Under Armour, Inc. Q4 2007 Earnings Call Transcript

Jan.31.08 | About: Under Armour, (UA)

Under Armour, Inc. (NYSE:UA)

Q4 FY07 Earnings Call

January 31, 2008, 8:30AM ET

Executives

Alex Miyamoto - IR

Kevin A. Plank - President, CEO and Chairman

Bradley J. Dickerson - VP of Accounting and Finance

Wayne A. Marino - EVP and CFO

Analysts

Omar Saad - Credit Suisse

Jeffrey Edelman - UBS

Robert Ohmes - Banc of America Securities

Jim Duffy - Thomas Weisel Partners

Brian McGough - Morgan Stanley

Jeffrey Klinefelter - Piper Jaffray

Brad Cragin - Goldman Sachs

Operator

Good day everyone, welcome to the Under Armour Fourth Quarter 2007 Earnings Results Conference Call and Webcast. Today's call is being recorded.

At this time, I would like to turn the call over to Alex Miyamoto, Director of Investor Relations. Please go ahead.

Alex Miyamoto - Investor Relations

Thank you and good morning everyone. I'd like to start by welcoming you to Under Armour's fourth quarter 2007 earnings call.

During the course of this conference call, we will be making projections or other forward-looking statements regarding future events or the future financial performance of the company. The words; estimates, intend, expect, plan, outlook or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially.

Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our press release and in the Risk Factors section of our filings with the SEC. The company assumes no obligation to update forward-looking statements to reflect the events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Before we continue, I'd like to direct you to our website, investor.underarmour.com. There, you'll find this morning's press release.

Now, I'd like to introduce the speakers and topics for this morning's call. Kevin Plank, Chairman and CEO; will address the drivers of our fourth quarter results and our strategy for continued growth in 2008 and beyond. Brad Dickerson, Vice President of Accounting and Finance, will then discuss the company's financial performance for the fourth quarter and provide an outlook on key balance sheet items. Wayne Marino, Executive Vice President and Chief Financial Officer, will conclude the prepared remarks with an updated outlook for 2008 financial projection. After that we will have a Q&A session that will end by 9:30.

With that, I will turn it over to Kevin Plank.

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

Thank you, Alex and good morning everyone. I would like to talk this morning about two topics I have some strong opinions about; the strength of the Under Armour brand and the future of Under Armour.

The strength of our brand was evident throughout 2007, as we saw a great revenue growth 41% to top the $600 million mark. We saw a great balance to that revenue growth for the apparel growing 37% for the year and footwear growing 52%. We also saw great balance in 2007 within our apparel top line growth as men's grew 36%, women's grew 35% and youth grew 53%. But the biggest call out for me is that we are able to achieve that level of growth primarily by growing within our existing categories and our existing distribution. That tells us that the opportunity for the Under Armour brand remains enormous and we are focused on building out our business while staying true to our performance position.

One area in which we believe we are well positioned to grow is women's. We have a great brand position, particularly with the young team athlete. We now have in place what we believe is the right focus on that opportunity, with the hiring of Suzanne Karkus, who joined us earlier this month as Senior Vice President of Apparel. Suzanne comes to Under Armour from Izod Womenswear, where she was President; before that she was President in the women's division of Calvin Klein Jeans.

The strength of our brand was most evident during the fourth quarter as we grew revenues 29% and would have been described as the most challenging retail environment in many years. We say strong sell-through for our core apparel styles in the Q4 selling season and as is our norm, virtually all of it at full price. Our strong sell-through at retail despite increased efforts from some of our competitors in performance apparel category is great evidence that we are clearly the performance brand of choice for this generation.

We believe in our current distribution and made our in-store presentation a priority in 2007. One of the ways we helped our retail partners drive sales in the fourth quarter was by improving the way Under Armour is presented within our best partners. That processes had a positive effect on sales as we out the concept shops covering more than 250,000 square feet in the back half of 2007 alone. This is most visible in our largest partners like Dick's, The Sports Authority, Hibbett and Cabela's, but is also evident across our distribution channels in accounts like Sport Chalet. Telling our story at retail is an asset for our brand and we will continue to invest in our in-store presence with our best partners.

Another great indicator of the strength of our brand, was our fourth quarter results in our online store in our first branded retail store which opened in Annapolis, Maryland in early November. We invested in both of these areas in 2007 to better understand how we can deepen our relationship with our consumer and the result exceeded our expectations in both cases.

In the case of our online store, we are very pleased with our average selling price, which increased more than 13% compared to Q4 2006. Based on these encouraging results, we'll continue to invest our online store book by marketing and technology perspective. Our performance in our Annapolis store was equally strong as we are now able to sell comprehensive product stories in a brand focused retail environment. While we're still in the testing phase at the Annapolis store, we are encouraged about our results there and believe it's a right time to test 3 to 4 additional Under Armour branded stores in 2008.

In the fourth quarter, our online and branded retail store accounted for 8% of revenues and helped drive our consolidated gross margins to the 52% level. There is more great evidence of the strength of the Under Armour brand. The effectiveness of our good, better, best strategy, which helped drive in improvement in our apparel ASPs of 8% for the full year, and helped us to maintain our position as the performance leader in the category. Our ability to enter new categories like golf and outerwear would provide great opportunities for us to gain share, in large existing categories. We bring UA technology to these categories and provide consumers and retailers with a new point of view on the business. And our 53% increase in youth for the full year, which was driven in part by strong growth in the core categories of baseball and football, and core products like Armour Fleece and ColdGear.

To sum up, I'm confident saying that the Under Armour brand has never been stronger. We grew our top line more than 40% in a year where our new product introductions are relatively limited and most of our growth came from core categories. We had a very strong fourth quarter, selling through at full price and generating strong traffic for our retail partners. We had great consumer response for both our first branded store and our improved online site. We continue to make inroads in Europe as Peter Mahrer, who joined our team in July of '07, looks to build our authenticity as well as our retail presence that now includes more than 1500 doors.

And most importantly, we expanded our position as the authentic performance leader and deepened our connection with the athlete of this generation. This brand strength is my primary source of confidence in the future of Under Armour. It's what empowers us to bring our consumer somewhere new, to take the Under Armour brand to businesses where authenticity and performance matters. And it's the reason we are so excited about the launch of our first line of performance trainers. This launch marked Under Armour's entry into the non-cleated footwear market and will be the cornerstone of Under Armour performance training.

Maybe the best way to describe what these performance trainers are all about is to tell what they are not. They are not cross trainers, which in our businesses has come to stand for a nice comfortable shoe you might where while grilling up some burgers or mowing the lawn. This is footwear for today's athletes. The new prototype, who spends nearly 95% of there time training for that very important 5% of competition on the field, court, ice or track. And we build the technology into our footwear for that new prototype athlete. To start, all our performance trainers are lightweight for speed and they align with our heat gear fabric featuring our signature moisture transport system to pull sweat away from the athlete. The mid sole features directional cushioning engineering, which provides specific grip to support propulsion, depending on the type of athlete you are, they are meant to perform.

To bring our story to this new prototype athlete, we've begun the most compressive brand campaign in our history. We selected May as the launch date to coincide around the training season where football begins. Football is a great asset for Under Armour and we see the new prototype campaign as a way to solidify our dominance in the sport. We began our strategy around acquiring football assets several years ago that plays out this spring leading up to our launch, let me take you through it.

It began earlier this month with the first Under Armour high school all American football game that was broadcast on ABC where we brought the best high school players from around the country to play it in All Star game and declare their college of choice on national television. Next with the Under Armour senior ball, which aired last weekend, and features the best collegiate players in the country preparing for the NFL. We gave you our new prototype campaign this Sunday for the Super Bowl and what may be the largest television audience in American history. We then go back to grassroots with the Under Armour football combine, which takes the 15 city tour inviting the top 2 to 300 high school underclassmen in any city to participate at NFL locations. And we will of course blitz the media around the NFL draft in April, and all that happens even before the shoes are launched in May.

Our strategy is to not just protect our position in football but the growth and learn as we bring you Under Armour story to new categories. We have been told that this launch is critical for the long-term growth of Under Armour and we agree. In fact, we vigorously agree. It's our authenticity with today's athlete that empowers us to lead them some place in new footwear. But it's important to understand that our Super Bowl effort is really just a start of a year long campaign focused on this new prototype athlete. We will tell the story through the launch of the footwear in early May and continue to communicate that performance message throughout the full year online, in-store, through grassroots and of course through product.

We believe communicating that authentic performance story both on our grassroots and national level, around where we are going to take this generation of athlete is a critical element to our success. This is the next leg of the Under Amour growth story, the future of Under Amour. We have the right combination of a great campaign, great retail partners who have heavily invested in the launch, the right product positioning and most importantly, great product that will deliver against the demand of today's athlete. This launch will further authenticate the Under Amour performance story with athletes and position us in a new footwear category in 2009 and beyond.

We feel confident about the investments we are making in this company; investments that will help generate large scalable business in new categories and geographies. We are not looking to take the express line of easy revenue growth that's unsustainable; we are building an infrastructure to support a multi-billion dollar company set on a broad-based foundation. The future of Under Amour is footwear, apparel and international. The future of Under Amour is sound, the future is ours and it begins Sunday night in the first quarter of the Super Bowl and we encourage you to tune in. Brad?

Bradley J. Dickerson - Vice President of Accounting and Finance

Thanks Kevin. I'd now like to provide some information around our fourth quarter and full year income statement. In addition, I will also discuss our 2007 year-end and 2008 outlook for some key balance sheet items.

First, our income statement. Our net revenues for the fourth quarter grew 29% over the prior year quarter. This is largely driven by nearly 30% growth in our apparel sales. For the full year, our net revenues grew 41% to $606.6 million, driven primarily by 37% increase in our apparel sales combined with a 52% increase in our footwear sales. For both the quarter and the full year, we also had strong growth in our accessory sales and our licensing revenues.

For the quarter, gross margin improved by 140 basis points to 52% from 50.6% in the prior year quarter. Primary drivers impacting the margin improvement for the quarter include the following. First, growth in our licensing and direct-to-consumer sales, which includes our website, catalog and retail stores, provided improvement in gross margins for the quarter. More specifically, our direct-to-consumer sales generally yield higher margin percentages through 80% quarter-over-quarter.

Second, as planned since the beginning of 2007, we have been shifting dollars previously given as customer discounts to in-store marketing and SG&A.

For the full year, gross margin improved by 20 basis points to 50.3% from 50.1% in the prior year, in line with our most recent guidance for 2007. Selling, general, administrative cost as a percentage of net revenues for the quarter was 35.8% compared to 37.5% in the prior year quarter. This 170 basis point decrease in SG&A quarter-over-quarter was driven primarily from a reduction in marketing from 12.6% of net revenues in 2006 to 11.2% in 2007. Similar to prior quarters increased investments in our growth initiatives, which include international, footwear and direct-to-consumer accounted for more than 40% of our quarter-over-quarter dollar increase in SG&A. For the full year, SG&A as a percentage of revenue decreased 80 basis points from 36.9% in 2006 to 36.1% in 2007.

Marketing costs remained within our 2007 target range of 10% to 12% of net revenues, representing 11.7% of net revenues compared to 11.2% in the prior year. By leveraging some of our fixed overhead components, we were able to more than offset with 50 basis point increase in marketing for the year.

Our operating income for the quarter increased to $28.3 million compared to $17.7 million in the prior year, an increase of 59%. For the full year, our operating income increased to $86.3 million compared to $56.9 million in the prior year, an increase of 52%, exceeding our previously provided outlook.

Operating margin for the fourth quarter was 16.2% compared to 13.1% in 2006. For the full year, our operating margin increased 100 basis points to 14.2% from 13.2%. The growth in our operating income and improvement to our operating margin were driven by the strength in our top line and the leveraging of our SG&A spending.

Our resulting net income for the quarter increased to $16.9 million from $11.9 million in the same period last year. Fourth quarter diluted earnings per share was $0.34 compared to $0.24 in the prior year. Full year net income increased to $52.6 million from $39 million in the prior year, resulting in diluted earnings per share of $1.05, exceeding the preliminary estimate provided on January 17th.

Now I would like to move on to the balance sheet. Total cash and cash equivalents at the end of the year were $40.6 million and cash net of debt was $26.3 million, ahead of our most recent outlook. For the year, cash net of debt decreased by $38.1 million. This year-over-year decrease was primarily a result of investments in inventory and capital expenditures, which I'll speak about shortly. For the full year 2008, we expect cash net of debt to remain relatively flat from our 2007 year-end balance.

Net accounts receivable increased 30.1% or $21.6 million on a year-over-year, which was inline with our net revenue growth for the quarter. In 2008, we expect net accounts receivable to continue to grow inline with top line growth.

Now I would like to discuss our inventory. Inline with our most recent outlook, inventory increased 9% from September 30th, 2007 to $166.1 million. For 2008, our inventory strategy is focused on continuing to meet consumer demand, while improving our inventory efficiency. We expect to achieve this by first, being in stock on core offerings. Second, shipping seasonal product at the start of the shipping window in order to maximize the productivity of our floor sets; and third, earmarking any seasonal assets for outlet stores and operating those stores at a profit.

Our inventory consists of three buckets: core, seasonal and prior. Core inventory, which represents approximately 60% of our total inventory, is available for sale over the next 12 months and beyond. In 2007, our strategy was to increase core fulfillment rates in the low 80s to the mid 90s on increased demand. This strategy led us to double our level of safety stock in core auto replenishment items. This strategy significantly impacted our top line growth. Additionally, we also took receipt of our entire season's ColdGear product by the end of October 2007 and take advantage of significantly favorable duty rates. This strategy has positioned us to receive a similar benefit for ColdGear and Fleet programs in 2008.

For 2008, our strategy around core auto replenishment program is to continue to fill our demand at 90% to 95% while reducing the number of weeks of supply in safety stock. Through improved supply chain efficiencies which we tested in 2007, we are already beginning to make adjustments to safety stock level, and expect to see an improvement in core inventory productivity during the back half of 2008.

Seasonal inventory, which represents approximately 30% of our total inventory, pertains to styles that will drop from our product line within the next 12 months. We generally purchase seasonal inventory based on visibility of future bookings. Our strategy for seasonal inventory is to set the retail floor at the start of the sell-through window. Our early receipt of spring 2008 products has put us in a good position to service that seasonal business.

Prior inventory represent 10% of our inventory and pertains to drop styles which are earmarked for our retail outlet stores. For 2008, we plan to add 5 new outlet stores, bringing the total to 22 by year-end. It is worth noting that we currently do not cut product for our outlets.

As we move to capital expenditures, we need to continue to point out that we are building the foundation for large scalable businesses. Our investment in capital expenditures for the fourth quarter was approximately $9 million, which brought the total to approximately $35 million for the full year, in line with our previous outlook. Our 2008 capital investments are planned at level similar to 2007, and will include approximately $15 million in our branded concept shop and in-store fixtures, $5 million in upgrades and improvements to our existing distribution facility, $7 million in upgrades and improvements to our information technology infrastructure including additional investments for our website, and the remaining balance in general corporate improvements to support our growth.

In addition, as Kevin discussed, in 2008 we will expand our full price retail test. We anticipate adding 3 to 4 additional full price retail stores in 2008. The investment in these stores will represent an additional $5 million to $7 million for the year and brings our total 2008 capital expenditures to the $40 million to $42 million range.

Now, Wayne will take you through the remaining outlook for 2008.

Wayne A. Marino - Executive Vice President and Chief Financial Officer

Thank you, Brad. First, I'd like to remind you that our long-term growth targets remain at 20% to 25% for both our top and bottom lines. Due to the strength of the brand in existing channels, the increased productivity of our new concept shops, the continued expansion of key customers and the ability of the brand to expand into new categories, we believe 2008 revenues and income from operations will increase between 26% to 28%. While we remain confident in our business and our long-term strategy, we believe it is prudent to consider the current macro economic environment in providing our outlook for the year.

Our strategic growth initiatives remain the same. First, grow our men's and women's U.S. apparel business. Second, expand our footwear business by launching new categories while maintaining a disciplined approach to gaining market share in existing cleated footwear categories; and third, continue to build the Under Amour brand internationally. Additionally, as Kevin mentioned, based on the success we've had to-date with our web business and our first branded store in Annapolis, we plan to continue to grow our direct-to-consumer sales.

Now, little more detail around these growth initiatives. Our apparel business will continue to be a significant part of our business for 2008. Men's full year growth is planned in the range of our long-term growth target of 20% to 25%, while all other apparel businesses are projected to grow at an even faster pace.

We had strong growth in apparel in 2007 and we believe additional opportunity can be captured in 2008 through strong order fulfillment within our core product offering, expansion of our lines in the training, golf, football and outdoor categories, continued innovation resulting in consumers moving into better performance products driving higher ASPs, and continued expansion of our larger strategic accounts into new geographic markets. The growth of our footwear business will be driven by the expansion of our Under Armour brand into new categories of footwear. The next phase of this plan begins with the launch of our performance trainer on May 3rd. We believe that success with this launch will position us to introduce additional performance footwear categories in 2009 and beyond.

Internationally, we will continue to focus on Western Europe, with particular emphasis on the UK, France and Germany. We continue to believe that the long-term opportunity for the Under Armour brand internationally is as large as the opportunity in the U.S. and we will make the appropriate investments in people, brand and infrastructure in 2008 and beyond to reach that goal. We expect our rate of top line growth internationally for 2008 to outpace the company's overall year-over-year top line growth rate.

For 2008, we believe that our direct-to-consumer sales which currently include our website, catalog, outlet stores and one full price test store will be an important contributor to our top line dollar growth and that even greater contributor to our operating income growth. Our first branded store located in Annapolis mall, which opened in November of 2007 has thus far exceeded our internal projections. We believe that there is more to learn about our full price retail opportunity and as Brad mentioned earlier, we are planning to open 3 to 4 new test stores in new geographic markets over the next year. Based on these growth drivers, we believe 2008 net revenues will increase 26% to 28%, resulting in a top line between $765 million and $775 million.

I'd like to comment on the timing of our business. Historically, a greater percentage of our revenues have been recognized in the back half of the year, and we expect 2008 revenues to reflect a similar pattern to that which occurred in 2007. For the first half of 2008, we continue to plan top line growth in line with our full year growth targets. However, based on factors that I will explain to you shortly, we expect our 2008 earnings to be more heavily weighted towards the back half.

Gross margin; based on the visibility that we have today, we believe that our gross margin for 2008 will show a 40 basis point to 50 basis point improvement as a result of growth in our higher margin direct-to-consumer sales outpacing growth in our overall business, offset in part by our anticipated growth in footwear, which carries lower margins than our existing apparel markets. The margin impact of footwear will be most evident in the second quarter. We are planning gross margins to be lower than the prior year. However, we believe our performance trainer will carry higher margins than our cleated footwear business.

SG&A; we will continue to make investments to drive the growth of the brand in 2008, while also investing in initiatives that will drive our longer term growth. First, let me begin with marketing. We believe that our marketing has a direct impact on our top line. In 2008, we plan to invest between 12% and 13% of our full year net revenues to tell our story and support major launches, specifically the performance training shoe in Q1 of 2008. It is important to note that our marketing line includes people, print and media, sports marketing, the amortization of fixtures and all our in-store marketing efforts. Additionally, we do all of our creative in-house.

If you recall, in 2007, we shifted certain discounts towards improving the presentation of the Under Armour brand at retail, essentially representing a shift from margin dollars to marketing dollars. For 2008, we plan to continue the strategy and expect to open or reshape over 300 in-store shops with our best retail partners. We've said in the past that as our business becomes more diverse in terms of product assortment, gender, sport category, we would adjust the timing of our marketing spend to reflect a more balanced mix. Historically, we have spent approximately 40% of our marketing dollars in the first half of the year. As we have stated for 2008, we are planning to spend more than half of our marketing dollars in the first half to support our new prototype brand campaign. We will use this new prototype campaign as a platform to launch our performance trainer in Q2. As always, we will be opportunistic with the timing of our marketing spend and provide appropriate updates on marketing spend as we manage our business during the year.

Below the marketing line, we plan to continue to invest each and every quarter in our strategic growth initiatives such as footwear, international and direct-to-consumer, putting the infrastructure in place to build large scalable businesses and to market the Under Armour brand globally. We have already seen these investments begin to pay off, with approximately 30% of our top line growth in 2007 coming from these new businesses. For 2008, we anticipate over 40% of our top line growth will be generated from these investments.

As a result of our top line growth, we expect our fixed components of our SG&A to leverage and partially offset the increased spend in marketing, resulting in a 40 basis point increase in SG&A as a percentage of net revenues for 2008. Based on these projections, we believe income from operations will grow 26% to 28% in 2008, resulting in a full year range of $108.5 million to $110.5 million. However, based on the seasonality of our top line, the timing of investments, the impact of performance training footwear on the second quarter margins, our earnings in 2008 will be more back half weighted, we are currently anticipating the first half EPS to be in the range of $0.03 to $0.05.

For the full year, we expect our effective tax rate to increase to 41.6%, up from 41% in 2007 and the weighted average diluted share count in the range of 50.5 million to 51 million. We are excited about the upcoming year, we believe our ability to continually invest in large scaleable businesses and the marketing to support these initiatives is paramount to our long-term success.

Now Kevin, Brad and I will take your questions. Before we do, I'd ask that each of you try to limit your questions to one to two per person, so we can hear from as many of you as possible. Operator?

Question And Answer

Operator

Thank you. [Operator Instructions]. We'll go first to Omar Saad with Credit Suisse.

Omar Saad - Credit Suisse

Thanks, good morning. Couple of quick questions; first, can you kind of talk about why you decided to do a Super Bowl ad, it seems like a little bit of a departure from your previous approach to marketing the brand. Can you comment on that?

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

Hey Omar, it's Kevin. We talked on how much we should put even in the script, but let me just take a minute and walk you through what's going on with Super Bowl. First of all, the answer is it absolutely has no change to the strategy that we had before. The fact we see Super Bowl as the perfect venue to unveil the most highly anticipated product launch in our company's history. All of our launches that we've done in the past has centered around major media, but we've done it on things like ESPN where you can pick up 1.5 million to 2 million viewers at a time. It's the opportunity to unveil, it's the coming out party for more than a 100 million people, to introduce them to the Under Armor brand and again, this is not just a shoe commercial for this company, it's a brand campaign.

And I think that's one of things that makes us so excited about what's coming up this Sunday. It's important for us to reiterate the fact that the spend we have falls within our 12% to 13% campaign for the full year. The new prototype is something again; it's much bigger than just a shoe campaign. So let me lay out for you the way and the idea we have, to really think about it in three phases.

Phase one is the teaser [ph] which has been going on for about the last frankly several months, kicking off with both online as well as 15-second teasers that we have been doing across media. Phase two is what we call, the blitz and that's introducing the mothership. The mothership is what starts with the Super Bowl ad and again, this is not a... our marketing for the year should not be defined as a Super Bowl ad as much as that simply the launching pad for a year long campaign. Again, it's the unveiling of maybe one of the largest growth engine that we'll introduce as a brand.

And Phase three is going to be what happens after Super Bowl. There is five components that we thought about to that. And its everything from major media with building around not only how do you translate the new prototype into just football and I took you through that in my script, as the way that we really took an approach of owning to score a football, but also how it translates into baseball, how it translates into field hockey, into lacrosse, every thing will take on the positioning of the new prototype.

Grassroots campaign and again, we talked about our all American games that we have beyond just the sport of football, but all American lacrosse game, so all American baseball and softball games. Under Armour camps and clinics throughout the year in combines, the Under Armour senior ball, which just took place as well as the ESPY awards that we have coming up. In-store, which you're going to see out of retail as you will find all of our major partners we'll be engaging, all of the graphics will switch over to the new prototype. You have 90-day count down clocks that will be found at all the retailers beginning on Monday.

Online, it's going to be our home base where we will continue to drive people and tell them the story about what the footwear is, you'll get the first look at it Sunday and people will be able to drive from there. And then also just the way that we are hitting kids, we are chasing just traditional media like a television commercial as much as things like the recent partnership we just did with Xbox, hooking up with things like Tom Clancy's new Ghost Recon, for instance, where you have somebody walking down the street, there will be Under Armour billboard inside the video game. So again, this isn't just one platform of a campaign, as much as it's multi platforms that will take place throughout the year. And frankly, for something as big and major, as Under Armour entering non-cleated footwear, we think it is completely appropriate.

Omar Saad - Credit Suisse

Thank you, that's helpful. One more question if I could, on the full price store in Annapolis, I know it's just a test location, could you share with us if you could, any details around how that star store performed in the holiday and something you are talking about three to four new locations this year, how you are thinking about that channel?

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

Well let me start with the fact that we like our distribution today. And our distribution likes us very much. We want to continue to reiterate the fact that this is a test. When we talk about the test, there's a line of things we get out of stores. Number one, to capture [indiscernible] the lot of things we get on the stores. Number one, we placed the store in a place where Annapolis mall, for instance, it didn't have Under Armour distribution prior to us putting a store in there. And you think about whatever revenue we put up and we did exceed our plan and exceeded our expectations. We would have locked, I don't know 80%, 85%, 90% of those sales had we not had a store there.

And you look at that, it's not exclusive to just the Annapolis mall, there is other locations out there where we believe we can be strategic with placing stores in the right locations. We believe that we are under penetrated at retail. And I think the mall channels are great examples of the fact that there are additional places for us to go where I believe with the breath of the product line that we have today, we can relevant to many more consumers. And again that also speaks to why open up at a venue like Super Bowl this week end.

You know two or three years ago, I am not sure that an event like would make sense as much as today, we have the breadth of product to be relevant to more consumers and we believe it will pay dividends for ourselves and for our shareholders in the long-term.

Omar Saad - Credit Suisse

Did the store have an impact on your wholesale partners in the area?

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

We... frankly, the one of the reason we selected that was because of... again, because of the fact that we didn't have wholesale or some of our wholesale partners in close proximity. And the ones that we did, actually cuts your comp plus or positively for the year. So you know, it's that same... I think you heard two sides of that argument, but obviously from our side, we are pretty pleased with the fact that we can go and create a bigger brand presence and still drive sales not only in our own store but also for our surrounding partners as well, which you know something that hopefully will continue as we find more depth this year.

Omar Saad - Credit Suisse

Thanks.

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

Okay thanks very much Omar.

Operator

We'll go next to Jeff Edelman with UBS.

Jeffrey Edelman - UBS

Thank you. Good morning. Two marking questions; Kevin, has the timing... did the timing of the marketing spend change materially from the third quarter conference call?

Wayne A. Marino - Executive Vice President and Chief Financial Officer

Jeff, this is Wayne. There is two things with that. First of all, for competitive reasons, we really wanted to control the release of any information around the brand. And Kevin kind of really explain on that, but the campaign around the performance trainer, we want to keep very tight. And secondly, our marketing consists of many components. It includes the retail, graphics, it includes the media and some of those decisions as related to the timing of our campaign, we made much later in the game, and that impacted our visibility.

Jeffrey Edelman - UBS

Okay thank you. And then let me --

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

Let me jump on the end of that well. I think it's a good example of what came out in brand week earlier this week as well. You had one of our competitors saying that they declared, they are now in the performance training, they calling it performance training, a) that they are going to announce or come out with their shoe a month before the Under Armour launch. If they are going to put the full weight of their brand behind the launch, they don't have a name yet, they haven't showed you shoe, they are giving you price points, but they haven't told anyone anything else. And you look and you think, because of those types of competitive environment that we are in and these people are good at what they do as well, if we had given them more notice, will they have had a name, will they have had a campaign, will they be going head-to-head versus one of the largest spend that we are going to invest in Super Bowl for instance, so we feel good about the competitive advantage that we put ourselves, we put our market to by coming out the way that we have.

Jeffrey Edelman - UBS

I understand. And then secondly, realizing how important is marketing is to driving volume, are you at risk with your marketing cut backs in the back half of the year in terms of driving volume or might we start to see a pickup there?

Wayne A. Marino - Executive Vice President and Chief Financial Officer

Jeff, this is Wayne. First of all, marketing for the full year, we are going to be very disciplined with our top of 13%. I think it's important to know that I think I said in the script that over 50% is in the first half and there's certainly a significant amount in the back half. So in the past we have spend 40 in the first half and now we will spend little over 50. So still very positive marketing throughout the entire year and the brand campaign that we are about to launch in the first half will be a brand campaign that will resonate through the entire year.

Jeffrey Edelman - UBS

Okay, great thank you.

Wayne A. Marino - Executive Vice President and Chief Financial Officer

You are welcome

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

Thanks Jeff.

Operator

We'll go next to Robbie Ohmes with Banc of America Securities.

Robert Ohmes - Banc of America Securities

Thanks. Hey guys, couple of quick questions. Kevin, can you... I was hoping you could talk a little bit more about Europe and Peter Mahrer and how different his approach is going to be versus the previous approach and then just my second quick question is in the core men's U.S. business, can you just walk us through the product extensions or how you get to may be 20%ish or better growth in just the core men's U.S. wholesale business in 2008? Thanks.

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

Yes thanks Robbie. So first of all, Peter joined us in July and has really hit the ground running. The strategy that we had in Europe, it hasn't frankly changed. First and foremost, there was three parts to that strategy. At number one, building the right team of people and obviously, Peter is a critical component to making that happen. And he is in the process of building his team and there's a good team in place in Europe to begin with. But I think expanding that and looking and saying, one of the things that we are engaging in over there now is a response team which basically put people in boots on ground in France, in Germany and the U.K. in 2008. So you are going to have these crack teams, they go to events and will be telling you Under Armour story, really taking a grassroots approach to it.

Now the second component was building of intensity on field. And I think again, if you continue to open up the papers in Europe, you'll find more and more credibility, more and more authenticity happening and occurring on field. And one thing we are excited about is that we do project that we'll have some exciting new announcements about sports partnerships that would be loud and will be heard in Europe in the coming months.

And then thirdly is establishing the appropriate distribution with good partners. We've expended now to roughly 1500 doors in and throughout Europe. Peter has engaged those relationships. And we are just coming off of or in the middle of a really strong ColdGear season. So I think there is good confidence in the brand, there's belief in the long-term our prospects and most importantly, probably most telling thing about our brand positioning in Europe is a) I give you that compression versus loose ratio. And it still it's about 4:1 in favor of compression. So we are still developing there, but more importantly, probably our fastest growing segment over there and one of our largest segments is our youth business. We believe that youth obviously is something that is a pretty good indicator of what are our long-term brand positioning in Europe is going to be.

Wayne A. Marino - Executive Vice President and Chief Financial Officer

Robbie, it's Wayne. The second part was the increasing core programs and what I want to point out is first of all, our top line 26 to 28 for the full year as well as for the first half, and in the back half, we would be introducing some new programs. For example, have a fitted ColdGear, some additional Fleece programs and additional space with those programs at retail. And that's certainly for us drives our plan in the back half to be fairly substantial increase year-over-year. So in apparel, that's a big driver for us, the extension of fitted ColdGear, Fleece and more space.

Robert Ohmes - Banc of America Securities

And does that skew... the extended ColdGear and the Fleece, is that across men's, women's and youth or is it skewed towards women's and youth?

Wayne A. Marino - Executive Vice President and Chief Financial Officer

It's mostly men's but it definitely crosses over.

Robert Ohmes - Banc of America Securities

Right, terrific. Hey thanks a lot, guys.

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

Thanks Robbie.

Operator

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

Jim Duffy - Thomas Weisel Partners

Good morning.

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

Good morning Jim.

Jim Duffy - Thomas Weisel Partners

FY '07 footwear revenue is $41 million in round numbers. How much are you expecting from footwear in '08? How much do you expect the prototype to contribute, just so that we have something to benchmark you again?

Wayne A. Marino - Executive Vice President and Chief Financial Officer

Jim, it's Wayne. For us, in 2008, we're expecting approximately 1 million units which is, to remind everyone, 1 million units is an allocated program. So we've kept it fairly tight. It's allocated to our current customer base. It's about 1 million units and you look at the prices and our average retail price 89 to 100, so I think you could probably take it from there.

Jim Duffy - Thomas Weisel Partners

Okay, very good. And then I think I may know the answer to this, but are you prepared to talk about this footwear concept that will fall on the success of the trainers in '09? What are some of the things you have in the works?

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

Yes. Hey Jim, I think that as we sit here today two days prior to the launch of the campaign and few months from actually having the product in the market, we are focused on delivering a great, great footwear campaign. I think the best measure of success for Under Armour in footwear at the end of the 2008 we sit there on New Year's eve of this year is going to be the progress that we made in building the foundation for a large scale of footwear business. We are going to be judge by how the brand is positioned at year end, the ability to enter additional footwear categories. So that question I think that too much of the shift has taken people into just focusing on running and basketball and training has been forgotten about.

We mentioned the barbeque shoes. But we see the opportunity to reinvent that category, which is something call performance training. In addition, from that platform we'll give us I think the credibility to go into additional footwear categories. But our consumer continues to ask for it, we hear that more and more. And just one more anecdotal piece; coming off of the Under Armour all American high school game, the Under Armour all American or senior ball and you've got the best of the best of collegiate and high school athletes and when you have kids that are in one of the events we are able to give kids a pair of shoe and they are only taking the shoes off their feet and walking barefoot back to the room because they don't want to get there shoes dirty. They are taking photos of the shoes that they can't get and e-mailing them to a friend.

So I mean the excitement or buzz we have around this campaign is where we are really focused right now, making this a success. And I think that we have learnt some things surround footwear that shows that being prudent about the projection we have. And is it a million unit? It's not a million unit launch, right? We are looking to sell much, much more than that, but its starts with one small step

Jim Duffy - Thomas Weisel Partners

So is it fair to say that you think there is enough work to be done in the training category, that's a multiple year program for you and things like basketball and running could be delayed even beyond '09?

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

Again, I think that there is opportunity and as I said it, in 2009, we'll re-evaluate that again. But look, I think we've got one more conference call before we even launch the footwear. So we will keep you abreast I think as that information comes in. But again, we spend the last year really building infrastructure. We spend the last year... apparel and footwear do not leverage. You know its one thing learns. The back office leverages and as you'll see on Sunday we believe the marketing leverages between apparel and footwear, but everything else to completely new supply chain, right. It's completely new... we've opened an office in... a quality office in China. We brought development in-house, we brought design in-house.

We have fully flushed out and built a footwear team in the last 12 months and because of that, we are positioned and we are testing, we building product for additional categories. But I think we're going to wait and we are going to use market timing and positioning as appropriate time ahead into any of those additional categories.

Jim Duffy - Thomas Weisel Partners

Understood thank you very much.

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

Thanks very much Jim.

Operator

We'll go next to Brian McGough with Morgan Stanley.

Brian McGough - Morgan Stanley

Yes, hi thanks. Brian McGough. So I hate to nitpick on the '08 guidance because it really does sound like you guys are making the right overall investments longer term in order to boost the MPV as the brand. But if I look at first half, so earnings are down about 80%, it implies that the back half numbers need to be a better than say, 60%, which is just a big number. And that's a rate that you guys haven't grown since at least three years ago, when the company was about a third of size it is now. So with no margin improvement plan for the year, I am just wondering, I mean one part of the equation is within your control, which is marketing and OpEx, but the sales and gross margin aren't as much within your immediate control especially with days inventory where they are, so what kind of leverage do you have in back half of the year in order to pull to still hit your full year goals to the extent that sales are coming down a little weaker or margins are coming a little weaker on the gross margin line, just still get to that 1.30ish number to the full year?

Wayne A. Marino - Executive Vice President and Chief Financial Officer

Okay. Brian, this is Wayne. Let me give you first of all, some color. First of all, the first half top line growth of 26% to 28%, full year 26% to 28%. Secondly, I would expect our gross margin in each and every quarter to be improved with the exception of Q2, which I mentioned which would pretty much be lower as a result of footwear.

The other thing I want to point out that our marketing. We've always said this, our marketing will be opportunistic with our marketing, but our marketing is a variable. It's 12% to 13% of our top line revenues, it has many components. So as we look at our entire year we have been very disciplined in staying within our 12% to 13%. Our ongoing investments, currently as Kevin mentioned, Brad mentioned, we have been investing in long-term large scaleable businesses. We have to continue to do that. We cant just slow down in the first half of 2008 because the top line revenue is more weighted toward the back, it is very prudent. But I also want to point out to everyone that within our SG&A there is a component in there, which is fixed and there's a component which is variable. And we will have the ability in our SG&A, if we see things with the visibility not to go where we plan; we could make the appropriate adjustments. So there is flexibility within the component of our SG&A.

So I think the whole story is a) we are very, very confident with what we have today in our top line. We've looked at the macro economic environment, we looked at trends that we've seen in holiday or we see it so far, look at the current visibility we have with our retail partners and our own direct-to-consumers business and we take all of those together and I think we're providing a balanced outlook. So taken as a whole, I would say the flexibility to adjust if we need, is there. We're very confident in what we put out today.

Brian McGough - Morgan Stanley

So the adjustment if there were to be one in the back half wouldn't come out of marketing is what you're saying. It would come out of some other area that you have identified internally that you think you can tap into if need be?

Wayne A. Marino - Executive Vice President and Chief Financial Officer

Marketing is a variable and our top line is 12% to 13%, we allocate for marketing. So there is a component of our top line that we will stay disciplined. And there is also a component in our SG&A which are very valuable. It's variable and will be able to adjust both.

Brian McGough - Morgan Stanley

All right guys, thanks for taking my question.

Wayne A. Marino - Executive Vice President and Chief Financial Officer

Okay, Brian.

Operator

We'll go next to Jeff Klinefelter with Piper Jaffray.

Jeffrey Klinefelter - Piper Jaffray

Yes, just a couple of quick questions. And Wayne, first off, on inventory, I apologize I missed this right at the beginning. But in terms of your inventory fast going into '08, it sounds like you're going to maintain very high service levels in your core, you're also going to be taking down weeks of supply? Can you give us some sense as we move through the year for what level of the inventory will be... not specifically by quarter, but how we'll see this coming down and narrowing the gap between top line growth and year-over-year inventory growth based on the dynamics within core and seasonal as we move through the year?

Bradley J. Dickerson - Vice President of Accounting and Finance

Yes Jeff. This is Brad, I'll take that one. Just again, let's look at the three categories or buckets of inventory I spoke about in the script. First; core, which we said was about 60% of our inventory, sells through a full price only 12 months out of the year. As we talked about on our previous calls in '07, our order fulfillment rates in the prior year, late '06, early '07, we're in the mid 80s. So we really had a strategy to increase that safety stock level on core, so we can get our order fulfillment rates up to the mid 90s which we were successful in doing in the back half of '07 and even in some instances, above the 95% level of our fulfillment rates.

Also we talked about bringing ColdGear in early, in October of '07 to take advantage of some of the favorable duty, rates we had for Singapore. So those were some of things we did in '07. As we look into '08 on the core inventory bucket, I think we need to be really smart about how we reduce those safety stock levels because you want to maintain those order fulfillment rates in the 90% to 95% range, which we think is an acceptable range. So we're working with reducing lead times and other strategies to do that, but we want to be smart about that. We really see right now that's really more of the back half of the all year improvement. And when we say improvement, we are looking at probably our inventory growing at a level less than our top line and that will happen during the back half of the year.

When we talk about seasonal, we mentioned that was up 30% of our inventory, you purchase that inventory based on our visibility of our customer bookings. However, again based on certain products and lead times, sometimes we are ordering some product ahead of those bookings. So we can get better of that as we go into '08 here and improve lead times and purchase the inventory more along the lines of bookings. So again we think there is an opportunity in '08 to be more efficient in our seasonal side too, and obviously any excess seasonal inventory that we have, obviously go through our outlet stores which are accretive to our gross margin

Jeffrey Klinefelter - Piper Jaffray

Okay. So the inventory growth will be... very likely will be ahead and may be well ahead of the sales growth in the first two quarters, but we will see it moderating down close to that growth may be even dipping below in the second half?

Bradley J. Dickerson - Vice President of Accounting and Finance

That's correct Jeff, again we want to be smart about reducing our safety stock. Obviously, we don't want to do that too quick, we want to maintain those order fulfillment rates.

Jeffrey Klinefelter - Piper Jaffray

Okay. My other question is on SG&A. There is some concerns near term that would likely be mitigated longer term with your strategy to go into these other businesses that it's going to require a stepped up level of SG&A for potentially the next two to three years as you really build out a footwear competency, meaning everything from R&D, their distribution house, expansion, people, marketing, because of more competitive environment et cetera. And then also international, I guess as that ramps up... takes a little bit longer and potentially could be more competitive. Kevin, how would you position that for investors? Is that likely to happen? Are you thinking that way that this SG&A build just may be required ahead of some of the revenue growth in these new businesses?

Wayne A. Marino - Executive Vice President and Chief Financial Officer

Yes Jeff, this is Wayne. What I want to first set out is we're going to continue to invest in large scaleable businesses and we've done so in 2007. And one of the points that I made was that if you look at our top line dollar growth for 2007, approximately 30% of our year-over-year dollar growth relates to the new investments. And in 2008 that will be close to 40%. So we are starting to see a return for our investors on the investment we're making in these new businesses.

The other point to make is that for 2008, we are planning to leverage our fixed cost, so one of the benefits if you look at it in our SG&A is that, we are able to invest more money in marketing to launch a large campaign, largest ever and being able to take fixed cost and leverage those fixed cost so that we are able to take some of that marketing investments and pare it down.

Second part to note in terms of the timing, the seasonality of our top line certainly impacts the leverage of SG&A. So it's important to know that one of the reasons... one of the things that is driving leverage in our fixed cost is our growth. So that's why it's paramount to continue to invest in that growth.

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

Hey Jeff, let me jump on the backend of that as well. And first of all, the first question regarding inventory, we are hyper aware of the inventory situation and more importantly, the way that it's viewed. And we obviously feel better about that with comprehensive look at what makes up that inventory, but you will see inventory improving from this company over the next 12 months. And I say that almost same time where we are investing in new businesses; we are getting into something as large and as footwear.

So there is going to be times where it won't really look on overall basis, but where you'll see improvement, you'll see improvement from our core apparel businesses. And with respect to SG&A, we are a company who had 100 basis points to our marketing this year and it is something we're still looking for on a net basis improving that. As Wayne said, the businesses that we're investing in though, there is a reason that we're not in china today, right. There is a reason why we are focused where we are; men's, women's footwear, international. What we're doing with our e-commerce, our direct business. We're investing in large scaleable businesses right, and what that means for us is that we believe that will pay dividend for us in time and we believe that we will and have the ability to leverage in the near term as well.

Jeffrey Klinefelter - Piper Jaffray

Okay. Just one clarification on that and that was very helpful. In terms of the footwear specifically, over the next couple of year, there is not a substantial amount of fixed expense that you have to invest in order to say, take that footwear business and scale it up to $200 million to $300 million business over the next couple of years. I guess that's the fear that there is a big investment coming as you truly become more of a balanced footwear and apparel company?

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

I think you've seen the investment takes place. You've seen the investment in frankly where... we've talked about footwear as being lower margins, for instance. If this is getting relationships with factories, this is doing business in Asia. We will be shipping our third year of football cleats this fall. We look to continue to grow market share there. We're entering... we are fully flushed in baseball. We're fully flushed in more of the niche sports like lacrosse and we see the opportunity with trainers to finally, we want to pay some of the dividends. Again, we didn't get into the footwear business to build football cleats. We build football cleats so we have the ability to expand into multiple additional categories and now that's how we see ourself and we are teed up to do and at this point, it's a function of design, the function of development, the function of really all of the qualities we already have. And at the same time, we will continue to build out the world class organization by attracting the best talent in the world, now for the sleekest best designs and the lightest and best performing footwear.

Jeffrey Klinefelter - Piper Jaffray

Okay thanks guys, good luck.

Alex Miyamoto - Investor Relations

Operator, we have time for one more question.

Operator

Okay. We will take our last question from Brad Cragin with Goldman Sachs.

Brad Cragin - Goldman Sachs

Yes good morning, thank you. As a follow-up to some of the infrastructure questions on footwear, can you just talk about how your management of that business is evolving and perhaps just to review with us how the cleated business is performing and how that experience is preparing you for the non-cleated launch now?

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

Sure. Hey Brad, this is Kevin. So let me start with one of the best successes I think we had in 2007 was finally splitting apparel and footwear and giving footwear its due. We took Rafael Peck, who had been our Head of Product Creation, and will now focus Rafael against our footwear initiative. We brought in Suzanne Karkus to head up our apparel side. So within footwear alone, it's been building out not only the existing categories of business that we have within cleated footwear, but it's maximizing in football, maximizing in baseball, and lacrosse and some of the other sports. And again the opportunity of getting into the non-cleated side, we do see leverage from both those business.

But as I said before, apparel and footwear don't necessarily leverage. A lot of the investment that you felt from the company I think have been us getting into business. One of the best things I think that we've done, we've taken some of the lessons that we have learned. There hasn't been perfect for us in footwear, but at the same time at the end of two years, we've got the number two market position in football. We got the number two market position in baseball, and we are positioned now to enter the trainer market where some of you back we heard as why are you doing this, just to sell a million pair of shoes. And as I said earlier, it's much bigger than selling a million pair of shoes. What we want to do is, we want to get the first million, roughly million pairs of shoes in the market, sell them through, learn and then develop and we come back with generation two as well as put ourselves in position to expand beyond just the training category.

Brad Cragin - Goldman Sachs

Okay and then in terms of pricing trends across your categories, I should think about your good, better, best pricing strategy. Have you seen many changes in demand at any particularly pricing tiers and do you see any need to make adjustments for the current environment?

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

One of the things I think that we have heard is from our retailers I think, we've all have heard it, is that performance apparel in general continues to be a driver out in the marketplace, and we of course, continue to be leading that drive. So with that, we continue to see the consumer, this is all part of the shift from cotton to performance, right; consumers continue to take that step and choose our brand.

At the same time, we believe that what we put out there will continue to exceed our long-term growth rate of 25% and putting 26% to 28% growth out, is something that we believe is prudent for the current market environment and something that I think we'll learn more information as the year progresses. But we feel good about what we said to the market. We feel good about our growth prospects, we feel great about the way we position ourselves with additional large scaleable businesses, not only continue to grow our core men's and women's businesses but then looking at things like enter the new categories of footwear, it just going to be exciting.

Brad Cragin - Goldman Sachs

Okay, great, thank you and good luck with ad campaign on Sunday.

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

Thanks very munch Brad. But it just starts Sunday.

Brad Cragin - Goldman Sachs

Well, good luck for the ad campaign all year.

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

Okay, operator?

Operator

: Thank you. And that does conclude today's call. We do appreciate your participation. You may disconnect at this time.

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