Under Armour, Inc. Q2 2009 Earnings Call Transcript

Jul.28.09 | About: Under Armour, (UA)

Under Armour, Inc. (NYSE:UA)

Q2 2009 Earnings Call

July 28, 2009 8:30 am ET


Alex Pettit – Director, Investor Relations

Kevin Plank – Chairman, Chief Executive Officer

David McCreight - President

Brad Dickerson – Chief Financial Officer


Omar Saad – Credit Suisse

Kate Mcshane – Citi Investment Research

[Michael Benetti – UBS]

Dan Werer – Raymond James

Robert Ohmes – Bank of America

Jeff Mintz – Wedbush Morgan

Michelle Tan – Goldman Sachs

Chi Lee – Morgan Stanley

Sean McGowan – Needham & Company

Jim Duffy – Thomas Weisel Partners

Tom Shaw – Stifel Nicolaus

Sam Poser – Stern Agee


Welcome to the Under Armour's second quarter 2009 earnings results conference call and webcast. This call is being recorded. At this time, I would like to turn the call over to Miss. Alex Pettit, Director of Investor Relations.

Alex Pettit

Good morning to everyone participating in this morning's conference call. During the course of this conference call we'll be making projections or other forward-looking statements regarding future events or the future financial performance of the company. The words estimate, intend, expect, plan, outlook, or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. Important factors relating to our business including that could cause actual results to differ from our forward-looking statements, are described in our press release and in the risk factors section of our filings with the SEC.

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

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

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

After the prepared remarks, Kevin, David, Brad and Wayne Marinox, our Chief Operating Officer 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

Thank you Alex and good morning everyone. Our results this quarter demonstrate our continued ability to successfully manage our business. As a growth company we possess a diversity of growth levers that will allow us to maneuver in a complex environment, and what you will hear our team talk about today is why we remain confident in our growth platform, the opportunities that lie ahead for the Under Armour brand and the building blocks we are putting in place to capture those opportunities.

At a time when so many companies are focused solely on cutting costs and getting lean, our challenge is to accomplish those same things while investing and innovating to drive excitement and newness in the athletic apparel and footwear landscape. Through all types of economic conditions, one fact remains true. Consumers rely on the brands that they trust.

As the brand leader in performance apparel, one measure of our performance is to what degree are we brining newness to the category and delivering on the promise that has earned our consumer's trust.

In Q2 we achieved double digit growth in all our apparel categories; men's, women's and youth. We delivered these results without compromising the integrity of our growth and maintained our brand's premium positioning and price integrity.

But what you want to take away from today's call is while this revenue growth may look relatively strong in the competitive landscape, we have both the capacity and desire to do so much more.

In terms of capacity, we are becoming better operators each quarter in every area of our business. David and Brad will both talk about specific areas where this operational experience is directly impacting our bottom line, and in those areas where we are not making as much progress as we believe we should, we are committed to bringing experienced talent in the organization that will drive that change.

As for desire, our challenge is to ensure that as we grow, we maintain both the energy and high expectations of ourselves that drove us from a small presence in the back corner of our sporting goods partners to our leadership position in performance apparel.

We are young enough of a team to remember that our early victories were won with hard work, taking that level of commitment to our work every day and shaping and forming it with the experience we've gained through our growth is what will enable this team to deliver on the promise of our brand.

To maintain industry leadership at athletic apparel, we cannot rest on our laurels. Innovation does occur by happenstance. It takes investment, resolve and insight. For instance, we recently introduce the Recharge suit. Recharge is built with strategic compression that stabilizes muscle tissue and controls post work out swelling to create a healing environment for the body. It then lets the body repair itself to a greater magnitude through compression, getting the athlete back in the game faster.

Under Armour athletes across all sports such as Mike McDonough in ice hockey, Heather Mitts in soccer and Hunter Mahan in golf, have all started to incorporate the Recharge suit into their training regimen.

But innovation cannot solely exist for the elite athlete. Our challenge is to bring that same level of insight into the needs of the everyday athlete and to scale that innovation so that it reaches a broader range of athletes.

We will be bringing to market over the next six to 12 months, compelling new materials and technology that will reinforce our position as the thought leader in performance apparel. The Under Armour brand was founded on the principal of making athletes better, and we will continue to invest to bring new applications to the next generation of athletes.

While keeping our focus squarely on the needs of the athlete, we also remain vigilant about cost controls and prioritization of investments. During the quarter we demonstrated the ability to tighten our spending while continuing to invest in critical areas for growth. We believe we continue to have the most overcrowded white board in the industry.

The opportunities for Under Armour in new product categories, new geographies and new distribution are as abundant today as they were in the past, but becoming operators of our business also means planning our business better, and we have cleaned up our white board to focus on our collective energy on the areas that will have the greatest returns for both our brand and of course our shareholders.

This growing financial discipline positions us well for the future as we better funnel investments towards those areas with the best return. Over the last several years, we have demonstrated our ability to diversify our business and build a compelling platform for growth. As we enter these new businesses, we recognize we will not only be perfect, but our commitment to you is that we become better operators over time.

Last quarter, we discussed that we planned our Training Footwear business to be down in 2009 as we planned conservatively given the introduction of Running Footwear in January. Our results are training in year two even with the addition of a running assortment tell us that the category of performance training is relevant to our consumer. They get it, and they want products specifically built for it.

We are going to leverage our authenticity in this category to deliver the best training solutions in both apparel and footwear, raising the bar for the industry and growing the overall category.

As we've discussed, there are three key measures for entering into Running Footwear; first, great product that delivers on the Under Armour promise, second, retailer support from all three channels that we entered, Big Box, Sporting Goods, Athletic Specialty and Run Specialty. And third and most importantly, consumer acceptance from both our core as well as the broader consumer demographic that running takes us to.

Based on what we've seen in our six months since entering the Running Footwear market, we believe we checked the box on all three measures and that we are here to stay.

Over the long term, we will measure our success in new categories such as Running Footwear by our ability to earn equity with an ever expanding core of athletes. To that end, we have begun to put the team in place that will help us earn that position in footwear. We recently announced the addition of Gene McCarty who will join us as our Senior Vice President of footwear in August.

Gene joins Under Armour with more than 20 years of senior level experience in our industry. We are excited about the recent additions to our team, and the impact we believe this will have over the long term. Dave will speak shortly about the continued progress we've made in building the team to support Under Armour's development into a major athletic footwear brand.

The strength of the Under Armour brand has enabled us to enter new categories, new geographies and new distribution. We took a fairly aggressive approach to the Running Footwear market in year one and now that we are here, we have a better understanding of the things that we did right and certainly some opportunities to improve.

There is a learning curve associated with any new business. The key for us as always is that we learn quickly, we adapt, we correct and we move forward. Our growth story remains simple and our potential remains great. We are the athletic brand of this generation; a performance brand born of fuel with a growth platform focused on delivering the best head to toe solutions for athletes across the globe.

We are proud of what we've accomplished, but will continue to hold ourselves accountable to a higher standard. We are committed. We are energized, and we are confident. We are on a mission.

I will now pass it over to David for some color on our results and business strategy.

David McCreight

Our second quarter results validate that the growth platform we've built provides us with multiple levers to pull to generate growth. Apparel revenues were up 16% in the quarter as male and female adult and youth athletes continue to vote for our performance apparel solutions.

As we look ahead, we are compelled by the potential for UA we see in gender, category, age and distribution. Our challenge is not to find more platforms for growth, but to invest appropriately and accelerate the capacity of our organization.

What I'd like to focus on this morning are some of the strategic and operational initiatives we are undertaking to active and manage the platform as well as our plan to prioritize our investments against those opportunities while continuing to deliver growth.

Kevin spoke earlier of learning quickly, adapting and correcting. One area where we see this manifest itself is the first half of 2009 is Europe. While our business in still largely concentrated in the U.S., we continue to make progress overseas. International revenues were up 51% for the quarter and 48% for the first half.

Since entering the European marketplace, we've learned a great deal about our brand and the opportunity. Our current performance reflects a product strategy that has become more attuned to the needs of the European consumer and a distribution strategy more concentrated in specialty. We will refine our strategy and without material investment, continue to make progress and drive results.

In our direct to consumer business, we made the decision last year to focus near term on our e-commerce and factory health opportunities and slowed the rate of investment in specialty retail. Direct to consumer maintained its strong performance for the first quarter with net revenues up 37%. We will utilize this area of business to connect with an athlete we are not currently reaching and to build deeper connections with our core consumer through branded content on our web site and in our stores.

We control the pace in our direct to consumer platform and have opportunities to scale this business in the near and mid term.

Now on to footwear; Under Armour has offered non cleated footwear for little over a year. We've consistently said that we'll approach all new categories and geographies with patience recognizing we need to learn as we grow. We are getting better at this with each season and we understand the challenges involved to be become a consistent player across the broad footwear spectrum.

As Kevin discussed earlier, we've achieved a number of objectives with our initial entry into the Running Footwear market. We delivered a good product in a technically demanding space with many entrenched competitors. We introduced Under Armour footwear to two new distribution channels, athletic specialty and run specialty in addition to our existing sporting goods distribution, and the brand was accepted by the footwear consumer in all three channels.

But the opportunities for Under Armour footwear are vast, and we will continue to refine our strategy. We have learned over the past six months not only what we have, but also what we need. First, we are going to further dial in our price value offering to the consumer. Improve sourcing; product and material engineering are par for the equation.

The second is recalibrating our seasonal demand forecasting and finally is the development and delivery of our next technology platform in footwear.

We are building the foundations for a long term successful footwear business. Each new season and every new year add to our knowledge set moving forward. It is important to maintain our learning and want to enter 2010 in the best possible shape at retail with our run footwear. To do so, we're going to mark down some of our current products to increase velocity and make room for the improved offering in the back half of 2010.

What we've learned being in the footwear business for over four years is significant, but I'm confident the new leadership we've added to our footwear team dramatically accelerates our learning curve.

As Kevin mentioned, we recently hired a new head of footwear, Gene McCarthy. Gene was most recently the Co-President of the Timberland brand and prior to that, held senior positions at Reebok and brand Jordan. Gene joins another recent addition to the Under Armour footwear team, Gavin, our design and development consultant.

Gavin served as the senior vice president and GM of the global footwear division at Puma, also held several leadership positions within the Nike footwear design team and began his design career with Apple.

This infusion of decades of industry experience and world class design to our existing team is a first step to bring new skills to our strategy of becoming a meaningful performance footwear brand to an ever expanding audience of athletes.

Our strengths are more apparent in the apparel area, and I believe the opportunities are equally clear as we add to our organizational capacity. In our current distribution, we believe we can continue to gain floor space as we prime our product engine to establish better seasonal flow and category extensions in sports where we are still building equity.

Our R&D efforts, another area where we are laser focused on improving our capacity, center on delivering relevant innovation to our consumer. Earlier, Kevin described one of our exciting innovations for this fall, the Recharge suit. Recharge represents tip of the spear innovation and commands a premium price point at nearly $200.00 for the top and bottom and we will continue to invent ways to deliver innovation to a broader base of athletes as well. More on that in future calls.

As the leading brand in performance apparel, we possess the capacity to dictate price and value. We spoke last quarter about opportunities we see to take costs out of the manufacturing process. Our core basic programs drive large volume and provide us with obvious targets on where we can focus our efforts to really move the needle on cost without compromising quality.

The supply chain team was able to reduce apparel product and transportation costs for the back half of the year and we are reinvesting some of these savings by offering the consumer greater value in certain core basic programs.

Ultimately, by offering more value in core basics, and expanding around those with introductions of new, more technical products, we believe we can tap into more athletes and can continue to grow our apparel share.

Over the years, the scope of the Under Armour brand has expanded. We have entered many new markets and tapped into the needs of athletes across many sports. As our brand speaks with a louder voice to more consumers, it's critical we remain close to our consumer.

Consumer insights and product innovation have always been the cornerstone of the Under Armour brand. Our original compression T-shirt came from a single key insight and through that, we were able to serve the needs of athletes across all sports.

While other brands rely heavily on markdowns and shift their assortments to basics, we are re-committing to insight led development. We've become more vigilant in the study of our athlete. We will improve our capacity for content, creating great product for the athletes to generate demand.

Greater consumer insights research and analytics will help us understand the consumer segments and product categories with the greatest untapped potential and craft more strategic plans which accelerate our success path. We will couple these learning's with distribution mapping we're performing to then determine the best vehicle to deliver the brand to those underserved athletic segments.

Under Armour earned its reputation amongst athletes by delivering a superior product, and we will secure our position in the global athletic apparel and footwear industry by raising the bar each and every season. We are proud, but not satisfied with what our organization has achieved in the past.

We are creating a more nimble, responsive and sophisticated team focused on the opportunities with the best return, and all the while we will drive greater coordination and efficiency in how we execute.

We are not content with being merely good, because our brand and competitive advantages give us the opportunity to be great. The multitude of our growth vehicles, our brand power and the strengthening balance sheet give us the ability to be patient and to optimize our time and investments.

And though we are making strides, we have much to do to reach the potential for the Under Armour vision. It is clear that our organizational capacities need to continue to grow. My focus is on accelerating our capacity by aligning the organization strategically, improving our decision making processes and most importantly, building the team that can deliver on the promise of the Under Armour brand.

You have heard today about where our initiatives are starting to bear fruit along with some opportunities for improvement. For Under Armour, the question is not if we should invest, but where we should invest.

The runway for our brand in tremendous. As we gain experience and expertise, we will drive greater alignment across the organization to create a potent combination of product development, distribution and story telling to transform Under Armour into a global, performance platform.

With that, I would like to turn it over to Brad.

Brad Dickerson

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 second quarter financial results. This quarter illustrates the financial discipline we have developed within the organization. We managed our costs effectively, continued to invest in critical areas of our business and strengthened our balance sheet. These are all keys to putting us on the path to drive long term value creation.

Our net revenues for the second quarter of 2009 increased 5% to $164.6 million. Year to date net revenues are up 16% to $364.6 million. Apparel net revenues increased 16% during the quarter, bringing our year to date growth rate in apparel to 8%.

As mentioned earlier, the Training Footwear business was planned down in 2009 with the addition of Running Footwear. During the second quarter of 2009 we anniversaried our May 2008 trainer launch which as anticipated, offset much of the growth in other areas. As a result, footwear net revenues decreased year over year in the second quarter. For the first six months of 2009, footwear revenues were up 51%.

Second quarter gross margins were 45.1% compared with 45.3% in the prior year's quarter. There were several puts and takes that impacted gross margin. First, in order to prudently manage our excess inventory, we increased our apparel liquidation sale above historical rates impacting our year over year gross margin.

These liquidation sales still represent a very small portion of revenues and allow us to profitably sell excess apparel inventory while helping to free up working capital which we feel is important in the current environment.

In addition, as David discussed earlier, with more visibility to our Running Footwear performance, we increased our reserves for footwear allowances and returns in the second quarter. Finally, these items were offset by improvements in apparel product margins as well as the strong net revenue growth in our higher margin direct to consumer business.

Similar to the proficiency we have achieved in apparel, we believe that experience gained in newer businesses such as footwear as well as optimization of product engineering and sourcing will allow us to offset some of these factors long term.

SG&A as a percentage of net revenues decreased to 43% in the second quarter of 2009 compared with 43.2% in the prior year's period. As a percentage of net revenues, marketing declined to 12.9% in the second quarter compared with 14.4% in the prior year. Partially offsetting this were selling expenses which deleveraged due to the contained expansion of our direct to consumer channel.

Operating income during the second quarter increased 3% to $3.4 million compared with $3.3 million in the prior year. Our effective income tax rate in the second quarter was 40.9% compared with 44.7% in the second quarter of 2008 due to certain one time items we recorded during the current year quarter. We are projecting our annual 2009 effective tax rate to be approximately 100 basis points improved from our 2008 effective tax rate of 45.3%.

Our resulting net income in the second quarter rose 5% to $1.4 million. Second quarter diluted earnings per share remained at $0.03. Year to date, our EPS is $0.11 compared to $0.08 in the prior year.

Please note, the company adopted a mandatory EPS accounting rule in 2009 which retroactively reduced our EPS for the first six months of 2008 from $0.09 quoted last year to $0.08.

Now to the balance sheet; our balance sheet continues to strengthen and our efforts to protect our liquidity are paying off. Total cash and cash equivalents at quarter end increased $66.2 million to $79.5 million compared with $13.3 million at June 30, 2008. Cash, net of debt increased to $59.2 million at quarter end compared with net debt of $16.3 million at June 30, 2008. We currently have no borrowings outstanding on our $200 million credit facility.

Net accounts receivable decreased 17% on a year over year basis which was significantly below our net revenue growth for the quarter. In addition to the strong performance of our collections team, part of the improvement in accounts receivable came from the higher mix of direct to consumer sales and a year over year increase in the allowance for doubtful accounts.

Inventory at quarter end decreased 1.4% to $181.4 million compared with $183.9 million at June 30, 2008. In addition to improved inventory management processes, our inventory balance at quarter end benefited from apparel liquidation sales mentioned earlier, strong performance of our outlet stores and increased level of direct shipments related to footwear. We expect our inventory growth to be below revenue growth in the fourth quarter of 2009.

We are pleased with the stabilization of our inventory growth over the past several quarters, but longer term we'll continue to strive for improved inventory turns to strengthen our cash position and working capital.

Our investment in capital expenditures in the second quarter was $4.5 million, bringing our year to date CapEx investment to $13.2 million. We continue to anticipate 2009 CapEx to be in the range of $30 million to $35 million, below the $41 million invested in2008.

Summing up the balance sheet, invested capital net of cash decreased year over year while we still achieved double digit top line growth for the first half. This is another indication of our improved inventory management and points to the opportunity in our balance sheet for greater efficiency.

We now have improved visibility to our business, and as such we would like to provide an initial outlook for 2009. It is important to note that we remain cautious on the remainder of the year and our outlook assumes there is no material improvement nor deterioration in consumer spending trends.

With a great deal of back half consumer activity centered on the back to school and holiday seasons, much remains to be seen. However, with our current level of bookings and trends in our business, we are estimated full year net revenue to be approximately $810 million in 2009. In addition after a soft last quarter, we do not anticipate back half revenues in 2009 to be as heavily skewed towards the third quarter as they were in 2008.

Full year gross margins are anticipated to be down year over year due to a number of factors. First, the majority of our top line growth is anticipated to come from our lower margin footwear business in 2009. Second, as discussed earlier, we are recognizing a higher amount of reserves year over year related to our Running Footwear. And third, there is the impact of the increased liquidation sales to third parties.

Apparel liquidation and anticipated footwear reserves will have a pronounced impact on third quarter gross margin. However, assuming continued strength in our direct to consumer business, fourth quarter gross margins are expected to be at least flat year over year.

We are still planning 2009 SG&A dollars to grow in the low teens on a percentage basis year over year and do not anticipate any significant change in the timing of our SG&A expense as compared to 2008.

For the full year, we continue to expect to invest in marketing in the range of 12% to 13% of net revenues. Based on our current top line projections, gross margin direction and planned SG&A, diluted EPS for the full year 2009 is currently expected to $0.80 to $0.82.

We maintain a cautious view on the consumer spending environment and will continue to focus on effective cost management and liquidity. Combine such diligence with powerful brand equity and compelling growth platform will strengthen our ability to be a growth company, balanced with greater profitability.

At this time, we'd 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 to as many of you as possible.

Question-and-Answer Session


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

Omar Saad – Credit Suisse

On the apparel side of the equation, could you help us understand, I think it came in better than a lot of us expected showing some strong resiliency after a couple quarters of slower sales growth. Can you help us understand how much of that was from distribution growth versus comp growth versus ASP's, what role the ASP's play and men's versus women's and kids and if there is any disparity in the growth level in the second quarter on the apparel side.

David McCreight

We actually saw a pretty broad based acceptance to apparel in the quarter. As I said earlier, and as Kevin mentioned, we saw success in men's, women's and youth, so it was broadly received. In terms of actual distribution, we saw it with some key strategic account success as well as strength in our direct to consumer channels as well.

Omar Saad – Credit Suisse

Was there a big change in the amount of distribution you had year over year in apparel?

David McCreight


Omar Saad – Credit Suisse

And on the ASP side, was there much change?

David McCreight

Not material.


Your next question comes from Kate Mcshane – Citi Investment Research.

Kate Mcshane – Citi Investment Research

Would you mind repeating what you said about inventories in the back half? Did you say you expect them to be up in line with sales?

Brad Dickerson

At the end of Q4 we expect it to be slightly below our sales growth for the year. Right now, Q3 probably relatively flat to maybe up a little bit, but more Q4 to be down year over year compared to the revenue growth.

Kate Mcshane – Citi Investment Research

In terms of liquidation sales for apparel, how should we think about that for the second half relative to what you saw during the second quarter?

Brad Dickerson

I think when you look at apparel liquidation, I think it's important to note again, we talked historically about how we've handled the liquidations on the apparel side. We have our choice here of moving them through the outlet channel, our outlet channel, moving them through third parties and also holding on to that inventory for maybe future outlet sales down the road.

We thought in this environment first of all, again more of a balance sheet liquidity play in this environment, we thought is was important to really look at our inventory and really make sure that we're as clean as possible going into next year.

Also if you remember, we had Q4 of 2008, the destocking at retail that obviously puts more pressure on inventory on the front half of this year. So we're in more of a one time event here in 2009. Again, it's a pretty small piece of our revenue overall, not a material change in our strategy there at all, just more of a focus this year to clean up our inventories to get towards the end of the year.

But again, we have the option of also moving our inventory through our outlets very profitably also. I think when you look at timing of this, it will be more pronounced in Q3 versus Q4. Some of that is just be design as far as number of units moving and also some of that is comparing this year versus last year and the different business environment in Q3 and Q4 also.


Your next question comes from [Michael Benetti – UBS]

[Michael Benetti – UBS]

Just a follow up to a prior question on apparel, I wanted to see if you could give a sense of how men's apparel trended in existing distribution versus distribution that was new for you this year.

Kevin Plank

First of all, in terms of the greater environment, we're seeing a lot of what everybody's seeing out there. The difference that we have going for us is the momentum of the Under Armour brand. So I would imagine being in the middle today in defining, I think we've talked about barbell effect in the past, is that people are going low and you either want to be down there or you want to be up high.

So I think the way that we're currently positions is as a premium, and I think we're seeing the benefits of that through our decisions to protect our brand and especially our pricing integrity. There's not a lot of Under Armour on sale in the market place compared to what other brands are doing so a lot of the comps that you're hearing about and the success that other people are having is really being driven by price and I think what you're seeing drive the Under Armour brand is brand and great product.

So we're really coming back and we are focusing on innovation. That's why making such a big pitch around the Recharge suit has been very important to us and I think again, going forward you're going to continue to see more and more compelling products out at retail.

In terms of distribution, we did not, our men's comp and what you're seeing in the performance out there is that you're watching us adjust our business. We continue to take the definition of our compression business and redefine that as our base layer business. And so we're adding things around some core basics for us. Our core compression, we're adding things like the fitted component.

So we're not really standing still and just waiting for the market to come to us as much as I think that we're really taking the fight to the market, and we're being really proactive about the way we address the business right now and I think that's coming through in some positive momentum, particularly in our products.

[Michael Benetti – UBS]

It looks like your guidance for revenues in the second half implies if my math is right, about an eight point slowdown versus the first half and that's versus a 15 point easier comparison in the second half of '08. I know you're planning conservatively, but perhaps you can give us some details on what you're seeing that's making you more conservative in the back half, and then finally how much of the back half revenue do you expect to come from new categories like footwear versus core apparel?

Brad Dickerson

Again, to look at that, obviously we're really happy with our first half of the year apparel growth. We do remain a little cautious towards the back half of the year, especially on consumer spending in Q3 and Q4. That's not a think you like to project obviously going forward, so we're going to remain cautious on our outlook for the back half of the year specifically around apparel.

We have definitely seen less volatility later in the first half of the year than we did earlier in the first half of the year, but again, we're going to be a little cautious as we look towards consumer spending in Q3 and Q4 and what that means with the back to school season and the holiday season.

As far as you look at, apparel is definitely the major driver of the back half of the year. Footwear for the most part at this point if you wanted to break footwear out, first half versus second half, probably about two-thirds of our footwear has shipped in the first half of the year versus a third shipping in the back half of the year so definitely more weighted towards the apparel.

David McCreight

While we posted good numbers for the second quarter and surprise, we still believe we have a long way to go and have much more opportunity to execute and grow the apparel business within the great brand platform that we have. So as Kevin alluded to, you should see more of that in 2010 and 2011.


Your next question comes from Dan Werer – Raymond James.

Dan Werer – Raymond James

On the increased reserves on returns for the running shoes and the increased amount of clearance, what is the reason for that given that product is so early in its life cycle. Was that a reflection of the pricing strategy might have been a big aggressive for this environment or was it reflecting more of some technical features with the shoes were not well received?

Kevin Plank

First of all, let me chip in here and I'm going to let Brad finish it up. First and foremost is that we've entered this new category. We've called it a launch and we are officially in the running business. And what we've seen and all indications point to the fact that its going to be long term rival business for this company and its brand. All the indications frankly point to that.

We had three objectives when we kicked off getting into the running business. Number one was to have a great product and we feel like we achieved that. Secondly was retail support, and I couldn't tell you from the bottom of our hearts just how committed our retailers have proved to be and what a great job that they have done for us across the board.

And thirdly, is consumer acceptance. We think that again, we checked the box on all three of those and with that was distribution. We really focused on three primary distribution channels. The first being athletic specialty. Also run specialty which was effectively new for us, and then of course our committed Big Box partners. And most important, we found out that the brand was not rejected from any one of these.

Now as we did that, we planned for this business back in the beginning of 2008 and planned our production and other things accordingly. And frankly we made decisions throughout that process to adjust as best we had the information coming in for 2009 as we continue to do. The world changed a little bit, but I think that we feel good about the business that we've put in place and we will continue to make the proactive decisions.

And some of those proactive decisions of course, began with our team and the people that we're putting around the table to help us make those calls, but also it comes back to inventory on some other things we're doing which is where Brad and his team come in.

Brad Dickerson

If you look at where we are today versus where we were at the end of the first quarter we have six months of information of sell through now on the Running Footwear side which is double the information we had the last time we chatted at the end of Q1.

So really with more visibility now to say what the sell through rate is in the front half of the year versus what we sold in, that really led us to make some decisions around what we do going forward. From an assumption perspective, we're assuming the sell through rate of Running Footwear in the back half of the year is similar to what we've seen in the front half of the year.

So again, from an assumption perspective, that's what we're planning for in the back half of the year for run.

A couple of other things too, one of the things David talked about was making sure we're set up for long term successful footwear so next season and 2010 is the first step in that and we wanted to make sure that we're as clean as possible going into 2010. So that's why we thought it was important here in the back half of 2009 to take appropriate measures to make sure that we're clean going into 2010.

Dan Werer – Raymond James

Just to make sure I understand the pricing strategy, earlier you noted that, I think it was in David's comments about adjusting the price value proposition. I guess that's implying that the 2010 product line will be a bit more affordable priced for the customers than what we saw in 2009?

Kevin Plank

Price value is a combination of perceived value of the product and what will be dialing in is in some cases, perhaps a more experienced view on what the value is of each shoe. But as it gets into for example, we were able to in year one, launch and in our space, deliver a top ten shoe, number six out of box.

So we've shown examples of where we can dial it in correctly, and there are other places where we think we have to adjust. For 2010, you're going to actually see us continue to work on adding new technologies and you may see price points in some areas go up, and then you'll see some come down as we want to embrace and bring more athletes into the business.


Your next question comes from Robert Ohmes – Bank of America.

Robert Ohmes – Bank of America

The footwear focused, I was wondering if you could talk about the hiring of Gene McCarthy and what drew you to him and how you envision the footwear division ramping up both from an expense standpoint as well as timing of a launch of basketball and sort of what the goal is. And related to that, when we would see footwear in Europe?

David McCreight

When we were looking for a leader, it was consistent with Kevin's vision for a leader within Under Armour bringing world class experience, the ability to really accelerate the capacity of our organization to match the reach of the brand and the desire from the market place for Under Armour to be an excellent performance footwear company.

And so we went out in the industry. We spoke with as you can imagine, many people and Gene fit that bill. You can see the breadth of his experience, suits us quite nicely as clearly another skill set notch in the basketball area as well as the intimate relationship with the market place.

As it relates to basketball, we currently are already on court. As you know we have one of the top ten picks in the NBA, Brandon Jennings is going to be playing this year with the Milwaukee Bucks. We've eight to ten D1 schools. We have 20 undeniable high school programs that we're working through and we're continuing to develop a great technology and great shoe to take to market when we think we're ready to do so.

Europe, we will be testing footwear in Europe in the near future and will continue to read the market place there and roll out when appropriate.

Kevin Plank

I think just some color around the footwear category of our business for us as a whole. We've really, one of the things that we listened and we learned about when we got into this back in 2006 and really started preparing for that all the way back to 2003, was that footwear and apparel, they just don't leverage very well.

There are some things you can coordinate on the back end, but for the most part you're building a brand new business. I think what you've seen us to, really beginning to start to put more dollars in as early as '03 and '04, it was really about our team. And so the addition of Gene has been well received and he's going to be a really big help to our team when he gets going here in just a few weeks.

In addition to that, from an infrastructure standpoint, there is so much opportunity for us in footwear, and if we had a message today, number one it is that our team, they are just a work in lights out number one, but number two is that we can do so much more.

When you look at just the margin opportunities that we have as a business, and you guys extrapolate the numbers of where we're probably coming in in footwear versus where some of our competitors are, I'd say we estimate there's more than maybe 1,000 gross margin improvement available to us as we begin to figure this out.

And so I believe, there's no magic formula or anything else that any of these other brands have. It's a fact that Under Armour, we're in this business. The consumer accepted us in this business. We're going to grind. We're going to work hard. We're going to build the right team of people around it and you're going to see us continue to improve every single day, not just year or month.

But that's the approach and I think that's the mentality that we have. It starts at a lot of different places, but most importantly, it starts with Under Armour's commitment to say we are going to be a great athletic footwear brand.


Your next question comes from Jeff Mintz – Wedbush Morgan.

Jeff Mintz – Wedbush Morgan

Could you talk a little bit more about your direct to consumer business? What's the current store account and is it up or down in the second quarter?

David McCreight

We are going to be, as we discussed earlier, adding additional stores, primarily in the factory house area, and we will be ending the year approximately at 35. We're going to continue to look for opportunities as you can imagine in the market place. With a brand as appealing as Under Armour, and the state of the real estate market, there are increasing opportunities for us to grow there.

And through the quarter, the direct to consumer results were fueled by comp door growth as well as new store count growth.

Jeff Mintz – Wedbush Morgan

What was the store count at the end of the second quarter?

David McCreight

28 factory outlets, 4 specialty stores.

Jeff Mintz – Wedbush Morgan

Can you give us a sense of how much did the gross margin benefit in the product mix? It actually shifted a little bit back toward apparel this quarter compared to Q1 '08.

Brad Dickerson

I think when you look at the benefit on the apparel sourcing side and product mix, it was about a 60 basis point improvement year over year in the second quarter.


Your next question comes from Michelle Tan – Goldman Sachs.

Michelle Tan – Goldman Sachs

I was wondering if you could give us any color on how much the close out sales added to the apparel top line this quarter and whether that pulled forward any of the second half business versus being most seasonal for first half?

Brad Dickerson

The apparel liquidation number is relatively small in total to our overall business, so it really doesn't impact the top line too much, and there was not really any significant fluctuation from Q3 to Q2 as far as the apparel liquidation.

Michelle Tan – Goldman Sachs

As far as kind of a follow up to the last question, I would have thought footwear penetration being down and direct to consumer being up, would be a bigger tail wind to gross margin. Can you help us think about whether the apparel, how much the apparel margins changed year over year versus the footwear margins year over year?

Brad Dickerson

Actually in Q2, we said that the apparel sourcing improved by 60 basis points. I think when you look to the back half of the year, our call outs there are really apparel liquidations and the footwear reserves are more pronounced in the Q3. On Q4, more flat year over year is actually more of a reflection of our direct to consumer, the strength in our direct to consumer business offsetting some of those in Q4.

And also, obviously an easier comp in Q4, but I do like to point out there is a lot of initiatives we're working on right now. A lot of them are in the margin area along with some cost area. We're not really going to count on those until we know they're going to be successful and then we know the timing when those hit.

So we're not just sitting here. We're actually working very hard on trying to get some better numbers here in Q3 and Q4.


Your next question comes from Chi Lee – Morgan Stanley.

Chi Lee – Morgan Stanley

You talked at several points about specific earnings related to Running Footwear. Can you be a little bit more specific about what that has been? What have been the challenges related to the product and how have you recalibrated for the second half deliveries?

David McCreight

What we did as Kevin had mentioned, we focused in on delivering a technologically sound product and so we've had learning across all areas; from product point of view, we continue to improve the cushioning and ride of the product. We continue to work closely with athletes to make sure that the technology platform is relevant and improving performance.

We've learned a great deal about the distribution. As you mentioned, we're running specialty stores as well as mall based athletic specialty stores, and the pace and flow of deliveries, the pricing mechanisms, the breadth of assortment and finally we've also worked on our supply chain, and we have a great deal to learn still about making great shoes efficiently and bringing them to market accordingly.

So we're learning in all areas. This is a first season of what we believe is going to be a multi-year growth platform for us, and we're going to get better each year, but we're absolutely committed to the space and we're going to learn at a very rapid pace, be it people, marketing process, all of the above.

Kevin Plank

We also, one of the things we realized, we came in with a business that had an opening price point of $90.00 where the meat of the business in sporting business, which is our wheel house, is a few dollars below that, actually $10.00 below that. Athletic specialty as a whole was a new category for us, and we were a new brand for a lot of these guys, so I think there's been a lot of learning on both sides and more importantly, the business is intact and we're going to adjust and you'll see us make some proactive decisions to move forward.

One think that we should note as well, we talked about Running Footwear, is really success that we continue to see in our Training Footwear. The cannibalization that we predicted, it didn't happen as much. So I just really want to emphasize that we are not going to forget about training and that we think there is a real business there. The consumer really believes in the Under Armour brand there as well and they continue to see us drive innovation and put great product around Training Footwear.

Chi Lee – Morgan Stanley

On the apparel liquidation, in terms of just timing of when you actually saw those liquidation sales occur in the quarter, was it more back half loaded versus front half loaded?

Brad Dickerson

It was pretty much even though out the quarter.


Your next question comes from Sean McGowan – Needham & Company.

Sean McGowan – Needham & Company

Can you give us some sense of the relative strength, the relative growth rates of men's, women's and youth apparel? Which of those apparel segments were growing faster?

Brad Dickerson

We're not going to get into that detail, but we just leave it said that all three segments grew. It was very solid and very broad based.

Sean McGowan – Needham & Company

From the release it's not entirely clear whether all three grew double digits or the whole thing in aggregate grew double digits.

Brad Dickerson

All three grew double digits.

Sean McGowan – Needham & Company

Currency impact on sales and EPS in the quarter, any meaningful impact?

Brad Dickerson

Nothing meaningful.

Sean McGowan – Needham & Company

The question on the liquidation sales, has there been a shift in your strategy on how to deal with that? I thought in the past more of the kind of stuff that would wind up in other company's would go to a third party instead of your own stores. Are you using third party outlets more now? Can you talk about that?

Brad Dickerson

No, we're not. Again, I want to reiterate that this is a very small percentage of our overall sales and what you're seeing is more just a one time clean up from the destocking in Q4 and any change in the model, we'll signal to you on future calls.


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

Jim Duffy – Thomas Weisel Partners

With regards to the gross commentary, can you quantify the apparel gross margin improvement that you saw or expect to see from process and cost savings?

Brad Dickerson

For Q2, we said apparel sourcing was about 60 basis point improvement year over year. We'll probably continue to see something similar in the back half of the year relative to apparel sourcing and needless to say, just as we talked about the other areas of the company, Wayne and the direct supply chain team are working hard. We believe there's still more head room ahead in apparel margins in coming years as well.

Jim Duffy – Thomas Weisel Partners

You spoke about the opportunity on footwear gross margin, is there a near term opportunity or is the product cycle improvements might be delayed into 2010 or beyond?

Brad Dickerson

We're probably right now, in 2011, working on products so it's a combination of relationships with suppliers, a combination of our expertise designing cost savings into product as well, and really just staying smarter about it, so all those things come in time. All those things come as the team continues to play together.

So again, putting the right team of people around the table, the right team of experts that bring that experience to the company and then just letting them work together. So I don't know that we can declare a date, but I think you'll see consistent improvement, particularly on the footwear side.

Jim Duffy – Thomas Weisel Partners

So in 2010 we should see improvement on the footwear side from a gross margin standpoint?

Brad Dickerson

Yes, I think we're talking about more longer term. Again, to get back to some comments we said before, the lock was in the margin relative to the price value relationship David talked about, relative to demand planning and forecasting in addition to logistics to move product from point A to point B and costing.

So there's opportunities in all those things, so we could see maybe some slight improvement in the short term, but it's more of a longer term play.

Kevin Plank

Part of that is offset by our investment into footwear. So we want to be clear. We're really a long term growth platform for our company. We really believe in the footwear engine, so some of that investment is personnel. It's building really a complete company around Under Armour being in the footwear business. So it's not as much immediate as much as it's long term.


Your next question comes from Tom Shaw – Stifel Nicolaus.

Tom Shaw – Stifel Nicolaus

You talked about the price value relationship a little bit earlier with Dan, but you talked about savings in core basics. Is that an opportunity to potentially open up distribution or maybe expand a good, better, best assortment? How do you look at that savings that you're going to pass on to consumers?

David McCreight

We're always looking to be more efficient and define savings, and the core basics provide us with that as I mentioned earlier, a clear target where we have high unit purchases so we can focus on efforts and build our savings. We're going to continue, we're studying distribution. Ultimately our mission is to reach more athletes and that's something that we're looking at geographically, by sport, by gender, and we're also going to look economically.

But we'll do that in due course. We've plenty of opportunity in the places where we are and we know that great product is going to fuel that pipeline. But our distribution is very tight and that affords us one of those levers in the future.

Tom Shaw – Stifel Nicolaus

Just on the SG&A in the quarter, I think it looked a little bit lighter than maybe the guidance had implied. Was there anything in the SG&A side that may have shifted to the back half or just more greater expense control than expected given that the full year guidance remains intact?

Brad Dickerson

There wasn't too much of a shift, maybe a little bit, but it's really more just on the way we planned our business. So obviously we stated that marketing will continue to be 12% to 13% of net revenues which is consistent with the prior year. The pace of spend in the back half of the year should be pretty similar to last year, so it's just a matter of Kevin and David both talked about this, balancing our efforts around cost control with appropriate levels of investment we need in critical areas for our growth.

So although we're leveraging our SG&A in some areas, we are investing in things like our direct to consumer business. Kevin and David both talked about talent, new team members on board, especially innovation around apparel and footwear design, a consumer insight visionary we're spending some money on to investing.

We're also investing in people and resources that can help with margin improvements longer term in the future, material and costing engineers. So there's a lot of investments we are making and some of those are being offset by leverage we're getting in other areas.


Your next question comes from Sam Poser – Stern Agee.

Sam Poser – Stern Agee

You talked about the 36% increase in the direct business. What kind of percent of total is your direct business? How do you foresee it being or what do you see it for the full year so I can have an idea of how important it is?

Brad Dickerson

In the quarter it was approximately 16% of our net revenues this year, about 13% last year. As far as the full year, we do see obviously with that business growing faster than our overall business that increasing as a percentage of net revenues year over year. Last year in 2008 we were at 14% and I would see that coming up a couple of percentage points probable.

The important thing about that level is in a period where partners may be focusing on their balance sheet and it allows Under Armour to continue to grow and reach athletes we may currently not be reaching. Because again, we can control the pace of those openings.

Sam Poser – Stern Agee

You talked about the key price points at the sporting goods retailers being about $10.00 under the $90.00 opening price point you started running. How do you balance performance and those lower price points, because a lot of the price points they sell at that $75.00 to $80.00 price points in running on more foot coverings that on technical footwear and I just wonder how you're balancing performance and the price point to get the sweet spot of those sporting goods guys.

David McCreight

We're early in the non [creeded] footwear space and we're focusing on making sure first we're building a good product that delivers from a technical aspect, and then we'll worry about margins and margin growth later. We want to get great footwear on more athletes. That's our number one focus, and margin will come thereafter.

Kevin Plank

You won't see us compromise our performance or what we do with product. I think one of the things we're seeing in the competitive landscape is that you've got a lot of our competitors out there that are taking what was formerly $90.00 to $100.00 premium product and they're selling it down to $60,00 to $70.00 range.

So again, it's more things to consider and that's where the market is, and so you'll find us, we're going to find a way to compete. We're going to find a way to win. So that's our commitment to the category.

Sam Poser – Stern Agee

With putting in Gene McCarthy, you said you're investing in the footwear space, continuing to invest in the footwear space. What kind of people, below Gene and rounding out what you need there, can you give us some idea of what kind of investment there, what kind of expertise you still think you need within the space?

David McCreight

We have a team in place and we've been building the organization for several years. But not just related to footwear, we're looking and want to make sure our team is developing and adding the skill sets necessary to deliver on the brand promise. So we've mentioned all the component scenarios and whether it's design, development, sourcing, technical, merchandising, all of those areas we have a team in place working very hard.

And Gene and Gavin's addition really are amongst a few people who are helping us move into the next level.

Kevin Plank

What you're seeing happen is that people are calling us and so if there's any message I'll send out on today's call is that our number is in the footwear business and we're going to be here for a very long time. When we launched Creative Footwear back in 2006, we had a little more than a dozen people on our footwear team. Today we've got well more than 100.

We've got offices in China, Indonesia, sourcing office Hong Kong. We've got our offices here, design development and you're going to continue to see us commit to and build an unbelievable team of people and most importantly, terrific product for the athlete.


That concludes today's question and answer session. I'd like to turn the conference back over to Mr. Plank for any additional or closing remarks.

Kevin Plank

In addition to our commitment to footwear, there are three critical things that I want you to take away from today's call. First, we remain confident in our platform and our ability to generate long term profitable growth. Secondly, we're going to continue to invest in the team and infrastructure to capitalize on the opportunities available to this brand. And third, we are committed to driving operational excellence throughout our organization. We are on a mission.

Thank you again for joining us today.

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