Under Armour Q3 2007 Earnings Call Transcript

Oct.30.07 | About: Under Armour, (UA)

Under Armour, Inc (NYSE:UA)

Q3 2007 Earnings Call

October 30, 2007 8:30 am ET

Executives

Alex Miyamoto - Director of IR

Kevin Plank - Chairman and CEO

Brad Dickerson - VP of Accountingand Finance

Wayne Marino - EVP and ChiefFinancial Officer

Analysts

Robby Ohmes - Banc of AmericaSecurities

Jim Duffy - Thomas Weisel

Omar Saad - Credit Suisse

Jeff Klinefelter - Piper Jaffray

Jeffrey Edelman - UBS

Operator

Good day, everyone and welcome tothe Under Armour’s third-quarter 2007 earnings results conference call andwebcast. Today's call is being recorded. At this time, I would like to turn thecall over to Ms. Alex Miyamoto, Director of Investor Relations. Please goahead.

Alex Miyamoto

Thank you and good morning,everyone. I'd like to start by welcoming you to Under Armour's third quarter2007 earnings call. During the course of this conference call, we will bemaking projections or other forward-looking statements regarding future eventsor the future financial performance of the Company. The words estimates,intend, expect, plan, outlook or similar expressions are intended to identifyforward-looking statements. We wish to caution that such statements are subjectto risks and uncertainties that could cause actual events or results to differmaterially.

Important factors relating to ourbusiness, including factors that could cause actual results to differ from ourforward-looking statements, are described in our press release and in the ‘riskfactors’ section of our filings with the SEC. The Company assumes noobligations to update forward-looking statements to reflect the events orcircumstances after the date on which the statement is made or to reflect theoccurrence of unanticipated events.

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

Now, I'd like to introduce thespeakers and topics for this morning's call. Kevin Plank, Chairman and CEO,will address the drivers of our third-quarter results and our strategy forcontinued growth in 2007 and beyond. Brad Dickerson, Vice President ofAccounting and Finance, will then discuss the Company's financial performancefor the third quarter and provide an updated outlook for the balance of 2007.Wayne Marino, Executive Vice President and Chief Financial Officer, willconclude the prepared remarks with the preliminary outlook for 2008. Afterthat, we will have a Q&A session that will end by 9:30. And with that, Iwill turn it over to Kevin Plank.

Kevin Plank

Thank you, Alex. Good morning,everyone, and thanks for joining us today. I'm proud to announce results fromour third quarter, which proved to be our largest to date in both top andbottom line.

Let's start with a quick recap ofthe scoreboard. Under Armour net revenues increased 46.3% to $187 million inthe third quarter of 2007. Operating income for the quarter increased to $33.8million compared to $22 million just a year ago, an increase of 54%. Forperspective, Under Armour's net income for just the third quarter of 2007, at$20 million, exceeds the Company's total net income for the entire year of2005.

Wayne and Brad will provide moredetail to the scoreboard in a few minutes, but it's the color behind thenumbers that we believe further solidifies our position as “the athletic brand”of this generation. And considering what we have planned on the horizon, thisis by far the most exciting time in our brand's history. With that, let's lookat our key growth drivers and let me start with women's.

With the launch of ourBoomBoom-TAP campaign in July, we staked our ground by authenticallyrepresenting the female team athlete, something no other brand has done todate. The Team Girl athlete has been at the core of our brands since ourbeginning when female teams were buying smaller sized men's Compressionbase-layers. We believe it's our duty and our privilege to continually innovateour design, style offering and color palette to the Team Girl, while continuingto speak to her as we did with the BoomBoom-TAP, our largest campaign of 2007.

The results speak for themselves.Women's apparel growth checked in at 49% for the quarter, driven by Compressionand Training, respectively. Our year-to-date growth in women's now stands at39%. This is proof that the female team athlete can be a driver at retail forthe women's category.

Another highlight is the youthcategory. Our youth business is not only a representation of our present brandstrength, but a positive sign for the future. Youth apparel growth was up 51%over the same period last year. This is further evidence that we are thisgeneration's athletic brand of choice, and we're making a pretty good case forthe next generation as well. Our men's apparel business continues to grow andshow strength, posting an increase of 43% over the third quarter last year. I'mproud to say that we continue to grow the core and find new, broader offeringsthat drive scalable growth for our men's business.

Fueling that men's business is Compression.It's the men's largest category, and it continues to grow at double-digitrates. Bolstered by our Good/Better/Best story, we've not yet found the ceilingfor Compression and continue to see growth in this category. Meanwhile, men'straining is growing faster than the overall Compression category at nearly 60%year-to-date. This can be attributed to our ability to expand our core businessas we broaden our performance platform across categories and across sports.

One of these new categoriesshowing fast growth is golf. Nonexistent two years ago for our brand, our golfbusiness has grown more than 140% year-to-date on roughly ten styles. We alsoexpanded our presence in Q3 in the outdoor mountain categories, with the launchof Under Armour outerwear. This program has just hit the floor and augments thecore offering that this channel has already accepted from our brand.

The success we've seen across ourmen's, women's and youth businesses, allow us to invest in large, scalablebusinesses to support long-term, sustainable growth. So for example, at retail,our concept shops continue to elevate our presentation and tell a richer storyabout our product and fabric technology. With partners like Dick's SportingGoods, The Sports Authority, Hibbett Sports and outsell outdoor retailer Cabela's,we're building new branded shops ranging in size from 500 to 1500 square feetacross the men and women's footprints.

These shops serve as a home baseof performance and anchor our many outposts throughout the sport andcategory-specific zones in the rest of their stores.

Before the kickoff of the holidayseason, we will have more than 260 new concept shops installed in North America alone, adding to and reshaping almost aquarter million square feet across these marquis positions within our topretailers' top performing doors.

This storytelling of the UnderArmour brand on the retail floor is naturally a global initiative for Under Armour.In Europe, for instances, we are mirroring this plan with shops in major citieslike Stuttgart and Berlin,Paris, Dublin andMadrid. Ourbusiness in Europe remains on track and ispoised to deliver as a long-term growth driver for our brand.

Peter Mahrer, President of UnderArmour Europe, who joined us in July, is on the ground and driving ourthree-part strategy from Amsterdam,our headquarters; building the team, authenticating the brand on field, andfinding the right distribution partners for Under Armour.

The goal in the United States and abroad is to tella better branded story while educating the consumer on the benefits ofperformance. Our job as the originator of performance and the thought leadersof the category is to continue to lead the ship from cotton into performance.Cotton remains the enemy as well as our largest opportunity. We will continueto dedicate space on the retail floor precisely for this education.

Logistically, we're alwayslooking to expand our footprint while continuing to improve our already strongproductivity per square foot.

So, part of telling a betterbranded story comes to life this week with the opening of the very first UnderArmour full-line retail store. We plan to cut the ribbon at the Annapolis Mallin Marylandthis Thursday with a store that will be unlike anything you have seen before ina mall. We set out to create a branded shopping experience that will be thephysical manifestation of the Under Armour brand and provide the feeling andemotion of being in an Under Armour commercial.

Our goal is to showcase the UnderArmour brand by telling comprehensive product and brand stories.

At the same time this week, wewill launch the latest version of www.underarmour.com. This new version willease the navigation of the site for quick and easy purchases while providingour web visitors with the newly added visual content they have been asking for,including enhanced branded content, product education, and high-resolutionproduct images with point-and-click zoom capability. I invite you all to comeand visit and explore this branded visual experience.

Next, we will answer the latesttop request from our brand fans; non-cleated footwear. As I statedlast quarter, the big news for Under Armour in 2008 will be the launch of ourfirst line of performance trainers. This first-ever version of Under Armournon-cleated footwear will be the cornerstone of Under Armour performancetraining, and it will complete the outfitting package for our athletes whospend nearly 95% of their time training for that very important 5% ofcompetition on the field, court, ice or track.

You'll see this launch in thesecond quarter of 2008, but as with any Under Armour launch, you'll hear thebuzz building much, much earlier.

With these launches on thehorizon, both near and long-term, we will continue to bolster our future byremaining disciplined with our marketing investments. We will invest wherenecessary to give our brand and our retail partners the proper support for ourmajor launches. At the same time, we will remain opportunistic with ourmarketing spends, allowing us to stay fast and nimble with our growing brand.

We are proud of the quarter weposted and the achievements we've had on both the top and bottom lines. We'reconfident of how we are committing resources today as we continue to invest inlarge, scalable businesses.

And lastly, we are excited aboutthe growth opportunities that lie ahead in growing our men's core appareloffering, expanding our women's business, building our international business,and launching Under Armour performance trainers.

With that, I will hand it over toBrad to take you through more detail on the numbers.

Brad Dickerson

Thanks, Kevin. I am going to takea few minutes to provide information around our third-quarter income statementand balance sheet, and I will provide an updated outlook for the full year of2007.

First, our income statement forthe quarter; our consolidated net revenue growth in the third quarter, comparedto the same period in the prior year, was 46%. This was driven by a 45%combined growth in our men's, women's and youth apparel sales. We arecontinuing to see benefits of an expanded product assortment in ourGood/Better/Best strategy with average selling prices and apparel upapproximately 11% compared to the third quarter in 2006.

Year-to-date, our consolidatednet revenue grew 46% with our apparel sales growing 41%.We continue to seestrong demand for our most mature business, our men's apparel. Growth in men'sapparel for the quarter was 43%, compared to 2006, and was driven by our Compression,Training, Mountain and Golf products. Year-to-date, men's apparel growth was40%.

Women's apparel growth for thequarter was 49%, compared to the prior year, and was primarily driven by our Compression,Training, and our new Mountain product offerings. This strong third-quartershowing helped boost our year-to-date women's apparel growth to 39%, anacceleration over the 31% growth we achieved for the first half of the year.

Our youth apparel growth for thequarter was 51%, compared to the prior year, driven by our Compression,Training and football products. Year-to-date, youth apparel growth was 58%.

Now, moving to our gross margins;for the quarter, gross margin was unchanged from the prior-year quarter at50.6%. There are a few puts and takes impacting the margin for the quarter.First, as planned, beginning in 2007, we began to shift dollars previouslygiven as customer discounts to in-store marketing and SG&A. Second, growthin our licensing and Direct-to-Consumer business, which includes our website,catalog and retail outlet stores, provided improvement in gross margin for thequarter.

These gains were offset byincreased sales returns, allowance and inventory reserves in the third quarteron certain cleated footwear styles that will not carry forward to the nextseason. SG&A as a percentage of net revenues for the quarter was 32.5%compared to 33.4% in the prior year. On a dollar basis, SG&A for the third quartertotaled $60.7 million, an increase of $18 million compared to the same periodin 2006.

Within SG&A, we continue toinvest in our brands by increasing investments in marketing. Marketing costsrepresented 11.5% of net revenues in the quarter, compared to 10.3% during thesame period last year, primarily driven by higher in-store marketinginvestments. We had previously indicated that marketing costs in the quarterwould exceed the 10% to 12% range of net revenues. However, it is important tonote approximately $2 million of marketing spend previously anticipated in thethird quarter will shift to the fourth quarter of 2007.

This is mostly due to the timingof the installation of new concept shops and will not affect our total plannedmarketing spend for the year. The increase in marketing costs, combined withadditional investments in our growth areas, represented approximatelytwo-thirds of the year-over-year dollar growth in SG&A. Our operatingincome for the quarter increased to $33.8 million compared to $22 million inthe prior year, an increase of 54%.

Operating margin for the thirdquarter was 18.1% compared to 17.2% in 2006.

The effective income tax rate forthe quarter was 41.9% compared to 27.9% in the third quarter of the prior year.The lower rate in the prior-year quarter was a result of a $2.3 million benefitfrom a state tax credit earned. Our resulting net income for the quarterincreased to $20 million from $16 million in the same period last year.

Third-quarter diluted earningsper share was $0.40 compared to $0.32 in the prior year.

Now, to the balance sheet; totalcash and cash equivalents at the end of the quarter were $14.5 million comparedto $44.3 million at the end of the third quarter in the prior year. This changewas a result of investments in inventory and capital expenditures, which I willdiscuss shortly. Net accounts receivable increased 43% or $38.7 million on ayear-over-year basis, continuing to grow at a pace below our top-line growth.

Now, I would like to discuss ourinventory. As we have previously stated, our strategy is as follows; be instock on core offerings to meet consumer demand while improving our inventoryefficiencies over the long term; ship seasonal products at the start of theshipping window and earmark any seasonal access for our 15 outlet stores, andoperate those stores at a profit.

Inventory increased $76.8 millionor 102% on a year-over-year basis. Let me take you through the details of thisincrease. First, our year-over-year increase in core inventory wasapproximately $37 million or almost half the increase in total. Our coreinventory represents inventory that we plan to have available for sale on a12-month basis at full price. In the prior year, we did not meet all of theconsumer demand for our products in the back half of the year. As a result, in2007, we strategically increased our safety stock levels for core items toimprove our service levels to meet the anticipated consumer demand, andincreased productivity from our investment in fixtures and concept shops.

We believe our investment in coreinventory is paying off, as we are seeing significantly higher percentage ofdemand for core items being filled today than one year ago.

Another portion of theyear-over-year increase was in-transit inventory. Our in-transit inventoryincreased by $13.1 million or 110% from one year ago; this was primarily aresult of our strategy to increase sourcing from Asia,resulting in more favorable product pricing.

Finally, the balance of theincrease was driven by additional inventory needed to support our growththroughout all businesses and an 8% higher average cost per unit due to productmix.

As we move to capitalexpenditures, I need to continue to point out that we are building the foundationfor large, scalable businesses. We continue to plan 2007 capital expendituresat $34 million to $36 million. Year-to-date, we've spent approximately $26.2million. These expenses were consistent with what we have discussed in previousquarters and mostly related to infrastructure needs in our distributionfacilities, in-store fixtures and concept shops, and other needs to support ourcontinued growth.

Now, moving to our updatedoutlook for the full year 2007; we are raising our annual net revenue outlookto a range of $590 million to $600 million, an increase of 37% to 39% comparedto last year and up from our previous outlook of $580 million to $590 million.This updated revenue outlook takes into affect our strong third-quarterresults, current visibility that exists into our fourth quarter, and ourinventory strategy which we believe positions us to fill seasonal demand forour core products at significantly higher levels than during the prior year.

We are also raising our full-yourincome from operations outlook to $81.5 million to $83 million, an increase of42% to 45% compared to last year and up from $79 million to $81 million in ourprevious outlook.

Now, let me take you through someof the details of our outlook. First, our gross margin; we continue to believeour gross margin will improve 20 to 30 basis points for the full year comparedto 2006. The puts and takes are consistent with what we have said in the past.First, we anticipate that our higher margin, Direct-to-Consumer business willgrow at a faster rate than our overall business. Second, we will have apositive benefit to our gross margins from the shift in spending from discountsto in-store marketing, and finally, a portion of these improvements will beoffset by our cleated footwear business, which carries margins lower than ourexisting apparel margins.

Related to SG&A, we believeour marketing has a direct impact on our top-line growth. As previously stated,for the full year, we're planning to invest at the high-end of the 10% to 12%range, and if top-line volumes exceed our outlook, we will be opportunisticwith our marketing spend and invest more in planned campaigns to launch large,scalable businesses.

Given the increase in ourexpectations for our top-line, balances our continued investment in marketing,we now expect SG&A leverage of 20 to 30 basis points for the full year. Weare forecasting our other income net, to be approximately $3.1 million for theyear, including a year-to-date foreign currency gain of approximately $2.1million.

We are projecting our effectivetax rate for the year to increase to 41.5%.

Weighted average diluted sharecount in 2007 is expected to be approximately 50 million. Now, turning to ourbalance sheet for 2007, based on our current visibility, we anticipateinventory at the end of 2007 to increase between 5% and 10% from the levels atthe end of the third quarter. Waynewill provide more insight into our longer-term inventory strategies in amoment.

Taking into account our strategicinvestments, including our expected investment in working capital, specificallyinventory, and capital expenditures, we are expecting cash and cash equivalentsto be approximately $25 million at the end of 2007. The $25 million takes intoaccount our recent pay-down of the $10 million in borrowings we had at the endof the third quarter. As a result, we expect, at the end of the year, to havefull availability of our $100 million line of credit facility.

Now, I would like to turn it overto Wayne, who will take you through a preliminary review of 2008.

Wayne Marino

Thank you, Brad. I will nowprovide you with the preliminary outlook on several key elements of ourbusiness for 2008. First, I'd like to remind you that our long-term targetsremain at 20% to 25% for both our top and bottom lines. However, due to thestrength of the brand, the capacity to expand across categories, and ourability to leverage our existing businesses, we believe our 2008 revenues andincome from operations will exceed our 20% to 25% long-term growth targets.

For 2008, our long-term strategicgrowth initiatives remain the same; first, continue to grow our men's andwomen's apparel business; second, enter new categories of footwear whilecontinuing to maintain a disciplined approach to gaining market share inexisting categories; and third, build the Under Armour brand internationally.

Complementing these growthinitiatives is the appropriate distribution for the Under Armour brand,including the opportunity we have in our Direct-to-Consumer business.

Now, let me provide you with somecolor around 2008. Apparel will continue to be a significant part of ourbusiness with strong growth in both men's and women's. This growth is plannedto be driven by continued expansion of product offerings in the training, golf,football, and outdoor categories. Strong fulfillments within our core products,which represent approximately 50% of our business; increased consumer appetiteto move into better performance products; increasing our ASPs; and higherproductivity within in-store concept shops that are being installed within ourlarger strategic accounts.

In the second quarter of 2008,we're planning to launch our performance trainer. Similar to our first cleatedfootwear launch, this will be an allocated program in the first season. Withthe launch of performance trainers, we expect the year-over-year growth rate inour footwear category to outpace the Company's overall growth and position usto launch into other footwear categories in 2009 and beyond.

Internationally, we will continueto focus on Western Europe with particular emphasis on the UK, Franceand Germany.We continue to believe that the long-term opportunity for the Under Armourbrands internationally is as large as the opportunity in the U.S., and we will make theappropriate investments in people, brands and infrastructure in 2008 and beyondto reach that goal.

We believe that ouryear-over-year rate of growth internationally for 2008 will outpace theCompany's overall year-over-year growth rate.

For 2008, we believe that ourDirect-to-Consumer business, which currently includes our website, catalog,outlet stores and full-priced test store, will be an important contributor toour year-over-year top-line dollar growth and an even greater contributor toour year-over-year operating income growth.

Our first full-priced retailstore, located in the Annapolis Mall, will open in two days. We are excitedabout this opportunity to present our brand at retail as we explore how full-pricedstores fit into our strategy going forward.

Our gross margin; based on thevisibility that we have today, we believe that our gross margin for 2008 willcontinue to show improvement as a result of growth in our higher-marginDirect-to-Consumer business outpacing growth in our overall business, offset inpart by our anticipated growth in footwear, specifically with the launch of ourperformance trainer, which will carry higher margins than our cleated footwearbusiness but lower margins than our existing apparel margins.

Our SG&A -- we believe thatour marketing has a direct impact on our top line. For 2008, we're planning toinvest additional dollars in key growth initiatives to tell our story andsupport our major launches, specifically in training. Historically, we haveinvested between 10% and 12% of our net revenues in marketing, and as Brad saidearlier, we're planning to be at the high end of that range for 2007.

From a financial perspective, ourmarketing philosophy remains the same; continue to make $1 spend like $3. Froma strategic perspective, we will continue to create our marketing messageinternally, and cluster our initiatives in key parts of the year. Rather thantrying to outspend the competition, we will continue to place our producton-field and in assorted media.

For 2008, we believe thatinvesting between 12% and 13% of our net revenues will not only support ourlarge scale of businesses like footwear and our international business, butwill further strengthen our brand's position as the athletic brand of choice ofthis generation. In 2008, we believe our strong growth in revenues will allowus to leverage our fixed costs and partially fund this investment in marketing.

Now, I will walk you through ourinventory strategy for 2008. As Brad said earlier, our inventory strategy issimple; first, be in stock on core offerings to meet consumer demand whileimproving our inventory efficiency over the long-term; second, ship seasonalproduct at the start of the shipping window; and third, earmark any seasonalaccess for our outlet stores, and operate those stores at a profit.

In 2007, we accomplished thefirst part of our strategy by doubling our level of safety stock in corereplenishment items that we sell year-round, which resulted in improving ourfill-rate percentages from the low 80’s to the mid 90’s on increased demand.This strategy significantly impacted our top-line growth.

For 2008, we will continue tohold our fill rates on core inventory at these levels while we reduce oursafety stock levels and drive more aggressive inventory management initiatives.We believe that by the end of 2008; will see an improvement in our inventoryefficiency whereby top-line growth should outpace inventory growth.

CapEx; taken as a whole, ourCapEx investments for 2008, related to our distribution house, informationtechnology, outlet stores, web business and office facilities, are plannedsimilar to 2007 levels. At our year-end call, I plan to provide you with morecolor on our capital investments for 2008, as well as more detail aroundseasonality and quarterly initiatives.

Lastly, we expect our effectivetax rate to increase to 41.6%, up from 41.5%, and weighted average dilutedshare count in 2008 is expected to be approximately 50.5 million to 51 millionshares.

For 2008, our continuedinvestment in infrastructure, research and development of new products, andmarketing to support our growth initiatives is paramount to our long-termsuccess.

At this time Kevin, Brad and Iwould like to open the call for your questions.

Question-and-Answer Session

Operator

Thank you. Thequestion-and-answer session will be conducted electronically. (OperatorInstructions)

We will take our first questionfrom Robby Ohmes with Banc of America Securities.

Robby Ohmes - Banc of AmericaSecurities

Can you guys hear me okay?

Kevin Plank

Yeah, fine Robby.

Brad Dickerson

We hear you good.

Robby Ohmes - Banc of AmericaSecurities

Good morning. Hey, two questions,one, you've given a lot of detail on the inventory, but can you help usunderstand if weather has played an impact in the buildup of your inventory?Then also, can you help us understand the sort of way we should think aboutquarterly revenue growth, because your implied guidance is obviously a slowdownin the fourth quarter versus what have you put up for the third quarter.

Then your '08 guidance ofexceeding that 20% to 25% implies a reacceleration. Can you just kind of walkus through how we should think about patterns of revenue growth for you guys?

Then the second question is, aswe're looking at all of the things you are doing in Europe,new stores and sneakers. Is sneakers the big focus of '08 and we should thinkthat Europe probably comes on the stronger,maybe more '09-'10? How meaningful could stores be? If you could help us rankwhere you see the opportunities as we are thinking about '08?

Wayne Marino

Sure, Robbie. This is Wayne. I'm going to takeyour inventory question first.

I think there's a couple ofpoints I want to make on the inventory. First, we made a strategic decision in2007 to bring our core inventory levels at a pace that would meet our demand.In 2006, specifically in November and December, one of the shortfalls we hadwas we could not keep pace with the demand for our product. So, we essentiallywent out and took core inventory, which is available for sale 12 months of theyear, and this is the benefit of our business model. We increased those levelsof safety stock. As a result, we filled demand at a much higher rate, and thatwas a big benefit to our top-line.

There's always an opportunity,and there will be as we go forward, to hold those fill rates constant as westart to improve our inventory efficiency. That's what we will be working on in2008. So, I think the inventory itself that we have on hand represents a planmostly around the core inventory. As far as the weather was concerned, ColdGearis a factor to us in the back half of the year as we all know. One of thethings we did this year was we received our ColdGear, and the entire season ofColdGear, in by the end of October. The reason we did this is, once again lastyear specifically in November, we were very short on ColdGear. In fact, wemissed some opportunities to fill that demand. So we wanted to be in a positionby the end of October to have our entire ColdGear season in-house, knowing thatthe season itself would have to be a longer season, which it is; it typicallyend for us in February or March.

In addition to that, we didn't haveto chase any inventory like we did last year. Now, the benefit of that, Robby,is that we are sitting here with ColdGear and we have been able to get somegood duty rates on ColdGear, which we should start to see as an opportunity inour gross margins. So, a lot of plusses on that as well.

As far as '08 is concerned, youknow, the inventory itself will start to get in line in '08; that's some of theinitiatives that we talked about. As far as our top-line growth, one of thethings we factored in for '07, we factored in the visibility we have currentlytoday with October. So, our full-year outlook factors in an unseasonably warmOctober. Also, I look into November and December of last year. November wasactually, as I said, not a month that we filled very highly and December wasunseasonably warm. The good news is that we are in a great position with ourinventory to fill demand in the back half of the year. We are also going to bein a great position to fill demand in the early part of the first quarter ofnext year.

Brad Dickerson

Robbie, this is Brad. I justwanted to add to that too, what Wayneis saying. Also, we tend to build our business on a seasonal basis versus aquarterly basis too. So we tend to look at the fall-winter season versus thefourth quarter in particular. Also, not really any significant new productlaunches in Q4 of '07, so from a year-over-year competitively basis, thatfactors in too. But obviously, our full-your outlook, our revenues are up 37%to 39% for '07, and as Wayne stated for '08, we are exceeding to 20% to 25% topand bottom line growth.

Kevin Plank

Robbie, this is Kevin. Let mejump on your second question there, which is how do we really rank I think thepriorities for our business and what are the growth drivers that are going toreally be impactful in 2008. I think, frankly, coming off a quarter where men'sgrew 43% and women's grew 49%, we still feel, first and foremost, great aboutthose two core growth drivers. I mean, men's and women's apparel alone just continueto I think show that we have yet to find the ceiling. I gave a couple ofcall-outs in my script to things like Compression and how we are continuing tosee the volume driving there, but even above that, the Good/Better/Beststrategy, ASPs were up 11% in the quarter and were up nearly 9% year-to-date.

We still want to continue todrive that. We think that, with our brand, we have the ability to placeconsumers into better products, and we need to continue to take advantage ofthat, so building better product is something you'll see come out of us in2008.

So, without question, the largestgrowth driver for us is our core existing U.S. business. Not far behind, froman excitement and a buzz factor though, is our opinion on footwear.

We've spent really the last twoyears and frankly the last three or four or five years planning for thatfootwear launch with getting into in starting with cleated footwear. We'vetaken our lumps with margin; we've taken our lumps with really building abusiness, building an infrastructure, and most importantly building the team ofpeople. We are poised and we are ready to start harvesting some of investmentthat we've input into athletic footwear.

You're going to see that in thesecond quarter of this year when we reintroduce the category of training to theworld. We believe that our athlete is training in a different way and that thestory we're going to be telling them is something which is consistent with whatathletes are doing today.

So, footwear, without question,is something that is going to be a big buzz and a big driver for us in 2008.

Europe,as we've stated all along, I think it's a long-term growth initiative for us.Peter Mahrer just got in there in July, and he's on the ground, and thatstrategy that we have is still the same. Peter's job is really localizing thatstrategy; number one, building the right team of people so he is over there,he's evaluating the team and he's building the out, he is making hires. It'sauthenticating ourselves on-field, of course and its finding and saying whatare the right properties for us to attack? Thirdly, it's also finding andsaying who are the right partners for us to be in Europe?

So, we've got some great doorsopening and Europe, we continue to seetraction. Again, we are on plan and it will grow, and as Waynesaid, it will outpace our U.S.growth. But still it's a long-term investment for us.

Robby Ohmes - Banc of AmericaSecurities

Terrific. Thanks a lot, Kevin.

Kevin Plank

Thanks a lot Robby.

Operator

We will go next to Jim Duffy withThomas Weisel.

Jim Duffy - Thomas Weisel

Thank you. Can you guys hear me?

Brad Dickerson

Yes, good morning Jim.

Jim Duffy - Thomas Weisel

Good morning; couple ofquestions. You mentioned some expenses in the fixturing program being pushedfrom the third quarter into the fourth quarter. Where are you with thefixturing program? How many store-in-stores do you have in place? Then relatedto that, do you have any further insights on the productivity enhancements thatyou're seeing from those fixtures?

Kevin Plank

Let me jump on it first then,Jim. Again, we are targeting about 260 of these soft/hard shops to be in by theend of the year. We are just over 200 right now that we have. Again, the impactof that will be roughly about quarter million total square feet that we willhave out at retail. That will be in this new concept, this new look, which wethink, something again, which is the manifestation of the Under Armour brand,when you walk into them. Not unlike what we're trying to do as we become betterretailers and better wholesalers.

The goal that we have and whatwe've seen to date, again, it's early. But I think what we've seenconsistently, when you put in concept shops, you're looking for about a 20%lift with product. And as that's been pretty consistent to the new fixtures andnew concept shops that we have versus the stores that don't have shops. Rightnow, we are looking at about three per week, is what we're going to beinstalling. Again, this is just not a Q3 or Q4 initiatives for us, as much asthis is something where, again, you're showing $20, $30, $40 T-shirts. You wantto be able to tell great stories at retail. It's part of our three-partstrategy which is the way that we are approaching the Web, the way that we areapproaching concept shops, the way that we are approaching I think our ownexperience, our own direct touch points with the consumer. We want to make surethat we are explaining to them what is performance, what is technology, and whatdoes the Under Armour brand stand for.

Jim Duffy - Thomas Weisel

Okay, great. And then Wayne, I want to drilldown a little bit on some of the things to improve inventory efficiency. As youlook into next year, what are some of the areas you'll be targeting to try toimprove the turns?

Wayne Marino

Yes, the easiest one for us,again, maintaining that fill rate at that high mid 90s is important to us forthe top-line. What we did, Jim, was we increased our safety stock probably twoand half times to be able to meet that demand. What we see, going forward, wewill be able to bring those safety stock levels down while holding our fillrate high. That's going to have a significant impact because approximately 50%of our inventory is in this core inventory. So, I don't see any risk at all inbeing able to do that; I believe that's a timing part, still maintaining thefill rate and bringing safety stock levels down. In addition to that, our ChiefSupply Officer Jim Calo already begun to look at programs that we run 12 monthsout of the year where we can shorten our lead-time.

Right now, our lead-time isanywhere from 90 to 120 days. The opportunity here is to work with oursuppliers and have them hold fabrications that will continue to run in ourbusiness going forward. Now, we've seen some benefits with cutting lead-timedown almost on half on just certain key programs.

So, early indications from me arethat we are in the right direction and we've accomplished that first goal ofholding our fill rate.

The last piece I think is asimportant for me sitting in the CFO position, is that our obsolete inventory isrelatively the same as a percentage of inventory as it was last year. Andanything that we have that we would consider prior season, we've earmarked forour outlet stores. Our outlet stores operate at a very good profit. It's a goodmargin model and a good operating margin model.

So, we've got a pretty goodcontainment on anything that is excess inventory. Again, that excess isminimal, mainly because we focused on that core inventory.

Jim Duffy - Thomas Weisel

Great, and the final question andI will let somebody else jump in; have you seen any resistance to higheraverage selling prices for your products?

Brad Dickerson

No. Jim, I think that the newcategories that we have gone into, they really have a tendency of creatingthese halo effects. So, the consumer is looking at our brand and they aresaying, we've got basic, it is sort of dumb-dumbs out there. What the UnderArmour brand stands for is that we are about innovation. We are about bringingand building technical product for the marketplace, and we've found that ourbrand actually gives us license to go to places where other brands in the pasthave not. And that's the excitement that we've had from important partners likeDick's Sporting Goods or people who say “We can try higher price points, we cantake this company and the brand to places where other brands have not been ableto go to”. So, we need to be thoughtful about that; we need to make sure thatwe are careful about the products that we do decide to get into, the categorieswe decide to get into. Again, that's what gives us continuing confidence inwhat we can do in apparel, as well as what we believe gives us the ability togo after something like footwear, and particularly in the performance trainingcategory.

Jim Duffy - Thomas Weisel

That sounds great. Keep up thegood work and good luck on the holidays.

Brad Dickerson

Thanks very much Jim.

Operator

We are going next to Omar Saadwith Credit Suisse.

Omar Saad - Credit Suisse

Thanks, good morning.

Brad Dickerson

Good morming Omar.

Kevin Plank

Good morning Omar.

Omar Saad - Credit Suisse

I wanted to just follow up on theweather question. What are you guys seeing in markets where it has got colderor as the temperatures have dropped a little bit here in the East Coast? Areyou guys seeing anything that can help us understand whether, there's a bigkind of question mark out there. Is it macro issues impacting the consumer,that's kind of impacting the slowdown that generally is being seen acrossretail, not just athletic?

How much is the weather playingan impact? Are you seeing the demand for some of those seasonal products insome of the markets, or do you feel like the consumer is kind of pinching theirpurse strings a little bit?

Kevin Plank

Omar, this is Kevin. First andforemost, what we're seeing in the market is that our brand in particular, andI can't speak for the total market, but our brand is very strong out there.When we are seeing cold weather, and whether it's what happened in Utah three weeks ago, what happened in Denvertwo weeks ago, but we're starting to get some signs on the East Coast and 43degrees this morning in Baltimore, Maryland and we are thrilledabout it, scraping ice off my windshield. But the opportunity that we have Ithink is, when it gets cold, it continues to pace and to outpace.

So, it's just a matter of timing.It's not a matter of if; it's a matter of when. We remain confident, I think,in what we're seeing in our business; we remain confident in the way that weare positioned. And more importantly, we spent, a year ago, when it comes tothe weather, really chasing it. In Q3 and Q4, we were out of stock; we were outof business. And since then, one of the things we made a decision this yearthat, with the weather comes, when it comes,we're going to be ready. We're going to have inventory and have theability to service it.

There's a lot of competition outthere that we are very aware of and that, frankly, they are pretty good at whatthey do and they are pretty cutthroat. So, our ability to have product, to haveit to the store, to be able to react to the weather, I think is something whichare these core basic products, things like our ColdGear items. You've got 10 or15 styles from Under Armour doing 30% to 40% of the work for our company. We'remaking the right bets and we believe we're making prudent bets on inventory.

Wayne Marino

Omar, this is Wayne. Just kind of to add onto that, from myperspective, I never bet against the weather. So, I sit in that CFO's seat, I'dlook at the brand and I say, we have gear for 12 months of business. And ourColdGear specifically is about the season; it is not just about the quarter.So, we've built our ColdGear for the season, and we believe that season inplaces where as Kevin said it started to get colder, we saw great results andwe expect those results to continue as the weather turns seasonal for us.

Now, secondly, we are factoredright now; we've factored the October unseasonably warm weather into ouroutlook. And in addition to that, we are well positioned. We've got someproducts that have been sold very well. I think our fleece product has beenvery powerful for us even in this weather today. So, we've got some great tops.In addition to that, we've got a new introduction of base layer which is doingvery well in its early introduction.

Omar Saad - Credit Suisse

And just so I'm making sure Iunderstand this; it sounded like you said you did the entire cold season by orfall-winter season by, it was done on your books by the end of October.

Wayne Marino

Yes.

Omar Saad - Credit Suisse

That was the rest of the season,not just through December but, last year it was freezing in February and March.

Wayne Marino

Omar, I positioned it with ourinventory team to take advantage of having all of our productד in for the end ofOctober, so that if we had the ability to reorder when we needed to, we couldreorder. Last year, we did not have that ability, and we missed opportunity.You're right; the cold weather season goes beyond just the fourth quarter. Forus, it's a season that falls right into January, February, and even sometimesparts of March.

So we've positioned ourselves forthat. It's at full price; it's the right sizes; it's the right styles, and Isee a minimal risk to us. I think ColdGear is about timing.

Omar Saad - Credit Suisse

Okay, and then if I could justswitch gears a little bit, something was mentioned in the prepared remarksaround gross margins. It sounded like you had some very positive impacts on thegross margin line, but it was offset by increased returns and reserves andallowances on some of the cleat offerings. It sounds like something was notworking there; you're going to discontinue some of those lines. Could you justdelve into that a little bit more and help us understand what's going on withthe cleat side of the business, and what gross margins might have looked like,ex that impact?

Brad Dickerson

Hey Omar, this is Brad. It'simportant for us to innovate and update styles seasonally. Our goal is tocreate great performance products for the athlete. So the realities of that,with the seasonal styles are that we have a short selling season, a shortselling window in these seasonal styles. So we kind of feel, not just infootwear but in apparel, normal course of business, we have to prepare tointroduce new styles.

We kind of feel we should becomebetter at this in footwear as we grow or business and learn from it. But reallythese are styles that we're going to update and bring new styles in, in thenext season. The good news here is that we've factored this into our outlookgoing forward, not only for the 2007 quarter going forward but for 2008 also.

Omar Saad - Credit Suisse

Okay. Can you help us understandwhat gross margins might have looked like ex some of the impacts there on thosecertain footwear lines?

Brad Dickerson

Sure. The returns allowance andinventory reserves actually had a 130 basis point effect, negative effect onmargins for the quarter.

Omar Saad - Credit Suisse

I got it. So, gross margins, exthat, up 130 bps on kind of the rest of the business?

Brad Dickerson

That's correct.

Omar Saad - Credit Suisse

Got it. All right, and then onelast question for Kevin, you talk about scalable businesses, footwear, women's.You're starting a retail launch in a couple days of a full price. Where do youstand on leadership for some of these key businesses? Are you happy where youare now? Because I know you brought Peter in on the international side. How areyou thinking about those going forward?

Kevin Plank

Look, for any great growth brand,I don't think you are ever happy with where you are, and that's part of what mynumber one job is. It's hiring and retaining great talent. So, you know, we arein a market today as we always are. Again, I spend about 25% of my time lookingfor great marquis talent, particularly around our growth initiatives. I thinkPeter was a great win for us in 2007. And we continue to look to bolster it,not only just the senior leadership but, a company like Under Armour that ispositioned for not the next 2 or 3 years but the next 5, 10, 15 years is theway we think about our business, the way we think about the infrastructure thatwe've invested in. We're looking for those great managers, those greatdirectors as well.

So, it's not just the premiumtalent that we get to send out the press releases about, but I think who ourcompany, our brand is, we are in this fortunate position that we really canattract some great young talent that's going to be there for us going forward.But without question, we're still learning in some of these things. Thequestion you just asked Brad about footwear, these are lessons that you gothrough it. It's hard to say and even when people have experience, until youhave a group or a team of people that are working together, things don't run assmoothly until you just have time.

Our footwear team is now headinginto its third year of fully operating and shipping product. Our forecasting,our sales team, the way that we interact, the expectation that we can have fromthe market, you just get better. The one thing that's always certain about ayear or two from any product company is that it will be better than year one,right? It's not to say there is anything wrong with year one; it just meansthat it is constant improvement. And frankly, that's the way that we approachour business each and every day.

Omar Saad - Credit Suisse

Excellent, thank you.

Operator

We will go next to JeffKlinefelter with Piper Jaffray.

Jeff Klinefelter - Piper Jaffray

Yes, just a couple of quickquestions for you, one is on sourcing. Wayne,you mentioned that, or I think you mentioned that on the prepared comments,that part of your inventory increase was in-transit due to Asiasourcing.

We also know that recently you'vediscussed transitioning some of your sourcing back closer to home for aresponse time. Could you just give us an update on, like, for example, at theend of Q3, how much of your inventory was Asia-sourced versus last year, Q3, toget a sense for how the in-transit increased to that degree, and then also anupdate on that new sourcing strategy?

Brad Dickerson

Jeff, actually this is Brad. Onthe sourcing piece, right now sourcing through Asiais about 50%. That's compared to about 40% last year. So we are up 10% in oursourcing from Asia. Also, on the temporaryshift, that was really more of a late Q4 '06, first half of '07 event, andwe've pretty much worked our way through that right now. So as we speak rightnow, that temporary shift -- we are not seeing that.

Jeff Klinefelter - Piper Jaffray

Okay, so that was a temporary;now you'll go back to seeing Asia become a bigger and bigger part of yoursourcing going forward? Do you think it will go above the 50% going forward?

Brad Dickerson

Correct. We should be rightaround 50%. We should see that. We will take opportunities to improve ourmargins through looking at sourcing it through Asiaas we see fit.

Jeff Klinefelter - Piper Jaffray

Okay, great. Then just a coupleof other quick questions; one would be on international. You clearly identifiedthat as a long-term growth strategy. We know, in the U.K., you've had some early successin distribution. Maybe, Kevin, could you give us an update there on, generallyspeaking, where your door count is situated today? We know the U.K.has been probably your strongest and earliest market with JJB. But in terms of France and Germany, you are using somedistributors in those markets. What's the margin implication of that versus thedirect distribution in the U.S.?

Kevin Plank

Well, today, Jeff, we've gotabout, we are over 1,200 doors of distribution that we have in Europe right now. Again, I will go back to thatthree-part strategy that Peter is driving for us right now; find the right teamof people, get us authentic on field, and find the right distribution partners.

So, speaking specifically todistribution, JJB has been an important partner to us, but not to be outdone Ithink by people like Innersport, which are the 4,000-store buying groups of thesmaller mom-and-pop independents which really got us going in Europe.So, it's not a one-trick pony in Europe or frankly in any of the markets -- notunlike what we did here in the States, we've got a strong, independentfoundation of dealers that are selling that authentic football shop, thatauthentic rugby shop, etc. They are talking directly to the athlete. Then wealso have the relationships teed up right now for the more, larger chainstores, like the JJB.

The good news in Europe is that they are not having any of the weatherissues that we've seen here in the U.S. Europe is actually very cold and that ofcourse always looks favorably for our business. So, I think business is aboutwhere we expected it to be in Europe rightnow. I think, going forward, that's some of things that Peter, as he gets inthere, he comes back after listening for three months and then starting toevaluate the team for three months, that is six-months plan of how are we goingto reengage and attack Europe, country by country, focusing on really France,Germany and of course the UK.

Jeff Klinefelter - Piper Jaffray

Okay. Then how does the 1200doors split between the U.K.,France and Germany today, Kevin?

Kevin Plank

I think you can call it roughlyhalf in the U.K.,and then the balance over the other two countries. And then also spread in afew other places, Italy and Greece and a little bit in Spain as well.

Jeff Klinefelter - Piper Jaffray

Okay. Then the margin structure;we've heard from other brands that you can get favorable margin and pricing inthose markets. Are you seeing the same trend?

Wayne Marino

This is Wayne. One of the things we did, we had theopportunity to learn. When we went to Europe, we set our pricing up, similar tothe U.S. but also takinginto account what it would take to do business in Europe.So, we've presented a fair margin. Our gross margins are good, but it wasn't byjust the pricing. I think what we did with the power of the brand, we went toour retail partners there and were able to negotiate with them, what I wouldconsider fair arrangements as our business grows.

So right now, we have a goodgross margin structure and I think fair pricing at retail. In addition to that,we've built it so that we have strong operating margins as well, as thatbusiness continues to leverage.

Jeff Klinefelter - Piper Jaffray

Okay. So just to clarify, Wayne, are you looking forcomparable op-margins out of the two businesses or; you are--

Wayne Marino

We've built the model right nowto have comparable margins over the long-term as the business continues togrow, yes. That's how we modeled it.

Jeff Klinefelter - Piper Jaffray

Great, thank you. The lastquestion; Kevin, you made it pretty clear in your point of differentiation isthat the power of the brand, your opportunities to take pricing up and ASP mixup in the U.S., So, clearly your priority is not figuring out how to godownstream in pricing. But we've heard a lot over the last couple of quartersfrom the moderate channel of distribution about how important this performancecategory is, probably due largely to success in Dick's and other higher-endretailers.

What are your thoughts on that?Let the competitors come in and take that moderate price, or consider itdiffusion or sub-brand for UA as some point?

Kevin Plank

Well, I think one of the themesthat we've heard from the line of questions that have been coming from you guysthis morning is how do you keep all of this stuff straight? You've got theretail component; you've got footwear; you've got your core business. But we dohave a lot of balls in the air; there's no question about it. It sounds like alot, but I think we've done a pretty good job of focusing and knowing what'simportant. It's like when I said, look, our core men's and women's business isgoing to be the most important thing for us. Footwear is number two; Europe is long-term.

We need to keep in perspective Ithink the areas that we're going to attack, and we see, frankly, so muchopportunity with just providing better product out to the market that we arealready serving. We still see the opportunity at Dick's Sporting Goods, at TheSports Authority, at Hibbett Sports, at the outdoor market in Cabela's and BassPro and these other just whole other channel that I don't think we're reallyspeaking to. So, it would be easy for us to look and have conversations aboutother distribution. It would probably be detrimental to our brand, I believe.

Our focus, lives, needs should beon where we're doing business today, and I think driving that, and taking theconsumer that we already speak to into higher and to better price points, andnot just higher price points, but it's better product. We don't just chargemore because it's Under Armour; we are introducing them something new. We arelifting their expectation of what should I expect when I wear a T-shirt? Right?So that is something that gives usour brand DNA.

Jeff Klinefelter - Piper Jaffray

Okay, great. Thank you.

Alex Miyamoto

We have time for one morequestion.

Operator

We will take our final questionfrom Jeffrey Edelman with UBS.

Jeffrey Edelman - UBS

Thank you, good morning. Just twoquestions; one, Wayne, as we think about next year, you mentioned leveragingyour fixed overhead, but when we think about the increased marketing spend, Isuspect that will put some pressure on the SG&A, and maybe we start thinkingabout relatively flat operating margin for the new year.

Wayne Marino

Jeff, it is Wayne. What I wanted to do is, first, look atnext year. One of the important factors for us is that we are a growth company,and we are going to continue to invest in areas that could become large,scalable businesses. One of the investments that we're going to make goingforward is in people, in brands. Brand is very important for us.

As we launch into the trainingcategory, which we're currently in right now in apparel, and we will be in withperformance trainers in Q2, it's important to send that message out, both infootwear and international and we believe that our marketing is that message.So, the ability to pay for that marketing is coming from our growth. Our growthis there because we have made the investments in the last couple of years. Partof that growth will help leverage our fixed costs.

So, one of the points I want tomake is that our fixed costs will leverage. We will take those dollars and itwill help offset some of the marketing.

In terms of doing the math, Ithink next year, when you look at it, we said first we will have growth in ourtop line and our bottom line. We're going to have additional investment inmarketing and leverage to pay for some of that marketing. I haven't given outthe exact financial projections for next year, but I think there are somenatural offsets.

In addition to that, anotherfactor that helps us pay for some of that marketing is increase in our grossmargin, and that's the other factor that will happen next year as we continueto look at our direct businesses, as we continue to improve our footwearmargins, as we continue to have strong apparel margins from our sourcing basein Asia.

Jeffrey Edelman - UBS

Great, thank you. And then, couldyou talk about your own retail? What kind of comp-store sales did those have inthe quarter and roughly what are they now as a percentage of total?

Wayne Marino

Jeff, it is Wayne again. Yes, we typically do not talkabout our comp stores and our outlet stores. What I can tell you, though, is,first, the gross margins in the outlet stores are as strong if not strongerthan our wholesale margins. Secondly, we have about 15 stores, hopefullyplanning to have 17 outlet stores. They essentially take all of our excessinventory and turn it into profits; they are all operating at a profit.

Now, one of the key metrics thatI use is looking at that direct business. Now, our direct business is acombination of our Web business and our outlet stores and our full-pricedretail store that we're about to open in two days. Collectively, the directbusiness will contribute approximately 15% of our year-over-year top-linedollar growth and an even greater percentage of our operating income. So, it's astrong model. It's a material model to our dollar growth, and accretive to bothour gross margins and operating margins.

Jeffrey Edelman - UBS

Great, thank you.

Wayne Marino

Okay.

Kevin Plank

Okay, operator. Thank youeveryone; happy Halloween!

Operator

That does conclude today's call.We do appreciate your participation. You may disconnect at this time.

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