mitch Kummetz - Robert Baird

Operator

Welcome to the Under Armour First Quarter 2009 Earnings Results Conference Call and Webcast. This call is being recorded today and at this time I would like to turn the conference over to Director of Investor Relations, Ms. Alex Pettitt. Please go ahead.

Alex Pettitt

Thank you and good morning to everyone participating in this morning's conference call. During the course of this conference call we will be making projections or other forward looking statements regarding future events or the future financial performance of the company.

The words estimates, intent, expect, plan, outlook or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risk and uncertainties that could cause actual events or results to differ materially.

Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements are described in our press release and in the risk factor section of the filings with the SEC.

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

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

Joining us on today's call will be Kevin Plank, Chairman and CEO, followed by David McCreight, our President, and finally Brad Dickerson, our Chief Financial Officer, who will discuss this company's financial performance for the first quarter and provide some commentary on our outlook for 2009.

After the prepared remarks Kevin, David, Brad and Wayne Marino, our Chief Operating Officer, will be available for a Q&A session that will end by 9:30. And with that I'll turn it over to Kevin Plank.

Kevin Plank

Thank you, Alex, and good morning, everyone. We are very pleased with our results this quarter, particularly with the revenue increase at 27% and EPS growth of 33%.

We believe this growth is a great illustration of the opportunities that exist for our brand, opportunities that will enable Under Armour to maintain our growth trajectory, even in today’s environment.

In fact, when you look at the three key drivers of our revenue growth in the quarter, Running Footwear, women’s apparel and our direct consumer business, all of those categories are areas where we have invested in and built the infrastructure for growth over the past several years.

Our ability to leverage these investments and generate growth, speaks of the willingness of our consumer to support our entry into new categories and channels, into the overall strength of the Under Armour brand.

Our growth drivers are intact and they are working as designed; apparel, footwear, international and direct consumer. This past quarter’s successful entry into Running and our increased presence in the mall are prime examples of how we can combine new product categories with new distribution channels to deliver growth.

There has been a lot of discussion about our entry into Running Footwear and I would like to spend a few minutes on how we started off and what we have learnt so far.

Our entry in the Running Footwear has been welcomed by both our retailers and consumers. As we discuss, the opportunity in Running Footwear is significantly larger than cleats in Training. And we consequently decided to wait to enter Running, while gaining footwear experience in these other categories.

Our internal success metrics in Running Footwear are focused on our ability to deliver a technically sound product to our athletes and our accounts. Based on the feedback we have received from our consumers and our retailers, we are delivering against this promise. This early acceptance will help us build a solid base, which runs for the long-term and solidify our early steps into specialty and the mall, an important distribution opportunity as our brand continues to grow.

In the short-term, we look at three key measures of our entry into Running Footwear. First, great product that delivers on the Under Armour performance. Second, retailer’s support from a largest established accounts like Dick’s, Sport Authority, Hibbett, Academy and [Model] and new partners such as Finish Line, Foot Locker and of course our strong foundation of independent and specialty accounts.

And third, and most importantly, consumer acceptance from both our core as well as the broader consumer demographic that Running takes us to.

We believe we’ve gotten off to great start with all three of these metrics and we believe that we are here to stay. Just as we’re learning to become a better footwork company, we are adjusting our marketing support to ensure consumers are being made aware of Under Armour Running on a more consistent basis.

For those of you who watched NFL throughout this past weekend, there is a good chance you saw our athletes who are on Commercial. Again, we took a category like running and rather than focus on narrow target of racers, we opened the market to all our athletes, men and women, with the message that all athletes run.

It’s our most inclusive campaign to-date and it’s still all about elite performance. Giving that Running Footwear is a twelve month business and we brought product to market earlier this year than we do with Training Footwear in 2008, we’ve been able to spread our marketing support over a broader period.

With our initial launch campaign speaking to a broader audience, we were also able to hone in our sports specific campaign, while partnering with national and regional retailers. In baseball, for example, we featured the New York Mets All-Star shortstop Hose Reyes in media, online and in our billboard in Times Square.

We will continue to partner with retailers to drive our marketing messages as we move to the introduction of our running line for back-to-school. We are in the process of building a great platform for growth in the running footwear business and it will remain a focus for us in 2010 and beyond. We are committed internally to getting better each season in all aspects of footwear and continuing to earn our stripes with athletes who demand the best from Under Armour.

I also want to mention the introduction of Under Armour’s Soccer Footwear. We are introducing the Under Armour soccer boot in a limited way to soccer specialty accounts here in the States and in Europe this spring. This begins with a great technical product that we expect to learn a tremendous amount from our consumers in the coming months.

As we gain authenticity on the pitch, we will increase our allocation of product for the market. This is a bit quieter than we have typically launched products in the past but an approach that we feel is appropriate for long-term success and helps us add another leg to the growth platform of footwear.

As proud as we are with what we accomplished this quarter in running, I believe that more important story is that we comp up in apparel for the quarter and did so largely at full price. We feel that as a strong achievement in this environment and we remain focused on generating growth in our apparel business for 2009 without sacrificing our integrity or the growth we see in apparel in 2010.

For instance, our new T-MPT-shirt which retailed for $30 was one of our strongest performers this past quarter. The fact that we can continue to reinvent the apparel product paradigm is a great testament to the strength of our brand. At the same time, we believe that we have not built our brands defining product yet, and we see numerous avenues beyond new product categories where we will be able to grow our apparel business. Innovation will be at the heart of this.

I want to pass it over to David in a moment, but want to leave you with one final thought. Under Armour was founded on a very simple idea with a pretty straight forward business model, which set us apart in that first phase of growth because that we brought the concept of performance to athletic apparel.

That original insight got us a long ways, women’s and kids businesses, product categories beyond our core compression, established businesses in Europe, Japan and Canada. But, now it’s time to evolve into the next stage of the Under Armour growth story.

Just as it was when Under Armour started, the key driver of this next stage will be product innovation, but it will no longer just be about Under Armour, the compression brand. The time has come to change the definition of performance. We believe it is up to Under Armour to create the next generation of performance products for athletes. Our consumers expect that from us and it will be our primary pursuit as we move into this next state of growth.

As we bring this new level performance to consumers, we will evolve our company with new ways of looking at how we tell the Under Armour story and new approaches to achieve operational excellence on a par with this next generation of performance product.

I am confident, this next stage of our growth story will be as compelling as the first, and we will build our team to ensure we balance our focus on athletes in achieving profitable growth.

I will pass it over now to David, who will give you a color on some of the additional steps we are taking to build our long-term growth platforms. David.

David McCreight

Thank you, Kevin. As we continue to evolve our long-term growth platform, it has become clear to me that the opportunities that exist with the Under Armour brand remain near the top for our competitor’s base.

This quarter’s results provide evidence particularly as it relates to our ability to sell-through at full price amid broad and consistent discounting activity in our marketplace.

While volume may be as impacted by the current consumer environment, our pricing integrity and brands position remain intact. The willingness of our athletes to pay a premium for performance product is a great indicator of our brands strength.

As time goes on, we feel our ability to balance pricing integrity and bottom line profitability will ultimately prove to be one of our business model’s strongest assets. As Kevin mentioned, we enter 2009 with our growth platforms under developed.

There lie a meaningful opportunities within all our platforms, including our apparel business. While evolving our apparel model from a year-round basics assortment to one that includes more seasonal flow in collections, we have been disciplined around both distribution and category extensions. This discipline and model evolution provides us with much leverage for generating mid-to-long term apparel growth.

But, while the marketplace looks for the consumer environment to normalize, we should be able to gain floor space in categories such as women's and youth within our existing distribution as well as strategically move into new channels where consumers will begin to expect our brand today.

Another example of how our opportunities are manifested from our growth drivers is our entry this quarter in to the multi-billion dollar Running Footwear category. Following last year's successful training shoe launch, we entered Running Footwear with the intent to build overtime a scalable and profitable platform that helps us reach even more athletes, both domestically and internationally. This is a new business and a new model for us and one we plan to perfect in the coming years.

On the margin side of our business model, it is time we revisited our supply chain structure. We plan on moving from a sourcing model that due to our rapid growth needed to emphasize reliable delivery and quality to one where we continue to deliver high quality premium products, but at a better value to the Under Armour shareholders.

Wayne and team are beginning to develop networks, analytic tools and skill sets that will support this vital initiative. One natural example is the significant opportunity to take cost out of the manufacturing processes as we gain experience in categories such as footwear. We believe, long-term these efforts will help offset some of the gross margin pressure we anticipate from a higher mix of footwear as well as higher mark downs related to seasonal apparels.

As Brad will review with you, we are being diligent in managing our SG&A, working to align our assets and investments with our growth drivers. We have recalibrated our marketing spend for this macro economic environment, but we will continue to drive our consumer in to our retail partner stores at an appropriate level and where necessary spends to remain the brands most relevant to this generation.

We believe that by continuing to prioritize investments and make the ones that will generate growth like Running Footwear, we are setting ourselves up appropriately for the long term. It’s important to understand that our future model is not simply about entering new categories for growth.

With each season, we expect to gain valuable insight that makes us better operators and strengthen the platform to reach more customers. This will help us ensure that the revenue growth we see in 2010 and beyond, will be more profitable and provide a strong return on our investments.

2009 is a year of balance for our organization. Cutting cost in some areas while accelerating investments in others; balancing our long term business view and decisions with the right cause for the business and our financial strength for 2009. We will continue to focus on brand and pricing integrity as we understand the importance of our brand equity to our long-term growth.

At the same time, we will protect our balance sheet and liquidity. We believe that our wholesale partners continue to adjust to the changing consumer environment. We are not planning on a significant increase in consumer activity for the balance of the year.

On the other hand, we do have the benefit of sports being the primary driver of our business and team sports like baseball, football and soccer continue to be played everyday. We believe this makes Under Armour brand a less discretionary purchase than our pricing might lead one to believe.

In the past, we were a company that relied on hyper-revenue increases to generate our profitability. The discipline that we are building on our investment in developing investments in cost management today is making us a better, a more athletic and powerful company for the future.

We believe that this conservative approach in 2009 is not only the appropriate time for this year but sets us up well to generate meaningful profitable growth as the difficult consumer environment improves. While we are very confident in our future long-term prospects, we remain cautious on the outlook for 2009. We have a great brand, a strong team, who are focused, dedicated and committing to doing what is right for this brand in the long-term.

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

Brad Dickerson

Thanks David. With Kevin and David having taken you through some highlights and strategies for our business, I would now like to spend some time on our first quarter financial results. Our net revenues for the first quarter of 2009 increased 27% to $200 million.

Driven by our entry into Running Footwear as well as shipments of performance training footwear which launched in the second quarter of 2008, footwear revenues in the quarter increased to $40.3 million to $56.9 million.

Our Apparel revenue growth rate in the first quarter improved slightly from the rate reported in the fourth quarter of 2008. Year-over-year apparel net revenues are up 2.4% to $132.2 million in the first quarter with our women's business generating the strongest growth rate.

Our direct-to-consumer channel continues to be a strong performer and was up 38% for the quarter. First quarter gross margins were 45.3%, compared with 47.6% in the prior year's quarter.

There were several puts and takes that impacted the gross margin for the quarter. First was the impact of the higher proportion of footwear sales in the quarter. As we've discussed, footwear has lower product margin that apparel. In addition, footwear has an increased level of mark-down allowances associated with it due to the seasonal nature of the business. As our footwear business matures, we expect to improve our planning for product flow.

Second; on the apparel side, margins were impacted by a less favorable product mix as well as higher product costs.

Finally due to trends in the current environment our license business declined 7% in the quarter adding to gross margin pressure year-over-year.

Driven by strong top-line growth in the quarter; selling, general and administrative expenses as a percentage of net revenues decreased to 41.3% in the first quarter of 2009 compared with 44.9% in the prior year's period. SG&A dollars increased $12.2 million to $82.7 million during the first quarter was nearly half of the growth driven by increased marketing expenditures.

As a percentage of net revenues marketing declined to 16.5% in the first quarter compare with 17.8% in the first quarter of the prior year. For the full year we still expect to invest in marketing at the high end of the range of 12% to 13% of net revenues.

Operating income during the first quarter increased 84% to $7.9 million compare with $4.3 million in the prior year. Operating margin was 4% compared with 2.7% in the prior quarter.

Below the operating income there are a couple of items to address. Net interest expense for the quarter was $860,000 compared with expense of $90,000 in the prior year's period. As discussed during our previous call in January, we entered into a new $200 million revolving credit facility.

In connection with this we terminated the prior $100 million facility, which resulted in a $400,000 write-off unamortized deferred financing cost. The balance of the interest expense primarily relates to interest on our subordinated debts.

The hedging strategies implemented at the end of 2008, allowed us to limit our exposure to foreign currency exchange fluctuations. During the first quarter of 2009 we recognized a slight foreign currency gain. Although the gain was much smaller then the $600,000 gain recognized in the first quarter of 2008, it was much improved in the $4.6 million foreign currency loss reported in the fourth quarter of 2008. With that said, there is no perfect test and there is still risk that our results in future periods could be impacted positively or negatively by foreign currency fluctuations.

Our effective income tax rate in the first quarter was 43.8% compared with 40.3% in the first quarter of 2008. Based on certain tax strategies being implemented in 2009, we are estimating our full-year tax rate to be improved from our 45.3% effective tax rate in 2008.

Our resulting net income for the first quarter rose 38% to $4 million compared with $2.9 million in the prior year period. First quarter diluted earnings per share increased 33% to $0.08 compared with $0.06 in the prior year.

Now, a few moments on the balance sheet. Total cash and cash equivalent at quarter-end increased $48 million to $65.6 million compared with $17.6 million at March 31, 2008. Cash net of debt increased $48.1 million at quarter-end to $46.9 million compared to net debt of $1.2 million at March 31, 2008.

We currently have no borrowings outstanding on our $200 million credit facility. Net accounts receivable grew only 3.9% on a year-over-year basis, which was significantly below our net revenue growth for the quarter. In addition to the timing of shipments in the quarter and the slightly higher mix of direct to consumer sales, net AR was also impacted by year-over-year increase in the allowance for doubtful accounts during the first quarter.

Inventory at quarter-end decreased 2.1% to $164.4 million compared to $167.9 million at March 31, 2008. Running Footwear was an allocated program, and as such much of it shipped directly from the factory to the customer, which benefited our inventory balance at the end of the first quarter.

Additionally, we continue to focus on three main components of inventory management. One, managing our inventory buys, two reducing our production lead times, and three selling excess inventory through our outlets and other liquidation channels. Proper inventory management is critical to both our financial strength and brand integrity, especially in this environment.

We need to continue to focus on proving our inventory turns by year-end. Our investment in capital expenditures in the first quarter was $8.7 million. During our last call, we announced that we would be taking a more conservative approach in 2009 and would plan our CapEx down year-over-year. Based on our current plans, we now anticipate 2009 CapEx to be in the range of $30 million to $35 million, below the $41 million invested in 2008.

In addition to the six to ten outlet stores, we are planning to open this year, significant portions of our investments will go towards improvements at our distribution center and additional in-store fixtures in concept shops. Although in the past, we have stated we would anticipate future CapEx to grow in line with our topline, we believe this year-over-year reduction in CapEx is appropriate in the current environment.

We are pleased with the results we delivered to date in 2009 and we continue to believe in the growth opportunities that we have this year and in future years. We have shown discipline around cost management with the continued willingness to invest in the areas of our company that will be most critical to our near and mid-term growth.

As we look forward the remainder of 2009, there are number of factors that can impact our full-year results, which I would like to discuss. Beginning with the topline; overall I would like to point out, we have not assumed an improvement in the environment this year and are planning our business conservatively, especially around our US apparel business.

With our entry into the Running Footwear category, footwear remains planned as our largest revenue growth driver in 2009, and the next key indicator will be the performance of our updated running line for back-to-school.

We are pleased with how our Running -- our Training Footwear performed at retail during the first quarter with our entry into Running Footwear, we have plan this business down in 2009.

Finally, one note regarding the seasonality of net revenues in the back half. As you recall, in the fourth quarter of 2008, we say a meaningful slowdown in the environment which caused back half revenues to be much more heavily weighted for the third quarter. We do not anticipate back half revenues in 2009 to be as heavily skewed towards the third quarter.

Moving on to gross margins. As we have previously discussed, footwear gross margins are lower than apparel gross margins with the majority of our topline growth anticipated to come from footwear in 2009 and lacking significant offset to other components of our gross margin, we anticipate full-year gross margins to be down year-over-year. Additionally, we anticipate fourth quarter to our highest gross margin quarter for the year.

As we said during our last call, we would like to protect operating margins on a full-year basis. However we are still being impact by visibility challenges to the topline as well as market uncertainty. One item that we do control is our level of SG&A investment this year. We continue to balance the need for tight cost controls with the importance of key investments to our long-term growth.

We are currently planning 2009 SG&A dollars to grow in the low teens on a percentage basis year-over-year. Additionally, we do not anticipate any significant change in the timing of our SG&A expend as compared to 2008.

I would also like to draw you some color on the second quarter. Similar to previous year, our second quarter is anticipated to be the lowest quarter from both the topline and earnings perspective. In addition, in 2009 we are comping last year's second quarter Trainer launch which will offset much of the growth in other areas of the business.

We continue to remain cautious in our view of the business this year and like many companies in this environment, we are adjusting outlook for the mid term horizon, as we cannot project when the environment will improve. However, we have many uncap store of opportunities and remain positive on our long-term prospects.

We’re focused on the health of our balance sheet, driving liquidity and effective cost management. Our commitment to our share holders remains as we drive a long-term value creation through financial discipline and investments in our growth platforms.

At this time we would now like to open the call for your questions. We ask that you limit your questions to one or two per person, so we can get through as many of you as possible. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first Michelle Tan of Goldman Sachs. Please go ahead.

Michelle Tan - Goldman Sachs

No problem, I have two questions. One was, some color on the growth in the apparel business. Any kind of more break out you can give us between new doors, you know new products and sell-through on the core products?

And then my second question was just any additional color on the timing of the running shoe shipment through the rest of the year?

Kevin Plank

Michelle, David will take that one.

David McCreight

Hi Michelle. We are generally pleased with how we performed in apparel for the first quarter especially considering the very commercial environment we’ve seen out there, and Under Armour’s ability to sell primarily at full price.

In the categories as we look across we saw some solid trends across there, nothing that really was unexpected for us. And what as Brad said we do remain cautious as we look at the balance of the year. What we have seen though as when we introduced new and compelling products, the consumer accepts this. As Kevin had mentioned even the TMP-T, which has a $30 price point has come out of the box and done very well and has not cannibalized other product offerings. So we're focused on continuing to drive innovation across all areas.

Brad Dickerson

Michelle this is Brad, the second part of your question on the timing of the Running Shoe Q1 will be the largest quarter Running Shoe for the year. As we stated previously running -- the entry into Running Footwear will be larger than our training launch last year but we do see Q1 being the largest portion, but obviously we will be selling running shoes throughout the year. Also as I've said in my prepared remarks, remember that we are planning the training business -- trained footwear business down here year-over-year also.

Michelle Tan - Goldman Sachs

Okay great and then any kind of color on the lumpiness on Running through the balance of the year is it more kind of even for the next few quarters or bigger in Q2 and then smaller in that or bigger in back-to-school and smaller in the other two?

Brad Dickerson

I think if you look at the year, Q1 and Q3 will be the biggest quarters of the year with the entry in Q1 and back-to-school in Q3.

Operator

Our next question is from Chi Lee with Morgan Stanley.

Chi Lee - Morgan Stanley

Hey guys. Brad question for you on the provision. Can you give us what the level of provision was during the quarter for the receivables?

Brad Dickerson

Right now at the end of the quarter we have about little over $4 million in bad debt reserves. I think the increase in the quarter itself was about $0.5 million.

Chi Lee - Morgan Stanley

Okay great. And as I look at your SG&A growth rate, I mean it seems that non-marketing expenses was very well controlled. Can you just give us directionally what buckets you're seeing the greatest levels of opportunities as you progress through the year?

Brad Dickerson

Really when we look at where SG&A right now is, is our controllable cost. So we look at those incremental cost that we haven’t spent yet and what we can hold back on a defer on, just year-over-year just trying to control those incremental costs. Also any other semi-controllable cost that we have an opportunity to go back and get some savings on and we are looking at those also.

In general, you have to remember that also in Q1 that we had a 27% top-line growth so that definitely helped leveraging of SG&A in total.

Operator

We go next to Robbie Ohmes with Banc of America. Please go ahead.

Robbie Ohmes - Banc of America

Hello, thanks, just two quick questions, the first I was wondering if you could elaborate a little bit more on the cautious business outlook for the year, is it backlog driven or are you concerned about G.I.Joe’s closings and other regional going out of business. May be just help us think about where the apparel business, what the risks and issues are that keep you so cautious coming off a good first quarter like this?

And the second question is, I don’t know if you give it but if you could tell us what international revenues were for the quarter, percent of sales, I might have missed it and then may be update us on, if there is any change or anything going on in the international side of the Under Armour business. Thanks.

Brad Dickerson

Hey, Robbie, its Brad. I’ll take the first part of this and Kevin and David might want to chime in after me but on the international revenue piece first. International revenues were 4% of our total revenues in Q1, first of all. Second of all, just on the customer credit side of being conscious going forward, obviously we did see some issues in Q1 with some of our customers and with our increase in our bad debt reserve in Q4, we anticipated some issues in Q1 So. so far, what we’ve seen from mid-size customers and smaller customers hasn’t really surprised us. Now we do think that we are adequately, our reserve right now and looking forward though, some of our cautiousness and conservativeness around our credit was a part of our overall top-line conservatism.

Kevin Plank

Hey Robbie, its Kevin, let me just follow up a little more, a give a little more about the way that we’re seeing sort of the balance of the year. Particularly for us, what’s so important is the apparel side of things.

First and foremost, as I mentioned in my prepared remarks, our growth platform we believe is intact. We are aware what's happening out there in the market and we are planning our growth accordingly and frankly rather conservatively as well.

The first and most important thing that we're doing is we're preserving our brand equity and our pricing integrity, and we want to position Under Armour for when the environment does change, because we do believe it will, although we're not making any predictions as to what that timing might be.

The good news is that, we continue to be one of the top performing brands in the market, if not, the top performing brand in the market. And given that, we are the leaders in the category, the difference that we see. particularly we're investing in heavily right now is innovation. Some of the things and you heard David mentioned things like our T-MPT. We also have a couple of great new program, exciting programs coming out this fall, like a reversible HEATGEAR, COLDGEAR strategy. We've got a new product called Recharge which is about getting athletes on the field quicker and faster.

So think you're going to see not only us continue to drive around the core basics that have sort of built this company, but more importantly, probably in the bigger part of our foundation is innovation. I think, if there's anything you'll see in the evolution of Under Armour is the fact that we continue to evolve away from being just the pure compression brand in being more of a performance brand. So, the place where and how we define what is, performance I think is what gets exciting around sports like golf and of course running and some other places that we can see we can take it, not only from apparel but obviously now from a footwear standpoint too.

Robbie Ohmes - Banc of America

Kevin, just a very quick follow-up on that commentary. So, when you look at the sort of mid-level and smaller regional sporting goods chains, is that a business that you think you might actually have to reallocate to another channel over the next year or two, or is it a situation where you think enough of them will make it though this environment that will just sort of come back when the environment upturns?

Kevin Plank

Well, first and foremost as a company our distribution is very, very clean. So we obviously have a lot different levers if we should ever decide to pull any of those. First and foremost, that we are committed to our core distribution, and I think you’re going to see without question consolidation will happen. We’ve already seen two of them occur this year.

We continue to see our bigger players in the Dick’s, in particular in the sports authorities and academies of the world, these guys are really driving us well. We’re out there, we want to support the smaller independent account and we want to give them every opportunity.

Again, I think you’ll see a limited amount of consolidation, but at the end of the day, I think you’ll see a healthier market. So, we are planning for that, we preserve for that. We’ve got every worst case scenario in there for that, and we’re of course optimistic in trying to support wherever we can, but also protecting Armour sales in the face of everything that’s going on up there too.

Operator

We’ll go next to Tom Shaw with Stifel Nicolaus. Please go ahead.

Tom Shaw - Stifel Nicolaus

Hey guys, nice quarter. Kind of continuation of the last question, where are the opportunities in distribution throughout the rest of the year, obviously the mall has been a focal point. But its not only in the US but also in Europe where some of the other retailers you are having better at shoes.

David McCreight

Tom, it’s David McCreight. We’ll break it under several different areas. One is looking within our existing distribution, when you look at Under Armour’s position in the floor space, while we’re the dominant player in our existing distribution, we believe they are product categories slow and opportunities to gain more floor space within existing distribution. So we are focusing increasingly on that and we’re smarter with flow, and as Kevin said, introduce new and innovative products.

Secondarily, we know Under Armour has fewer touch points from the customers than many other larger companies and we are going through a relatively detailed and analytic review of that and beginning to map as sporting goods spend and performance apparel spent across America and we're going to identify these pockets and then wait to discuss that.

Then finally, you've heard us mentioned as we introduced the mall channel this year with the Running shoes, and we think we've have a big opportunity to take advantage of that contact point.

Then finally, we have our direct-to-consumer, all of them are very good and a arsenal of growth opportunities for distribution to bring our brand to more athletes.

Kevin Plank

And let me pile on if I could. The best way I think that we have going for us well on what we found is that there is such an unbelievable call of support for our brand too. I don’t like someone from our distribution of again having someone step up. So, we've really at this time, and think you've heard, within my comments for praises, support that we received on our Running launch from our critical partners there. I think they've a lot to gain in Under Armour's success not only on the apparel side but obviously on the footwear side. So it takes a (inaudible), that’s for sure, and I think what’s you're saying with the successful foot of Under Armour.

Tom Shaw - Stifel Nicolaus

Okay. David, you talked about recalibrated marketing spend. I think, Kevin you mentioned that, at the same time you're adjusting some marketing to support the improved awareness of the Running launch. You're still maintaining kind of high-end of the 12% to 13% range on marketing spend for the year. Its sounds like, if you're changing the awareness around Running and keeping the range, does that imply that you, or perhaps point back somewhere else when budgeting for the year?

David McCreight

No. It has to do with the shift in the timing between quarters as well as within categories and then with the way we break out our spend.

Operator

We'll go next to Omar Saad with Credit Suisse. Please go ahead

Omar Saad - Credit Suisse

Kevin and David actually, I wanted to follow up on some of your comments from the prepared remarks. Kevin, you talked a lot about the next phase the new ideas, balancing the growth and the discipline I wanted to see if you guys would take this opportunity to be a little bit more specific and go into more detail about how you are going to manage this company, how you are thinking about managing this company over the next couple of years and where you are going to put your resources and emphasis behind and what are some of the areas at least in theory that you might have pulled back from. And because I the growth company that has really enjoyed such strong growth to this point and then at this point in time you are kind of at a cross road if you will, or you can continue to press the accelerator button and chase a lot of things or you can kind of be a little more specific about what pick?

Kevin Plank

Yeah let me by crystal clear first of all with the fact that, we remain a growth company. We have not given up on that and I think again our performance in the first quarter is demonstrative of our ability to be able to execute on that as well. We learned a lot of lessons in 2008 though and from a company who began with -- we have always had a top line that would always be there for us and one of the lessons learnt is that when things do become greater or out of your control, so the macro economic environment that we sell at the end of the year we have a different -- obviously a place that we need to focus. We need to figure out how to manage our business.

And while we have been working toward that, one of the greatest examples of things that we are probably most proud of in 2008 was our ability to demonstrate our ability to manage inventory. In the market place though we continue to first and foremost protect the brand and protect our pricing integrity. You do see Under Armour in highly promotional way in a very commercial environment, at the end of Q4 frankly through Q1 we have continued to outperform and we are not as surely giving up market share while we just continue to sell at full price. We believe that these, the difficulty that people are seeing right now, in difficult times are going to make us a better company and I think we are executing on that.

So, what you'll find with Under Armour, or maybe in the past we've been more of a top-line story. We believe that we are lot more than a top-line story we're demonstrating our ability to manage our business as well and frankly that's where the addition of David who would not only be able to have some else who is with me pound at our desk and saying, we are going to continue to grow but also ensuring that with David and Wayne and Brad’s help we continue to make sure that we deliver on the bottom-line too and let me let David add on to that too.

David McCreight

Good morning, Omar. As Kevin had indicated we are beginning to take advantages in credible opportunity we have with this high growth brand and make sure we are smart how we sequence and stage this growth. And an example of that is Kevin, Wayne and I put together a series of goals for the company which, are all around; we are going to be a growth company, we are going to grow profitably, we are going to focus on innovation, consumer insight and becoming excellent in operations. And all of these things make us a well rounded and very portent for us in this sporting goods space to take advantage of this incredible brand we have. And we'll share more with that in the coming calls.

Omar Saad - Credit Suisse

Okay. Excellent. I was also intrigued by the soccer launch, kind of this quite soccer launch, There hasn’t been much fan fare on it. I know its not to the large distribution especially in the US, it sounds like. But what was the thought process there? Is this something we might see more of in the future as the brand kind of branches onto new areas?

Brad Dickerson

I think Omar, it comes back to just the approach is what was needed for this market. A good analogy that I will use there is that if I am playing around the Gulf and I need to take more out of my bag than just driver. In this situation we thought we need to do is to get into market and begin to just start operating. So we look at this more as an introduction with a limited allocation of product.

And frankly probably if we made any mistakes on the Running “launch”, It was probably calling Running, a launch. We spend a fraction of what we spend in Training a year ago and the results we are looking for was something, we effectively we opted for three or four more month of selling season versus a sort of larger launch in the April, May timeframe.

So we feel that it was a right decision looking back on it. But we think we may have created expectations that might not have been as realistic. We have been a little more quite on the soccer group side because again it is a hypercompetitive market that we know that we need, [over] technical product, which is latest and greatest. And what we want to do is we don’t want to come out beating our chest, but we want to go - we want to build the grounds swell with acceptance among athletes and we are seeing that.

We have got dozens of [membership] players now that are moving in and again we hear this these are established players that have been wearing other brands for years that are moving into our boot and really like the boot.

Now more importantly, we are targeting is that younger generation who is in as brand consumed yet and that for again the business that we believe we can plan. So as far starting with some very high-end product, you are talking about $200 shoe and some very [niche] product that will give us sharpness. Again we believe that we believe that we can be successful there.

Omar Saad - Credit Suisse

Okay so just to make sure I understand. It sounds like that there is a little bit of shift in the mentality in how you approach new category. So is there going to be less of this emphasis on a big fanfare driven, loud in the marketplace type launch and you are going to be a little bit more strategic about how you enter some of these new categories.

Kevin Plank

Omar we carefully plan to continue to be strategic but what we will do is modify our approach based on the marketplace, the environment and where we are in it. And so you may hear us trumpet loudly, we are not going to shy away from big bulled marketing our future but we are going to enter categories where we think so to be appropriate with the level of marketing the future but we are going to answer categories because what we think sort of the appropriate level of marketing and some may build their crescendo and other categories will may come out of the box hot and strong.

And at the same time we are not going to apologize for the company that we've been but we also believe we're bit more diverse than big guys in tight shirts just came out here to go by Under Armour. So I think that again you'll see a lot more from us you'll see a lot more prep and lot more diversity from us going forward particularly in our marketing messages.

Operator

We'll go next to Jim Duffy with Thomas Weisel Partners. Please go ahead.

Jim Duffy - Thomas Weisel Partners

Couple of questions. Kind of a follow-up to the way to define the dialogues here David, where are you guys in the process of presenting apparel collections, and then help us with some of the thoughts on new channels of distribution for the apparel business. Are you going to take us outside the traditional sporting goods channels and what was the timing of all of this? Is it an '09 thing or something we are not likely to see until 2010?

David McCreight

As it relates to collections with the recent hires, Suzanne Karkus and Kevin's charge to grow the women's and youth business, we look at our model and decided to recognize to how that athlete shops. And so you're beginning to see some of the collections primarily this fall season. We'll start to see an increase flow and a different sort of rhythm to how we deliver products.

If you'd walk the floor today, you'll see different assortment and a different approach to women's than you've seen the year before. So, I think you're going to see us start to continue to build in the coming deliveries.

As it relates to distribution, we feel confident that we can continue to grow in comp within our existing distribution, and it’s largely going to be around our content and the strength of offer that helps us get there, while we do remain cautious for the balance of the year based on how our partners are viewing this space.

And outside the existing channels, primarily what Kevin has challenged us to think about is to look at how to bring Under Armour to more athletes, and so we’re still early in the analysis but when you do the broad overview and measures, you can see pockets and many actually large areas and athletes that we’ve yet to touch with our current approach.

So, we think as I was discussing earlier, we have many arrows in our quiver still and there is better analysis and decisions being done in the coming quarters.

Jim Duffy - Thomas Weisel Partners

Okay, pretty interesting and the collections, so we should look for maybe a shorter window for some of the collections that we’ll see in the fall line or it maybe a cycle things through.

David McCreight

Yes. It’s probably or just be more apparent, the flow of freshness will increase, the amount of print pattern and the innovative technology that’s been introduced be very visible, but you’ll start to see that rhythm and we’ve had it but it’s been more quite in the past.

Jim Duffy - Thomas Weisel Partners

Great. Thanks so much, and good luck.

David McCreight

A way to think of it is, we’re evolving beyond sort of a basic year around business and building on top of that adding incremental opportunities to think of the athlete had to do.

Operator

And we’ll go to David Glick with Buckingham Research. Please go ahead.

David Glick - Buckingham Research

Yes. Good morning. Just a follow-up question on the apparel business. I was trying to get a better sense for the selling versus the retail sell through. The apparel business certainly kicked up in the quarter up, those single digits, possibly due to some new distribution in the mall. But, can you give us a sense for the trends at retail and your more existing sporting goods channel, how your trending versus last year and plan, how the natural margins are trending? Just a better sense or some more color on really what’s happening with retail?

David McCreight

In Q1 we were, as Kevin said, pleased with the results of apparel. We benefited from some cold weather in that time period as well as the delivery of fresh new collections. We have made increased investments for their partners in certain strategic category that we've already discussed, and it’s still very sort of early in the spring season to say how the balance of this season is going to play out. But we think we’re in a pretty good position in apparel.

David Glick - Buckingham Research

Okay. I appreciate that. Any difference you're seeing in the selling either by category or just any trends that you see differ between your new mall distribution and the selling there and footwear and apparel versus your more matured sporting goods channel?

David McCreight

They’re very different assortments. They're not really fairly comparable. But what we are seeing is when we deliver newness and freshness, and it's being well received.

David Glick - Buckingham Research

Great. Thank you very much.

Operator

We'll go next to Sam Poser with Sterne Agee. Please go ahead.

Sam Poser - Sterne Agee

Good morning. I just have a couple of questions regarding; one, the updates that you're making to the Running shoes. Can you give us some indications as to what you're doing both from a color pattern and from possibly tweaking the existing shoes themselves?

David McCreight

Really, we're going to continue to deliver fresh colors through the balance of the spring season and then in back-to-school you're going to see another new edition of style delivered and starting with [selling one] on floor.

Sam Poser - Sterne Agee

So is that going to shift in your second quarter then? Those new styles that you’ll ship in Q2?

Brad Dickerson

Yeah, this is Brad. It will probably, some at the end of Q2. But I think Q3, as I said before probably it will be a little bigger.

Sam Poser - Sterne Agee

Okay. And then we're hearing lots of talk about your basketball shoes versus [Concorde] in Europe right now and a couple of players, so on. Can you talk to where you are right now with that?

Kevin Plank

We remain in fact we love the fact that you are hearing about it and we also have no designated data as to when we will be launching basket ball other than the fact that is exactly when we are ready.

But you will continue to see basket ball shoe show up under our NFL teams or collegiate teams like University in Maryland and Texas Tech and some of the other properties that we’ll be adding as well. You will continue to see it on sort of the High School in NFL teams as well as Brandon Jennings shoes on of our -- he is our only professional athlete that we have today as well.

But again we believe that we’re going to be very important in basket ball. We also believe that we have the luxury of being patient as to the point when we decide to enter that market, and we’ll do so frankly first and foremost and only when the products are 100% ready. So we’re biding our time and going to make a strategic decision around that.

Sam Poser - Sterne, Agee

Yes then lastly, if you could give us the specific components of the SG&A for the quarter either by dollars or percentage, Brad?

Brad Dickerson

Yes, this Brad and on marketing was 16.5% versus 17.8% last year like I had discussed. Selling was 7.3% versus 7.6% last year. Our product innovation supply chain was 8.6% versus 9.5% last year and corporate services was 8.9% versus 10% last year. Obviously you will see those in the in Q2.

Sam Poser - Sterne, Agee

And is there some - is there a work that we can, can we expect that kind of relative pattern for the rest of the year?

Brad Dickerson

Yes I think because the top-line grew 27% in Q1 that’s going to skew somewhat a little bit. So I think you are going to see similar SG&A year-over-year, the timing of SG&A and percentages year-over-year.

Operator

We’ll go next to Dan Wewer with Raymond James. Please go ahead.

Dan Wewer - Raymond James

Thanks. Brad, did I understand your comment correctly that you are planning performance trainers to be lower, in ‘09 than ‘08?

Brad Dickerson

Yes, Dan, that’s correct.

Dan Wewer - Raymond James

That’s starting in the second quarter of ’09 for you compared to second through the fourth quarter of ’08, or are you saying that all of fiscal year ’09 will be less than the three quarters of ‘08 the product was available?

Brad Dickerson

Dan, I am going to let David, add some color to that. But right now what we are planning is for the whole year, our training footwear will be down year-over-year. We plan that down year-over-year with the entry into Run. David might want to explain that a little bit.

David McCreight

Dan, as we enter, really added our second non-cleated footwear category. We wanted to be very cautious with their expectations around Training year-over-year and wondered to what degree people have participated in buying training shoes because of the first way to get Under Armour footwear on their feet and not beyond field.

And so, we entered the season very cautiously and actually have been pleasantly surprised and actually very heartened by the response of the training business today. That being said, we are cautious for the balance of the year on training and do expect to be down year-on-year. As we build -- we are new in the running space and as we build the non-cleated footwear business ,we were expecting to in the future begin to grow all this, all versions of run footwear, including cleats, slides, training and running.

Dan Wewer - Raymond James

So, if I understand correctly some of your running or customers who are buying running shoes are doing so perhaps instead of buying the performance trainers?

David McCreight

We had planned some of cannibalization and so, we had gone out with a smaller offering in anticipation of that in order to avoid any type of balance sheet issues. And have been impressed with the sell through in training in the first quarter.

Dan Wewer - Raymond James

The other question I had is on the comment that the second half of 2009 will be less skewed towards the third quarter, I guess Kevin that would imply the fourth quarter for the bigger piece of the second half revenues. I that’s correct, I just want to understand why the shift in the seasonality?

Kevin Plank

Sure and I think if remember late in Q4 of last year is when we saw some impact due to macro economic environment last year. So as we planned out 2009 we anticipate it to look a little more like previous year's relative to the mix between Q3 and Q4.

Dan Wewer - Raymond James

But you are not expecting the economy to improve though right?

Kevin Plank

I am not expecting the economy to improve so what you have is, you have a Q3 comp over last years Q3 environment and a Q4 comp over last years Q4 environment.

Dan Wewer - Raymond James

Okay I think I understand. Okay thank you.

Alex Pettitt

We have time for one more question.

Kevin Plank

And I request that someone ask a question to Wayne.

Operator

And out final question comes from Mitch Kummetz with Robert Baird. Please go ahead.

Mitch Kummetz - Robert Baird

I think I may let Wayne off the hook this one time.

Kevin Plank

He is sitting here quiet. I can’t believe it.

Mitch Kummetz - Robert Baird

Unless he wants to jump in and answer one of these, but two questions, one on gross margin. Brad you mentioned three factors dragging down the margin in the quarter that were apparel, mix in costs there and then license stock percentage of your overall business.

I am assuming you mentioned those in order of magnitude and then how should we be thinking about those factors going forward. I mean obviously footwear growing as a percentage of the business is going to impact the balance of the year, but what about the apparel either the mix and I would think that the cost outlook might improve in the back half and then license, do you still think that comes down as a percentage of the total?

Brad Dickerson

Yeah Mitch, I think to your point yes. I did kind of list them in the order of magnitude. As far as apparel going forward, I think, as we talked about in the past, we tend to lock our costs in well in advance.

So although we can obviously get better at renegotiating costs going forward we locked our first half of the year costs on the apparel side in early during the summer to last year when the environment was a little bit different from a inflationary perspective with price of oil and labor tightness across the world. And so as we get into fall and we enter ’09 we lock those prices in after the environment changed in September of 2008. So we should see that change a little bit on the sell side.

Licensing business; we anticipate our licensing business although was down in Q1, probably to be kind of more in line with our apparel business as far as visibility and challenges at the topline, I don’t think it was a little bit choppy and just like our apparel business. So it is a little hard to say right now, how licensing will impact our margins going forward.

Mitch Kummetz - Robert Baird

Okay. And then second question. Your direct-to-consumer business was very strong in the quarter. Could you maybe talk a little bit about how that performed, e-commerce versus stores. How did your outlets comp in the quarter and I know that you said in your Q4 call, you expect your direct-to-consumer to be a bigger impact on your business in the back half -- as a bigger percentage of the business in the back half I think. So could you talk a little bit about what do you expect - how you expect that to play out for the balance of the year?

Wayne Marino

Mitch, this is Wayne. And I actually get our - sorry, I don’t want to hear about it. I think the first thing is, we are not going to get into any specifics when it comes to the direct-to consumer businesses. What we can say is that, in all our channels of direct-to-consumer the outlet, as well as our web business, we have seen very positive results whenever we have gone to the consumer directly. The outlet business serves two purposes really, it has been helping the liquidation of our inventory, but it has also been delivering great profitability and strong balancing to us.

As far as the web, we are continuing to see growth in the web business as well. That’s helped with what David has brought to the table in terms of reaching out to consumers, our service center of course, the addition of new products on the web. So we would expect that trend to continue and I would also want to point out that the ASPs are really holding, which is a real credit to the price and the integrity of the brand.

Operator

That does conclude today’s conference call. Thank you for your participation.

Kevin Plank

Thank you all very much.

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Source: Under Armour Inc. Q1 2009 Earnings Call Transcript
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