Under Armour, Inc. (UA) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Under Armour Inc. Third Quarter Earnings Webcast and Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Tom Shaw, Director of Investor Relations. You may begin.

Thanks, and good morning to everyone joining us today's third quarter conference call. During the course of this call, we'll be making projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. These risks and uncertainties are described in our press release and in the Risk Factors section of our filings with the SEC. The company assumes no obligation to update forward-looking statements to reflect events or circumstances after the event on which the statement is made or to reflect the occurrence of unanticipated events. Joining us for today's call will be Kevin Plank, Chairman and CEO; followed by Brad Dickerson, our Chief Financial Officer, who will discuss the company's financial performance for the third quarter, provide an update to our 2013 outlook and introduce a preliminary 2014 outlook. After the prepared remarks, Kevin and Brad will be available for a Q&A session that will end at approximately 9:30 a.m. Finally, a replay of this teleconference will be available at our website at approximately 11 a.m. Eastern Time today. And with that, I'll turn it over to Kevin Plank.

Thanks, Tom, and good morning, everyone. From our very first day of existence, Under Armour has been about making athletes better. Executing against that promise in 1996 had its own set of challenges, but they're dwarfed by the complexity of running a global brand with over $2 billion of revenues. Our consumers' expectations shift constantly higher and they count on their favorite brands to consistently take them some place new. The company that we are building to deliver on that promise is in constant evolution. We are a different company every 6 months. Our consumer moves quickly and fortunately, so does Under Armour. Today, I want to discuss that evolution. How it's manifesting itself in product innovations like SpeedForm and ColdGear Infrared with emerging athletes like Stephen Curry and Jordan Spieth, and new retail experiences in Shanghai and New York City. All key elements of our growth story, yet all of them have already become important Under Armour stories in the past few months. So while this evolution is taking place throughout our organization, I want to talk today about 4 areas of our business where our focus is helping generate growth in 2013 and beyond. First, I will cover how we will be more integrated than ever when it comes to telling our brand stories. We will have our product communications and retail presentation aligned unlike anything we've done in the past, aggressively bringing our consumers into retail at key points during the year. The second area is around innovation and how will we innovate, not only do we win with consumers, but we drive an industry-leading pricing model. Because wherever we show up in regional sporting goods, urban department stores or our new retail experience in Shanghai, we are a premium brand. That premium status comes from our ability to innovate and that innovation enables us to drive that pricing power. Third, we are winning with America's Youth as we continue to resonate at the highest level with our youngest consumer. Apparel continues to drive our youth numbers, but we have had solid momentum in Footwear as well, a great indicator of a long-term equity we are building in our brand. And fourth, our team is constantly evolving as well. I will talk to you today about some new additions to our senior leadership and some other moves we are making to become a more globally focused organization. And most importantly, we are doing this as we grow our business at an industry-leading pace. This was our 14th consecutive quarter with net revenue growth of 20-plus percent and our 16th consecutive quarter with Apparel growth of 20%-plus. Our core is strong and that gives us the firepower to grow in new geographies with new categories and new consumers. So the first topic. How could we better integrate our products, communications, in the presentation of our brand to consumers. Clearly, it starts with product. And as I said in our last call, the pipeline of innovation at Under Armour has never been more robust. Our ColdGear Infrared just hit retail in Q3 and it's off to a great start. This latest innovation utilizes ceramic thermo-conductive inner coating to absorb and retain body heat. This industry-leading technology provides warmth without the weight and enables us to bring our consumer apparel that exceeds their expectations around cold-weather protection. In Footwear, our big story for 2014 is SpeedForm. We are bringing the Under Armour Footwear when customers have come to expect from our Apparel. Innovation around fit, and we're bringing that innovation to the world of Footwear by not making these shoes in traditional Footwear factories, but in bra factories that understand the importance of fit. With innovations like these, our challenge is to align our communications and how we show up at retail for maximum impact with our consumer. We started that effort this year with our 3 Brand Holidays, the third of which will hit next month with athletes like Olympian, Lindsey Vonn; Freeskier, Bobby Brown; and the lock for PGA Rookie of the Year, Jordan Spieth, who will help us tell a great story around ColdGear Infrared. And no story that Under Armour in the outdoors would be complete without an appearance by our friends from Duck Dynasty. In 2014, we will take an even more integrated approach to our brand holidays with greater focus on key products and a more extensive effort with our retail partners designed to drive traffic in to their stores at key points throughout the year. That greater integration will also be on display at our Brand House here in Baltimore, at our newest store in Tysons Corner that we announced earlier this week and the next evolution of Under Armour retail, our store in Manhattan that we will open in spring of 2014. Combined with our New York office that is opening early next year, this new retail space in SoHo will give us a meaningful presence in the city and enable us to bring a local Under Armour story to New Yorkers and the millions of tourists that make their way there as well. Just a week ago, I was in Shanghai for the opening of the Under Armour experience. A first-of-its-kind retail theater featuring an immersed multi-dimensional video experience that combines the high energy of our brand with our commitment to telling authentic athlete stories. The experience in Shanghai's brand new Jing An Kerry Center on Nanjing road is connected to our branded store with curated assortment of Under Armour's best Apparel and Footwear technologies. One of our big goals with this new retail experience is to help educate our Chinese consumer on what it's like to be an athlete. In order to do that, we had to break the traditional model a bit. While most retailers more like 80% product and 20% storytelling, we flipped that and are really concentrating on storytelling as a primary focus of the store. You enter to a red carpet, through an illuminated hallway and are greeted by a video image of Michael Phelps, who's your host and guest trainer. He leads you through a series of vignettes that define the will of an athlete, including a training session with NBA star Brandon Jennings, rooftop yoga in Shanghai, and the exhilaration of running out on the pitch before a match at White Hart Lane, the home of Tottenham Hotspur. The second piece I wanted to cover was how our innovation agenda enables us to win with consumers and drive a powerful pricing model. Our strategy is fairly simple. Wherever it is that we show up as a brand, our goal is to be best-in-class. Whether it's at our national sporting goods partners or regional ones like Scheels and Dunham's Sports. Our innovation agenda is what enables us to be the premium brand at that retail destination. So when we have success with the ColdGear Infrared long sleeves at $50 or woven stretch capri at $55, it reinforces our promise to deliver that best-in-class innovation to our consumer. We saw great evidence of that in Q3 where our average selling price grew by 5% in Apparel alone. We believe our ability to continually innovate for our consumer and the pricing power that comes along with it is a key element of our growth story and one that helps separate Under Armour from our competitors. The third thing I wanted to cover was our success with the Youth athlete, where as we refer to them, Next. Our continued strong growth in Youth is prime evidence of our ability to make that emotional connection with the young athlete, both on and off the field of play. We are winning with Youth in both Boys' and Girls' and it's not just in our core Apparel where we would expect to be strong. Our Youth Footwear business is extremely strong, and we anticipate that strength continuing in 2014. One great indicator is that in categories like basketball where we are performing very well in authentic distribution with a slightly older consumer and we are making great strides in the category with our Youth consumer as well. And like we laid out in our Investor Day this past June, our focus when it comes to Under Armour athletes is all about Next. So we partner with a great up and coming athletes like Stephen Curry of the Golden State Warriors, we're connecting with the hardcore athlete who knows he set the NBA record for 3-pointers made this past season and a 12-year old kid in New York who remembers him dropping 50 on the Kicks on his last visit to the garden. It's athletes like Stephen, Jordan Spieth, Bryce Harper, Cam Newton and Sloane Stephens, none of them over 25 years old that help us connect with our young consumers and challenge us to raise our product development game up to their level. So fourth and final piece for me today is about our team. A team that is evolving from within but also adding a new dimension to our leadership with experience from the outside. First, the internal piece. Kip Fulks, currently our COO, is adding the new title President of Product. In his extended role, he will now directly oversee the design and development of all product, including Apparel, as well as our supply chain and information technology areas. Henry Stafford who has served as Senior Vice President Apparel since joining Under Armour will take on the role of President of North America. In his newly created position, Henry will be responsible for our North American wholesale business, retail marketing, global retail and global E-Commerce. Working together, Kip and Henry will drive an integrated product and merchandising strategy that will ensure we remain focused on growing our core business here in North America while providing a foundation for the product merchandising and retail development to help Charlie Maurath drive our business outside of North America. In addition to Kip's and Henry's new responsibilities, we've elevated Matt Mirchin for the new position of Executive Vice President of Global Marketing. Matt, Kip and Henry all embody the Under Armour culture and I'm confident in their proven ability to lead. In addition to these appointments from within, we are adding 2 new members to our senior leadership team. Susie McCabe is joining Under Armour as Senior Vice President of Global Retail. She comes to us from Ralph Lauren with extensive retail management experience. Also joining the team is Jason LaRose as Senior Vice President of Global E-Commerce. Jason joins Under Armour from Express and will oversee our online consumer experience and drive our web business strategy. In their new positions, both Susie and Jason will report to Henry. So I'll now turn it over to our CFO, Brad Dickerson, but I want you to know that there are multiple other areas of our business where we are working with just as much intensity as the 4 areas I focused on today. We will continue to be a growth company in constant evolution on all fronts. We will use our brand momentum here in the U.S. to fuel our global ambition. We will stake out a new position with today's athletic female, and we will become a more digitally relevant brand for our consumer in the next 12 months, and there will be much more. As I said earlier, we are a growth company, and one that is focused on our future but delivering results now. With that, let me turn it over to Brad. Brad?

Thanks, Kevin. I now like to spend some time discussing our third quarter financial results followed by our updated outlooks for 2013 and preliminary thoughts on 2014. Our net revenues for the third quarter of 2013 increased 26% to $723 million. Apparel grew 26% to $561 million during the quarter from $445 million the prior year, representing our 16th straight quarter of at least 20% growth for our largest product category. In Apparel, we continue to perform best when we deliver newness and innovation to the consumer, a powerful dynamic that helped drive average selling prices of approximately 5% higher during the quarter. Apparel results benefited from new innovations like the recently introduced ColdGear Infrared technology, expanded platforms in areas such as Storm and Charged Cotton and enhanced design across both legacy and new offerings. From a product category standpoint, while training remains our largest category and drove majority of the dollar growth, we experienced strong growth rates in our running, hunting and mountain categories across genders. We also continue to see momentum in our Women's Studio line, as well as significant growth across our Youth business. Our Direct-to-Consumer net revenues increased 34% for the quarter, representing approximately 25% of net revenues compared to approximately 24% in the prior year period. In our retail business, we opened 6 new Factory House stores during the third quarter, increasing our North American Factory House store base to 112, up 17% from 96 locations at the end of last year's third quarter. We currently expect to open 4 additional Factory House stores during the remainder of the year, bringing our total door count to 116. We're also on track to expand 9 existing locations in 2013 as part of our efforts to better service demand with our broader assortment in areas such as Footwear and Women's. Looking at our full price Brand House stores, we continue to see positive results in our store in Baltimore and we'll open our second location at Tysons Corner near Washington, D.C. in early November. Our story in our E-Commerce business remains consistent year-to-date. Strong results driven in part by positive trends in average order value given our improved inventory positioning across the channel. Third quarter Footwear net revenues increased 28% to $81 million from $63 million in the prior year, representing just over 11% of net revenues. Running Footwear remains the largest contributor to growth with continued expansion of UA Spine and improved penetration across wholesale. We also concluded successful football season with Fleece led by our expanded highlight lines where we continue to take market share. Our Accessories net revenue during the third quarter increased 18% to $64 million from $54 million in the prior year period led by strong year-over-year gains in both headwear and bags. International net revenues increased 38% to $44 million in the third quarter and represented 6% of total net revenues headed by strong growth in our Europe and Asia regions. Moving on to margins. Third quarter gross margins contracted 30 basis points to 48.4% compared with 48.7% in the prior year quarter. Two primary factors contributed to this decline during the quarter. First, we experienced a higher U.S. import duty exposure on certain products imported in prior periods, which will identify and reserved for during the quarter, negatively impacting gross margins by approximately 90 basis points. In addition, as expected, product costs were also impacted by the resourcing of fleece to more reliable but higher cost suppliers negatively impacting gross margin to be approximately 30 basis points. Partially offsetting these growth margin headwinds, ongoing supply chain enhancements contributes a lower Apparel sales discount, and allowances and air freight expenses, benefiting gross margins by approximately 70 basis points. Selling, general and administrative expenses as a percentage of net revenues levers 120 basis points to 31.7% in the third quarter of 2013 from 32.9% in the prior year's period. Details are on the 4 SG&A buckets are as follows: First, marketing costs decreased to 10.3% of net revenues for the quarter from 11.4% in the prior year period primarily driven by the planned timing of our global marketing campaign this year, as well as overall expense leverage given our top line performance; second, selling costs increased to 8.1% of net revenues for the quarter from 7.9% in the prior year period primarily driven by the growth in our Direct-to-Consumer business; third, product innovation and supply chain costs decreased to 7.3% of net revenues for the quarter from 7.5% in the prior year period, primarily driven by a shift from a third party distribution facility in California last year to a consolidated in-house facility this year; and finally, corporate services decreased modestly to 6% of net revenues for the quarter from 6.1% in the prior year period. Operating income during the third quarter increased 33% to $121 million compared with $91 million in the prior year period. Operating margin expanded 90 basis points during the quarter to 16.7%. Our third quarter tax rate of 39.4% was unfavorable to 36.1% rate in last year's period primarily driven by a lapping of state tax credit last year and a higher levels of investments -- international investment this year. Our net income increased 27% to $73 million compared with $57 million in the prior year period. Third quarter diluted earnings per share increased 26% to $0.58 compared to $0.54 last year. Now moving over to the balance sheet. Total cash and cash equivalents at quarter end increased 19% to $186 million compared to $157 million at September 30, 2012. Long-term debt, including current maturities decreased to $54 million at quarter end from $72 million at September 30, 2012. Inventory at quarter end increased 59% year-over-year to $497 million compared to $312 million at September 30, 2012. As previously discussed, the normalization of our fleece levels following last year's delivery challenges was a significant driver of a higher inventory growth rate during the third quarter. In addition, we have moved some capacity back to certain suppliers after last year's challenges. In effort to help move capacity with our suppliers we have brought in some products earlier than otherwise planned. Our investment in capital expenditures was approximately $23 million for the third quarter. We currently expect 2013 capital expenditures of approximately $95 million ahead of our prior guidance at the high end of $85 million to $90 million, with the incremental investments driven by international supply chain initiatives and domestic retail. Now moving on to our updated outlook for 2013. Our prior outlook called for 2013 net revenues of $2.23 billion to $2.25 billion representing growth of 22% to 23%, and 2013 operating income of $258 million to $260 million, representing growth of 24% to 25%. Based on our current visibility, we are raising our net revenues outlook to approximately $2.26 billion, representing growth of 23%. We are also updating our operating income outlook to approximately $260 million representing growth of 25%. Total operating results, we continue to expect a full year effective tax rate of 40% to 41%, while our full year fully diluted share count is now expected to be approximately 108 million, which is at the low end of our prior range of 108 million to 109 million. We have several additional updates pertaining to guidance for the balance of the year. First, on net revenue. As we have previously outlined we continue to plan our business assuming comparable weather year-over-year. Due to a significant shift in the timing of shipments, we also expect minimal growth in both Footwear and International during the fourth quarter. Moving on to gross margin. We expect the year-over-year decline in the fourth quarter of approximately 50 basis points with the factors driving this decline consistent with those outlined in the last quarter's call. The positive factors include ongoing supply chain improvements following last year's delivery challenges and lapping last year's excess disposition strategy at our outlet stores. The negative factors include more expensive resourcing of key products and FX impact on our licensing revenue stream from Japan and the impact in the previously discussed change in our Canadian import duty methodology. While we have a lot of moving parts for the quarter, we still expect the full year gross margin rate to improve modestly from the 47.9% level in 2012. Switching over to SG&A. In marketing, based on the year-to-date spending trends and leverage from higher revenues, we now expect the full year marketing expense rate will be closer to 10.8% compared to last year's 11.2% rate. Looking at the other 3 SG&A buckets in aggregate, we expect expense de-leverage during the fourth quarter given higher incentive compensation levels and ongoing investments to support our global growth initiatives. Overall, although we now expect a slight increase in consolidated SG&A spending rates for the full year, we still expect to achieve a modest operating margin expansion from the 11.4% level achieved in 2012. As we indicated last quarter, we remain opportunistic with any additional net revenues or gross margin upside to our plan during the fourth quarter by reinvesting in SG&A to help support our growth initiatives in future years. That's why we expect more ability to improve our operating dollars in the event of better than planned results and not operating margin. Finally, a little more color on inventory. The same factors that impacted the third quarter are expected to persist in the fourth quarter. However, we expect the inventory growth rate will ease sequentially in the fourth quarter but remain higher than sales growth. Before we turn over for Q&A, we'd also like to provide you with our preliminary outlook for 2014. Based on our current visibility, we anticipate 2014 net revenues and operating income to be at the lower end of our long-term growth targets of 20% to 25%. I would emphasize that our focus remain to drive higher operating income dollar growth, balanced with making the right investments to drive our long term global success. We wanted to outlined 2 preliminary factors to consider for 2014. For net revenues, we expect accelerated growth rates for Footwear and International with most significant growth impact for each expected to incur in the first and fourth quarters. For gross margins, we expect modest full year gain driven by ongoing supply chain efficiencies, partially offset by a less favorable sales mix. As has been our custom, as we finish up the current year and get more clarity on next year, we will provide more color on 2014 during our fourth quarter earnings call in January. We'd now like to open the call for your questions. [Operator Instructions] Operator?

[Operator Instructions] The first question is from Matt McClintock of Barclays.

So, Kevin, I was just wondering if you could drill down more into the Women's business. The improvements of the product that you've made in the fall, what you're seeing there specifically? And then if we could actually extrapolate that into what you're doing with the Studio shop-in-shop, and how you think about using that to potentially transform what -- traditionally hasn't been a place for women to shop, the sporting goods channel to actually draw women to that channel?

Great. So I want to say this remains a tremendous opportunity we think for the brand. And as we stated all along, we believe that Women's has the potential to be larger than Men's. In fact it will be larger than Men's some day in the future. Women's today is nearly 30% of our Apparel business versus less than 16% when we were a public company that we'll celebrate here in just another week or 2, more than 8 years ago. So in addition, we've also added more than $2 billion in revenues during that time, and so we're very pleased I think with the trajectory that Women's have is outpacing our overall growth of the company. Our Women's business, as we stated in Investor Day as well, it's something we anticipate to be nearly $1 billion business for us by 2016 and we're highlighting that with the emphasis around opening our New York office some time the end of this year, early part of next year, led by Leanne Fremar who joined us from Theory within the past year. And we're seeing the team that Leanne is building out, and again, in addition to the other brand experts that we already had here. From a momentum we have and the ownership we believe we have in that female athletes, I'm frankly making more beautiful product for her. Taking her from beyond just on the athletic field and taking her to places that I don't think they'd expect the Under Armour consumer to be in the past. We're also I think putting our money where our mouth is around Women's. You mentioned the shop-in-shop, so you'll see a big emphasis on that. One thing that we've done differently in 2013, we think they paid a very good dividend for us was our use of the Brand Holidays. And we've had 3 of them as I mentioned in my script, the first 2 that have already taken place. The third of which will happen in the next couple of weeks. And we're planning to commit at least one of those brand holidays exclusively to Women's in 2014 also. So we want to make a big statement that we believe that Under Armour Women's has really arrived and something that is extremely important for us. Now probably one of the best vehicles we've seen are Women's product come to life has been the idea of Women's Studio. And I think it's really our commitment with, number one, any of you that are here at Investor Day, you see us highlighted particularly in our own Brand House store, but really, from the excitement we have in some of our key partners like Dick's Sporting Goods but we built out this new Studio presence and I think we've all got extremely excited about what it can mean, and what it's done, I think the dimension that's been added to the brand. But also showing a different side of Under Armour than the female consumer has seen us before, is that we're much more than compressor short and Sports Bra and I think we've demonstrated that with the range that we have as a product. And I can tell you it only gets better and better. We're also from a distribution standpoint, we talked about the department stores, again, that's something important to us. We're in roughly 1,000 department stores today. The majority of that assortment I want to be clear, these are not full assortment we have there. The majority of that is Youth, underwear and there's a Women's products. So we believe there's a lot of growth available for us there and frankly it's a way for us to reach the female consumer where she shops. And so we're going to hit at all levels. First and foremost in our core sporting goods partners, we want to become more comprehensive in the way that we present ourselves there. We also have some initiatives that we stated at building out things like the Women's Studio shop, like the Luxe shop that we have at Dick's for instance and then we also are going to continue to emphasize I think the places where she's shopping. And again, as I mentioned Department Store business. So Women's for us remains a tremendous opportunity and it continues to outpace our overall growth to the company as well.

And next question is from Eric Tracy of Janney Capital.

Really want to dig in on the Footwear piece here a bit. Maybe if you could just talk about some of the evolution of Spine as we go into spring next year. The introduction of SpeedForm, sort of the cadence and how we should think about the distribution strategy there. It seems to be again we're in an inflection point and an acceleration but I just want to sort of gauge your thoughts a bit on Footwear?

Yes, I think -- keep level setting I think with the expectation we laid out back in June at Investor Day. But a lot of the things we talked about was being a top 3 Footwear brand in sporting goods. And we look at where we're successful and where we're winning. And obviously the Apparel floorspace in any given sporting goods stores, Under Armour has a significant impression. And unfortunately, we haven't represented that way on the Footwear side. And so we've got a couple of things. When Kip first took over the Footwear business several years ago, one of the initiatives we had was building shoes that cost $100. And I think we saw a success for things like Charge RC, seeing success with the first price point introduced spine with. RC was that $120, Spine was at $100 and I think we came to realize is that just picking some number isn't necessarily the right place for us to be, particularly in sporting goods where you're really winning there is at $70, $80, $90. And so we've changed that mindset a bit that we're very pleased I think with the premium product that we have and things like Charge RC and things like Spine and products that we have like SpeedForm and I'll get to that in a second. But we also have some products we're really excited about heading into the year with some real house price points like the $80 product that we have called engage coming out. So we really want to emphasize and focus on winning where we're already being successful in the Apparel side, which is in sporting goods. We also believe that there's tremendous opportunity in the mall. Our key partners in Finish Line, Foot Locker that have been incredible partners for us and continue to give us great runway. So SpeedForm is going to be a critical component of what that means. So let me backup for a second and just talk about Spine. Spine continues to sell very well for us. The latest iteration that we have is called Vice [ph] and we're about to launch a new even lighter, sleeker and faster version in early 2014. I've mentioned Charge RCs, you'll see us coming back with new styles and colors and updates for that style that ranges somewhere between $110 and $120. And then what we have with SpeedForm that we introduced in a very small way just to get taste of what we thought the product could do at $120 this year in Specialty and the product has been incredibly -- we're incredibly pleased with it at this point. For instance we made the cover of competitor magazine being labeled the best innovation in 2013. We're coming back from a bit of a more commercial product that we have, we're going to call Speedform, Apollo, which will launch at $100 in a lot more volume in many more of the places where you would expect to find Under Armour. The feedback we're seeing on the product is really, really been good though and something that we believe that we're in a position to do well. All of this that we say running and I think we've been clear that we need to win in running. So we are -- it's great not to just be talking about 1 style heading into a season but being able to talk about $120 Charge RC, $100 SpeedForm, a $90 Spine and $80 Engage. You're seeing as beginning to add a dimension to the brand, but at the same time it's all underpinned by the authenticity that we're driving on field. Football for us in cleated -- I think people roll their eyes a little bit, but I can tell you the authenticity that we get from being as good as we are in grabbing market share in places like cleated has been extraordinary for us. Football for us as a whole, we're up 28% in units and 42% in dollars with the Highlight Cleat leading the way. And we enter a market with that type of innovation, we're seeing it cascade into many other products and we're selling it the Highlight Cleat at $100, $110 or $120. With that does for us in some of our $70 and $80 price points as well, it really drives business and it moves markets for us. We're also seeing, I think really nice progress in things like basketball. We recently announced Stephen Curry joining our roster of athletes and something we're really excited about again. He broke the record in the NBA for 3-pointers last year. And I think tremendous competitor and something really fits well with the character of our brand and frankly, somebody, like the DNA of all of our athletes, some of them really want to be with us. And so I think we're getting more presence on court, but I think we're doing it in a prudent way. We're not trying to buy loyalty. I think we're demonstrating, we're earning it, whether it's on the football field or it's on the basketball court, some of the moves you're seeing us do in soccer with Tottenham Hotspur, Colo-Colo and others, you're seeing us show up I think in more relevant ways with our brand. And again all these things underpin the success that we've had in the Apparel, but I think you're beginning to watch it move towards area like Footwear too.

And, Eric, I just want to tie in to Kevin's comments and clarify my prepared remarks around that Q4 growth rate in Footwear. And again, just emphasize this is the timing issue. The fourth quarter actually is our lowest volume quarter for Footwear. And this is really more around the timing of our baseball cleat shipment and again it's our lowest volume quarter, so our year-to-date 2013 growth rate in Footwear is around 25% and again, we called out the fact that Footwear is going to be above the company growth rate in 2014. So the Q4 growth is just the timing issue.

That's fair. And then I guess, Brad, to follow on that, the Footwear acceleration next year understand that dynamic in terms of laying on gross margin. But the early sort of color on gross margin next year of modest gains, given supply chain enhancements, given -- now pricing seems to be again, whether it's within Footwear or even Apparel, a nice tailwind. Some of these onetime sort of upfront costs should go away. Can you just maybe walk through again the gross margin dynamic next year, where the potential is for upside or is it purely just the mix on the Footwear that should be the drag?

Sure. And to be honest with you right now on the gross margin side, looking at the data we have and the data that we don't have yet, we have pretty clear visibility into spring, summer '14 and don't have all the data points in fall and winter '14 yet, so we're kind of using spring, summer '14 as a proxy for our guidance for the full year '14. And if you did kind of look at the front half of the year and the things that you have. You have a couple of things working in your favor, a lot of the things you mentioned some supply chain enhancements that we've been making along the way we would continue to expect to see some benefits from those going into next year and for the full year. From the things working against us is the mix piece, so obviously we're calling out things like Footwear and International, those are 2 parts of our business that from a gross margin perspective, although both improving year-over-year within themselves, they're still a drag on gross margins overall for the company, so that would be a big part of offsetting some of those supply chain enhancements that we'd make during the front half of the year. So again, positives, supply chain side, again, positive there working for us. The negatives on the gross margin side would be the businesses that are growing above the company growth rate for Footwear and International.

And the next question is from Evren Kopelman of Wells Fargo.

Okay. I wanted to ask on the inventory, maybe thinking both the inventory on your growth and also thinking about the channel. Excluding the Fleece and timing compare issue you mentioned, how do you feel about it, about the content of it? And thinking that the second have interrelated question is how the sell-through performance in the channel, in the quarters maybe, was there difference in sporting goods versus department stores versus other in the wholesale channels?

Our inventory in general and then sell through -- from an inventory perspective, like I said, there are a couple of big issues that are really driving that and the year-over-year growth rate. We are absolutely comping a challenging service level of last year, that we talked about last year especially in the Fleece business, so more normalization of our inventory levels on the Fleece side. If you remember our inventory growth last year in the Q3 with a minus 2%. Just kind of going back to some of the challenges we're having last year at this time. In addition to that, we kind of are in this kind of middle of a period here towards improvement relative to the some supply chains, thanks, specifically on the inventory side. We talked a lot in our Investor Day upon our 3-year planning process and the benefits that's going to have specifically in the supply chain longer term. Those really probably the benefits of getting better visibility out there further from a capacity perspective, probably it won't start really coming in to play for us until I think until we hit 2015 maybe the end of '14 into 2015. So in the meantime, we've talked about kind of resourcing some of our products to our existing suppliers and in putting more capacity to our existing suppliers. So part of the byproduct of that was making sure with them, really working with them and managing their capacity and their level loading of inventory, and manufacturing the ability to smooth that out and take some inventory at earlier too. So the impact of that has been a little bit more than we anticipated coming into the back half of this year on top of, again, the comp issue that we're absolutely having the back half of last year too, relative to the service levels. So those are really the 2 big things that are driving inventory. As you look again into Q4, into early next year, I would assume pretty similar stories. Again, I think if you look at our growth rates in inventory, in Q4 last year was minus 2%, in Q1 this year was flat year-over-year. So if you look at some of those challenges we were having on the supply chain side, we're definitely -- all the back half of last year and into the beginning of this year, so we'll continue to have some of those comp issues and we'll continue to have those issue of level loading with our vendors too from a capacity perspective until the benefit for 3YP start to kick in a 3-year planning process. On the sell-through side, obviously, we're posting really strong results here in the quarter. We've seen really good results in our Direct-to-Consumer business, obviously as I stated in my prepared remarks. On the wholesale side of business we've absolutely had another strong quarter and anticipate the strong quarter in the fourth quarter. Have we seen some impact to the much-publicized softness at retail? Absolutely. I think everybody sees some impact to that. We've seen a little bit of that as we got towards the end of the third quarter and the beginning of the fourth quarter. But again all that kind of built into our guidance and we're working through that. It has impacted our business a little bit, but I again, I think much, much less than it has probably other people in this space.

And the next question is from Camilo Lyon of Canaccord Genuity.

Kevin, I wanted to just touch on Youth and in particularly Alter Ego, since like that's been a runaway success for you. I'm just curious to hearing your thoughts on how you plan to expand the distribution? I know that you started going into your wholesale partners with the product this quarter. How do you see that broadening unfold? Do you think about shop-in-shop's dedicated to the Youth category?

So first of all, Alter Ego for us has been a really great success in 2013. It's a business that in June of 2012 didn't exist. We ideated it, tested it, built a product and had it in store this year. We primarily were in market with just a couple of our key partners, only may be 2 or 3 for partners, so we're just starting to get in front of the production side where we can get the product out there. So within our existing distribution, there's a lot of runway, I think for Alter Ego. At the same time, as good a partner as Marvel and D.C. Comics have been for us with this process. We'll also go after this cautiously optimistic about how many Batman and how many Superman t-shirts. First of all, there's a whole slate of characters that they have and so we're already sure we spread that, and we don't want to get caught holding the bag as trends move up and trends go down. However, we believe in it, we think there's a plenty of runway there. What we discovered I think as a company though is that not as much about just any one particular. Character, as it is about the want, the desire, the need for newness and for novelty. And so we believe that we've invented this new category of novelty. And so whether it is Batman, Superman, Ironman or whoever else to use or whether it's a slogan, we know the consumers are not looking for a basic white T-shirt in Under Armour logo, a black Under Armour logo on the left chest, that we need to provide a little bit more and that frankly across the board what we've seen with our -- all of our styles is that, particularly on our Direct-to-Consumer business, when the consumer comes to us they're not looking for the basics but they're looking for the things that have a little surface texture, have a little more interest, a little more technology, at frankly higher price points too. So Under Armour is really getting de-commoditized, I believe, to some extent and while we play with big volumes and big programs and we can make some pretty wheel house programs and products, we think that the consumers continue to push us to ask for more innovation, and luckily we've got innovation pipeline that's really full. Youth as you mentioned, Camilo, it's been really just on a tear for us. Our Youth business as a whole continues to lead the market as best we've seen. Our product alone on the Youth side is up. It's outpacing by almost 2x our total company growth. We haven't find -- found the top, the biggest challenge we have is finding appropriate distribution. Our own key partners have never exactly emphasized youth departments and youth sessions in their stores and I think because of the success we've seen, we're testing that more and more and we're looking to be creative I think with some of their own floor space and some categories that are more a drag to them and saying how can we build out bigger youth sections. So that's I think you'll come from us. And as I mentioned in my own script where -- this is not the Youth Apparel conversation either. I think I've made the statement of challenging somebody and go ahead and take a dozen 12 and under year olds and give them $100 and tell them to walk into it, sporting goods store, buy 1 piece of apparel, 1 pair of shoes. And I think there's a really good chance that they'll walk out with a piece of Under Armour apparel on the top. And based on what we're seeing in the last 6 and 12 months in Footwear, there's about as good of as a chance these days as them walking out with a pair of Under Armour shoes too. So we're really resonating with that kid and we're looking to doing great job for them and growing up and growing old with them too, so I think it has this position us very, very well.

Great. And then, Brad, just quickly, you talked about assuming a similar weather pattern as last year. How do you view your ability to meet at once orders should weather become more favorable? And have you think of that as a source of upside? And then just finally on gross margin, have you begun to realize the mix benefits in your Direct-to-Consumer business as you skew more towards made-for versus excess?

Yes, first on the weather side. Yes, absolutely if weather is in our favor, there'll be upside for us but again, the part of AR business and the part of our business that's extremely weather dependent is much less than maybe was 5 or 6 years ago. So a lot of our Q4 product is going to be in the Fleece side, which is more versatile and maybe less dependent on weather then may be with how we look 5 or 6 years ago. So would there be an upside for us if weather was cold? Yes, but let's just make sure we're prudent on how much upside there would be relative to that. From an AR perspective, absolutely, our AR fill rates are much better year-over-year. We're in the high 80s last year in AR fill rates and now we're in the mid-90s where we probably should be. So again, if the weather gets cold and somebody has looking for that product is an AR style, we should be able to service that demand in the fourth quarter. Our relative to the gross margin and then the realization of benefit per mix. Yes, we're still seeing some of that benefit on the made for mix. It was definitely there in the third quarter also. It was being offset by some other mix issues specifically with the growth in Footwear for us in the third quarter also. So yes, we're seeing consistent benefit in the made-for mix in the margin upside of that. It's just a little bit muted in the third quarter because there's some other things going on in mix.

And next question is from Michael Binetti of UBS.

So, Brad, since you mentioned it earlier on, on the International investment in the quarter, that was a big point of the conversation at the Analyst Day you guys had at the headquarters this summer. Maybe you guys could talk a little bit about the plan for International as you look just into 2014 in the context of what you guys talked about at the Analyst Day in the headquarter, what some of the investments may look like, that was -- it was obviously a material components of how you guys guided operating margins as well as well. So maybe just a little bit more about how the near term looks on that?

Yes, Michael, let me take this to sort of a big overall, spend a minute on International for us. So first of all, I think we laid it out very well. And it was great to have the ability to introduce Charlie to I think the investment community and get you to see the type of leadership that we have there. So would have a couple basic rules here at Under Armour and one of them is that great ideas get funded, but only great ideas with great leaders get funded. And So we're putting our money where our mouth is on that side as well in addition to that Women's. And what we see is that International has great dividend for us but we know it's going to an investment, it's going to take time. And part of our restructuring was really built around that. The movement that we did with Kip and with Henry was really to put some of our better leaders on our cash generators. And the philosophy that we're driving I think our corporate strategy these days is the principle that I have in my script. Our North American growth and castration are going to be the engine that feeds our global ambition. Because we have the success in North America, it allows us to make just longer-term investments. And so we're going to be investing appropriately internationally. But we're going -- we believe we've got some really good ideas, we believe they have some really good leadership. So let me work my way around the world and start with Latin America, which Charlie has been working on prior to coming to Under Armour's, particularly for the last 8 years but not exclusively, of course. Mexico, we're in the process of bringing back in our Mexican -- and making them -- Mexican distributor into a subsidiary by the first quarter of '14. We just opened of our first specialty store in Mexico City on the middle first week of October, and it's doing very well. I think we're seeing that we're resonating with that consumer. Brazil is obviously a big hot topic of conversation for everyone. The team that Charlie has assembled there is literally second to none. Unbelievable amount of experience with the 50-year of experience we held. That office is open now and will be beginning to probably looked to move our product, we'll be in there by -- in time for World Cup in 2014, but not a huge presence, but again it'll give us traction and I think you'll see a bigger presence as we build up to the Olympics in '16 also. Chile is another office that just opened in the past month. We announced the deal that we did with Colo-Colo, who's one of the largest soccer clubs in Chile as well and again with just a proven professional running our business there. Moving across the pond to Europe. It's a place where we've been in Europe really since 2006. We just opened a new office in Manchester, the focus on the U.K. specifically. Our business with Tottenham Hotspur is something that it I think demonstrates our commitment to being a global brand and obviously showing up in the global stage of EPL it's something that we've been doing very well. And our Kip is doing extremely well in that market also. That being said, we still have -- we have work to do in the Europe. We're still resonating with that consumer and we believe we like our leadership, we like our team. We have good momentum but we need to capitalize on it. We need to make Europe an absolute win and a positive for the company. And we see it. We believe that, that tipping point as we sit here in the year 7 or 8 of our existence there is something that is very, very close for us. Moving to the other side of the globe. Asia, beginning in China, I talked about last week having been over there and did a tour from visiting our partners in Japan who are doing extremely well, growing close to 30% on a meaningful business there. Again, nearly crossed $200 million last year. And continue to grow China for us where I spent time. We've got 6 stores opened right now, 3 of them are exclusively Under Armour stores. The Under Armour experience that we opened in Shanghai is just really cool environment. And again, I believe the first thing that we need to convince the consumer in any market but, particularly in China is why walk by -- how do I compel you to walk by the 4 or 5 global brands you've heard of and the 7 or 8 local brands and commit you to walk into an Under Armour or participate with our brand. And we believe that we're doing that with this new retail experience. So something very exciting and we think there's a lot more things to come. In other places, Taiwan and Hong Kong, opened our first store with a new partner in Taiwan recently. In Hong Kong, we opened with a distributor there called Giga Sports, retail chain there and again the product is doing extremely well. We just launched both websites recently. So we're balanced, it sounds like we're doing a lot, we really are, but we believe we have it in can control, I think part of our shift is again this reorganization we just announced, has as much to do with Under Armour transforming from being a North American companies selling stuff in other parts of the world that truly be a global brand that's doing business in North America and Latin America and Asia and then Europe. So we're very focused on making that happen and I think we're taking really good progress steps towards that direction.

And, Mike, just on the magnitude of the investment both will be growing SG&A in Europe to Kevin's point. I think most of the additional investment we're looking at from '13 to '14 and even starting in '13 is just building up the foundation of the international business globally so making sure that we have the right people, process and systems from an information technology perspective. Supply chain and leadership as Kevin mentioned is part of the additional investment this year and into next year and probably the other big piece of the additional investment is going to be the Latin American region as we bring Mexico in as a fully-owned subsidiary and we opened up fully-owned subsidiaries in Brazil and Chile. So when you're looking at kind of year-over-year incremental investments, it's that International corporate group and it's Latin America that really is driving the investment in International for the most part.

And next question is from Kimberly Greenberger of Morgan Stanley.

I'm wondering if you can just help us with the preliminary 2014 outlook. I know that on your fourth quarter call, you'll have a lot more detail. But if what is that you're seeing happening in the environment that would suggest that the lower end of your targets are the right place to be for next year? And if there's any additional color you could offer on that, that would be fantastic.

Sure. I think if you just kind of look where we're guiding this year compared to our guidance next year relative to revenue growth rate. Two things that we did call out. International and Footwear being accelerated growth next year, so you would look at those 2 things seeing positives from our growth rate perspective. But the one thing I think that clearly we look at year-over-year, where we are this year versus next year, that the largest piece of our Direct-to-Consumer business is our outlet business. And we have talked about slower growth indoors, new doors on the outlet side although we're focusing on growing and expanding some existing doors. Our outlet business will grow at a slower pace than this year as we start the transition also into putting more effort into the Brand House side of our business on top of the outlet business. So that DTC business is obviously a much bigger business than International and Footwear combined. And again outlet is the biggest part of that DTC business, so you have 2 businesses growing at a faster pace that are off a smaller base than the outlet business, which will grow a little bit slower pace.

Okay, that's really helpful. And then in terms of your wholesale. Should we assume that wholesale who also be nearing the lower end of that range as well?

Yes, usually since wholesale is the biggest part of our business you would expect it to be pretty much close to the range we're guiding to for the most part.

Okay, and then the last question is from Sam Poser of Sterne Agee. Sam Poser - Sterne Agee & Leach Inc., Research Division: Brad, I was just wondering, can you give us some detail on how you're thinking about the SG&A next year? Will it be this constant reinvestments or do you expect that to open up a little bit towards the back of the year? If sales come in above where you're going?

Sure, Sam. A couple of things just to call out on SG&A next year. We do see some items like marketing as an instance, it probably would have been, if I was look at it directionally for marketing right now, I'd say, probably going to be a little bit of a de-leverage for us next year. Based on where we're going to end up this year. Again, we haven't really figured out the exact timing of that yet, so we'll give more information on timing in the next earnings call. And something we're calling this year will also be a little bit of an investment overall for the company next year and that's in incentive compensation next year, which is kind of across all 4 of our SG&A buckets that will be a de-leverage item next year. Consistent stories relative to again some of the investment needs -- both is innovation is an area, that directionally, we would look to be increase our investments. So on the product side, specifically innovation, supply chain is an area again an investment for us as we are looking to expand our capabilities globally and obviously, a continued expansion of our global business itself as we just talked about specifically in the Latin America will be investment areas for us. Relative to your question about how the investments play out versus our top line and performance. And I think the one thing that we're going to constantly balance is we are focused on driving operating income dollars and operating income dollar growth just like we talked about in our Investor Day over the long term. We will always look for opportunities to help ensure successful business in a subsequent year or do things in the current year that could benefit the current year also from an SG&A or investment perspective. So if numbers would come in better than we are planning for 2014 and the timing of that would happen differently, we would definitely look to where we can reinvest those dollars and be opportunistic to benefit '14 or probably more specifically as they get towards the end of '14, what could we do to accelerate or ensure our success for 2015? Sam Poser - Sterne Agee & Leach Inc., Research Division: Okay. And then you've talked about the mix -- in the fourth quarter you talked about gross margin being down, but the mix of retail's going up and the mix of Footwear is going down in the fourth quarter, so why would that drive lower gross margins?

Probably the only -- the couple of things that are going to be happen in Q4 that maybe were a little bit more impactful than Q3. First and foremost, if you remember the Canadian duty issue we called out in the last call, we talked about some uncertainty around the impact of margins for that in the back half of the year. That's still an ongoing issue. We have not resolved that issue, it's still kind of in the audit mode right now. So we didn't really have an impact in the third quarter relative to that issue. We do fully anticipate that, that issue is going to be resolved in the very, very near term here, so there will be a fourth quarter impact to that issue as we finish up this year. So that would be a little bit of a difference from Q3 to Q4 and also on the FX side, our business in Japan where this really impacts us the change in the yen rate year-over-year will be a little more elevated in the fourth quarter versus the third quarter also. So those are 2 things -- 2 unique things, I think, that are going to be more elevated in the fourth quarter versus the third quarter specifically. Sam Poser - Sterne Agee & Leach Inc., Research Division: And just any word on tax rate for next year and that's it.

Tax rate for next year come again, that's something we have to really kind of roll together, the all the numbers in especially the back half the year. But I would anticipate the 2 big drivers of tax rate for us right now is our ability to have comparable tax credits year-over-year. Would be one thing, we're able to get tax credits next year that we would have this year would be one way to look at the direction of our tax rate and the second thing would be obviously pointing to incremental international investments and we need international profits to drive the lower tax rate and when we are in an investment mode that will work against us from a tax rate perspective. So my part would be our tax rate last -- next year will probably be a little bit higher than this year, but as we get more information we'll guide to that obviously in January.

All right. Thanks, everyone for joining us on our call today. We look forward to reporting you our fourth quarter 2013 results, which tentatively have been scheduled for Thursday, January 30 at 8:30 a.m. Eastern Time. Thanks, again, and goodbye.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.