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Under Armour, Inc. (NYSE:UA)

Q2 FY08 Earnings Call

July 29, 2008, 8:30 AM ET

Executives

Alex Miyamoto - Director of IR

Kevin A. Plank - President, CEO and Chairman

Brad Dickerson - CFO

Wayne A. Marino - COO

Analysts

Robert Ohmes - Merrill Lynch

Omar Saad - Credit Suisse

Dan Wewer - Raymond James

Jim Duffy - Thomas Weisel

John Shanley - Susquehanna Financial Group

Kate McShane - Citigroup

Paul Swinand - Stephens Incorporated

Operator

Good day and welcome everyone to the Under Armour Second Quarter 2008 Earnings Results Conference Call and webcast. This call is being recorded.

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

Alex Miyamoto - Director of Investor Relations

Thank you, and good morning everyone. I would like to start by welcoming you to Under Armour's second quarter 2008 earnings call. During the course of this conference call we'll be making projections or other forward-looking statements regarding future events or the future financial performance of the company. The words estimates, intend, expect plans, 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 and on our webcast page images of a number of the products and initiatives we will address on the call.

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 second quarter results and our strategy for continued growth in 2008 and beyond; Brad Dickerson, our Chief Financial Officer will then discuss the company's financial performance for the second quarter and provide an updated outlook for 2008. After the prepared remarks, Kevin, Brad and Wayne Marino, our Chief Operating Officer will be available for Q&A session that will end by 9:30.

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

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

Thank you, Alex, and good morning, everyone. Under Amour is a growth company. Once again we delivered very strong top-line results with revenues increasing 30% in the second quarter. These are strong numbers that any brand in our space would be happy reporting. But while these results reflect our consumers continuing commitment to our brand, we believe it understates the overall progress we've made in the past 12 months.

We believe that in all three key areas; brand, product and team, that we are a much stronger company today than we were one year ago. So before Brad reviews our result for the past 12 weeks, I'll like to provide an update on the past 12 months and share our confidence in our progress.

First, let's talk about the strength of the brand. The athletic industry stood up and took notice when we launched Performance Trainers in the second quarter. In short, our launch was everything we hoped it would be. The most successful launch of performance athletic footwear by a new brand and as many years as most people can remember.

From a brand perspective, our launch of Performance Trainers via the new prototype campaign was very successful on two major touch points. First; we delivered innovation and product design to our consumers who have long needed that performance footwear solution to match their performance apparel. Now, I am proud to say that performance doesn't stop with the ankle, and as we said in our advertising, the new prototype of athletes can stop training in their running shoes.

Secondly; as par of our strategic rejuvenation of the training footwear category, we were able to create a new performance training protocol for serious athletes through our TNP training website. This website is designed by the true authority of professional personal trainers, the members of our Under Armour training counsel.

Our online community is more robust than ever and we continue to communicate with athletes of all ages. The response to our Performance Trainers launch has been tremendous. Our retailers did a great job of educating their customers about the shoes and we have been thrilled with the response to our product and its sell through across our distribution.

However, our best partners continue to deliver the best results. Our retail concept shop initiative continues to be a priority in-store and the ability of key partners like Dick's Sporting Goods, sports authority and ESPY [ph] who have helped us leverage our authenticity from apparel and carry that through to footwear beyond just cleated is an asset for our brand in the market.

We have new color on the floor for back-to-school and we will be reinventing the product for holiday as well. Our core consumer with whom we have an ongoing dialogue online has given us most positive feedback on our footwear. We are aware of what happens when brands loose focus on their core consumer, understanding importance of keeping them at the heart of our product innovation efforts. And it's that success with our core consumer and our proven ability to deliver product that exceeds our expectations that gives us the confidence to enter the running footwear business in the first half of 2009.

We intend to bring a younger, more authentic team approach to the running category. We aim to ride these athletes with new innovation in design in their running shoes. This is not about merely putting an Under Armour logo on an average shoe. It's about building a better shoe, about delivering performance to all athletes and about connecting with an entirely new generation of athletes who run.

We are confident that we can create successful launches like we did with Performance Trainers and we can enter large new categories like running because we built the trust with our consumers who now expect us to deliver a higher standard of performance apparel and footwear beyond our compression product and provide a fuller range of product for all their athletic needs.

That's why we are confident our brand is much stronger today than we were 12 months ago. We are not just a compression brand, we are not just an apparel brand, we are a performance brand and we believe our consistent approach will enable us to become a truly global performance brand.

The strength of the product, in addition to the continued strength of our brand our consistent ability to create compelling product storage for our consumers have kept Under Armour outperforming the other brands in our state [ph] and help us drive 30% growth in the second quarter. It's also why we are confident in our ability to achieve the full year guidance we have laid out and why we believe we are building the foundation for long-term profitable growth.

While the second quarter has historically been our smallest quarter from an apparel revenue respective, our third and fourth quarters have traditionally been strongest as we introduce many of our new apparel products in the back half of the year. We believe we have some of the most exciting new athletic apparel in the market with the introduction of our Fit-it [ph]. Consumer have embraced our COLDGEAR brand and we are the market leader in the category, but we understand that not all of our consumers need the added benefit of compression technology. Our new Fit-it COLDGEAR provides the looser fit at a higher ASP with the same level of performance that athletes have come to expect from our brand.

In addition to this major new program, we have greatly expanded our Armour Fleece and Micro fleece programs and expect to make continued in roads in to basketball apparel, another category where players view as as an authentic brand. We continue to make great progress in women's, with sales up 15% of second quarter and up 27% in the first half, with retail sell-through of women's out pacing both our men and youth businesses in the quarter. Overall women's will continue to see accelerated velocity due to big programs, better colors, improved fits, better flow and an improved presentation at retail.

In addition to this strength in our product line, our confidence in the second half of the year comes from three main areas. First; our At-one's [ph] business continues to be strong and the percentage of our second half business already booked is similar to the level of bookings we had at this time last year when we delivered strong revenue growth in the back half.

Secondly; retail sale through of Under Armour apparel in the second quarter was higher than the sell into our major accounts. This reinforces our view that retail inventories of Under Armour are in good shape across our distribution as we enter the important back-to-school season.

And third; the fact that our direct to consumers business which is growing at a faster rate than our overall business is expected to make up nearly 25% of our growth in the back half. This business is already grown at a 75% rate through just first six months of the year.

Now, let me take you through the strength of our team. The third key area where I believe we have significantly improved our position from a year ago is within the Under Armour team, improving depth and breadth of our leadership team has always been a priority and the area that will be most critical to achieving our goal of 25% CAGR through 2010.

We have invested in infrastructure to support all of our growth engines, including our expanding apparel, footwear direct and international businesses. But the most important investment we have made are in building the team that will help direct our growth and execution going forward and ensure that we have the right mix of Under Armour experience and industry expertise.

Beginning this time last year, we brought Peter Mahrer to run our European operations. Then followed that by hiring Suzanne Karkus late last year to Head our Apparel team. And with the now the addition of David McCreight as President of Under Armour, I believe we have strengthened the foundation of leadership that will complement the Under Armour veterans that have driven our growth to date.

David will oversee our front-end business units and his broad experience will bring a new perspective on developing our organization, building internal efficiencies and will help us as we continue building our global distribution strategy.

For me, David's experience, efficiently managing growing companies will enable me to focus more of my energy on leading our long term strategy which includes driving innovation throughout our apparel business as well as our rapidly expanding footwear business and our opportunities outside the U.S. and Europe, Japan and down the road, also in Asia.

We did more than 90% of our business in the U.S. this quarter and there are a number of large markets like China, Brazil, Russia and India where we have yet to sell our first shirt. It also enables me to spend more time with our innovation team, to ensure that we stay true to the Under Armour universal guarantee performance for all consumers and especially how that reflects with the authenticity on field.

We are yet to produce our defining product as a brand. And I am intent on delivering that to a demanding core consumer in the seasons to come. With Peter, Susanne and now David having joined us, we've added over 50 years of industry experience in the Under Armour leadership team in the last 12 months. With David running the front-end and Wayne Marino, our Chief Operating Officer running the back end, I know that our company is in better hands then it was 12 months ago and with their participation and leadership I am confident of our ability to deliver against our ambitious long term growth plans.

We made significant progress over the past twelve months and the past 12 weeks is a microcosm of that. During just the past 12 weeks we have had a tremendous launch for Performance Trainers and brought excitement to what was previously a dead footwear category. And now start entry into the running footwear market in the first half of 2009. We grew revenues 30% in the quarter, 90% based in the United States. We saw significant deceleration in our inventory growth and we hired a President to come and help us lead our business.

Our brand is stronger, our product is stronger and most importantly our team is much stronger than we were a year ago. We stayed on path through the first half of 2008 and I believe our focus and brand strength will enable us to achieve our goals in both the balance of this year and beyond.

Thank you, and with that, I'd like to hand it over to Brad Dickerson, our CFO.

Brad Dickerson - Chief Financial Officer

Thanks, Kevin, I'll take a few moments to read the key financial highlights for the quarter and year-to-date and then discuss our outlook for the full year. Beginning with the income statement, our net revenues for the second quarter grew 30% over the prior year quarter. The growth was largely driven by our successful launch of Performance Trainers during the quarter.

Year-to-date our total net revenues increased 28%. This is at the high end of our previously provided outlook of 26 to 28% growth for the first half. Our apparel business was up 10% in the second quarter with our youth segment showing the strongest percentage growth at 29%.

As discussed during our last earnings call in April, we successfully implemented a warehouse management system in anticipation of this, some of our customers elected to take shipments in March that were originally planned for early April. This impacted the apparel growth in our second quarter. However, year-to-date our apparel net revenues were up 18%, which is more closely in line with our full year projection of over 20% apparel growth.

Our direct-to-consumer channel continues to be a strong performer across the board, where we were talking about the web outlets for our newly opened specialty retail stores. This channel grew more than 75% during the quarter. Additionally, we opened our second full price specialty store and fast selling mall in Aurora, Illinois and are opening our third store in Natick, Massachusetts it's very soon.

While our international revenue in the first quarter was impacted by one of our major accounts in the U.K., our growth rate in the second quarter was strong bringing our year-the-date growth ahead of our overall company growth.

As anticipated, our second quarter gross margins were impacted by the launch of our Performance Trainers. In fact, 310 basis points of the 370 basis point decline was related to footwear. Footwear represented 29% of our net revenues during the second quarter of this year compared to only 17% in the prior year's period.

The balance of the decline in gross margin was a result of several factors including product mix, higher transportation costs and a discount to customers on a few discontinued styles limited to the second quarter. This was partially offset by the gross margins associated with our direct-to-consumer revenues.

SG&A as a percentage of net revenues for the quarter increased to 100 basis points from the prior year quarter to 43.2% driven by our previously announced plans to ship a greater portion of our marketing dollars to the first half of this year to support our performance training launch.

Marketing expense grew from 13.5% of net revenues in the second quarter of last year to 14.4% this year and were the main driver of our SG&A deleverage. Selling costs also deleveraged in the quarter due to cost incurred to support the growth of our direct-to-consumer business. However, it is worth noting that our corporate service costs leveraged in the quarter.

Operating income for the quarter was $3.3 million compared to $8.2 million in the prior year. Operating margin for the second quarter was 2.1% compared to 6.8% in the prior year quarter. Decrease in operating margin was driven by the previously discussed declining gross margins and the planned increases in SG&A specifically marketing.

Our effective income tax rate for the second quarter was 44.7% compared to 40.9% in the same period last year. This increase in our tax rate is due to an increase in the Maryland State income tax rate beginning in 2008 an additional one-time true ups occurring in the second quarter of 2008.

Our resulting net income for the quarter was $1.4 million compared to $5.7 million last year. Second quarter diluted earnings per share was $0.03 compared to a $0.11 in the prior year. Year-to-date our diluted earnings per share totaled $0.09 compared to our previous outlook of $0.06 for the first half of the year. The continued demand for our products along with visibility and controls around spending allowed to exceed our original earnings outlook for the first half.

Now I would like to move on to the balance sheet. Total cash and cash equivalents at the end of quarter were $13.3 million compared to $40.6 million at December 31, 2007 and $25.7 million at the end of the second quarter of 2007.

The year-over-year decrease was primarily a result of investments in inventory and capital expenditures. Consistent with prior years the seasonality of our business typically results in the second and third quarters having the lowest cash balances of the year. For the full year 2008 we continue to expect cash to remain relatively flat from our 2007 year-end balance. At the quarter end we had $95 million available on our $100 million line of credit facility.

Net accounts receivable increased 24% on a year-over-year basis which was below our net revenue growth for the quarter. In 2008 we continue to expect net accounts receivable to grow in line with top-line growth.

Now let's talk about inventory. During previous calls, we've discussed various operational initiatives that we are putting in place to drive improvement in our inventory management. Those operational initiatives are in process and have begun to pay off. At the end of the second quarter, inventory increased 43% year-over-year to a $183.9 million compared to a $128.8 million at June 30, 2007, and $166.1 million at December 31, 2007.

As we projected, this 43% year-over-year inventory growth rate in the second quarter marked a deceleration from the inventory growth rate reported for the first quarter. We continue to anticipate incremental improvement in the inventory growth rate as we move through the year. As we previously stated, by the end of the third quarter, we expect inventory growth to be in line with sales growth, and by the end of the fourth quarter, we are projecting inventory to grow at a rate below our sales growth.

Our investment and capital expenditures for the second quarter was approximately $13 million. Our full year 2008 capital investments are still planned at approximately $40 million to $42 million.

Now, moving to the outlook for the remainder of the year, our outlook is a reflection of how we think our business will perform based on the strength of the brand, the strength of our products, and our investments balanced with sensitivities in the current macroeconomic environment.

For the first half of 2008, we met our top-line projections, reported strong deceleration on our inventory growth rate, and exceeded our EPS outlook.

Our results in the first half and our visibility into the second half give us continued confidence in our top-line projections for the year. We continue to plan our men's apparel grow in the range of our long-term growth targets of 20 to 25%. Additionally, our women's and youth apparel are projected to grow at even a faster rate much as they did in the first six months of 2008.

In addition, we continue to expect our international top-line growth to outpace the company's overall year-over-year growth rate. Therefore, we're reiterating our 2008 full year net revenue guidance of $765 million to $775 million, which represents a 26 to 28% growth over 2007. We continue to expect our full year 2008 gross margin to be approximately 50% or 30 basis points lower than 2007. We believe in the opportunities for this plan and are committed to making investments to drive our future growth.

Additionally, we are still on track to invest at the high-end of the 12 to 13% of net revenues for marketing in 2008, up from 11.7% in 2007. However based on our results in the second quarter and controls on unplanned investments for the year, we are now anticipating only a 30 basis point increase in SG&A as a percentage of net revenue versus the 40 basis point increase previously estimated. As a result, we are raising our income from operations outlook for 2008. We now believe full year income from operations will grow 21% to 22%, for a full year range of $104.5 million to $105.5 million compared with $103.5 million to $104.5 million previously anticipated.

Based on projected interest expense for the full year and foreign currency exchange impact to date, we estimate our net other expense to be approximately $1.4 million for the year. For the full year we are now estimating an effective tax rate of 42.6%, up from 41% in 2007. This increase in the full year tax rate is mainly attributable to an increase in state income tax rate for Maryland, our home base state from 7% to 8.25%, beginning in January 2008.

Our weighted average delivered share count is estimated to be approximately 50.5 million shares. Now that we have discussed our full year outlook, I would like to provide some color on the seasonality of our business in the back half.

First starting with net revenues; During the first six months we shipped about 70% of the approximately 1 million pairs of Performance Trainers planned for the year. Over three quarters of the balance left to ship for the year will go out in the fourth quarter.

As Kevin said earlier, our direct-to-consumer revenues are expected to make up 25% of our incremental growth in the back half of the year with the biggest impact in the fourth quarter through the holiday shopping season as well of the timing of new store openings for full price specialty and athlete [ph].

Because of the timing of the remaining Performance Trainer shipments and the growth in our direct-to-consumer business, net revenues for the third and fourth quarters are expected to be similar, which is the change in seasonality from prior years. Although the majority of the remaining Performance Trainers are shipping in the fourth quarter, the impact of direct-to-consumer revenues in that quarter is expected to lead the year-over-year improvement in our fourth quarter gross margins.

In the third quarter of 2008, marketing as a percentage of net revenues is expected to be similar to the percentage in the third quarter of 2007. We are still planning marketing for the full year to be at the high end of the range of top of 13% of net revenues. Therefore, marketing in the fourth quarter is expected to decrease year-over-year as a percentage of net revenues.

Based on the timing of investments largely around our direct-to-consumer growth initiatives, non marketing SG&A expenses for the remainder of the year are expected to be comparable in the third and fourth quarters.

In 2007, third quarter showed the highest earnings of any quarter during the year. However, as a result of these [indiscernible] to both the top-line and expenses, the fourth quarter is now expected to be our highest net income quarter in 2008. We hope that this discussion has helped you to understand the timing differences impacting our second half of the year.

Our company remains focused on executing our growth plan for 2008 and investing in our future. Like the athletes, we build product for, we continue to challenge ourselves and find ways to make incremental improvements to the way we operate. With the growth initiatives, we are currently investing in, the strategy we are building, and the additions we have made to our executive team over the last 12 months, we are building the foundation for large scalable businesses.

We have a culture of growth, balanced with a culture of profitability. At this time, Kevin, Wayne and I would like to open the call for your questions. We ask that you limit your questions to one or persons so we can get to as many of you as possible. Operator?

Question And Answer

Operator

Thank you. The question and answer session will be conducted electronically. [Operator Instructions]. And we'll take our first question from Roby Ohmes, Merrill Lynch.

Robert Ohmes - Merrill Lynch

Guys, can you hear me, okay?

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

Yeah, how are you Roby?

Robert Ohmes - Merrill Lynch

Terrific, hey, how are you? Hey actually just one sort of broader question I was hoping Kevin we could get you to talk a little bit more about 2009 and the potential for really opening up your mall distribution, both on the running side and also expanding your apparel business in the malls and maybe a little more detail if you are ready to release it on... how big the launch could be? Could it be well over a million pairs for the running shoe and could it be a big program with Foot Lockers as well as finish line. Whatever you can give us on that would be great. Thank you.

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

Sure. Well first let me start and give the first credit words to and that's our key sporting goods partners. None of this happens frankly without the authentication [ph] I think that these guys have provided us with the ability to be successful with great programs like A; launching football athletes more than two years ago and then of course attaching trainers who has passed May.

We've obviously developed ourselves and laid out the foundation for being I think a great footwear brand what you are going to see about Under Armour speaking on a couple of different levels is of a [indiscernible] great footwear company. With that our distribution is not unlike our product where we view it like chapters in a book. Every chapter needs to make sense the one before these make sense to one after it.

What we have always said about mall distribution is that, we only want to be in places where we can be important. And unless you have a footwear component we never felt that was possible within the mall. That obviously changes with the advent of trainers not including footwear and of course our announcement of getting into running. We are... I think very excited about what the mall means and from a door standpoint, we are looking to expand into additional Foot Locker we'll have roughly about 6 to 700 doors by the end of 2008 and that will be apparel only.

And beginning in 2009 in some other stores we will have begin to carry athletic footwear. At the same time, just beginning, getting on to the footwear side of the world, I think the consumers' focus is that they want more and expect more from our brand. Again, the response that we heard about, around the training launch was pretty overwhelming. Just four weeks into it we have sold through more than 30% of our product which was far in a way ahead of where we expected to be.

We still, I think the metrics are pointing the fact that the consumer accepts us as a athletic footwear brand and are asking us to go into more places. At the same time we are also seeing that fact that we have been able to leverage I think our apparel authenticity in places like where we have been authentic and running and frankly in some places that we haven't been able to get into with our running lines.

We are pretty pleased I think on not only with the mall players or the way that they are viewing us Under Armour as a footwear brand, we are looking at new categories like running but we are also pretty excited what it means by the authentic distribution in the athletics specialty, the run shop places like Road Runner Sports and more the hardcore athletes like Luke's Locker down in Dallas that are brining our product line on.

So all in all I think it's a pretty tremendous opportunity for us and again from a size or product standpoint Roby training wasn't completely allocated program for us. We are going to tap running the exact same way, it will be completely allocated but what I can tell you is that we will be larger in a good bit larger than our training launch.

Robert Ohmes - Merrill Lynch

Terrific. And I just wanted to ask one quick follow-up question. I think you mentioned on the call that this sell through rates at one point I think somebody said that sell through rates on the women's and kids were stronger than the men's and I was hoping you could go into more detail on that comment and if we should be worried about men slowing or just sort of what that means?

Wayne A. Marino - Chief Operating Officer

Roby hi, this is Wayne. That's that we talked about was in total and what we are saying is that in the second quarter our sell-in to the accounts compared to how our retailers sell through that delta was about 15% and let me just tell you that we get that information weekly. We look at our five of our top accounts, we look at our business both men's, women's, and youth and that's one of the reasons that we feel very good about our back half is that our inventory levels at retail are very clean as we go into that back half. So, it's a sell-in versus sell through number.

Robert Ohmes - Merrill Lynch

Okay got you and then the last question and I'll let you guys go. Is there any running shipped in the fourth quarter of this year or is that all first quarter shipped?

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

All right. This is Kevin. We are not anticipating shipping running this year. And if I can maybe hedge it, the next question too is we are not anticipating chasing any of the training business. So, the number that we put out there in athletic training is the one that we're going to stick to in 2008.

Robert Ohmes - Merrill Lynch

All right. Hey terrific. Thanks guys.

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

Thanks, Roby.

Operator

Our next question comes from Omar Saad with Credit Suisse.

Omar Saad - Credit Suisse

Thanks. Good morning, guys.

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

Hey, Omar.

Omar Saad - Credit Suisse

Wanted to follow-up on some of you kind of forward-looking comments, there is a lot of speculation in the market place, we're such a difficult consumer spending environment. Everybody is feeling pressure on from inflationary issues and then just obviously the headlines that are impacting how people are spending. The discretionary dollars, what's your early back-to-school read? Can you talk qualitatively how retailers are approaching the fall, it sounds like a lot of your order book is kind of on track from where it was last year.

Can you kind of give your state of your from your view, what the state of the Under Armour consumer is and then the retailers that you work with as well?

Wayne A. Marino - Chief Operating Officer

Yeah. Omar, hi, this is Wayne, I'll start off. Our outlook that we put together is a reflection of how we think our business performs in the current environment. It does not assume any turnaround this year. So I just want to set the stage for that and like we've always, we've taken a balanced approach on how we looked at our business.

But there are several factors that I think I'd like to share with you. And number one thing, and I mentioned this a second with Robbie, is that, we do gauge very closely how our products are selling through at retailers, and right now based on that information and what we've seen in the second quarter what we see today, we feel that we're going into the back half for the year with a very, very clean inventory at retail and a very productive product at retail. I mean we continue to sell through at full price at retail.

Another point is that, we have launched into the non accretive [ph] business and I think as Kevin mentioned and Brad, 70% were shipped in the first half, but we still have 30% of that business to go out mainly in the fourth quarter. So that's an additional piece to us.

We also had some very... very good reads with our direct-to-consumer business, Kevin mentioned it was been up 75% year-to-date and in addition to that, the back half of our business which is typically more weighted with direct-to-consumer, Brad called out at 25% of our back half dollar growth is relating to direct-to-consumer and for us, that's a very good indicator of how we are doing.

And in addition to that, one of the other things is as we have got additional distribution of Foot Locker group. And in addition to that, we have additional doors, with our existing retailers pretty much planned their door growth more or less than back half.

Kevin called out some new programs that are back half. We also have a holiday delivery in Q4. So there is quite a few metrics that we see which give us excitement about the back half and also going in very clean. Kevin.

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

Yeah, Omar, so building up what Wayne touched, and I will just jump on the apparel piece which is, some of those bigger programs that we have in and typically we are bigger and we are launching our bigger programs in the back half of the year. But that's they call here, its right in the whole good, better, best concept and we are taking a real house program, several million unit program, joining a $50 ASP and adding a 60 and $70 complement to it with something at the consumer effectively has been asking us, not begging us for which is like many of the older bodies in the room here is our COLDGEAR here that is in compression. So that city component is really going to pay dividend out in the market place and we think we will see good response there.

We also have we are getting lot more serious involvement in basketball. First of all, you are going to see that in places like this in [indiscernible] sports and our key, sporting goods partners, but you are also going to see us driving and building off authenticity through our basketball with our sort of our new mall partners as well.

So, that and then the expanded micro fleece program as we talked about, Jeff you got to feel the Under Armour brand throughout sporting its distribution in this fall and we are pretty excited about the product itself and what's going to mean to the back half.

Omar Saad - Credit Suisse

Okay, great. And then just quick question on marketing in... kind of any big programs coming up, should we be thinking about to re-plan our models and SG&A hit had at the footwear launch, kind of like we saw in '08. Is there going to be a big campaign around that launch how should we be thinking about that and how are you thinking about marketing the brand over the next six to twelve months?

Wayne A. Marino - Chief Operating Officer

Yeah, Mark this is Wayne, I'll start off with kind of my view of it is... one of the things that we have learned is that as we start to launch new products which we will overtime... that we'll send that marketing message out a lot closer to when we introduce that product to market and for us that really is as Kevin mentioned and Brad we're looking at a first quarter run launch and we would expect that our marketing, our message around that and for the consumers will be closer right to when we launch. So, unlike this year, we started a little bit earlier. We think its better to get closer.

Unidentified Company Representative

We talked about this in Investor Day as well, but that campaign, that concept around athletes run is something we're very... very excited about and I can't reiterate enough this as you know our big story in 2009 is going to be around Under Armour get into athletic footwear with not just a brand entering the market, but we think we've got better product and of course we're going to do a great job telling them the story about that product.

Omar Saad - Credit Suisse

Great. Thank you.

Unidentified Company Representative

Okay. Thanks very much.

Operator

We'll go next to Dan Wewer, Raymond James.

Dan Wewer - Raymond James

Good morning. I was attempting to pencil through the margin rate on the incremental footwear and it appears that somewhere around 30%. I know that footwear margins are lower than apparel, but I was under the impression that non-cleated footwear margins to be higher than cleated. Curious as to what may have been impacting the margin rate on the Performance Trainers?

Wayne A. Marino - Chief Operating Officer

Okay, Dan, hi this is Wayne. First we want to mention that just like apparel margins our footwear margins will improve over time. And for example, we have our Generation II, Performance Trainers, which were launched in November and we'll start to see an improvement in those margins. Our main focus when we launched Performance Trainer, was to develop a right product for our consumer and create a buzz in the category and as important as that where is to deliver on time. We know we are going head-to-head with some very... very strong brands and we wanted put the right product out in the marketplace at the right price point.

So, when we look at our checklist, we feel very good that we've hit all our goals. And there is no doubt that there is opportunity for us to continue to improve our footwear margins, and like I said earlier, that opportunity starts to take hold as we see Generation II in November.

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

And Dan if you look in the marketplace, we went head-to-head with some pretty tough competition out there, and if you check both the outlet stores or if you check full price retail, you will find that the Under Armour brand, the Under Armour product and new color ups and some offers is going still be selling through at full price at 80, 90 and $100. And you can't say the same thing about our competition.

So, I think our initial goal all along has been authenticating our sales improving I think to the consumers and especially to the company that we have the ability to be an authentic footwear brand. And as I mentioned just a little bit earlier, I think what you are going to see is the company evolve into as we improved supply chain, as we improved efficiencies, is that building athletic footwear its not really a business that leverages off of apparel.

We've effectively... we've had to build a completely new company around footwear and we're continuing to build and get better there too. And so whether its the categories as we say, training margins will be better than cleated margins. Running margins will be better than training margins. And the same way every year we get better as we get more depth and breadth out of our assortment on manufacturing base and continue to build and just become a great footwear company.

Dan Wewer - Raymond James

That's helpful. I guess my other question is regarding the third and fourth quarter guidance. It appears that you are lowering the other third quarter expectations. I am just curious as to when you begin to recognize the change in seasonality. The different curve [ph] after the Analyst Day?

Brad Dickerson - Chief Financial Officer

We haven't given quarterly guidance in the past, Dan this is Brad by the way and so we really looked at the first half and back half of the year. So we weren't giving quarterly guidance. So really as we are getting into the back half of the year right now we are just trying to get some added flavor to maybe some of the change in the seasonality from the prior years but we are still looking at the full year being just in line with what we said all along 26 to 28% growth.

We are calling offering [ph] income up for the year right now. So again we really didn't give any specific guidance for the quarters but we thought it was important to call out as we get into the back half of the year some of the timing differences from the previous years as well relative to the footwear, shipments in the fourth quarter and the continued strength in the direct-to-consumer business especially in the holiday season in the fourth quarter.

Dan Wewer - Raymond James

And I guess just the last question you had noted that the Performance Trainers shipments would increase in 4Q, are you also assuming running shoe shipments beginning in 4Q as well?

Brad Dickerson - Chief Financial Officer

Kevin just stated that before that we are not anticipating any fourth quarter shipments in running shoes that would be a Q1 2009.

Dan Wewer - Raymond James

Okay, great. Thank you.

Operator

Our next question comes from Jim Duffy, Thomas Weisel.

Jim Duffy - Thomas Weisel

Thank you. Hello, everyone.

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

Good morning, Jim

Brad Dickerson - Chief Financial Officer

Good morning.

Jim Duffy - Thomas Weisel

You mentioned that direct is going faster then the remainder of the business. I am hoping to get some perspective on where you see the direct-to-consumer revenue as a percent of the overall revenue for the year. And if you could, perspective on how much the online contribution would be within that? That would be helpful, thanks.

Brad Dickerson - Chief Financial Officer

Jim, this is Brad. As far as percentage of revenues right now for the full year, we are anticipating our direct-to-consumer to be right around 15% of the overall company's revenues for the year. Last year within the low teens or actually below double digits I should say, seeing kind of get a flavor for the difference year-over-year as far as direct to consumer. We really don't look at we kind of talk about our web and our retail stores together in the direct-to-consumer and we really don't break out our online numbers to percentage of revenues.

Jim Duffy - Thomas Weisel

Okay.

Wayne A. Marino - Chief Operating Officer

Jim, hi, it's Wayne. The other thing I want to point out is that when you look at direct-to-consumer, I really want to drive the point home that, it is definitely more back half weighted as well. I mean Brad is struggling [ph] this home, but over 65% of our annual direct-to-consumer business is done in the back half and really 32% the balance in the front half.

So, that's the other reason that we start to see that back half look a lot stronger both in terms of growth as well as in terms of margins.

Jim Duffy - Thomas Weisel

And are you tracking with plans in terms of these store openings?

Wayne A. Marino - Chief Operating Officer

Yeah, I think one of things we said last call is that we were going to open up two to three stores this year. We're on track to hit that. Our stores are on plan for us. We've opened recently outside the Chicago area, and we're pretty excited about the stores so far.

But I want to mention that we are still on a test mode. And for us opening the full priced stores, specialty stores we're going to learn from that. And we are going to try different concepts overtime and try different merchandising plans within the store. But for us we are going cautious, for we are very happy with what we see as surplus terms of results.

Brad Dickerson - Chief Financial Officer

And then Jim this is Brad, and just to add some flavor there too on the outlook side, we began the quarter at with 19 stores and we anticipate opening another five to six stores, the back half of this year which will put us on 25 stores by the end of the year from the outside.

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

Not the enterprise [ph] a, we like the percentage. We like the 15% percent in our direct-to-consumer business today. And we think it makes for pretty healthy wholesale business. But I can understand, understand enough I think the addition of David McCreight joining our team as well. And what that's going to mean for us on a, direct-to-consumer basis. So, there are three components of web, full price and outlet. We have been really pleased I think with our outlook business of not having to liquidate or dispose a product in unsavory channels or places where we would not want to be.

So the ability to control that is something that has become a brand strength and then again we're learning a lot. We're got two doors open right now and I'll say that until David gets on here and gets on board, we're going to reserve judgment for what the future of Under Armour full price retail looks like and really let him sink his teeth in and make sure that we have a model that first and foremost drives and authenticates and helps grow our key wholesale businesses like Big Box sporting goods.

Jim Duffy - Thomas Weisel

Great. And a quick one for you Kevin, if I may. You mentioned the importance of the basketball product in the second half of the year. Should we expect kind of basketball specific marketing programs?

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

I didn't follow that up with nudge, nudge wink, wink, did I? No, I think where we are looking at Jim is we believe that basketball is an important sport that we have yet to attack. We're not anticipating any other launches or on the category side, but with the addition of the Mall channel, we think that we've got a great vehicle to speak to that basket ball consumer and we are going to attack that pretty aggressively. But more importantly, again going back to our wholesale distribution is that these guys do a great job by selling basketball parts to begin with and you will see a pretty heavy in store campaign around basketball sports, in 2009 and carried through in... 2008 and carried through to 2009 as we continue to build credibility there.

Jim Duffy - Thomas Weisel

Thanks and good luck.

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

Thanks very much.

Operator

We will go next to John Shanley, Susquehanna.

John Shanley - Susquehanna Financial Group

Thank you. Good morning everybody.

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

Good morning, John.

John Shanley - Susquehanna Financial Group

with the launch of the running line in the spring of '09 entail about the same degree of marketing efforts that you put into the launch of the Trainer Program. In other words, are you going to front load a lot of your marketing efforts to spring season in order to get the line launched, the way you did with the Trainer line this year?

Wayne A. Marino - Chief Operating Officer

John, Hi, this is Wayne. I think first we want to make sure that its really clear that our marketing for us has always been a disciplined move stay within that 12 to 13% we think that's the right number to support our business and to support our launch as the one thing we will do is when we do have launches we're going to have to have those launches and those marketing essentially be in the same quarter.

So we're going to have our marketing dollars very close to the launch because we think its important we did it this year, we had a very successful performance training launch and we think that's a formula to be able to get out there and tell out message especially as we introduce new categories.

John Shanley - Susquehanna Financial Group

I see, okay. Can you give us a little bit of an update on the international business specifically Europe you mentioned that its growing at a much faster rate than the domestic market. Are you prepared yet or you get the planning stages the introduction of football cleats for the European market or is that something that's still going to be down the road a bit?

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

Well John I want to go back and just start with our strategy as we have attacked international specifically Europe. Number one is building the right team of people. Peter Mahrer just crossed the one year mark in terms of his contribution to the company. And he is doing terrific and really building headway there as we are building out on plan there.

The second component was building of intensity on the field and within that we've... the recent signings of the Welsh Rugby Union and Hannover 96 which is a boonish [ph] league of First Division German club. We had a great response. We actually just kicked off our uniforms in the whole presentation. At the first day we had 4,000 kids there walking through Under Armour set, we had 10,000 fans greet the team for the unveiling of the new uniforms.

So I think the reactions are of intensity, it's something that you'll see us continue to build on and invest in over time. And then from a distribution standpoint we have got just over 17,000 doors in Europe today and we're seeing growth and we're seeing headway. But, we need to reiterate the fact that Europe is a long-term investment for us and we'll continue to drive and what gives us confidence there, as you look across the globe as Asia is another growth opportunity for us.

And tangibly, our success that we've seen in Japan, and I don't know if I can underscore enough of our Japanese business and we don't typically call this out, but is one where we did $38 million in 2007. That business will nearly double in 2008 for us.

So, we really feel like we've crossed the tipping point and again just reiterate the fact that brand translates. And then of course as I mentioned in my script, we are really heavily focused, I mean that data point of 90 plus percent of our business being done in the United States today.

We feel there is tremendous opportunity, A; in the confidence we have and that the brand does translate. But in time, we are going to develop into a global performance brand and not just the U.S. one.

John Shanley - Susquehanna Financial Group

All right. Would you agree Kevin that you've really have to have cleats in order to make in roads into the European sector?

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

Yeah, we haven't... publicly speaking, I can tell you from an product development standpoint we have been working across many categories and I would absolutely agree and you can look in 2009 for some product to begin showing up on athletes because and again this wouldn't be logos on the feet but you will probably begin to see product out in the marketplace at least authentically on field, on teams not... that's really for sales, we've put on the right teams the right way, in 2009 as well. But yeah I would agree that we need a great soccer build up [ph] and a great football build up [ph] if we're going to compete internationally.

John Shanley - Susquehanna Financial Group

Okay. And just one last question, we have been interviewing a lot of retailers recently and they indicated that there was falloff in demand for the compression product but a renewed interest in the uzipped [ph] product. Are you seeing that across the board or is this just unique some of the retails that we have been talking to?

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

Yeah, I think it speaks to probably the diversity of our brand is that Under Armour is not just a compression brand. Like we're not just a footwear brand or apparel brand for that matter. We're performance brand. And this ability for us to take that is... is it goes back to when we slam the table and say cotton is the enemy. It shows that frankly our brand is growing.

We almost gauge maturity by the... the balance between compression versus loose, and it was actually in 2008 when loose product finally surpassed compression product as being dominant within the company. And going back to the European question, a good gauge that still 80 plus percent of what we do in Europe is still compression product.

So I think it's probably... it's a positive sign that the brand A; compression is still growing, is important I think to call out for us, but I think it's a positive sign that our loose products the consumer is seeing is not just as compression, but giving us the benefit of doubt on our performance being loose fitting as well.

Wayne A. Marino - Chief Operating Officer

And John, this is Wayne. Some of our bigger growth categories that we've seen recently, Golf has been a great growth category, Kevin called out basketball apparel's been very strong for us. The training category has been good and apparel and running has been extremely strong for us. So we are starting to see that there's end use categories that start to really have accelerated for us in the last year and they become part of our big drivers in our apparel growth.

John Shanley - Susquehanna Financial Group

That's great. Can you give us an update in terms of what the divide is between compression and loose fit, currently?

Unidentified Company Representative

It's roughly fifty-fifty, and we're all actually favoring loose fitting product versus compression product.

John Shanley - Susquehanna Financial Group

Great. Thank you very much, appreciate it.

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

Okay, John.

Wayne A. Marino - Chief Operating Officer

Thank you very much, John.

Operator

We'll go next to Kate McShane, Citi Investment Research.

Kate McShane - Citigroup

Hi, good morning.

Brad Dickerson - Chief Financial Officer

Good morning, Kate.

Kate McShane - Citigroup

Can you tell us... are you able to tell us what men's and women's apparel growth would have been during the second quarter if you didn't have that sales shift to the first quarter?

Brad Dickerson - Chief Financial Officer

Yes, it's kind of tough to say, Kate, this is Brad. With the shift with the warehouse management system, we're really looking at the first half of the year and not quarter-to-quarter, it's really tough to determine the dollar amount that shifted between quarters. So we will look at the whole first half of the year, as far as our 18% apparel growth.

Wayne A. Marino - Chief Operating Officer

Yeah, and Kate also, it's Wayne. One of the things Brad called out which I think is good point is looking at half of the year, we are still very comfortable with the men's growing in that 20 to 25% range and women's and youth exceeding those points, where we stand today. So we are very comfortable with the metrics that we're looking at.

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

Yeah, one thing if... Kate I think we have done a pretty good job in what's a well publicized pretty difficult environment out there is... again our view says as an apparel brand, as a footwear brand as much as we are a performance brand and we built this model that gives us multiple leverage. We talked about those four to five growth drivers that we have and in any given quarter when we look at things on a full year basis and then at any given quarter, we have the ability to pull on one of those growth levers and its fortunate for Under Armour that we had... we have the growth lever of launching performance footwear that helped drive us, but again to reiterate the fact that we do see apparel growth for the year for the full year at 20 to 25 plus % growth.

Kate McShane - Citigroup

Okay. Thank you and one final question in terms of gross margin pressure that you saw during the quarter. I know a large amount came from the footwear mix, but can you talk a little bit about what you're seeing on the sourcing side. There has been a lot of talk by all manufacturers about higher inflationary sourcing cost. I just wondered if you could talk about for a few minutes.

Brad Dickerson - Chief Financial Officer

Kate this is Brad. A couple of things there. We are reiterating our outlook for the year for gross margins to be approximately 50%. So a lot of what we are also seeing in the market place is already kind of baked in to the back half of the year for us. We have talked obviously before about... from a product cost perspective we have locked in our pricing for the spring, summer season of 2009.

So again from the back half of this year our pricing is pretty much in place. Again, the... probably the two biggest drivers that we consistently talked about and we look at gross margins at least going forward footwear, we continue to call out will be below our apparel margins but we will improve all the time. But still be below our current margin over the long term and also directed consumer business having positive impact on margins going forward.

I think those two items will still be the major impact in the gross margin when you look at the future quarters. Obviously as we talked about direct-to-consumer, is very strong in the back half of this year, specially in Q4 around holiday season. So we should see some benefit to that in the back half of the year gross margin and Kate this swing, we are not immune to raw material and labor costs in certain parts of the world increasing. But I have to give a call out for supply chain team. They have done a good job leveraging the growth that we have and quite frankly there are still lot of opportunities for us.

We are a young company and a growing company and there is many more efficiencies that we can take out the profits to help offset some of the increase in cost.

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

And when we give that fall out to our team. You have to understand we continue to operate in the businesses as well. Good example in the past quarter that we did, somebody call reinventing the core. We took our core women's key care product which is our top two or three styles in the line. And we actually we updated and reinvented that product than we have brand new women's product [indiscernible] and it is doing terrific. And again this wasn't something that, declining sales told us we had to do as much as it is the evolution of our brand, we believe it is important to evolve our product. You got to remember, the first men's superior T-shirt that, I built was nearly 12 or 13 years ago, and so having the benefits to reinvest that product is something we think is going to be pretty compelling. And we'll ensure that these franchised businesses for us like our HEATGEAR products will continue to pay and continue to grow for us in years to come.

Kate McShane - Citigroup

Okay. Thank you.

Alex Miyamoto - Director of Investor Relations

Operator, we have time for one more question.

Operator

Thank you. We'll take our final question from Paul Swinand, Stephens Incorporated.

Paul Swinand - Stephens Incorporated

Good morning. First questions just on the following up to one of the last questions, the men's business is supposed to grow 20 to 25% in the second half or presumably for the full year. You are up 18% for the first half; can you give us some color on how that's going to accelerate in the second half? Is it styles, is it core business versus new business? Can you give us any more color on that please?

Wayne A. Marino - Chief Operating Officer

Yeah, Paul, hi. This is Wayne. Actually there is several factors to that. One we've looked at and we call that early our direct-to-consumer business apparel is more back half weighted, that would include both men's, women's and youth. So there's also a factor in terms of the timing of when we see that percentage of our business grow.

In addition to that, there's additional distribution in the back half, the Foot Locker group roof has additional distribution, which includes apparel. Our existing retailers, when they start to add more doors, most of the doors were planned in the back half. New programs, Kevin called out such as Fitted COLDGEAR, 100 gram weighted micro fleece and we actually have a new shipping window which we would call holiday window, to freshen up the floors, and all these pieces together will give a nice jump to our men's business.

And in addition to that, something Kevin said earlier, was that we do have visibility into our business, just two factors; one going into the back half, very clean at retail with inventory. And secondly, looking at our futures and our bookings, begin somewhat comparable year-over-year, so the confidence that we have and the confidence that our retail partners have in our business as well. So that's what gives us the confidence to be able to say 20, 25% in the back half.

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

And Paul, you're going to continue to see us loud and proud in the marketplace as well, and not only with our own dollars, but I think we've demonstrated the ability to leverage some of our partners' dollars as well. We have a current campaign in the marketplace out right now, co-branded with the sports authority, that's bolstering our footwear in the marketplace, and you're also going to see, in fact the school and holiday rather us partnering with our Dick's Sporting goods with more creative on television.

So we're going to continue to make sure we reinforce that, with our key partners in a way that we show up in their fours, and of course then doing a great job for us in storage. So with that, we feel pretty good about the outlook that we provided, and we're ready in fact for the second half of the year.

Paul Swinand - Stephens Incorporated

And as woman's kind of the same story, I know at the Analyst Day, you talked about some of the new initiatives or new cuts, really not hitting the floor until fourth quarter?

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

Yeah, well I think, and first of all, our women's business is doing really very well its up 28% for the first half and again we anticipate women's being up over 30% for the full year. So women's is on plan again Suzanne Karkus is really driving that business for us and what you're going to begin to really see movement of changes it's going to beginning in 2009 but our performance in 2008 on the women side has been very good I think we are very happy and pleased with it and its only going to get better.

Paul Swinand - Stephens Incorporated

Okay, thank you.

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

Yeah, thank you very much Paul.

Operator

That concludes the question-and-answer session today. At this time Mr. Plank I would turn the conference back over to you for additional or closing remarks.

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

If I could we opened this call and stating that Under Armour is a growth company and that's one thing I hope to take away from the conversation that we had today. There is a lot of features for the growth we continue to make the progress that we expect from ourselves. We grew revenues 30% in this quarter. We had a great launch for Performance Trainers and we are set up into the running forward category.

We made great progress in managing our inventory and we hired a new President to help us execute our growth strategy. We're going to continue to build out our large scalable businesses setting a stage for profitable growth in the second half of 2008 and beyond.

With that, we thank you all for your time today and hope to see you in about 90 days. Thank you.

Operator

That does conclude today's conference. Thank you for your participation. You may now disconnect.

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Source: Under Armour, Inc. Q2 2008 Earnings Call

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