Under Armour, Inc. (UA) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Under Armour, Inc. Fourth Quarter Earnings Webcast and Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Tom Shaw, you may begin.

Thanks, and good morning to everyone joining us on today's fourth quarter conference call. During the course of this call, we will 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 date on which the statement was made or to reflect the occurrence of unanticipated events. Joining us on 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 fourth quarter and full year 2013, followed by an update to our 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 11:00 a.m. Eastern time today. And with that, I'll turn it over to Kevin Plank.

Thanks, Tom, and good morning to everyone, from the brand-new Under Armour office here at New York City that just opened earlier this month. It's great to have a presence here at our new space in Chelsea, and we're looking forward to the opening of our first store in Soho later this spring. So Under Armour is a growth company, and with growth comes change. We like to say that Under Armour is a different company every 6 months, so we thought we'd start today by listing a few game changers that took place since we last spoke. First, despite starting the season unranked, Auburn University had 2 of the greatest comebacks in college football history, on its way to playing in the BCS National Championship Game. Then, we announced partnerships to outfit 2 of the most prestigious collegiate sports programs in the United States, the University of Notre Dame and the United States Naval Academy. As someone here characterized it, we now have both God and country covered. Thirdly, we signed agreements to outfit 2 leading soccer clubs, Colo Colo in Chile and Cruz Azul in Mexico, as we lay the foundation for growth outside the United States in the world's biggest sports. Next, we signed our first ballerina. I can safely say those are 5 words I didn't picture myself saying on an earnings call when I started the business in '96. Misty Copeland of the American Ballet Theatre is a great illustration of how we will bring new dimensions to the Under Armour brand in 2014, as she helps us redefine what it means to be an athletic female. And finally, we made what we believe is a compelling first acquisition, MapMyFitness, which firmly positions us at the forefront of the exploding connected fitness movement. So a…

Thanks, Kevin. I would now like to spend some time discussing our fourth quarter and full year 2013 financial results, followed by our updated outlook for 2014. Our net revenues for the fourth quarter of 2013 increased 35% to $683 million, representing our fastest growth rate in the past 9 quarters. For the full year, net revenues increased 27% to $2.33 billion, which compares to our most recent full year guidance of $2.26 billion. Apparel grew 35% to $546 million during the quarter from $405 million in the prior year, representing the 17th straight quarter of at least 20% growth for our largest product category. As a reminder, we grew Apparel 25% in the fourth quarter of 2012 despite facing the headwinds of warm seasonal weather and poor service levels in key areas like Fleece. This year, we came into the quarter with a compelling lineup of product, including expanded Fleece and UA Tech offering, as well as our new ColdGear Infrared technology. This new product position -- positioning, combined with the tailwinds of cold weather and our ability to better service the business with higher fill rates, allowed us to more fully capitalize on the strong demand from our consumers. From a product category standpoint, training continues to drive much of our overall Apparel dollar growth. We also saw strong growth during the period in our running, hunting and mountain categories, in our Women's Studio line and across our Youth business. Our Direct-to-Consumer net revenues increased 36% for the quarter, representing approximately 39% of net revenue, which was the same mix as the prior-year period. In our retail business, we opened 5 new Factory House stores during the fourth quarter, increasing our North America Factory House store base to 117, up 15% from 102 locations at the end of…

[Operator Instructions] Our first question comes from the line of Omar Saad of ISI Group.

Two questions. Firstly, real quick, do you guys have a sense for how much the cold weather contributed to that really big sales acceleration in the fourth quarter? And then I have a follow-up on DTC.

Sure, Omar. On the cold weather question, we had talked last year, last year, we had a warm winter in the fourth quarter and we still grew 25%. And we've been talking about that the impact of weather is less and less in our organization as our product line evolves. So 5, 6, 7 years ago, cold weather would have had a significant impact, either upside or downside, in our business. But our products have evolved so much, and it's much more diversified now, especially with our Fleece offering, that cold weather has a little bit less of an impact than it did 6, 7 years ago. So just as a warm winter in Q4 last year didn't have a huge downside to us because we grew 25%, it didn't have a huge upside to us in our 35% either. That being the case though, we definitely realize that there's some tailwind to weather, and it makes our results a little bit better across our channels, wholesale and DTC. So there was definitely an upside. Quantifying the upside to the fourth quarter is a little tough to do when you're growing 35%, but you could easily say maybe a couple of percentage points of was due to cold weather.

Brad, that's really helpful. And then, Kevin, DTC, it looks like it approached 40% on the business in the fourth quarter. That's pretty amazing from where you were 5, 6 years ago. Can you talk about what you're learning, maybe from the Tysons Corner store, the Baltimore store? You're in New York, you're coming into the New York downtown. Is the product different than what you're offering at wholesale? Is it more premium? And the way you flow in product to generate more newness and innovation, can you maybe talk about some of the strategies around the new full-price stores?

Yes, well, we're celebrating our 1-year anniversary of opening the brand house in Baltimore, and we opened it in a place that wasn't exactly a retail destination and just see what we could learn. We -- I think the learnings of the last 12 months have told us a few things. Number one, that we got a premium brand that there is a position that the consumer is looking for. There is product that we offer in the brand that maybe they haven't found in an easier basis at retail. I think the #1 goal that we have with this was making it a more compelling experience for our customer base and having our wholesale distribution as well recognized, that we could be much bigger and broader than maybe they positioned us and sort of putting us in a bit of a box in some of the retails that we've had before. Great examples of that, I think, is the way we've been able to obviously expand Men's, but Women's is probably the biggest thing, the openness of color. Things like our StudioLux line is where customers are coming from all over the country, in fact [ph], all over the world, and saying, "Wow, this is a full-line brand" versus maybe just seeing a few items, which is I think we've gotten pinned into that in the past. So Tysons is something where we then said, it was just something in our backyard. We expanded at Tysons. We're seeing similar results there. We're outpacing the way that perform at the stores. And so it's doing incredibly well. And we're going to learn a lot when we come up to New York City. And I think it will be refreshing because there's not [ph] a people in this market that I don't believe have gotten a great Under Armour experience walking into some of our stores here. So I'd say that as a challenge to our wholesale partners and also as an opportunity for ourselves. And so having retail gives us the ability to be strategic and be thoughtful, and I think we're learning. There's no plan in place right now to say we're looking to roll out 25 or 50 or 100 units. I think we're going to take them one store at a time. We're going to look for key markets where we can be strategic, places that we want to enter, and we're going to continue to learn. So I think we have the ability to change the model as to how people have done it in the past, a, not being just a retailer, not just being a wholesaler but there's a great balance in the middle, and ideally, we're inspiring our wholesale distribution to take on more comprehensive Under Armour presentation in their own stores.

International maybe for one of these new stores?

Yes. No, it's the same thing. You look at markets that we have around the globe and just take China for instance. We've got 13 stores total in 2013. We'll be growing over 50 stores by the end of 2014 as well. We're adding over 40 stores globally outside the United States as well. So we -- this really has served as much a sort of a brand marker and not something that's just domestic. It absolutely has as much to do with our global footprint and our global growth as anything. So ideally, what you'll see is consistency. You'll see a consistent message from what you find in Baltimore to Tysons to New York, and then what you find in Mexico City or in Shanghai or any place else where we're opening an Under Armour brand now.

And our next question comes from the line of Jim Duffy of Stifel. Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division: Kevin, people really seem to like your brand.

We'll take it. Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division: I'm intrigued by your Women's Brand Holiday. Are you willing to share a preview of the direction and timing for that? Then I have a follow-up on MapMyFitness.

We're just getting going with launching Holiday One this afternoon, so we're pretty focused on what Footwear is going to be. So if you don't mind, I'm going to turn that into, I think, more of a Footwear approach than anything. The answer, though, briefly, I think Women's deserves it. We don't give a lot of credit for our Women's business today. Even still, yet it's approaching over $500 million. We crossed $500 million in 2013, and our Women's business is really beginning to take hold with us as a company. We find out again that when we do innovate, we win. And our Women's business is no different than that. And so, I think it's earned the right and it's earned the focus that you're going to see of a committed organization that has 3 massive events a year, and Women's is going to have a second event during the back-to-school campaign. So that's going to be a big deal for us. Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division: Great, look forward to that. MapMyFitness, a great category. Heretofore, they've had a device-agnostic approach. Looking forward, how are you and Robin thinking about evolving that Switzerland position? Will there be a more brand-exclusive approach at some point in the future?

Yes. No, I don't see that. If I could, let me take a minute and just tell you about MapMyFitness and the way that we've approached the category. We haven't had a chance, I think, to speak to the market about what our mindset was when we made the acquisition back in December. So first of all, as a great brand, which I think we're continuing to underscore, [indiscernible] mentioned at the top of the Q&A as well, again, is that we've got a chance to go in a lot of different directions and a lot of different categories. And so, the most difficult thing we have is editing where do we want to go. A while ago, we identified Connected Fitness as the future of sport, a place where frankly, Under Armour has to be because we see the commitment from our consumer to want to be there also. Measurement and information, it's critical to making athletes better, which is our core mission statement. So it was important enough [ph], and we looked at the space and we spent some time looking at the categories. But I'll be honest, I was a user of the MapMyFitness app for more than 2 years, so I was incredibly familiar with it. And Robin and I have had a few conversations just about entering the space, and I just gave them feedback and comments mostly just as a consumer, but then also putting my Under Armour hat and thinking, "Wow, what would this mean for us?" We looked at 3 basic criteria when we decided, are we going to pick a partner here? Are we going to make an acquisition or are we going to try to go it alone? And frankly, we've almost been doing that with our Armour39 product that…

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

I have one question. I was hoping that we could get you to sort of elaborate on Under Armour's dot-com strategy and maybe start with I think with the fourth quarter of last year, you guys had a few website transition issues, some weak conversion rates. Can you maybe start by talking about how your website business has been in the fourth quarter and then how you foresee it in 2014? And also, maybe help us understand maybe a little bit more how Under Armour thinks as a brand about the growth of its website versus the growth of Under Armour on other websites like the dot-com-only players like Amazon as well as some of your key partners like Dick's Sporting Goods. I think it'd be helpful for all of us.

Robbie, this is Brad. I'll jump on the front half of that question, if you don't mind, on the dot-com kind of numbers in Q4 and how it relates to '14. So yes, you're right, we had some challenges last year on conversion and all that kind of common metrics on the E-Commerce side last year versus this year. We saw some pretty significant improvements. So that's really a testament to the E-Commerce team during the course of the year getting the site where it needs to be, getting ready for obviously the heavy traffic we expect in Q4. Q4, obviously, is a huge part of the year for us in the E-Commerce side. So we saw pretty much across-the-board that key metrics around traffic, conversion, average order value are really looking in our favor in Q4 year-over-year. That was part of the obvious upside to the fourth quarter. Again, going back to my comment before, we -- a couple of comments before, we serviced our business much better year-over-year. There's no doubt the E-Commerce business benefited from that. We talked a little bit about the tailwind of weather, which we think obviously helped a little bit also. And then I think just in general for our brand, this is an E-Commerce statement, it's also a statement for overall brand, is looking back 90 days, we performed much better in the fourth quarter in a full price -- at full price for our brand compared to what was a very heavily promotional environment, too. So coming out of that, beyond our expectations, that also helped the E-Commerce side in the fourth quarter. Looking at 2014, this is also, I've got to comment, E-Commerce also the rest of our business, as we roll out of this great fourth quarter we just had, looking at it, and we're really a couple of weeks into this kind of gathering of data, looking at it and saying what does it mean for Q4 next year and the back half of the year. Again, E-Commerce is heavily weighted towards the fourth quarter, so our teams are still kind of working through that, what's the right level of expectation in the fourth quarter for us coming off this great fourth quarter this year. But the good news here is that the metrics, again, conversion, traffic conversion, average order value, all seem to be working in the right direction for us year-over-year. But with Jason LaRose on board now, our new leader, we are really focused not just on the good results we're having right now but what do we do in 2015 and beyond to keep this momentum going. And maybe I'll let Kevin jump on top of that one.

Yes, I think the best place to start with this, and Brad just hit on it, is leadership, plain and simple. The addition -- it's unfortunate that I think we've gotten a bit of a reputation about executives in our team, but we don't get [ph] the press release 2 times, the ones that are doing so well for us. So we made 2 key additions last year. We had several but 2 I'll highlight is on the Direct-to-Consumer side. Number one, Susie McCabe running our retail division, who came to us from Polo, Ralph Lauren; And then Jason LaRose, who's heading up E-Commerce. And so, again, while they're both in that 120-, 160-day opening window, I think the leadership changes are something that's been incredibly significant. And you're going to see that as we begin to, I think, grasp the fact that this community is growing in an amazingly fast way. Mobile for us today is 40% of our business, to ua.com, and I think if go back 2 or 3 years, it was like 3%. So we're quickly, I think, modifying and adjusting ourselves to a mobile world and what that means. And also, what Jason is doing is building out our International E-Commerce team. He's taken some of our best and brightest talent that we have in the company and focusing them on our International E-Commerce and doing that for Charlie Maurath and what we're doing on a global basis. I don't know if the model's been written as to how we're supposed to go about being a global company. And so, getting translation, becoming local in markets. And again, this is much bigger than just putting a site up in German. I mean, the supply chain, the logistics, all the components, we -- the system side…

Our next question comes from the line of Lindsay Drucker Mann of Goldman Sachs.

Brad, I wanted to ask you just a couple of questions. Number one, if you could help maybe put some numbers around the improvement in fill rates, when that started to happen, how much better you guys have gotten and whether you think there's more to go? And then secondly, if you could talk just a little bit about more broadly on the supply chain where you talked about strides that you've made and how encouraged you feel about the go-forward, just some of the specific areas where you've see an improvement in metrics that they have?

Sure. On the fill rates side, yes, definitely saw improvements coming into the back half of the year, especially, as we worked through some of the issues that we had last year in the back half of the year. So fill rates in general were improving as we worked through the back half of the year. In the fourth quarter, in general, if you looked at kind of our normal fill rate by cancel date, we were probably in about the mid-80s in the fourth quarter last year, and this year we're much closer to the mid-90s. So like I said in my prepared remarks, definitely a tailwind there and help from our supply chain side of servicing the business much better year over year. We do see those fill rates stabilizing here as we get into the front half of the year. As I've always said, the supply chain is a very complex area. There's always going to be challenges here and there. But in general, we see fill rates stabilizing in the front half of the year and again comping -- again, we were improving our fill rates last year in the front half of the year. But really, more towards the back half of the year is where they kicked in. So we'll see a little bit of a benefit from that in the front half of the year, too, as we work through the first 6 months of 2014. In general, supply chain, a lot of things here. It's people, it's process, it's systems. A lot of additional leadership coming on board. Since Jim Hardy came on board 2 years ago, he's bringing additional leaders, putting people in the right places. That helps, again, getting more discipline and processes around how we buy inventory and how…

And also, just jumping on the end of that, and look we had a banner quarter, and hats off really to our entire team. But I think it's important as we call out things, and Jim Hardy is now 2 years in the job and Chris Gates, who just got here 5 minutes ago, and the foundation that was laid by the balance of our team and guys like Jody Giles and Mike Fafaul that really laid the foundation for our organization to run forward like this. So any way, I just want to give a great shout out to those guys and the entire supply chain team, who has built and put this -- made this kind of opportunity available to us.

Our next question comes from the line of Camilo Lyon of Canaccord.

Kevin, you talked about some pretty great innovations over the last year, SpeedForm Apollo, ColdGear Infrared. I wanted to hear your thoughts on zippers.

Right. You must have been out at the outdoor retail event.

I was, yes.

Look, I think it's -- speaking about product, one thing that we found is that when we innovate, that we win. You're seeing it happen on the Apparel side. You're not beginning, but you're continuing to see it happen on the Footwear side, but that's the kind of volumes that we've approached on Apparel. What we found out from 2013 was that things like introducing ColdGear Infrared, and we thought that we'd see really large gains in that product coming in 2014 and that has big plans and had a lot to do with the growth that we saw in 2013, and beginning with the fact the product just works. And it's -- this ceramic print that we have, and there's a lot more technical that goes into it than just that, but it's a terrific product that is great. Charged and Storm Cotton I mentioned on the -- in my script earlier. It didn't exist before 2011. Today, it will be over $300 million business. The things like Alter Ego that we got up and down just inside of a year, so introducing this new category of novelty for us where it's not just going to be how many Batman and Superman shirts we sell this year. We still see a growing and good business there, but introducing this idea that the consumer wants a new story from us and a way to introduce these technical products in new ways that's beyond just the fit, fabric and function, but it's doing it in a fun way. And so I think it's important that the brands have fun, and I think we're demonstrating our ability to do that. As you mentioned as well, Camilo, it's going into things like MagZip. It's the simplest innovations that we have. And you got…

That's great. And then just my follow-up for Brad. Just more on the numbers and on ASP front. With all this innovation, we'll take the MagZip as an example, what kind of price increases would you expect to see on a ColdGear Infrared jacket and just generally on ASPs into next year with all of this innovation coming into the product line?

Yes, it's tough to say in general. But I think ASPs, we've seen pretty consistently over the last few quarters be a couple of percentage points, kind of mid-single-digits up overall. In general, I think that's, again, being driven a lot by innovation and products like ColdGear Infrared. Obviously, our growth story is unit growth, but ASPs are definitely helping us a little bit, too, again more defined towards the innovation and new products we're putting out there in the marketplace. So as far as ColdGear next -- ColdGear Infrared next year, sure we'll look at the price points as we grow that product line. We're still working on final price points for fall/winter to some degree, but you could definitely see an increase in price points of around 10% or so maybe on the ColdGear Infrared side.

Best of luck. And Kevin, I love the Colo-Colo jerseys.

Thanks very much.

And our next question comes from the line of Eric Tracy of Janney Capital.

Great quarter, great year. Kevin, I guess if I could for you, maybe just tee you up a little bit more on the international front, provide sort of a learning from Charlie and his team, where we sort of stand. I know it's not going to inflect materially here over the next 12 months, but any update on the international front would be great.

Yes, thanks very much, Eric. First of all, we're learning a lot. I think we had a great quarter but there are still a lot of things that we are just beginning to get going in. And especially when you look at the international front. We're in different stages of growth in really all parts of the world, from the U.S., to Japan, to Europe, to China. But we're incredibly encouraged, I think. We're confident that the brand does translate. And as long as we execute and we do the things that we're supposed to do, we've got a real chance to live and fulfill that mission of being a true global brand where someday, more than half of our revenues will come from outside of our home country. So first of all, from a leadership standpoint, Charlie's doing really well for us and building out his team. And I think as we're as at about the 18-month mark with Charlie being on board, he might have broken the record and he's definitely, a Chairman [ph] flyer for United or anybody else. So he's been running all over the world, I think doing a great job there. And basically, though, we're in a position to do all of this, though, because of the strength of the core business, obviously. We use that statement that what's happening in North America for us, that our North American growth and cash creation are going to be the engines that feed our global ambitions for us as a company. If you look across the globe, though, let's just start with Latin America, which is where Charlie really came from, and we really put an emphasis on in his first chapter here at Under Armour. Under Armour Mexico [ph] was an acquisition that we just…

Really helpful. And let me just -- a second question here. A bit more structural for -- Kevin, for you, and for Brad, in terms of the top line. It seems like cold weather didn't really have a major catalyst in 4Q. Fill rates are moving meaningfully higher. The strength in the core Apparel in North America, layering in Footwear, DTC is still strong. What am I missing? Or what is the potential kind of roadblock in terms of really inflecting to a higher growth rate over the next 12, 24 months? I'm just trying to reconcile the 35% there versus kind of pulling back. I understand you guys want to be conservative, but is there something that's sort of prohibiting from that growth rate to inflect a little bit more aggressively?

Yes. Let me -- and I know -- I'm going to let Brad answer this, but I just want to be clear as well, is that no question, a great quarter. I heard years ago was that when the weather gets cold, I think we all get a little bit smarter in our industry. So it definitely had an effect. But I think, to Brad's point, there's a lot more to it. So I'm going to let Brad dig deeper on that.

Yes, Eric, if you look at the front half versus back half, so we've talked about some of the things working in our favor in the front half, again comping some -- a little bit tougher supply chain challenges last year and feeling better about that this year. We also talked about, obviously, our Footwear business and a lot of that growth coming out of the first half of the year. We feel pretty good about that. Obviously, visibility for the front half of the year for us is very, very strong at this point, obviously. The back half of the year, the visibility gets a little bit more tougher for us, especially in the fourth quarter. Again, we're just coming out of this really strong fourth quarter of 35% growth, and what does that mean to our Q4 forecast for next year in our DTC business and our wholesale business. So teams are working through that right now. So there's -- but we'll get more visibility to orders in the fourth quarter. As we work through the first quarter of this year, that'll also be a great data point for us on the next earnings call. So we should have a better idea of what that back half of the year looks like, specifically in our DTC and the wholesale businesses in the fourth quarter. Also, we talked about International growth expansion. It's weighted towards the back half of the year for a lot of the reasons Kevin talked about and the markets we're entering towards the back half of the year. And the realization is, is that we obviously are planning to execute flawlessly in going into these markets, but we want to be cautious because we are entering some new markets for us. So just give ourselves a little bit of room here in the back half of the year, if there's any execution challenges on launching some markets, which is always a very, very complex process in itself. So that's kind of what you're seeing, good visibility front half, a little less visibility in the back half. We have to work through Q4 orders with our customers during the first quarter. And now DTC teams need to work through just what is the cold weather impact from Q4 this year, how much of that do we want to build into next year's forecast, again what is the overall strength of the fourth quarter this year relate to the fourth quarter of next year. So as I said in my prepared remarks, as we get towards the next earnings call, we should have a lot more visibility into the back half of the year.

All right, Operator, given the time, we're going to conclude the call. But we really want to thank everybody for joining us today. We look forward to reporting to you our first quarter 2014 results, which tentatively has been scheduled for Thursday, April 24, at 8:30 a.m. Eastern Time. Thanks again, and goodbye.

We have one final [indiscernible], we've got a tradition with this, but this year the prediction will be Broncos 38, Seahawks 28. All right. We'll see who'll win. But have a great holiday, everybody. Thanks very much. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.