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Under Armour (NYSE:UA)

Q3 2011 Earnings Call

October 25, 2011 8:30 am ET

Executives

Brad Dickerson - Chief Financial Officer and Principal Accounting Officer

Tom Shaw -

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

Analysts

Sharon Zackfia - William Blair & Company L.L.C., Research Division

Eric B. Tracy - FBR Capital Markets & Co., Research Division

Omar Saad - ISI Group Inc., Research Division

Camilo R. Lyon - Canaccord Genuity, Research Division

Joseph Parkhill - Morgan Stanley, Research Division

Michael Binetti - UBS Investment Bank, Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Under Armour Third Quarter Earnings Webcast and Conference Call. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to introduce your host, Tom Shaw, Director of Investor Relations. Please go ahead.

Tom Shaw

Thanks, Stephanie. Good morning to everyone joining us on today'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 in which the statement is made or to reflect the occurrence of unanticipated events.

Joining us in today's call will be Kevin Plank, Chairman, CEO, and President; followed by Brad Dickerson, our Chief Financial Officer, who will discuss the company's financial performance for our third quarter, provide an update to our 2011 outlook, and introduce our preliminary outlook for 2012. After the prepared remarks, Kevin and Brad will be available for a Q&A session that will end at approximately 9:30 a.m. I will then close with a tentative date for our fourth quarter 2011 earnings call. Finally, a replay of this teleconference will be available at our website at approximately 11 a.m. Eastern Time today.

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

Kevin A. Plank

Thanks, Tom, and good morning, everyone. One of the internal mantras that we use here at Under Armour is "focus and finish." Its purpose is to remind ourselves that while the strength of our brand has created abundant prospects for growth, we will be measured on our ability to fully harvest these opportunities in new product categories and geographies. So we look at where we stand at the end of our third quarter, I want to start today with how we are focusing and finishing in our apparel business, and how that is driving us for continued strong results we reported this morning.

Our performance in apparel year-to-date has helped enable us to pass last year's full-year revenue number of $1.06 billion in just three quarters this year. In the third quarter, we put up a net revenue increase in excess of 40% for the second consecutive quarter. And not to steal all of Brad's thunder, but third quarter apparel net revenues increased 31%, the fourth consecutive quarter of growth in excess of 30%.

So while we continue to lay the foundation for growth in categories like footwear, and new markets like China, we are achieving these strong results by focusing and finishing on the opportunities we see in our core apparel business. Specifically, we're seeing great success in our twofold strategy of innovating to drive better performance product with higher prices in our core, while expanding our reach beyond our core with new products like Charged Cotton. Let me start with our core though, and specifically Armour Fleece, which is exceeding our expectations in helping us drive higher price points at retail. Armour Fleece is our signature synthetic-based fleece with a soft-brushed inner layer in the inside and a lightweight fast drying outer layer. Armour Fleece is helping Under Armour, again redefine the performance category. Much like we did with the basic T-shirt, we have taken the basic hoodie, the go-to apparel product for our core consumer, and raised expectations of what that product can be. And it has enabled us to bring new price points to retail as well. With hoodies ranging from $50 to now more than $75. All of this with the consumer who has been accustomed to playing less than half of that for a hoodie in the past. This is a great example of focusing and finishing, as we take our strategy of reinventing the basics and being performance to the garment. Our Charged Cotton Tees are redefining the T-shirt category and our Charged Cotton Storm Fleece, which I'll speak to in a moment, is the initial phase of redefining that very large category as well. We believe we are one of the very few brands that continue to bring a true performance message to the athletic consumer and that's enabled us to continue raising our consumers' expectations and driving the performance apparel category, which continues to be a bright spot for the industry. Under Armour remains the market leader performance apparel, especially as we continue to take our average selling price up in an environment where others have chosen not to or have been unable to do so.

So while Armour Fleece is driving great volumes and higher price points on its own, we're also bringing the first of our cold weather Charged Cotton Storm product to consumers, and this latest innovation from Under Armour is up to a great start. Storm is really the next generation of protection. We've taken the classic cotton heavyweight sweatshirt with it's heavy weight feel and make it water resistant, so water rolls right off. We're bringing this product to market at price points from $60 to $100 and again, without sounding like a broken record, our consumer has shown a willingness to pay a premium when we can change the way an athlete uses our product. And that's what Charged Cotton Storm does.

So we think there's a great opportunity here for us to build another wheelhouse product in Charged Cotton Storm. As we've said before, using cotton opens access to the Under Armour brand to a much broader range of athletes. Instead of competing to have 3 out of the 4 compression garments they may have in their closet, we're now competing for share of the 30 plus garments, many of which are cotton. Or to put it in a more quantifiable measure, we've gone from competing for share in a $3 billion category, just a year ago, to competing for share in a $12 billion category today. And that's why the phrase, focus and finish, is at the heart of what how we see the business at this point in our growth. We know there are abundant opportunities for our brand outside of our core and outside of the U.S. but we will not pass up the opportunity to create these new building blocks in our core while the same time bringing the Under Armour brand to new consumers. Innovations like Armour Fleece and our Storm product also give us a much larger tool box of products as we expand outside the U.S.. And we will continue to consistently flow UA innovations to consumers, with next-generation technologies like Coal Black, that reflects heat and UV rays before they get to you. Imagine staying 10 degrees cooler in the summertime because of the effect of the material on your body. That is Coal Black and it's an innovation coming to the market next spring.

I said before that Under Armour remains the market leader in performance apparel. Equally important is that with technologies like Charged Cotton and Coal Black, we remain the thought leader of performance apparel and believe the continued strength in our apparel business is the true indicator of our relentless focus on innovation and what's next. One of the benefits of our success in apparel is that our core sporting goods distribution continues to allocate more space to the Under Armour brand. We launched the first of our All-American shops at Dick's Sporting Goods this quarter. And it's really the pinnacle of presentation for our brand within sporting goods. As you can imagine, we have a much more richer story to tell our consumer at retail these days, and these shops enable us to present the brand in a much more powerful way. We have 50 All-American and Dick's open to date, with many, many more to come and we're also significantly upgrading our retail presence in other key partners including the Sports Authority, and Academy Sports and Outdoors.

Beyond sporting goods, our brand is having an impact within the department store channel. As our initiatives in women's, youth, and underwear extend the reach of the Under Armour brand. First, within Nordstrom, our women's assortment has seeing very strong sell-through's and our footprint continues to expand. Secondly, our licensee of product for infants and toddlers is outperforming, as we get traction in the department store channel. We'll grow our department store presence in youth going into 2012, not only as that younger license business grows, but as we add new doors with our own youth product for older kids. And third, we see the expansion and relaunch of our underwear program, in 2012, as a key driver for our department store channel as we will offer a differentiated assortment and widen the distribution within this channel where consumers shop for their underwear already.

In footwear, the arrows continue to point up as our third quarter business grew 97% to over $50 million. Through September, we have already surpassed what we did in all of 2010, and our sell-through's over the past 6 months give us the confidence that our footwear is resonating with consumers. That confidence in running has come through great product at tiered price points, starting this past Spring with the Assert at $70, then the summer with the Split at $90. And just this past month, with our strong introduction of the Charge RC at $120. Just as we are expanding our reach within department stores with new women's, youth, and underwear programs, the traction we are getting in footwear brings us to new consumers through key mall partners such as Foot Locker, and the Finish Line. As we've said before, it's about getting the product to look and feel like Under Armour and running shoes, like the Split, Charge RC, and some of our upcoming basketball footwear definitely capture our DNA. By focusing and finishing on the needs of the athlete, our footwear team has shifted the conversation on footwear from if to when. And this quarter's results reflect the progress our team has made.

Outside of the U.S., the Rugby World Cup just concluded this weekend, and this event gets one of the top 4 global TV audiences. Behind only the Olympics, World Cup, and the European soccer Championships. The Welsh Rugby team made their way to the semis outfitted in their Under Armour, Armour Grip Kits, putting the Under Armour brand in front of hundreds of millions of new consumers. In China, we're very pleased with the results from the small sample we've seen since opening our first store in Shanghai, our brand position there is firmly rooted in performance and we believe that our longterm opportunity in China will be grounded in sport, just as it will be anywhere we take the Under Armour brand.

On the team front, you hear me consistently talk about building the foundation for growth. We made 2 key appointments that we believe are important steps in assembling that right team for this next phase of our growth. First, Kip Fulks, who has been with Under Armour since the beginning and has the most complete knowledge of our products and processes, has taken over as COO. He'll continue to oversee design and development of all product and has added oversight of our sourcing information technology areas. As today's results illustrate, product development has been an Under Armour strength, and Kip has helped lead these efforts. We believe this operational knowledge and insight will help us build the right team for an improved supply chain that is aligned with the strength of our product and brand.

On the brand front, we are officially announcing today that Stewart Redford [ph] has joined Under Armour as Senior Vice President of Global Brand. Stewart brings a wealth of global brand management experience, most recently at Sony Electronics where he served as Senior Vice President of Corporate Marketing. That global knowledge will be critical as we continue leveraging the Under Armour brand into categories and geographies. As we look to harvest these new opportunities for our brand, we'll remain focused on what drove our success. We will continue to do more with less. Whether it's with the next generation of great athletes like Cam Newton or bringing innovation to the college football uniform. Under Armour will continue to grow by speaking with a disruptive voice across broadcast and social media. We will focus and finish, and continue to drive innovation for our consumers, and value for our shareholders.

And with that it, I'll throw it over to Brad Dickerson, our CFO, and then we'll be back later to take your questions. Brad?

Brad Dickerson

Thanks, Kevin. I would now like to spend some time discussing our third quarter and year-to-date financial results, followed by our updated 2011 guidance. I will conclude with our early read on 2012.

Our net revenues for the third quarter of 2011 increased 42% to $466 million. Year-to-date net revenues are up 40% to $1.07 billion. Apparel grew 31% to $363 million during the quarter and is up 33% year-to-date. We continue to experience strength across each of our men's, women's and youth categories. Our Men's business was driven in part by growth in training category, including Armour Fleece and Storm Fleece, while both graphics and hunting easy outpaced overall growth during the quarter. In Women's, Armour Fleece continued to be a standout, and we also saw strong growth in running led by our skate program of both tops and bottoms. Our direct-to-consumer net revenues increased 73% for the quarter, representing approximately 22% of net revenues compared to 18% in the prior-year period. The growth rates for both the retail and e-commerce business were strong during the quarter. On the retail side, we opened 4 new Factory House stores during the third quarter increasing our Factory House store base to 76, up over 50% from 50 locations at the end of last year's third quarter. We plan to open 4 additional Factory House stores in the fourth quarter, bringing our total Factory House store count by year end to 80. Our e-commerce growth remains robust as we continue to drive both higher traffic and conversion rate year-over-year. In addition, we expect our new Web platform to go live over the next few weeks, with enhanced features and functionality added during 2012.

Footwear net revenues during the third quarter increased 97% to $52 million from $26 million last year, representing 11% of net revenues. We had solid results with our back-to-school running product led by the Split and strong consumer response to our New-Line of outdoor boots. From a timing standpoint we shipped the bulk of our basketball footwear during the third quarter this year, compared to our initial product last year, which launched in the fourth quarter. In addition we continue to introduce footwear to our Japanese consumer through our licensee Dome by shipping nearly $5 million of product to Dome during the quarter.

Accessories net revenues during the third quarter increased 211% to $40 million from $13 million last year, reflecting the addition of our hats and bags business, which we brought in-house in January, and has received strong consumer acceptance. We are on track for our hats and bags business to contribute $65 million to $70 million to net revenue for the full year 2011.

International net revenues increased 53% to $33 million in the third quarter, and represent approximately 7% of total net revenues. The footwear sales to Dome that I had previously mentioned also played a significant part in the growth rate of our International business during the quarter. Licensing net revenues declined 18% to $10 million in the third quarter driven, as expected, by the transition of our hats and bags business in-house.

Third quarter gross margins contracted 250 basis points to 48.4% compared with 50.9% in the prior year's quarter. Results were largely in line with our prior guidance and primarily reflect 3 factors. First, in North American apparel, less favorable product mix and higher input costs negatively impacted margins by 140 basis points. Second, a lower mix of licensing net revenues negatively impacted margins by approximately 70 basis points. And finally, an unfavorable year-over-year impact of inventory reserves, net of benefits and discounts in sales allowances negatively impacted margins by 40 basis points. It is important to note that the prior year period margins benefited from a reversal of inventory reserves.

Selling, general, and administrative expenses as a percentage of net revenues leveraged 130 basis points to 32.3% in the third quarter of 2011, from 33.6% in the prior year's period. Details around our 4 SG&A buckets are as follows: First, marketing cost declined to 10.4% net revenues for the quarter, from 10.9% in the prior-year period. Once again, our strong top line allowed us to leverage marketing cost which increased 35% during the period. Second, selling costs increased to 7.9% of net revenues for the quarter, from 7.1% in the prior-year period. Primarily driven by the continued expansion of our Factory House stores and investments in our e-commerce business. Third, product innovation and supply-chain cost held steady year-over-year at 7.7% of net revenues as we continue to invest in these areas to support our long-term growth. And finally, corporate services decreased to 6.3% of net revenues, compared to 7.9% in the prior-year period as we leveraged corporate personnel, facility expenses, and IT.

Operating income during the third quarter grew 32% to $75 million compared with $57 million the prior year. Operating margin contracted 120 basis points to 16.1% from 17.3% in the prior-year quarter. Below the operating line, other expenses increased to $2.7 million from $700,000 in the prior year's period. Two factors drove this increase. First, given the sharp decline in the Canadian dollar and Euro late in the quarter, we had a little over $1 million of net foreign currency exposure during the period. Second, we experienced a $1 million increase in interest expense related to the debt assumed for our acquisition of our corporate headquarters. Our third quarter tax rate of 36.3% was favorable to the 37.7% rate in the prior year period and our previous 40% guidance. The lower tax rate during the quarter was a function of favorable developments in our ongoing tax planning strategies including a benefit of $1.8 million during the quarter. As a reminder, during the third quarter of last year, we benefited from the receipt of state and federal tax credits.

Our resulting net income in the third quarter increased 32% to $46 million compared with $35 million in the prior year period. Third quarter diluted earnings per share increased 29% to $0.88 compared with $0.68 in the prior year. Results include the aforementioned tax planning strategies which benefited EPS by approximately $0.04.

Switching over to the balance sheet. Total cash and cash equivalents at quarter end declined to $68 million compared with $134 million at September 30, 2010. From a funding perspective we borrowed $30 million from our $300 million revolving credit facility. Given the level of cash flow we typically generate in the fourth quarter, we expect to fully pay down these borrowings during the fourth quarter. Long-term debt also increased to $80 million from $19 million in the prior year's period, reflecting the acquisition of our corporate headquarters. As we outlined last quarter, this debt consist of a $25 million term loan and a $38 million assumption of debt at cash to the property.

Inventory at quarter end increased 63% year-over-year to $319 million compared to $196 million at September 30, 2010. Although still exceeding our net revenue growth rate of 42%, our inventory growth rate has moved more in line compared to the second quarter inventory and net revenue growth rate of 74% and 42%, respectively. Two factors to consider in the third quarter inventory growth are transition of our hat and bags business in-house, and higher input cost. Excluding these 2 factors, inventory would have increased approximately 52%.

Our investment in capital expenditures was approximately $13 million for the third quarter and approximately $45 million year-to-date, excluding capital expenditures related to our acquisition of our corporate headquarters. We are now planning capital expenditures for 2011 in the range of $50 million to $53 million compared to our prior indication of the high end of the $45 million to $50 million range. In addition to our normal operating capital expenditure plan, we have approximately $63 million in total investments for 2011, related to the purchase of our corporate headquarters and other investments and improvements in the campus.

Now moving on to our updated outlook for 2011. Previously, we anticipated 2011 net revenues of $1.42 billion to $1.44 billion, an increase of 33% to 35% over 2010. And 2011 operating income of $155 million to $160 million, an increase of 38% to 42% over 2010. Based on third quarter results and our visibility for the remainder of the year, we are raising this full year 2011 outlook. We now anticipate 2011 net revenues in the range of $1.46 billion to $1.47 billion, an increase of 37% to 38% over 2010. And 2011 operating income in the range of $159 million to $162 million, an increase of 42% to 44% over 2010. Our current guidance implies full year operating margins of between 10.9% to 11%, leveraging 30 to 40 basis points from the 10.6% level achieved in 2010.

Similar to my comments in the quarter, other expense should remain higher year-over-year as we incur additional interest expense tied to our headquarters acquisition. With the benefits of our ongoing tax planning strategy during the third quarter, we now expect to see an effective tax rate of approximately 38.4% for the full year. As a reminder, our full-year effective tax rate in 2010 was 37.1% due in part to the one time tax credits received in both the third and fourth quarters last year. Finally, we anticipate fully diluted weighted average shares outstanding in the range of $52.5 million to $52.7 million.

Now, I would like to add some additinal on our outlook for the remainder of 2011. First, regarding gross margins. Consistent with our previous guidance, we continue to anticipate a 160 to 180 basis point decline in gross margins for the full year. The contributors to this decline are unchanged and our primarily due to lower apparel margins driven by higher input costs and the transition of our hats and bags business in-house. Second, a little additional color on SG&A. We previously indicated that marketing spend would equate to 11.3% to 11.5% of net revenues. While we expect a consistent level of dollars spend, as implied in our prior guidance, our higher top line guidance should allow us to leverage this line to a greater extent. We now expect marketing spending, as a percentage of net revenues, between 11.2% and 11.3%. This additional leverage in marketing will be offset by higher spending in selling costs related to our direct-to-consumer business as we continue to invest to drive current and future growth.

And finally regarding inventory. We closed the gap between inventory growth and revenue growth during the quarter and continued to anticipate inventory growth moving more in line with net revenue growth during the fourth quarter. As we highlighted on our last call, we believe we are continuing to make the right investments across supply chain and planning to help stabilize and then improve our inventory turns and fill rates in 2012 and beyond.

Before we turn it over for Q&A, we would like also to provide you with our preliminary review for 2012. Based on our current visibility, we anticipate both 2012 net revenues and operating income growth to be at the higher end of our longer-term growth targets of 20% to 25%. While we will provide additional details on our 2012 guidance in future calls, there are a couple of preliminary factors to consider when comparing 2012 growth to our updated 2011 guidance. First, we will anniversary the hats and bags transition in 2010, which is providing over a 6% lift to this year's net revenue growth. Second, we are planning for Factory House store growth of approximately 20% to 25% in 2012 compared to nearly 50% in 2011. An additional consideration for 2012 is our tax rate. As a function of our ongoing tax planning strategies we expect our effective tax rate 2012 will be at or below the 38.4% level forecast for 2011.

We will now like to open up the call for your questions. [Operator Instructions] Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our next question comes from Eric Tracy of FBR Capital Markets.

Eric B. Tracy - FBR Capital Markets & Co., Research Division

So, yes. I guess, Kevin, if we could first touch on footwear. Obviously, quite a bit of traction here, more than anticipated. You say not if but when. Can you talk about the cadence? How we should talk about that business playing out. I know you're not going to talk, specific about product introductions, but now that you've got this traction just talk about the potential for new platforms coming out as we think about FY 2012.

Kevin A. Plank

I think going back to 2010, we took a lot of the pressure off of footwear. Our plan was to reposition, recalibrate, effectively relaunch footwear. And we did that through leadership, we've done that through product, we've done that through cleaning up our inventory in the marketplace and so we feel really good about where we sit from footwear today. And when you look at the way that we've layered in product, we took a very patient approach and frankly, because of the other growth drivers that we have, with DTC and apparel, it's given us the ability to be as patient as we've been. So it started, really this past spring with a clean market and we brought a product called the Assert, which is a $70 running shoe that we brought into the market. And we saw a nice sell-through with it but frankly, $70 shoes isn't where we think the brand should be positioned in footwear, and so the idea was walking the consumer up. And then this past summer we launched the Split, which is a $90 option, which is a great shoe and we've gotten great feedback and again, great sell-through with many of our key partners on that product. And then, just most recently launching the Charge RC, which was a $120 product. So when Kip took over the product role, more than a year ago, the charge that we gave him, particularly as they're going to focus a lot of his time around footwear, was to make product in excess of $100. So where we see the brand position, long-term, is having those types of products. And what you see now is a little bit of texture to our footwear business, where we've got $70, we've got $90, we've got $120. We've got more than just one shoe that defines Under Armour footwear business. And more importantly, where we're heading in the future is, we've got some really great technologies we'll be introducing in 2012, that I think can start becoming more accounts specific, and giving us a little bit more range as we move beyond just 3 shoes into segmenting by sporting goods, the mall channel, and a few other places that we'll add. And then also, most importantly -- probably in addition to the product is going to be the story telling that'll go along with it. We launched the Footsteps campaign that featured Tom Brady, Cam Newton, Georges St-Pierre this past summer, and the tag line at the end was Under Armour footwear. I'm not sure that we had that message out there and so we want to make sure to tell that story very loud and you'll hear, in just a few weeks as well, a new basketball campaign that'll be breaking also, around the 1st week in November with Under Armour footwear space there. So it's really a pretty balanced approach, but as we said all along, you're going to see a little bit of traction -- and we're not declaring victory but any stretch, but I think we've demonstrated that we know how to win and the team that we've assembled has really done just a great job, having us in a position of strength there going forward. So we feel very good about the footwear business and more importantly, the future of the footwear business.

Eric B. Tracy - FBR Capital Markets & Co., Research Division

Okay. And maybe switching gears, if I could, to the supply chain. Coming out last quarter, obviously identified some inefficiencies in terms of supplying products. Could you give us sort of an update there? How should we think about the team and sort of executing on the strategy you have in place to sort of lift the gross margins as we head into '12?

Brad Dickerson

Sure, Eric. Obviously, we talked about, the last quarter, some pressures there around gross margin going forward. As we look into the rest of this year, continue to see some price pressures, the back half of Fall '11 here. Also into 2012 and if you just think about 2012 when we locked in pricing for spring, summative '12 specifically. It was back in the Spring, April-ish timeframe, our commodity prices were still pretty high-back then, so we're still going to some price pressures into Spring/Summer '12 on the input side. We talked about the ability to raise ASPs in Spring/Summer '12 and offset most of that, but not all of that in Spring/Summer '12, so you'll still see some pressures in the first half of the year. We think we have some opportunity in the back half of the year, Fall/Winter '12. And a lot of that will be based on, again where pricing comes in, that we roll-up here in the next 30 to days 45 days or so, so we're still rolling up those numbers right now. We think we have some opportunity, but I haven't quantified what that opportunity is. And obviously, with Janet, her team being on board, since April timeframe, the ability to impact Fall/Winter '12 for her is a little bit more than what she had for Spring/Summer '12. But going forward we feel pretty good for 2012, that we have some opportunity in the back half of the year but still trying to roll that up.

Eric B. Tracy - FBR Capital Markets & Co., Research Division

Okay. And then just lastly if I could, on the inventories. Obviously worked-down a bit here in the quarter, but still elevated and I get there's some things going on. Should we assume by, kind of year-end, we can get those in line with sales growth or is this going to be, kind of, a couple of quarter thing to work through?

Kevin A. Plank

Definitely think it's going to be a process over time. We had called out hiring SVP of Planning back in July, Rich Rapuano, from Black and Decker. He's bringing some competencies in also, some additional people he hired. Won't be able to see too much of an impact from him and his team in Spring/Summer '12 but again, probably more towards Fall/Winter '12, maybe a slight impact on inventory management. We do see though our ability to continue to close that gap in the fourth quarter, the difference between revenue growth and inventory growth. So where will have a 32 point gap in Q2, down to a 21 point gap in Q3. In Q4 we should continue to see that pace come down, in the gap in Q4 for inventory versus revenue growth. As we get into 2012, obviously letting Rich and his team take root a little bit. Really from the Spring/Summer '12 perspective, again the impact of Rich and his team is pretty minimal. But I think our goal, as we stated in the near term, is to get to a 3 forward turn and hit that 90% to 95% fill rate for our customers. That's really going to be our focus throughout 2012. Again, Spring/Summer '12, I think we can continue to try to improve on the gap between revenue and inventory that we've seen earlier this year. But the real benefit and I think the real ability for us to achieve those goals and the 3 forward turn in the 90%, 95% fill rate will be in back half of the year when Rich and his team have more impact.

Operator

Our next question comes from Robbie Ohmes from Bank of America.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Just a couple of cool questions. First, you had a great answer earlier on your strategy for segmenting, for footwear, across more channels and I thought you guys might be looking at right now. Can you talk more about apparel through all of those channels? Foot Locker, Finish Line. You talked a lot about underwear in youth, in women's. How but the men's business in the department stores as well? And then maybe top it off with your oldest and dearest distribution channel. Where you guys are at on in-store shops and what we could be looking at through this year and into 2012. And then the second question is just on Europe. Maybe talk a little bit more about, if the strategy is changing there, I think near the beginning of your comments, you mentioned some of the newer products potentially being key products for Europe. I'd love to hear more about that as well. Sorry about the long question.

Kevin A. Plank

All right. Let me take them in pieces and I may circle back with the second one. But to start off, with the mall first of all, I think we're gaining traction in footwear and again, as I said, we're certainly not declaring victory but we are very encouraged by what we're seeing. But the fact of the matter is while we've some very healthy apparel business in -- for instance, the mall channel in the past, and we'll continue to do so in I think diversifying our own line with things like graphics and hooking better. The fact of the matter is that the key to the mall is footwear. And until we are a significant player in footwear, everything else there will be taking a backseat to that and that's the approach they've had. But at the same time, we've had unbelievable support from both Foot Locker and Finish Line, from the patient standpoint. And I think that they're continuing to give us the opportunity but they're just saying, guys when you get the product, we have an opportunity but it's incumbent on us to put the product there. So we feel good about where we're positioned now in basketball but a lot of that is going to come down to story-telling as well. And it's a little bit of a chicken and the egg here between the story with the consumer and the product of performance. Basketball is a good category just to look at where I feel that we've made great strides with this consumer in terms of believing that we make a quality product. And so of the 30 state championships that were played for, wearing Under Armour product last year, and the buy-in at our Elite 24 of nearly a dozen kids, the top 24 players in the nation that chose to wear our product when they have a choice of any other shoe they wanted to wear. We're seeing those kinds of encouraging signs but what we're not seeing yet is the kid after the game, putting their shoes on and walking home with a pair of jeans. That comes in time though and frankly, we're fortunate to have the ability to be patient with that thought process. And at the same time, you mentioned -- and I'll get to the department stores in a second. Our own sporting goods distribution. I think we're seeing great success there. I mentioned in my script about success we're seeing with our heritage product like the Armour Fleece and then also the introduction of things like the Storm Cotton product that we've now brought into the market. Taking kids and really realizing higher ASPs in the $50 range in the Armour Fleece and our opening price point that Storm Cotton fleece is $60 and that full zip is $70, $80, $90. And so we are driving, again I think bringing, a, an innovative story and driving consumers to retail and really helping our partners there. But what's going to drive that is that there's so much storytelling in our product. It really hasn't come to life and it's hard to sell a $70 hoodie unless you're telling that story on the floor as well. So our partners have been great. In particular, Dick's Sporting Goods has been great with us with the All-American shops and some of the blue-chip shops that we've built out at Roosevelt and in Lombard. And we're going to continue to expand those programs from just some of the 50 shops we're in now and we're working with them on how big that can we take up based off the lift that we're getting with some of the storytelling. And as I mentioned as well, it doesn't just stop at Dick's Sporting Goods either, it's that we're really trying to take a target approach. And when you look at the way that will be affecting our in-store presence, we'll be touching more than 700 doors over the next several months and so it's really an enhancment across the board. Where we're selling in those 700 doors and I'd probably guess the math, but I'd say it's at least 20%, 25%-plus of our total business will be affected by affecting those 700 plus stores. The Department store channel, that we mentioned, there's a 3 prong approach that we're taking there, as we're thinking. And number one is women's and I think it's selling products where women's shop and so it's doubling down in some of our existing partners like Nordstrom where we've had great, very good success and very solid -- that's led to the 30%-plus growth we've seen in apparel. Women's is driving a lot of that growth force. And so I think it's a bit of a misnomer when people look at our Women's business. We have great success and we have certainly haven't done everything perfect and there's certainly a heck of a lot of opportunities for us. But we're driving that, of course in the product, of course in the storytelling, but also in the distribution. And again, that goes back to the distribution in the way and the setup and some of the shops that we're building out. Women is a big focus in our sporting goods distribution, first and foremost. But again, back in the mall. Youth, it's always a tough channel because we have such a great youth presence and such a great youth driving demand for our brand and so distribution has always been a bit of a challenge there. So frankly, department stores gave us a little bit of range to be a little bit more open and so we've had and seen some success there. And finally, with the underwear program, and underwear for us has been -- I look at that business and it's a relatively small business, that we're saying when we look at some of the competition out there. With our brand, our name, our positioning may we believe that we could be the clear-cut leader in underwear. And so in addition, first and foremost, of building out a comprehensive underwear line and our existing sporting-goods distribution that we basically -- have started with many of them. It's also going where a lot of underwear is bought in the department store. I hope that covers it Robbie, and then coming back on the European question. What were you looking for in Europe, Robbie?

Robert F. Ohmes - BofA Merrill Lynch, Research Division

You had mentioned some of the products. Some of the newer products potentially being very good for targeting Europe. And I didn't know if there was an update on the strategy there and what you're doing there.

Kevin A. Plank

Yes. Well, I think it's about not entering a market with a compression shirt in 9 different colors and saying look how innovative we are. The fact is, amenities markets, we're not going to be first to market with things like compression, and so it means bringing some of our new technologies to bear. And whether it is things that Storm Cotton that get that jaw-dropping response from people who look and see the performance of the product -- or the Storm Cotton products rather or just the hand and the feel and sort of the DNA that is Under Armour. I think that it gives us the ability to reinvent ourselves and the we go to new markets. There's not one playbook, and the one thing we've learned and -- probably characterize the last 6 or 7 years since we've really tried become a global business. Number one, the seeds that we've planted, and whether it's in Europe, in our headquarters, in Amsterdam, and the things that we've done in the U.K., and the way that we're doubling down on some of those businesses. We're not a lot smarter but we know a little bit more than when we went into these markets. And they're certainly not easy, and it's certainly going to be something we'll be fighting for a while. But we're beyond just the, we're-investing-in-Europe mode, we're-breaking-even-in-a-Europe mode. But we think, more importantly, that there's the opportunity for us to drive and move forward. And the confidence that we've demonstrated with the investment in something like cotton, I think shows that we're ready to cut our teeth. And I think the Olympics next year and a lot of things happening in London -- I don't believe we truly told our story to the European consumer, and maybe I'm focusing a little bit on just the U.K., but I think that there's the ability for Under Armour to be successful there. We've seen some of the beginning signs of it and I think we, frankly, have only gotten started. So with the right product line, frankly, with the right supply chain that can support us and moving beyond the sophistication of trying to keep up with the 40% grower, just here in the U.S., and having the right team on board that can think globally and has built supply chains globally, that can be effective for us. I think we feel very good about how we're positioned in the first 6 years in a place like Europe, that we are not that far from a tipping point, not unlike we saw in Japan, in year '07 and '08. I think we're very close to something similar in what we're doing in Europe right now.

Operator

Our next question comes from Omar Saad from ISI group.

Omar Saad - ISI Group Inc., Research Division

Kevin, I was wondering how are you guys thinking about the opportunity to move consumers more upstream, technical, innovative products at higher price points? I know there's some really interesting launches like the Storm Fleece and Coal Black but you also have very big programs for some of the basics at affordable price points. And how have your ASPs been trending over time? And what are your strategies around that and long-term goals? And do your channels give you the flexible to really drive prices higher through innovation?

Kevin A. Plank

I think that we really have a -- I mean there's a lineup, frankly, of people inside the building, from the different product teams that are trying to say -- they're fighting for the dollars for which story are we going to tell. I made mention of something like Coal Black which to me, I use the quote when I define Under Armour is that -- someone said once, who ever reinvents the white T-shirt wins. And I feel like that's almost we did with first product, the style 39, the first compression T-shirt. And I think we keep finding ourselves looking for pinnacle products, of course, that can be defining things like the E39, that we think is going to be a great opportunity in the future, but what pays the rent for us here is also the simple innovations and reinventing the basics. Our $25 Charged Cotton T-shirt is something that took a t-shirt market and again, justifying why a consumer would spend $25 when, frankly, they can go to many partners instead. For $25 you can get 5 or 6 t-shirts for that price. So I think taking consumers up with simple innovation and things like the cotton t-shirt that dries 5x faster than anything else, is pretty defining of our brand. I also believe that our job is to be the thought leaders in this space. The consumer's looking for it from us, I think our retailers are looking for it from us, and that we need to keep driving that through storytelling. Storm product which hit the market just in the last month or so, we've seen a great reaction from the consumer and again, taking the hoodie market where -- you guys have been out of retail and the hoodie market a $20 or $25 hoodie typically. But when you can put the right story and more importantly the right performance behind it, I think we can drive $60, $70, $80 price points. So I think that our job all along, was deliver -- maintain margin is where we were typically valued from our retailers in the past. And we were the company that changed the apparel floor from their anticipation of low- to mid-40 maintain margins into maintaining margins that begin with a 5 handle. So I think we're going to do that through a number of different ways, innovation being the crux of it. But I think we've got a lot of stories in the pipeline and a lot of things coming and I think, again our 42% growth was demonstrative of our thought leadership within the space.

Operator

Our next question comes from Joseph Parkhill from Morgan Stanley.

Joseph Parkhill - Morgan Stanley, Research Division

I was just wondering quickly, on third quarter gross margin line. I don't think I heard any benefit from a shift towards direct to consumer. So I was wondering if that mix shift did not positively impact gross margins and if you could elaborate on why that might be the case.

Kevin A. Plank

Sure. To your point, direct-to-consumer didn't really provide an uplift year-over-year in the third quarter. Although the mix of direct-to-consumer was higher year-over-year, the margins were a bit lower in that business year-over-year, so that offset some of the benefits of mix in Q3.

Joseph Parkhill - Morgan Stanley, Research Division

And was that driven by less made-for sell-through or...

Brad Dickerson

I would say it was driven by an acceleration of the back half of the year, of excess inventory moving through Factory House, similar to what we talked about last quarter. So the made-for dollars in the back half of the year were consistent with what we planned, but there is some additional capacity in the Factory House in the back half of the year from what we've planned, which gave us the ability to move to some excess product through it, which has reduced the margins in the back half.

Joseph Parkhill - Morgan Stanley, Research Division

And then just along the lines of retail. Do you have any updated thoughts on exploring specialty expansion or perhaps more on the combined outlet specialty store concept you spoken of about before?

Kevin A. Plank

Yes. I think Brad covered it in his script as well, that our intend is to slow down our outlet expansion. And that, again the purpose and the reason that we opened up the outlet is pure and clear disposition of excess inventory. And so we obviously -- we've got excess inventory today and so we're fortunate to have the nearly 80 doors by year-end, but our goal isn't just using that as simply a retail driver for us. But I think you'll continue to see a test. I mean, the ultimate goal that we have is to serve our consumer and frankly, there's many markets that we're not doing that. But we're fortunate to have a great distribution today, a great relationship with the distribution that we have today. Are so our intent is never to cannibalize any of those sales but to find opportunities where we can be that last line of defense. And frankly, that's where our DTC and our e-commerce channel has served a great role for us in doing that to date.

Operator

Our next question comes from Michael Binetti from UBS.

Michael Binetti - UBS Investment Bank, Research Division

Kevin, just a quick question and I have a couple of follow-ups. You guys have done a great job of innovating into this new category and really catching some market share in running. And when we look at some of the core categories and some of your oldest categories and frankly, ones that -- for all rights, you guys actually invented for the most part. Like compression, we've seen some market share losses there. I think we've talked, in the past about how some of that was planned, you didn't expect to have 90% of the market forever or whatever, you had when you came out. But it seems like a lot of people, like in the cold compression gear have innovated in to that category, everybody's got a cold gear compression at this point. As you look ahead to next Fall, is there any way to differentiate the product or move price points higher and stand out from what has become a crowded field at this point?

Kevin A. Plank

Yes. When you look, from a market share standpoint particularly around compression, the fact is that you're right. We used to have a 100% market share. And so the declining nature of that has been on, basically the mass acceptance of growing this entire pie and more importantly, a pie that never existed before. So I want you to know, as we look at that, one of the indicators, frankly, in difficult markets that we use to judge our business is market share. And so first and foremost is that, number one, we continue to be the market leader in this category, and I want to be very clear about that. But we are hyper-aware of sort of the competition we have. And the one thing is that when you talk about our competition, the word you can't say is, boy these guys stink, we're better. The bar is very high, and we need to do a great job. And so the good news is, for the consumers, that we think we all continue to push one another and the consumer is getting a better result. At the same time, some innovations that I've seen in the pipeline and as you push, and you look, and you move, there's lots of places we continue to innovate. But I think what we keep our eye on is moving beyond just being a compression company. And again, the 40% plus growth in the quarter is something that we say we have our eye on a much bigger opportunity. And so we're taking the credibility that we've established in a market like compression and we're using it to leverage ourselves into things like fitted and into looser fitting products, and into outdoor, and into mountain categories, and into all these other categories that we've been able to expand to. So I want to be clear, number one, we're not taking our eye off the ball. But it's a tough place will be complete, and more importantly we've opened a lot of new categories that we're now competing in that are going to feed our growth today and frankly, be feeding our growth into the future, as we build a multi-billion dollar global platform.

Michael Binetti - UBS Investment Bank, Research Division

Let me ask you a couple of quick ones on footwear here, if I could, for a second. In the past you've talked to us about where your gross margins on the footwear program are and the significant gap between where you're at versus industry-standards. As you look at -- we won't call it a launch, but the reenergized footwear program here. What are your thoughts, as we look ahead to 2012 with new products coming? And how the product is built before we even talk about whether it will need to be marked down, if it's accepted, anything like that. But as far as how the product is built -- I mean are you going in from an advantaged position versus where you were previously, on gross margins, from the build standpoint? And then maybe, I know when we talked at the analyst day, you didn't want to commit to guidance for the forward business, but maybe how we can just think about the range of potential outcomes on the top line for footwear in 2012. I know that's something that the analysts have had a very tough time forecasting for you guys, since it's such a volatile business.

Kevin A. Plank

Let me weigh in on sort of the margin question to begin with. The challenge that we've given our team and because we're a brand, it gives you the ability -- we're not competing at commodity levels here. So frankly, we have the ability to set and dictate price, and in order to do that though, you must be innovating. And so the challenge that we have for our team and in some of the margin compression that you've seen around us, we don't see that as being acceptable, we just see that as, we have a lot of things going on. And the challenge we have internally, is a roadmap to 50%. That we believe we're a company that frankly, should have a gross margin that begins with a 5, and we have the ability to do that through better product. And again, I'm not putting a timeline on when that can happen because we are entering things and frankly, a bit of the unknown with things like footwear. But what we're doing and where we're pressing on the footwear team for instance is put points on the board. We're frankly, not going at it. We haven't limited them with saying, we need this margin, we need to be here, we need to be there. What we're doing is we're driving ASP's up in our footwear business overall and, obviously that's going to give us the ability to put more innovation into the product. And frankly, tell a better story to our consumer of where the Under Armour brand should be positioned in footwear. So I don't think, again, as we look or we think about footwear, we really, we're trying to create the wind. And so, as I mentioned, we've got this layering now with -- call it a $70 shoe, a $90 shoe, a $120 shoe that are frankly, all still selling at full price as well. And as we look at those, there's going to be a lot more technology that we'll start layering in, in 2012. But it is a foundation that's been laid at this point and while I think we're doing okay with margin, we're certainly not optimizing from a factory based standpoint where -- again, when we launched in 2006, we had 1 factory. Today we have 9 or 10, I think the optimal level we should be is 14 or 15. And where we can really start pressing price and pressing some of the other things, but the most important thing we're driving on right now is build a great looking shoe that performs well, that a kid is going to like. And so starting with that and frankly, because of the luxury of the other growth drivers that we have, that are building and moving for us. It gives us the ability to be patient and thoughtful and frankly, not putting as much pressure about something like footwear.

Operator

Our next question comes from Camilo Lyon from Canaccord Genuity.

Camilo R. Lyon - Canaccord Genuity, Research Division

So I just wanted to ask a question on Charged Cotton. So it seems like you've had some really nice early success with the product, good healthy sell-through. You've talked about the program being about a $60 million program this year, as you start to gauge consumer interests for this new product. How do you think about expanding that product into '12? Whether it's going deeper in your existing distribution or expanding just the number of doors that it's in. How should we kind of think about what kind of growth rate you can expect from Charged Cotton?

Kevin A. Plank

I think, first of all, expansion can be one of the most dangerous things you do. I used in my script the mantra, focus and finish. And frankly, I'm not sure that we focused and finished, I'm just getting started on the original Charged Cotton T-shirt. Number one, just from a -- making sure that we're keeping the fixtures full. On the Men's side, I think there's a lot more opportunity for us to be broader in the range, in terms of again, an inventory replenishment. But on the women's side, we left some meat on the bone and it's something you'll see us come back and really focus on color and fit and style. We're going to get it right, we're going to get the core basics right. But you'll see us move from one t-shirt that sort of defines Charged Cotton into multiple ways. You'll see us move from short sleeve to long sleeve. You'll see us begin to layer in shorts and bottoms, and all the other things that go with it, in lightweight hoods. And I think that opening up and again, using that idea of moving from a $3 billion addressable market to nearly $12 billion market. It's pretty indicative of what we're sitting on, we think we've got a little bit of a tiger by the tail. We're taking our performance DNA and guardrails, and being able to apply them to a market like cotton which is getting the consumer. Because we sometimes limit ourselves with the fact that what a product needs to do to perform. But our mission statements says to make all athletes better and the way that we can do that -- it is as much through performance as it is through style, and fit, and design. So I think you'll see us take a much more designed, enhanced focus which will allow us to move beyond just sort of a item-driven company into a company that's allowed to hook with shoes, and with pants, and with the accessories, and the other pieces. So I think you'll probably see a more mature approach from Under Armour, beyond just a very simplistic one, sort of one t-shirt that's sitting on a fixture.

Camilo R. Lyon - Canaccord Genuity, Research Division

And that'll grow. That SKU count, if you will, will start to materialize. That growth you feel will materialize in Spring of '12?

Kevin A. Plank

It will. It's a big deal to grow a SKU count around here these days, and so Brad keeps a pretty good measure on exactly how we're doing it that. But obviously, we feel very good about what we have, the opportunity we have, and the entire cotton franchise for us. And so, yes, it'll absolutely be something that we'll look to grow in a pretty significant matter in 2012.

Camilo R. Lyon - Canaccord Genuity, Research Division

Got it, great. And then just had one other question for Brad, if you could. Brad, with respect to the gross margin discussion, specifically around the sales allowance and the negative mix comparison in the outlet channel. When should those start to abate? And if so, do they start to abate at the same time? And is it purely a function of improvement on the supply chain side or is there one piece of that, that will improve before the other?

Brad Dickerson

Yes. To go back to the last quarter, my conversations around those. Again, a lot of that comment from the last quarter was the change to the outlook to 2011 versus a comp over 2010, to some degree. So there might be some confusion there but on the sales allowance side, actually from a year-over-year comp perspective, we started seeing some sales allowance issues last year, so we are comping those this year. So there's not much of a year-over-year change on sales allowance, it was more of a change in the current year. Also on the mix side, same thing, it was more of a change in the last 6 months of mix as we saw the ability to move more excess product with extra capacity that we didn't quite know of and again, planning. So when you loot at, going forward and those two issues, I think both of them point to continued efforts in the supply chain and inventory management. So whether it's Janet Fox and her team on the sourcing side or Rich Rapuano on the planning side, the ability for us to forecast more accurately and get the supply flow of inventory coming in on a timely basis, that should help us reduce sales allowances going forward. Also on the other outlet mix side, the ability for us to more accurately plan the total capacity we have in outlet and plan accordingly from a made-for versus excess mix, and then how we give our guidance should help going forward too. So I think with Janet and Rich onboard, you should start to see some minor improvements to those as we get into Spring/Summer '12, more opportunity in Fall/Winter '12 forward on those 2 items.

Camilo R. Lyon - Canaccord Genuity, Research Division

So the first half of '12 pressure is going to be related to input cost pressures?

Kevin A. Plank

Yes, if you look at that. Because we locked prices back in April for Spring/Summer '12 and commodity prices were pretty much at their peak at that point in time, as far as pressure for the most part. So Spring/Summer '12 is still going to be still challenging for us. As you look to Fall/Winter '12 we'll be locking those prices. We're kind of locking some prices right now, next 30 to 45 days, locking a lot more pricing for Fall/Winter '12. Obviously, commodity prices are heading in the right direction. So that goes for our comments around, we believe we have some opportunity in Fall/Winter '12. Not only because of commodity pricing but also the fact that Janet has a little more input into Fall/Winter '12 than she does Spring/Summer '12.

Operator

Our final question comes from Sharon Zackfia from William Blair.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

I was wondering if you could talk about sell-through throughout the quarter. If your retail partners and direct-to-consumer -- I think that there's a perception that there is some volatility. So maybe if you could talk about that in. And kind of the inventory levels, your retail partners, how you feel about that at this juncture going into the holidays?

Brad Dickerson

Well I can start Sharon, on some of the data you're talking about, on sell-through, retail and DTC. Obviously, if you look at the quarter growth rates, we saw strong sell-in and sell-through in Q3, both in the wholesale side and direct-to-consumer. Especially direct-to-consumer, obviously, with the 73% growth rate in the third quarter. From an inventory management perspective at retail, I think along the lines of the commentary you've heard in the market place, concerns around the back half of the year and consumer demand. I think we've seen a little bit more tightening of management of inventory at retail. Not extreme by any means, but we also we had a little bit more tightening, so that does impact, obviously, sell-in. But obviously, if you look at our growth rate in Q3 and our guidance going forward, raising top line guidance and raising bottom line guidance. That has been taken into account in our raise of guidance.

Tom Shaw

All right, thanks for joining us on our call today. We look forward to reporting to you our fourth quarter 2011 results, which tentatively has been scheduled for Thursday, January 26th, at 8:30 a.m. Eastern Time. Thanks again, and good bye.

Operator

Thank you ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.

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