Under Armour CEO Discusses Q3 2010 Results - Earnings Call Transcript

Oct.26.10 | About: Under Armour, (UA)

Under Armour (NYSE:UA)

Q3 2010 Earnings Call

October 26, 2010 8:30 am ET

Executives

Brad Dickerson - Chief Financial Officer and Principal Accounting Officer

Tom Shaw -

Kevin Plank - Founder, Chairman, Chief Executive Officer and President

Analysts

Eric Tracy - FBR Capital Markets & Co.

Taposh Bari - Jefferies & Company, Inc.

Oliver Chen

Sam Poser - Sterne Agee & Leach Inc.

Matthew McClintock - Barclays Capital

Omar Saad - Crédit Suisse AG

Chi Lee - Morgan Stanley

Robert Ohmes - BofA Merrill Lynch

Michael Binetti - UBS Investment Bank

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Under Armour, Inc. Third Quarter Earnings Webcast Conference Call [Operator Instructions] I would now like to turn the conference over to Mr. Tom Shaw. Please go ahead.

Tom Shaw

Thanks, and good morning to everyone participating on 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. We wish to caution that such statements are subject to risk and uncertainties that could cause actual events or results to differ materially. These risks and uncertainties are described in our press release and in the Risk 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.

Joining us on today's call will be Kevin Plank, Chairman and CEO, who will address the drivers of our third quarter results and our strategy for continued growth in 2010 and beyond. Brad Dickerson, our Chief Financial Officer, will then discuss the company's financial performance for the third quarter, provide an updated outlook for 2010 and introduce our preliminary outlook for 2011. After the prepared remarks, Kevin, Brad and Wayne Marino, our Chief Operating Officer, will be available for Q&A session that will end by 9:30 a.m.

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

Kevin Plank

Thank you, Tom, and good morning, everyone. At Under Armour, measuring success has always started with a scoreboard, and I'm going to get to that in just a moment. But as we complete year five as a public company, the measure of our success as a brand gets a little more complex.

So in addition to our quarterly numbers, I want to talk this morning about four benchmarks, by which we measure ourselves to ensure we are building our platform for long-term brand strength and long-term return to shareholders: Product, story, service and team.

But first, to our scoreboard. Our Apparel net revenues are up 30% year-to-date. We think that number speaks volumes, not only in our ability to continue resonating with our core consumer but to the strength and validity of our strategy. We believe that 30% year-to-date apparel net revenue growth is great evidence that there's still a tremendous opportunity for us in the U.S. Apparel business as we continue to lead in our core sporting goods accounts and gain traction outside of our core distribution.

For the quarter, our Apparel net revenue growth was extremely balanced with Men's, Women's and Youth, all growing at least 25%. In addition, our growth being broad-based, we continue to see our market share of dollars run ahead of market share of units, which we believe is a great indicator that our consumer remains willing to pay a premium for Under Armour apparel. We have consistently talked about building our Women's business to be larger than our Men's. This past quarter, the dollar growth in wholesale women's training apparel, our largest category in Women's, was equal to the dollar growth we saw in men's training apparel. Well, that is just a snapshot, we think it's a great sign that we've established the right cadence to build the same level of equity and loyalty among our female consumers as we know exist with our core male consumer.

So to become strong in areas like Women to Direct-to-Consumer, we are also able to invest in areas where the opportunity is even larger. First, there is Footwear. In this past weekend, consumers got their first taste of Under Armour basketball footwear. And while a few days of sell-through are an accurate measure of how well we've been received, we are much more confident about our entry into this important category because of the approach we've taken, and because of what we have learned and now applied to basketball with the experience for the past five years of building footwear.

By the time our first basketball footwear arrived in sort of last week, literally hundreds of the country's best players have tried our product and given us feedback. That process has helped us deliver a basketball shoe that works for the player and gives us confidence that we will see a return to growth in our Footwear business in 2011.

Outside the U.S., the Under Armour brand continues to gain traction and build a base for long-term growth. Our International business grew 60% in the quarter, with both Europe and Japan showing very strong growth. In Europe, our base player continues to lead the way, but we are making strides for diversifying our apparel mix as our fitted product grows as a percentage of our business, moving into 2011. We're also bringing grassroots marketing to our European business. As of the past quarter, we brought hundreds of young athletes to the Under Armour Rugby Combines in the U.K.

Our business in Japan continues to perform exceptionally well, where our partners, Dome Corporation will pass $100 million in sales in 2010 as they continue to push forward, including the launch of the first non-cleated footwear for the Japanese consumer this quarter. We also saw the first UA brand in full price retail store opened outside the U.S. as Dome opened the UA clubhouse in Tokyo. Our success in Japan and the traction we are gaining in U.K. are great indicators of our ability to speak to athletes who play something other than American football, and better position us to succeed in new categories to help drive our growth.

We've talked about developing the Under Armour brand like chapters in a book, with each chapter connecting to both the previous and following ones. As our brand continues to reach new consumers, both here and the U.S. and internationally, we will be bringing the next chapter of Under Armour innovation via athletic apparel next spring. When we first brought the idea of moisture-looking compression apparel to the market, our goal was to make athletes rethink expectations for their apparel. Our history is built on our ability to trade consumers up when we deliver true unexpected innovation. And it is with this spirit that 2011, we will bring to market the world's first true performance cotton t-shirt. This evolution will introduce Under Armour to a whole new audience of consumers while bringing a new level of performance to a category where expectations for it have been low. You'll be hearing a lot more about the next chapter in Under Armour's performance apparel platform in the coming months, and we're confident this innovation will expand both the reach and equity of our brand.

I talked on our last call about investing to build the UA team. That's an ongoing part of my job, and one where we continue to make great strides. I'd like to focus on another area where our apparel net revenue growth is enabling us to invest and that's from the field of play. Our strong apparel engine is fueling our ability to invest, not just in new categories and geographies but in marketing as well.

Under Armour was born on the football field, and our business there remains very strong. To help ensure that brand strength going forward, we continue to activate and invest in sports marketing assets. On the college field, we continue to generate great visibility for the brand with our great collegiate teams. And this week, we are very proud that the Auburn Tigers, an Under Armour school for more than five years who exclusively wear our uniforms and cleated products has just moved to number one in the BCF College football standings, War Eagle.

On the pro side, we recently signed on to not just maintain but expand our relationship with the NFL. So in addition to teaming with the league to maximize our involvement at the NFL combine this spring, we are adding pro bowl players like Miles Austin and Anquan Boldin to the roster of UA athletes wearing Under Armour cleats that you will continue to see on-field.

So while we're investing to help us grow our share in the core category like football, we are also positioned to invest in assets that we believe will help us accelerate our growth in categories where we're just establishing ourselves. We're confident these coming investments will enable us to quickly build the UA identity in these new categories and bring increased focus to the global opportunities for our brand.

I talked at the opening about setting additional benchmarks to help guide us towards a multibillion dollar platform. Going forward, our focus is very clear. There are four areas where we need to win as we continue to drive value for our shareholders: Product, story, service and team. First and always foremost, at Under Armour, it's product. Our apparel engine is strong as we continue to create the best solutions for the athlete. We will continue to demonstrate our apparel thought leadership in 2011 with our next generation of apparel innovation involving the brand new category for Under Armour in cotton. We promise to make it exciting, and the market opportunity is very large.

2011 will mark our fifth year of making footwear, and we believe that the opportunity in footwear can someday be greater than apparel for us. We have built up our equity with athletes over the years, and they have embraced our footwear product on the football and baseball fields. Our challenge is to invest and win outside the Cleated business because while our core consumers found in the football turf and baseball diamond, the bigger dollar opportunity remains at growth categories such as running and basketball.

Our second focus for growth is around telling the Under Armour brand story globally. We have begun to lay the foundation for the storytelling in key markets like the U.K. and Japan, and have now taken our first steps in the world's largest market in China. Our challenge will be to assemble the pieces in each of those markets, retail presence, sports marketing assets and grassroots storytelling that will position us to win. We've established our priorities in our key markets, are investing to grow globally. And we're confident that you'll see these pieces start coming together over the next several months.

Third is our ability to service the business. We look at 30% growth in our apparel net revenues year-to-date, and it looks like we're checking that box pretty well. But we are not satisfied with our consistency and servicing consumer demand for UA product. We have made servicing the business a top priority in 2011, and are committed to making it a competency that will help drive long-term operating leverage.

The fourth and final piece of our plan is building the team. I've spoken to this consistently on these earnings calls as I believe it's the number one priority for the CEO of any growth company. Our results this past quarter gave me confidence that progress is being made. Our retail team continues to drive net revenues, exceeding our wholesale growth and bringing in new consumers to the UA brand. Our Web business continued to deliver strong numbers while building the next evolution of what UA needs to be online for our core consumer. And the continued strength in our core Apparel business is fueling our growth and enabling us to invest across both categories and geographies. All three of these areas are run by experienced leaders we have brought to Under Armour within just the past 12 months.

Building the team will continue to be my primary focus as we build out the infrastructure of a multibillion dollar global brand. Our revenue growth and the opportunities ahead means we continue to attract the best and the brightest. We will continue to bring an experienced industry pros to help us navigate these new categories and geographies, and complement the homegrown UA team, who has built our business and brand equity to date. Making great product, telling a great brand story, servicing our business and building a great team of people that are going to help us do that. Our goal is to continue to win in each of these areas, ensuring that our core consumers maintain his and her loyalty to the Under Armour brand in 2011 and beyond.

With that, I'll pass it over to Brad Dickerson, our CFO. Brad?

Brad Dickerson

Thanks, Kevin. With Kevin have been taking you through at some highlights and strategies for our business, I would now like to spend some time discussing our third quarter financial results.

Our net revenues for the third quarter of 2010 increased 22% to $329 million. Year-to-date, net revenues are up 20% to $763 million. This strong growth was largely driven by Apparel, which was up 28% to $277 million during the quarter and up 30% to $600 million year-to-date. Apparel strength was broad-based during the quarter, with each of our Men's, Women's and Youth Apparel businesses growing at least 25% year-over-year. Our Direct-to-Consumer net revenues increased 47% for the quarter and 58% year-to-date, representing approximately 18.1% and 19% of net revenues, respectively. Similar to last quarter, third quarter net revenue growth was driven by a combination of new Factory House stores, strong same-store sales growth and the Web business. We opened five new Factory House stores during the quarter, increasing our Factory House store base to 50. We expect to end 2010 with approximately 54 total Factory House stores, up from 35 locations at the end of 2009.

Footwear net revenues declined 20% to $26 million in the third quarter, in line with our previous indication that Running and Training Footwear revenues were expected to decline in 2010 compared to 2009. International net revenues increased 60% to $21 million in the third quarter and represented approximately 6% of revenues, up from roughly 5% of revenues in last year's quarter.

Third quarter gross margins were 50.9% compared with 49.5% in the prior year's quarter. Several factors contributed to the 140 basis point gross margin expansion. First, we incurred lower sales returns and markdowns contributing approximately 60 basis points. Second, we experienced a favorable impact year-over-year from liquidations and inventory reserves, contributing approximately 50 basis points. And finally, we continue to see a higher percentage of net revenues from our higher-margin Direct-to-Consumer business, contributing approximately 45 basis points.

Selling, general and administrative expenses as a percentage of net revenues increased to 33.6% in the third quarter of 2010 compared with 32% in the prior year's period. Let me take you through the four major components of SG&A, many of which are consistent with our story throughout 2010. First, marketing costs increased to 10.9% of net revenues for the quarter from 10.5% in the prior-year period, primarily driven by increased sponsorships and higher marketing costs for specific customers. It's important to note that third quarter marketing costs reflect an approximate $2 million shift of certain media costs to the fourth quarter. Given our updated four-year plan, we now expect 2010 marketing costs as a percentage of net revenues at approximately 12% compared to our previously indicated range of 12% to 13%.

Second, selling costs increased to 7.1% of net revenues for the quarter from 6.6% in the prior-year period, primarily driven by the continued expansion of our Factory House stores, which carried better gross margins but also incur higher SG&A expense as a percentage of revenue.

Third, product innovation and supply chain costs represented 7.7% of net revenues for the quarter compared with 7.3% in the prior-year period. This increase is primarily a function of increased investments and personnel associated with the design and sourcing of our expanding Apparel, Accessories and Footwear lines.

Finally, corporate services increased to 7.9% of net revenues for the quarter compared to 7.6% in the prior-year period as we invested an additional corporate personnel, facility expenses and information technology initiatives needed to support our growth.

Operating income during the third quarter grew nearly 21% to $56.7 million compared with $47.1 million in the prior year. Operating margin was 17.3% compared with 17.5% in the prior-year quarter. In other expense, we experienced a net loss of $180,000 related to foreign currency during the quarter and a net loss of $1 million year-to-date.

Looking at our tax rate, several factors positively impacted our third quarter rate. First, we received a state tax credit similar to one's previously received by us in 2002 and 2006, along with a federal research and development tax credit. Second, we continue to develop and implement our tax planning strategies. These efforts reduced our effective income tax rates in the third quarter to 37.7% compared with 43.9% in the third quarter of 2009 and are expected to result in a full year tax rate of approximately 39.2%.

Our resulting net income in the third quarter increased 33% to $34.9 million compared with $26.2 million in the prior-year period. Third quarter diluted earnings per share increased 31% to $0.68 compared with $0.52 in the prior year. While our operations remained strong during the quarter, we did experienced approximately a $0.05 favorable impact from the lower-than-expected effective tax rate during the period and approximately a $0.02 benefit from the shift of marketing spend from the third quarter to the fourth quarter.

Now moving over to the balance sheet. Total cash and cash equivalents at quarter end increased 43% to $134 million compared with $93 million at September 30, 2009. Cash, net of debt increased $40 million at quarter end to $115 million compared with $75 million at September 30, 2009. We continue to have no borrowings outstanding on our $200 million credit facility.

Inventory at quarter end increased 28% year-over-year to $196 million compared to $153 million at September 30, 2009. In line with t previous guidance, the inventory growth outpaced net revenue growth as we increased our safety stock around core programs to better meet consumer demand and increased or made for strategy across our Factory House store base. Our investment in capital expenditures was approximately $9 million for the third quarter and approximately $25 million year-to-date. We now anticipate capital expenditures in 2010 will come in towards the lower end of our previously indicated $35 million to $40 million range.

Now moving on to our updated outlook for the remainder of 2010. Previously, we provided an outlook for 2010 net revenues in the range of $990 million to $1.10 billion, an increase of 16% to 18% over 2009. And 2010 diluted earnings per share of $1.11 to $1.13, an increase of 21% to 23%. Given the sustained strength in our Apparel and Direct-to-Consumer channels, our improved visibility for the remainder of the year and a lower effective tax rate, we are raising our full year outlook. We now expect 2010 annual net revenues in the range of $1.30 billion to $1.35 billion, an increase of 20% to 21% over 2009. We also expect 2010 diluted earnings per share in the range of $1.23 to $1.24, an increase of 34% to 35% over 2009.

Similar to last quarter, we want to elaborate on three areas of our updated 2010 guidance: SG&A, taxes and inventory. For SG&A, we see year-over-year dollar growth in the fourth quarter, approaching 30%. We continue to make the right investments to support our growth platforms. This includes Footwear, which was planned down this year and hats and bags, which are not generating revenue until 2011. They also includes higher personnel costs at our Factory House channel will we planned to end the year with 54 stores, up from 35 stores at the end of 2009.

Now looking at our tax rate. Our effective tax rate in the third quarter benefited from one-time state and federal tax credits, along with an improved outlook relative to long-term tax planning strategies. As we stated earlier, these items will drive our effective tax rate for the full year in 2010 to 39.2%, down from our previous outlook of 42%. As we move into 2011, we anticipate our effective tax rate will increase to a range of 40.5% to 41% due to the one-time nature of the tax credits received in 2010. However, this increase we partially offset in the permanent impact relative to the our continued long-term tax strategies.

Finally on inventory. We continue to see the same factors from the third quarter, driving fourth quarter inventory growth ahead of sales growth. This includes an increase in our safety stock and continued investments around made for products for our Factory House outlet channel. It also includes new product categories for 2011, including hats and bags coming in house and the introduction of our new cotton product.

Before we turn it over for Q&A, we'd also like to provide you with a preliminary view for 2011. Based on current visibility, we anticipate both 2011 net revenues and 2011 EPS growth to be at the higher end of our longer-term growth target of 20% to 25%. We intend to give more details on our 2011 guidance in the coming months. With that, we would now like to open the call for your questions. We ask that you limit your questions to one per person so we can get to as many of you as possible. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Michael Binetti with UBS.

Michael Binetti - UBS Investment Bank

If you could maybe help us out a little bit some more detail on the gross margin. I'm just wondering, I see what you guys talk about as being year-over-year lifts to the gross margin. What were maybe one or two of the biggest offsets to that in the quarter, please?

Brad Dickerson

Mike, this is Brad. I think, when you look at a lot of positive things on the gross margin side, as far as negative maybe offsets, we did have a little bit more apparel liquidations year-over-year. But I think that really is more a function of just keeping our inventory clean. And actually, you're seeing some of the benefit of that in what I call not as lower returns and markdowns. So even though we have a little bit more volume on the apparel liquidations side, which had a little bit of drag on margins, very small, have more than offset by the fact that our inventories are very clean now, and we're seeing less returns and markdowns.

Michael Binetti - UBS Investment Bank

As I look through the national statements on 2011, how should we think about I guess the gross outgrow and then our models for 2011, should we think about -- it seems like there's been quite a bit of preloaded costs this year, you guys bring in hats and bags and you buildout for Footwear to be getting bigger. Should we think about EPS start levering revenues next year as we think about this 20%, 25% targets? Should EPS be growing ahead of revenues? Did you guys start leveraging some of those costs? And maybe to what extent should we be thinking about that at this point?

Brad Dickerson

We'll give a lot more detail around 2011 on the next earnings call. But I think as we kind of sit here, targeting that a higher end of 20%, 25% both for top line and bottom line, we are going to target a modest SG&A leverage in 2011. We need to continue to invest in our businesses, but with hats and bags coming in house to your point, also with footwear returning to growth. We are targeting a modest leverage in SG&A. They talked about the tax rates. So year-over-year, the tax rate will be going back up again a little bit because of the one-time nature on some of those tax credits. And on the margin side right now, we're still working through a lot of the details. Although, we've been seeing some of the challenges that the industry's been seeing relative to some margin pressures out there. We're working through that right now, specifically around the back half of 2011.

Michael Binetti - UBS Investment Bank

That's the gross margin comment, Brad?

Brad Dickerson

Right.

Michael Binetti - UBS Investment Bank

So that's why we shouldn't expect a huge amount of leverage on the growth. There's quite a bit of noise in that gross margin outlook for you guys next year, so I'm just trying to think how we should maybe think about that number heading into next year, even though it's early for you guys?

Brad Dickerson

Yes, I think you've got some puts and takes there with SG&A, with the tax rate. And also with right now, we think we have more detail on the gross margin later at the next earnings call. So I think for now, we look at that 20% to 25% both top line and EPS line higher into that.

Operator

Our next question is from Robbie Ohmes with Bank of America Merrill Lynch.

Robert Ohmes - BofA Merrill Lynch

I apologize if I missed it, but more any basketball shoes shipped in the third quarter or does that shipment all fall in the fourth quarter? And then related to that, can you talk about the sort of the inventory investment there and the allocation strategy for basketball shoes? And then my follow-up question would be for the Performance Cotton business launching next year, maybe a similar sort of discussion, is this an allocated launcher? Could this be pretty broad and does it encompass any new distribution channels?

Brad Dickerson

Robbie, this is Brad. On the Q3 shipments for basketball, now, there was not any Q3 shipments for basketball, that's a Q4 entry into that marketplace. And as Kevin mentioned, we're really talking about a takes here. So from an inventory perspective, don't really anticipate any significant movements in inventory relative to the basketball footwear. As far as allocation, yes, it's an allocated program this year as we head into next year also for basketball. On the Cotton side also, for the most part of an allocated program, we'll have a little bit of replenishment on the cotton side too going forward. From a distribution perspective, no significant changes in distribution in 2011 for us, and that includes our cotton product.

Robert Ohmes - BofA Merrill Lynch

And just a quick follow up on Footwear. If you look at the shipments for the fourth quarter, I'm sorry, for the third quarter, it looks like your revenues were down about 20%, if I think I have the right number in there. Were there some wholesale accounts where your Footwear business was actually up in the third quarter and/or, were you doing Footwear in your outlet stores? I would've thought you would have planned that Footwear business down more significantly versus the numbers last year. Any comment on that?

Kevin Plank

Yes, Robbie, I think when you look at year-over-year in the third quarter, obviously Q3 last year was a pretty big quarter for us, with the back-to-school program around run. So obviously, it makes sense that year-over-year, as we called out Running and Training to be down this year, that Q3 would be down. We have seen some pretty good success in our outlet channel with our footwear, so that helped a little bit offset some of that. But again, you actually saw as we called out consistent with prior quarters, our footwear is down overall.

Operator

Our next question is from Omar Saad with Credit Suisse.

Omar Saad - Crédit Suisse AG

Kevin, I wanted you to elaborate on a comment you made at the beginning on the basketball launch. Under Armour's greater level of confidence, given the experience and key learnings over the last five years of footwear. Could you elaborate and maybe give some examples of things that you've learned in the Footwear business that makes you more confident on the basketball side?

Kevin Plank

Yes, actually I want to give a little more color around footwear in general. So let me take a minute to do that. And if I could drop it into three buckets, which the first bucket is reality, the second is what we've learned and the third being what we're doing about it. So first of all, I want to set expectations for people, and when we talk about what we believe our opportunity in basketball is. We've been pretty clear about saying our goal is to be the number two player in basketball in the next several years. Now keep in mind people that a $1.3 billion market opportunity in the U.S. alone, that's currently dominated by one company through three different brands, controlling 90% plus of the market. So as we say targeting number two, you're looking for about mid-single digits would accomplish that goal for us. That being said, our long-term goal, like it is in every category we enter, is to someday be the number one player, but that of course is going to take time. But as you can tell for our brand, we are thinking more about Under Armour 2020 than we are even about Under Armour 2011. So we've absolutely had a great education in footwear since 2006. And first and foremost, we have listened, and I think hopefully applied most of those learnings to what we're doing through our basketball introduction. First and foremost, the emphasis on use. Winning brand fans over inception versus at age 25. A great example is when we launched running shoes even after training shoes, one of every two pairs of shoes sold in training in 2008 were to use. When we came back in 2009, we didn't sell youth products in the initial launch. So lesson learned. Narrow distribution for the introduction and limited amount of pairs, we put out for the market a fraction of what we've done with other introductions from a total number of pairs in the market. And most importantly, we built around our key sporting goods partners that have been great and terrific with us through this past weekend, as well as incredible support from the mall with both Foot Locker and Finish Line, really doing a great job for us. And then, most importantly, the acceptance that we had from some of the top specialty door, to some of the top urban doors around the country. So there's a lot of lessons to be learned here. And again, it's very early, but the indications are that we're going to get started. And again the one certain thing that we can tell you is that day 365 will be better than day one. And that comes back where I think one of the places where we've been pretty critical of ourselves is what we've done when we introduced the product versus what we do in season two and season three. And what I can tell you with confidence is that season two and season three will be greater at again than we were on day one. And most importantly, we've core tested and approved the product. We'll have 20 division one teams wearing in this fall and throughout several years, 12 Men's, eight Women's teams, 10 UA programs, 30 high school teams, Brandon Jennings in the NBA. I mean we've really taken the time to build a good product. And more importantly, a great product that is a foundation that's something to build on. And then finally, as you know, what are we doing about it? I think the culture of being a basketball company is one of the most important things that we've really been able to evolve into. Not just talking about being a basketball brand, but really walking about being a basketball brand. And a large part of that, you're not allowed to call them six for earnings calls, but I just got back from a week in China visiting our factories and visiting our office in Guangzhou and Hong Kong. So I'm fighting between costs here, but bear with me. But you have to go there and you have to see it. And I can tell you that the partner base, distribution base, the manufacturing base that we have today, the office, the more than 40 people that we have in Asia, the nearly 100 people that we have here, the opened requisitions, the culture of building a Footwear business, and particularly, a pretty successful sport in Basketball business is something we're pretty proud of.

Omar Saad - Crédit Suisse AG

Just to follow up, talking about things that run in the past, with this kind of new cotton product launch, you also alluded to some new channels or new consumer, new markets that's opening up. So can you be more specific in that?

Kevin Plank

Well, I think that obviously the addressable market of what cotton product would be for in large form is a big opportunity. We looked in our athletes store and you'd find that typical teenagers sure you find 30 t-shirts. Four of which were performance, 26 of which were cotton. Of the four, we had three of which were Under Armour and one was another brand. So we're fighting ourselves to try to capture that other fourth T-shirt when we realized looking at the other 26 shirts were a greater opportunity. And so we never had issue or we never had problems with when think about Under Armour getting into cotton, with frankly cotton T-shirts as much as we had issue with non-performance. So the ability for us to make a product that performs is something that we think a, speaks to our existing consumer, as well as opens us up to a new consumer who always just said I'm a cotton person, I don't like Under Armour, which is that synthetic goods. So we think that there's a much larger market opportunity there. Again, for consumers that are walking through existing distributions and then, of course, I think there's probably a bigger opportunity as we think about where we can go, where we haven't been able to go before because we didn't make cotton products.

Operator

Our next question is from Taposh Bari with Jefferies.

Taposh Bari - Jefferies & Company, Inc.

Kevin, you talked about in your prepared remarks about service brand experience. Maybe give us an update on your latest thoughts on your retail strategy? Obviously, your outlet stores are doing very well. Any update on where you stand on full price retail?

Kevin Plank

We have no plans to open any additional specialty stores in 2011, but you're going to continue to see us test the market as well. For instance, we got a great pop-up store that you'll be seeing in New York City in November, right around the marathon and right around our ability to find out what we can do at holiday. As we look at distribution U.S. and where we're under-penetrated as a brand, one of the vehicles we consider is the Direct-to-Consumer Business as a whole. And that's includes both retail as well as our Web business. Our goal with owned retail is to supplement our existing distribution to get to that consumer, because we think there's still a lot of places where still frankly were under-penetrated. And so by offsetting or frankly augmenting our existing distribution base with the appropriate full price strategy is something that may make sense in the future, but we have a long way to go and we have a lot of work to do with our existing account base. But you look at where the most comprehensive branded story is told for the Under Armour brand, and we have some great distribution partners that make that happen. But in a lot of cases, it's an outlet store. It's Branson, Missouri where we opened up our first outlet, and on day one, we'll have 53 outlets by year end. For the place like at Branson, Missouri on day one, we sold nearly $60,000 out of a 5,000 or 6,000-square-foot store in the opening day. And you think about what that opportunity means for us from the having the ability to continue to find pockets where Under Armour brand and frankly the need from the consumer for the Under Armour brand are not met, I think we want to be and remain thoughtful with that.

Taposh Bari - Jefferies & Company, Inc.

It seems like there's some exciting new product launches scheduled for next year. Can you maybe give us an update or some kind of idea of timing for this new cotton fabric and also I guess running 2.0?

Kevin Plank

Well, as we mentioned, we basically, I haven't told you anything about cotton yet, and so just giving the indications. So there's a lot more indication, that, and you'll see that around the first quarter of 2011. We have a lot of great products out right now, probably some things and just some one-offs that we're really excited about this, out of the marketplace right now is our new Ego ColdGear, which in the past, if you've ever said tried an Under Armour compression cold weather shirt, we should say that two best times of a day, at the minute you put it on and the minute that you take it off. And so imagine putting an Under Armour shirt, not being a full contact sport, something more excited about this new fitted product. So we think this opens up again to a much wider, more addressable market as well for people that aren't really looking for super compression. So it's a little more of a relaxed fit, and I think with all of the benefits and properties of Under Armour. So a lot of new product categories like that, but I think that performance that you're seeing with 30-plus percent net revenue growth in Apparel, it speaks to I think the trust that we have for the consumer and the fact that we have a pretty good thought leadership position when it comes to apparel.

Taposh Bari - Jefferies & Company, Inc.

Any indication on when jeans, new running products should be expected at retail next year?

Brad Dickerson

Well, it's consistent. You're not going to see one big great new launch. What you're going to see is consistently better product in the marketplace. And again, we feel very good about the product that we have there. Now we feel very good about the product that we have there now. We feel very good about the product we have in 2011, which is why we've taken some of the steps backwards to reset in 2010, that sets us up for position to have clean inventory and to grow attractive business in 2011 and especially heading into 2012. So what you're not hearing us say right now are any major predictions. What you are hearing us say is that 2011 will be bigger than 2010, that basketball be an important part of what we're doing. And that we have great confidence that for the long term, both Running and Training are going to be important categories for our brand.

Operator

Our next question is from Kate McShane with Citi Investment.

Oliver Chen

It's Oliver Chen for Kate McShane. We had a question related to gross margin and looking for it in relation to product costs. Do you feel that your business model has sensitivity to any of the recent escalation in cotton prices? And if so, kind of what is the base case assumed for that outlook? And secondly, for modeling purposes, what kind of -- should we be projecting an inflection towards positive footwear growth as soon as first quarter 2011? Is there any kind of feedback around how to think about that?

Brad Dickerson

Sure, this is Brad. As far as gross margin goes, I think the important thing to note is that still for us it's consistent with what we said in the past. That's the biggest drivers of gross margin for us. We'll continue to be the growth in two businesses for us. One, our Direct-to-Consumer business, which positively impacts gross margins and two, growth in our Footwear business, which we've called out right now impacts our margins negatively from a gross margin perspective. So those two really will still continues to be the biggest drivers of our gross margin story going forward. To your point around some of the pricing issues. We are kind of rolling up our prices right now for the back half of 2011, thoughts on work to do on that. So we'll get some more details around gross margin in the next earnings call. I think the important thing to point out though is that we don't anticipate cotton, as a percentage of overall business to be a significant driver of our cost. So from that perspective, I don't think cotton will have a negative impact for us in 2011. But again, we'll get more detail around margins in the next earnings call. As far as Footwear growth and timing of Footwear growth, I think what you should anticipate is probably Q2 and Q3 kind of being the quarters that have the best footwear growth, and that really is more around the back-to-school season. So to Kevin's point before talking about some of the categories of footwear, I think you're going to see the most impactful growth in Footwear on Q2 and Q3.

Operator

Our next question is from Eric Tracy with FBR Capital.

Eric Tracy - FBR Capital Markets & Co.

Maybe if I could just follow up a little bit more on the Footwear side and Basketball in particular. I know you don't give specifics next year but just in terms of, is there sort of a goal or a market share grab you expect to what's embedded in that top line guidance for next year?

Kevin Plank

In basketball, like I said, I think we've got a few years to start really showing up in terms of absolute market share. So our number one goal right now is learning the cadence of how to work within that category, getting the consumer acceptance from the athletes on court, and then of course building up a little bit excitement around some very key and limited doors. So there's nothing from a basketball specific. In terms of footwear overall market share, we're thinking more about how that compares to ourself, what are we doing to ensure that footwear in 2011 again is greater than it is in 2010.

Eric Tracy - FBR Capital Markets & Co.

And then just on footwear margin side, as we think about next year again from a gross margin, it sounds like it still is a little bit of a pressure, but sort where we are in the stages of scaling that business up to sort of leverage the costs that have already put in, or we have that inflection point next year? Or are we still working through that?

Brad Dickerson

Yes, Eric, this is Brad. I think from the margin side, we still, we calling out about 1,000 basis point plus opportunity in margins in footwear, longer term. We continue to see that opportunity longer-term in 2011. I think from a margin perspective, you'd probably see something similar to what we've seen in 2010, some puts and takes to get to. But we'll give a little bit more detail on that in the next earnings call.

Eric Tracy - FBR Capital Markets & Co.

And I know you don't want to get too specific on the gross margin side, but certainly you got the pieces of Direct-to-Consumer helping, but in terms of some of the takes again around these product costs inflation, not just cotton but be at labor or freight, even polys continue to escalate. Is that obviously, and as we think the back half of the input costs there embedded within your sort of guidance already or is it still you're working through relative to the sort of price increases you think you can take to offset?

Kevin Plank

Yes, our guidance takes into account the visibility we have today, which is pretty good on spring, summer. On fall, winter, we're still kind of working through that. So that's why we're not able to give so much detail until the next earnings call. But just to kind of reiterate again from an apparel perspective, when you talk about labor costs, less than 10% of our apparels manufactured in China. So China labor is less of an impact to our Apparel. It's a little more of an impact to our Footwear margins, which is a small percentage of our business obviously affected before cotton. Although, incremental top line for us in 2011 still relatively small percentage of our overall business. But we're kind of working through all of those margins and give you a more detail in the next call.

Operator

Our next question is from Michelle Tan with Goldman Sachs.

Unidentified Analyst

It's Nicole [ph], filling in for Michelle. We wanted to see if you could give us an update on your international efforts? And is there any new initiatives that are driving the strength in that market?

Kevin Plank

Yes, it's Kevin. So I think, first of all, our goal is to be a global brand, which we defined that is being more than half of our revenues should come from outside of our home country. And so in doing that, we have a long road in front of us, with 90% plus of our business coming within North America today. That being said, we've got great confidence of what global can mean. So as we think about global, there's three regions that we consider, that the Americas, Asia, and Europe. In Asia, I think that we've weight from great groundwork, again with Dome Corporation demonstrating that our brand a does translate, and the success that we've seen with Dome Corporation passing a USD $100 million, it's been 10 years to get to that point, but I think that they are really positioned to start scaling and start leveraging their business as well. And so, again, it took seven years to get to the first $35 million, and just three to get over $100 million since then. So we feel like that the tipping point effect is something that's taking place there. And again, it helps lay a little bit of a model as we think about other, particularly Asian countries. So China is the next one that we have on the map. And as we think about entering China, we're going to do it very conservatively. And within the next several months, we expect to have a shop-in-shop up in China at some point and opening our first full price store in 2011 as well. So again, all of that has been around putting to work all of the studies and all of the market research that we've done to date, putting ourselves in a position to enter that market. But again, as we see or what we found with entering other countries is that the first five years are about understanding culture and understanding on building your teams. So we've got a very long-term plan with that, and we're very fortunate to have an Apparel and a Direct-to-Consumer business that allow us to make these kind of investments. Europe, for us, is a place that we continue to believe in. And again passing that five-year mark, we're in a point where we think that Europe is something that poised for growth for us as well. As we said, our International business is up over 6% of the quarter, 59% year-to-date, so we feel very good about and encouraged by what we're seeing internationally. But it's all up of the small base and something that we think over time, again, our goal is to build out that global base where half our revs are coming from outside of America.

Operator

Our next question is from Sam Poser with Sterne Agee.

Sam Poser - Sterne Agee & Leach Inc.

Could you talk about how many stores do you have right now, and what is your store growth plan into next year?

Kevin Plank

Yes, Sam. Right now, at the end of the third quarter, we have 50 Factory House stores. And obviously, we still have a four full specialty stores on top of that. We anticipate opening another four Factory House stores in the fourth quarter, So we'll end the year with about 54 stores. And next year, right now anticipate building approximately 20 new Factory House stores in 2011. There'll be a little more on front end loaded to as far as opening than we've seen in previous years too.

Robert Ohmes - BofA Merrill Lynch

And then, the big basketball launch that's going to happen next year, the big basketball launch that you're going to do next year when it's no longer just an eye dropper, that's going to be more of a back-to-school event rather than third quarter based on what you said?

Kevin Plank

Yes, no. I think, Sam, is that, we haven't said any major launches next year. I think one of the lessons learned that we have figured out of being in footwear for the last five years for us is not putting that big bull's-eye on any particular date. And so what you see now is, I called it a little more than a slow roll. But we're looking to basically create some market want and desire or need from the consumer. And we now have that platform from a distribution standpoint. I think we like the partners that we have selected right now. I think we have a great balance between our core sporting goods guys, mall channels as well as some of the specialty urban doors. So we're going to basically go where we find heat, and we see that with a product standpoint. As I mentioned in my comments, I do want to make sure it doesn't get lost is that when I say we'll be greater on day 365 than we will be on day one is that we feel great confidence in the product that we have out there and we'll be able to start looking at future seasons to come. What we have coming in the spring, what we have coming next summer and we look at what we have coming next fall. And so there's no big surprises that we're waiting for what the product's going to look like. But it's been tested and we're working with that in our teams are now. And I think we feel very good about the progression and majority that's going to be basketball footwear for the Under Armour brand.

Sam Poser - Sterne Agee & Leach Inc.

The comps, how did you comp in your retail stores? And what is the breakout between made for goods right now and selling markdown product, just all of the products that we just start products?

Brad Dickerson

Sam, so I think we don't really talk about comp percentages at the retail stores. What I will say is that's probably the benefit we can see from a made-for strategy to some degree is better comp year-over-year. That helped obviously at our product assortments, it's been a better consumer experience within our outlet stores themselves that helped our comps more than anything. As far as made for itself, I think the industry range out there right now is about 75% to 95% made for in the factory store base. We're well below that as a brand right now. And year-over-year, we're probably -- even though we're below that year-over-year, we're probably about double our made for last year at this time.

Operator

Our next question is from Jim Duffy with Stifel, Nicolaus.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Couple of questions around footwear sourcing. Can you speak to the progress you're making on cost there? And whether are some of the keys to getting better leverage on the footwear gross margins? Is it really just a volume thing? Or are there some other aspects of it that should represent inflection points for you?

Brad Dickerson

Jim, I think volume definitely plays a part. Obviously, when you look from a tooling perspective, the more volume can have on your footwear side. It helps to offset some of those upfront tooling costs. So that would always help. Our footwear team and specifically, our sourcing team within footwear has been doing a lot of work around short-term and long-term strategies of sourcing to be able to be more flexible going forward with our source base, and really put us in a position just from a product category perspective to improve margins across the board pretty much in all categories for longer-term. So as I spoke about before, we think there's a lot of opportunity on the footwear side margins, 1,000-plus basis points we think, it's going to take some time. But right now, we're kind of working through that strategy, and we anticipate seeing some benefits from that in future years.

Kevin Plank

And Jim, just coming back from Asia and spending time at our factories where our key partners too is part of that learning progression over the last five years has been us becoming a better customer to the vendors we do business with as well. And so erratic buys and some of those things when you just don't know the size of the business and you're learning and getting your molds and your laps and all the amortization that you're going through, so there's some significant start up costs. When we open footwear five years ago, we started getting into that category, we had one partner. We had 13 people on our team. Today, we have, with outsourced development, outsourced design, today, we have five or six key partners that we're working with. We have an office in Guangzhou, we've got 40 people in Asia. We have 100 people here, we have 30 up for requisitions from new people joining the team. So we've become a lot smarter, but we've come a lot bigger, but I think we have become a lot smarter about this. And a lot of the infrastructure build that we've had, even with categories that we haven't been in yet like basketball we're now a, starting to see some revenue come in there, it's also beginning to apply a little bit of an consistency with some of our factory base because when we started as a football company, that was seasonal. And with factories, like anybody wants as they want the ability for 12 months of production that can smoothen out and some other things. So we're becoming a better company customer, which are allowing us to be more strategic and thoughtful about a, where we're manufacturing and where we can take advantage of appropriate local conditions to take advantage of the costs and some of the other things. But I think that's giving us -- we're again much more mature as a Footwear business today than we were obviously five years ago.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

So, Kevin, are you working with fewer factories and trying to concentrate your sourcing through factories just to get some captive capacity? Or help me understand the dynamic there as to how you're securing capacity and how that's helping you from a cost standpoint?

Kevin Plank

We're not alike our Apparel business is that we want to have a few key strategic partners. And so I wouldn't saw three partners on this last visit in six or seven different factory locations, but we can minimize sort of geographic risk and geopolitical risk and some of those things. And I think that the world of footwear manufacturing is going to move very quickly beyond just China. And so that's one of the things we have to be thoughtful with. And again, we're working with very large-scale partners who have that ability because we want to be very important to a few partners versus trying to have a lot of those relationships.

Operator

Our next question is from Matt McClintock with Barclays Capital.

Matthew McClintock - Barclays Capital

With all the folks on basketball, I just wondered if we can get an update on the Cleat Business. What trends have you been seeing in market share in this category? Is the company still building on this position? And granted that there won't be any major launches next year, but should we see anything exciting in this category next year along with training and running?

Kevin Plank

Yes, well one thing that's exciting, I mentioned to some of the authenticity that we have with some of our collegiate properties that we'll have wearing our footwear from both baseball and national champion baseball winter, University of South Carolina to the number one team in the country on the collegiate level and Auburn University to just re-upping our deal and more importantly, expanding our deal with the NFL by taking over combine but ensuring that our athletes will be wearing on our football cleats and football gloves beginning in 2011 as well. Market share on the cleated categories continues to grow and expand for us. And so, we see continue to take market share in 2011 in both baseball and basketball cleats. And so it came out on a very small categories, they're also very strategic and very important categories for us. And we think gives us a great foundation and a great base as we continue to build on things like our training footwear as well as give us the credibility of going after categories like running and some of the bigger platforms like basketball as well.

Operator

Our next question is from Chi Lee with Morgan Stanley.

Chi Lee - Morgan Stanley

Kevin, can you just talk about have you guys been able to manipulate the supply chain so that you'll be able to read it and re-up on basketball to what you're seeing at retail business, what you guys we're able to do with running or training?

Kevin Plank

Number one is that we're not looking to be reactive with any of the categories that are running right now. And so, I think we're putting a very firm plan in place and the ability for us to chase, something we could think about long term. But frankly, we don't need the revenues. And so, we're not -- we're very fortunate to have the strong Apparel business that we do that allows us to be thoughtful and strategic. And so when we say we've issued a taste of basketball footwear, there's a much more demand than what we're putting into the market. And again, we're selling at about a fraction of what we've done with other categories that we've entered. And so, we're positioning this as, this is a long-term three- to five- to 10-year plan for us to look to become the dominant and leading player in every category where we were participating.

Chi Lee - Morgan Stanley

I guess my question wasn't so much on the quantities and being able to actually chase quantities, but actually being able to manipulate either design or actual qualitative aspects about the product?

Kevin Plank

Yes, I think that we stayed very close to consumer. Today alone, I mentioned that 12 Men's and eight Women's Division One teams that we have to more than 10 AU programs, the 30 high school teams. So hopefully, we're doing a lot of that work upfront, and we're finding out what the consumer wants. But shortening and staying closer to consumer, shortening those lead times and staying closer to the market, I think that's everyone's goals. But in footwear, we want to be careful before we try to reinvent the wheel. We want to understand the way that we can deliver a great product to consumer. And that unfortunately today's working with an 18-month calendar. So that creates its own limitations, but we're trying to shorten that anyway that we can. But right now, again, I think most important, the one thing you'll find about our basketball is that some people will like it, some people will not like it but it definitely has a point of view. And it's something that we're very proud of and we feel very good about the way we're coming to market with that product.

Chi Lee - Morgan Stanley

Just Brad, following up on the gross margin, can you talk about what categories you saw and the higher liquidation sales year-over-year in 3Q? And as I looked at your fourth quarter guidance, it seems to imply some acceleration in the gross margin trends 4Q from what we saw in 3Q. Is that just an expectation that those liquidation sales will go away?

Brad Dickerson

Yes, I think on the liquidation side, I won't get too caught up on the components of that. I mean as a percentage of revenues, although in the apparel side, it's a little bit higher. As a percentage of revenues in Q3 this year versus last year, it's still very, very small part of our revenue base. And usually, right now, on the liquidation side, we've obviously seen a lot of success in our outlet channel liquidating apparel. So from a third-party liquidation perspective, it's more kind of a one-off things that are a little bit more difficult to liquidate but we look to do that with. As far as -- I'm sorry, what was your second question again?

Chi Lee - Morgan Stanley

Just in terms of what I think the implied fourth quarter gross margin seems to imply something like 170 bps or so improvement year-on-year. Is that just really driven by lower liquidation sales vis-à-vis 3Q, just help us understand the drivers?

Brad Dickerson

Yes, I think I would anticipate your fourth quarter margins to be relatively similar improvement as your third quarter margins. Again, strong Direct-to-Consumer quarter as it has historically has been for us. And also on the Footwear side, with the taste of basketball, I think you'll see a positive impact in the top line from footwear also. Although it's a small quarter for us, we'll be able to do a positive impact there. So that may offset some of the Direct-to-Consumer benefit.

Tom Shaw

Operator, we're done.

Operator

Thank you. Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect, and have a wonderful day.

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