Under Armour, Inc. (UAA) Q4 2012 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 program is being recorded. I would now like to introduce your host for today's program, Mr. Tom Shaw, Director of Investor Relation. Please go ahead, Sir.

Thanks, and good morning to everyone joining us on today's fourth 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 date on which the statement is made or to reflect the occurrence of an unanticipated event. 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 2012, followed by an update to our 2013 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 the 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.

Thank you, Tom, and good morning, everyone. 2012 was another outstanding year for Under Armour. And as we enter the new year, 2013 holds great promise. Because Under Armour has always been about a promise. What is it that we can do with the team to empower athletes to reach their full potential? How do we help make athletes perform better? Stay warmer, stay cooler, stay drier and stay lighter. This morning I want to talk about the promise of Under Armour, both the one we share with our consumers, and the one we have with our shareholders. Those promises have been connected since our inception and we believe that both our revenue and EPS CAGRs of 30-plus-percent since our IPO in 2005 is a great measure of our success. 19 months ago, we hosted Investor Day here in our campus in Baltimore and promised that we would double our revenues to $2.13 billion by 2013. Given some of the noise that was going on around about the appetite of the U.S. consumer, we understood that was an aggressive number. But we had enough vision and an executional plan to get there. In our release this morning, we issued revenue guidance for 2013 in excess of the doubling of the business that we forecasted in 2011. Our ability to provide that guidance tells me 2 things: first, we're becoming much better company operationally. While our business has become more complex and multilevels we've grown, our operational financial planning teams have met the challenge; secondly, not only have we kept our promise to the athlete, who helped us reach our first billion in revenue, but our growth as a measure of how we've been able to reach out to a new consumer, one who understands that the promise of what Under Armour brings. Our growth has come through diversity of products as well. We've taken a number of logical next steps, moving into product categories like Charged Cotton and Storm Fleece, that were adjacent to our core Baselayer businesses. Developing these large-scale apparel platforms has not only enabled us to take a bigger share of closet with our core Men's consumer, but it has helped us grow an even faster rate in Women's and Youth. The results of this diversification are quite clear. In our IPO year of 2005, compression represented 64% of our apparel mix. This past year, that compression number was down to just 14%. But our diversification extends beyond apparel. In footwear, we've achieved meaningful market share in just one category to date, cleats. However, when we look at categories like Run and basketball, which are significantly larger, markets included, it's clear that the footwear opportunity for Under Armour extends well beyond the near quarter billion dollars in revenue we saw in 2012. The path for our continued growth in footwear is clear. Over the past 3 years, we have aggressively built a team of designers and developers, who can execute against the promise of Under Armour footwear. Under our new leadership with Kip Fulks, my original partner, and the person who has overseen all of our product development and innovation for the past 2 years, we are building a new wave Footwear culture that will ensure we are positioned to fight for market leadership in every athletic footwear category. Kip's primary focus in footwear will be to lead and continue to bring new talent into the team. Our success included is a great indicator of what happens when we execute in Footwear as effectively as we do in apparel. Kip's proven leadership skills will ensure our culture of innovation and anticipating the needs of the athlete as part of our footwear DNA for the long-term. By continually flowing new technologies to market, and growing our business, our existing distribution in key retailers like Foot Locker and Finish Line, we believe the future of Under Armour footwear holds great promise. The diversification of Under Armour extends beyond product categories though. Through the growth of our Direct-to-Consumer channel, we've learned much about how our consumer likes to shop. Our direct consumer business accounted for 29% of our revenues in 2012 compared to just 21% in 2010. We've also diversified our leadership, bringing experience from outside of Under Armour to lead our apparel, supply chain, Women's and international teams, and we are focused on our growth outside the U.S. in 2013, prioritizing the key markets where our brand is best suited for growth, and building the teams and infrastructure to execute. But our focus not only as a brand, but also as a public company is our next. What does the Under Armour promise hold in 2013 and what are we doing executionally to make that happen? Our growth drivers have not changed since our IPO in 2005. Men's, Women's, footwear, direct-to-consumer and international have been critical to achieving our promise and remain our focus in 2013. More importantly, the aggressive diversification of our business will continue. In fact, we will be even more aggressive in 2013. We will bring more innovation to our consumer. We will redefine the pinnacle of how we present our brand at retail. We will elevate the presentation of our brand and our wholesale distribution and most importantly, we will speak with a louder brand voice than at any point in our history. So first, on bringing more innovation to our consumer. At the NFL Combine in 2011, future NFL stars like Cam Newton and Julio Jones were the first to wear a performance monitoring system now known as Armour 39. Next month, that same state-of-the-art technology will be available to the high school freshman in Florida who's looking to improve enough to make his varsity baseball team this spring, and the college lacrosse player who wants to make her All Conference team in her senior year. The Armour 39 is the first of its kind, performance monitoring system for athletes that measures what matters most, willpower. Willpower is the score that tells you exactly how hard you've worked during a training session. Willpower combines a range of dynamic inputs, including body position, user profile and key heart rate measures. With willpower, athletes can, for the first time, objectively measure a hard day and a light day to ensure their training effectively to meet their goals. Armour 39 is the first system that detects and responds to every move athletes make. Any direction, any speed, any position, the Armour 39 wearable on body strap works with an accompanying watch or on your phone through a mobile app. So onto how we look at retail. In 2 weeks, we will debut our new specialty retail concept across the harbor from our campus here in Baltimore. It will be over 8,000 square feet of the ultimate expression of the Under Armour brand, delivering an unrivaled retail experience through specialization, localization, and of course, innovation. From a merchandising perspective, our new store will have 2 clear distinctions from how we look at wholesale. First, the footwear presentation will be a primary focus of the store, enabling us to tell our technology story across multiple categories. Secondly, the new store will carry as much Women's apparel as Men's, allowing us to tell a focused story on fit and style with product like the Armour Bra and the latest from our UA Studio line. We believe that when our consumer sees the cohesive story of our product merchandise the full power of our brand, we will be positioned to take our growth in both footwear and Women's to the next level. Elevating our retail presentation will be a focus for us in 2013 and not just in our own store. While we look to expand upon the learnings we gained from our Baltimore store, we're focused on improving how our brand is presented across our wholesale distribution. Within Dick's Sporting Goods, we are adding 15 new All-American and 20 blue-chip shopping shops, including our new prototype in Cranberry, Pennsylvania, which is the most complete presentation of Under Armour apparel at wholesale today. In addition, we are significantly expanding our Women's and youths assortment across key accounts like Academy and Hibbett Sports. Our focus on how our brand is presented at retail extends beyond our sporting goods partners. Within our growing department store distribution, we are gaining new doors and growing existing floor space with key partners like Macy's, Dillard's and Belk department stores, with our key initiatives in Women's, Youth and Underwear driving most of that growth. With all this happening, it's clear that we need to speak with a louder voice to our consumer because our product innovation demands it. We believe we have some of the most compelling product that has ever come from our design team and we plan to let people know about it starting this quarter. Our revenue growth in 2012 were strong, yet we believe there's a consumer who wants more from Under Armour, more Storm Fleece, more innovation like the Armour Bra, more thought leadership from footwear like the Highlight cleat. Our plan to talk to that consumer will be different this year and we will do so in multiple ways. We will show them who we are as both a Women's and footwear brand in our new store here in Baltimore. From immediate perspective, we will go harder, and we will talk to them in a concentrated and focused way. We will consolidate our spending for tighter, but louder message and ensure that we continue to reach that new consumer who's helped drive our billion dollars of growth over the past 3 years. We will tell the Under Armour innovation story this quarter with the first of several planned campaigns of what we are calling Holidays. We will create several brand holidays throughout this year, creating a call to action for our consumers to stand up and get the latest innovation from Under Armour. You'll be hearing the Under Armour brand voice in 2013, louder and better than ever. And the first of those holidays will happen in just the next few weeks. In summary, I want to remind you of the Under Armour promise. We have lived it and delivered it for our shareholders since our IPO more than 7 years ago. And we, of course, do it by understanding our consumer and bringing them new products that they didn't realize they wanted or needed. We will view that even more aggressively in 2013, bringing new dimension to our brand than what the world has seen in the first 17 years of our journey. With that, I'll turn it over to Brad Dickerson, our CFO. Brad?

Thanks, Kevin. I would now like to spend some time discussing our fourth quarter and full-year 2012 financial results and our updated 2013 outlook. Our net revenues for the fourth quarter of 2012 increased 25% to $506 million. For the full year, net revenues also increased 25% to $1.835 billion, which compares to our most recent full-year guidance of $1.82 billion. Apparel grew 25% to $405 million during the quarter, representing the 13th straight quarter of at least 20% growth for our largest product category. Our big story is driving growth across genders for Fleece and Storm. We were able to significantly expand the Storm platform beyond just the Charged cotton line last year to now encompass the broader Armour Fleece line. That advice to this product to the consumer was key as consumers look for more versatility from our store base. In Women's, we continue to raise our consumers' expectations with new product categories like Studio and Armour Bra. Youth products led the way from a growth rate perspective in Q4 as we gain shelf space at both existing and new distribution and continue to broaden into areas like graphics, which more than tripled during the quarter. Our direct-to-consumer net revenues increased 29% for the quarter, representing approximately 39% of net revenues compared to approximately 38% in the prior-year period. For the full year, direct-to-consumer net revenues increased 34%, representing 29% of net revenues compared to 27% in 2011. In our retail business, we opened 5 new Factory House stores during the fourth quarter, increasing our domestic Factory House store base to 101, up 26% from 80 locations at the end of 2011. In e-commerce, we achieved a growth rate in line with our overall net revenues growth during the fourth quarter. Fourth quarter footwear net revenues increased 43% to $45 million from $31 million in the prior year, representing approximately 9% of net revenues. New running products led by the UA Spine platform continues to be the largest contributor to category growth. We also experienced a strong initial selling of our 2013 line of baseball cleats. Our accessories' net revenues during the fourth quarter increased 16% to $43 million from $37 million in the prior-year period. International net revenues increased 30% to $34 million in the fourth quarter and represented approximately 7% of total net revenues, highlighted by solid growth in Latin America, Asia and our Europe regions. Moving on to margins. Fourth quarter gross margins contracted to 50.3% compared with 51.6% in the prior year's quarter. The 3 primary factors driving this performance were consistent with our expectations outlined last quarter. First, our sales mix is adversely impacted by moving through a higher rate of excess inventory at our Factory House stores as well as a higher mix of Footwear, which carries lower margins than other product categories. Combined, these factors negatively impacted gross margins by approximately 80 basis points. Second, given our previously outlined supply chain challenges, we had to airfreight some product, which negatively impacted gross margins by approximately 50 basis points. Third, we relied to lower North American apparel product costs, partially offset by higher North American footwear product cost, which benefited gross margins by approximately 35 basis points. Selling, general and administrative expenses as a percentage of net revenue leveraged 370 basis points to 34.2% in the fourth quarter of 2012 from 37.9% in the prior year's period. Details around our 4 SG&A buckets are as follows: First, marketing cost decreased to 9.7% of net revenues for the quarter from 10.9% in the prior-year period. As we have previously outlined, our 2012 marketing budget was more related to the second and third quarters to better align with brand initiatives; second, selling cost decreased 10.7% of net revenues for the quarter from 10.9% in the prior period; third, product innovation and supply chain cost decreased to 7.6% of net revenues from 8.2% in the prior-year period driven by overall expense leverage in these areas given our topline growth; finally, corporate services decreased to 6.2% of net revenues for the quarter from 7.9% of net revenues, primarily driven by leverage in corporate personnel, incentive compensation and administrative costs. Operating income during the fourth quarter grew 48% to $82 million compared with $55 million in the prior-year period. For the full year, operating income increased 28% to $209 million, compared to our most recent full-year guidance of $207 million. Operating margin expanded 240 basis points during the quarter to 16.1% and 30 basis points for the full year to 11.4%. Our fourth quarter tax rate of 37.1% was favorable to the 39.6% rate in last year's period. Our full year effective tax rate of 36.7% was below the 38.2% effective tax rate for 2011, primarily due to state tax credits received in 2012. Our resulting net income in the fourth quarter increased 54% to $50 million compared with $33 million in the prior-year period. Fourth quarter diluted earnings per share grew 51% to $0.47, compared to $0.31 in the year-ago period. Full year, diluted earnings per share increased 31%, to $1.21, compared to $0.92 in 2011. Now moving over to the balance sheet. Total cash and cash equivalents at quarter end increased 95% to $342 million, compared with $175 million at December 31, 2011. Long-term debt, including current maturities decreased to $62 million at quarter end, from $78 million at the end of 2011. Inventory at quarter end decreased 2% year-over-year to $319 million compared to $324 million at December 31, 2011. The modest decrease of our inventory levels, relative to our 25% topline growth during the quarter, was primarily driven by the ongoing success of our inventory management initiatives. Our investment in capital expenditures was approximately $23 million for the fourth quarter and approximately $63 million for 2012. We are currently planning 2013 capital expenditures in the range of $80 million to $85 million. Now moving on to our updated outlook for 2013. Based on current visibility, we expect 2013 net revenues of $2.2 billion to $2.22 billion, representing growth of 20% to 21% and 2013 operating income of $255 million to $257 million, representing growth of 22% to 23%. Below operating results, we anticipated comparable level of total interest and other expense in 2013, a full year effective tax rate of 39% to 39.5%, and fully diluted weighted average shares outstanding in the range of $108 million to $109 million. Of note on the expected tax rate in 2013, we have not assumed a benefit from any state tax credit, which we anticipate pursuing. Looking further into our operating expectations for 2013, I'd like to provide additional color on expected quarterly timing throughout the year. First on net revenues. As Kevin mentioned, our growth drivers from 2013 are consistent with recent years. We anticipate that most of our dollar growth for the year will continue to come from apparel, with strong growth across Men's, Women's and Youth. Looking at Footwear, the growth is expected to be slightly above our overall net revenues growth for the year. In Direct-to-Consumer, we expect these channel to grow modestly higher than our overall business as we open 10 Factory House stores and up to 2 specialty doors, focused on larger footprint within our existing Factory House fleet, and invest in more targeted traffic drivers in e-commerce. Finally, we expect our International businesses to outpace overall growth both still at the small base. Moving on to gross margin. We continue to anticipate stronger growth margin expansion in the first half of the year relative to the second half, primarily driven by favorable year-over-year product cost expected during the first half. However, we expect several factors to limit the overall progress in the first quarter relative to the second quarter. First, as we continue to work through recent supply chain challenges, we expect to incur higher year-over-year airfreight costs during the first quarter. Second, we expect strong quarterly growth in our Latin American region, which is currently distributor base business carrying a lower gross margin. Third, the mix of excess and made-for products in our Factory House outlet channel is expected to remain relatively consistent year-over-year during the first quarter. We anticipate a shift back towards more profitable made-for product commencing in the second quarter. Given these factors, we foresee year-over-year gross margin rate as relatively unchanged in the first quarter followed by over 100-basis-point expansion during the second quarter. In the second half of this year, we will be lapping last year's excess disposition strategy at our outlet stores and incremental airfreight. These positive factors are expected to be partially offset by certain changes to our supply base, especially in Fleece. While these changes give us better confidence in measures, such as delivery performance and future capacity, the mood will ultimately result in higher North American apparel product costs. As a result for the full year, we expect modest gross margin expansion from 47.9% level in 2012, primarily driven by the first half of the year. Next, on SG&A. As Kevin outlined, we are planning to be more targeted in some of our marketing expenses this year, which we anticipate will create some significant year-over-year timing shift. The first quarter in particular is expected to see nearly 350 basis points of deleverage, primarily as we launch a major a brand campaign focusing on innovation and incur costs around our Tottenham sponsorship which commenced in July of 2012. We also expect meaningful leverage of marketing expenses in both the second and third quarter, followed by a more consistent year-over-year rate of spending in the fourth quarter. Despite these expected ship, we plan to hold total 2013 marketing and spending relatively flat as a percentage of revenues compared to 2012, 11.2% level. Beyond marketing, we expect heightened deleverage in our other 3 SG&A buckets in the first quarter, driven in part by incremental expenses, tied to the expansion of our California distribution center, the opening of our Harbor East specialty door in Baltimore and higher year-over-year incentive compensation expense. These combined factors are expected to drive a total SG&A expense rate for the first quarter to a range of 44% to 45% of net revenues. During the remainder of the year, we expect meaningful SG&A leverage in the second and third quarters and a relatively consistent rate of spending in the fourth quarter. With our overall focus on investments in product creation, international, and innovation, we expect a relatively consistent rate of overall SG&A spending for the full year. In summary, we anticipate the strategic marketing decisions plan will result in some significant quarter-to-quarter shift in SG&A. With these shifts, we expect year-over-year operating income growth to be slightly higher in the second half of the year compared to the first half, yielding modest full-year operating margin expansion from 11.4% achieved in 2012. Before Q&A, I want to also -- I like to provide some details around our inventory position. We made some solids strides in our inventory management efforts in 2012, with inventory below our plan the past 3 quarters. During 2013, we expect the inventory growth rate will remain below net revenues growth rate in the first quarter, and then be generally in line with our topline trends through the duration of the year. We would now like to open the call for your questions. We ask that you limit your questions to 2 per person, so we can get to as many of you as possible. Operator?

[Operator Instructions] Our first question comes from the line of Robby Ohmes from Bank of America Merrill Lynch.

Two questions. The first question would be, Kevin, can you give us a little more detail on exactly what a louder brand voice means, maybe paint more picture for us what the big change could be in the approach to marketing for 2013? And then just the second question would just be on international that you're talking a lot more about, Latin America and maybe Asia, and I'm just curious where Europe fits into the international growth strategy going forward?

So let me take a second and tell you about what we want to do from a marketing standpoint. What we did -- I guess, starting so, so 17 years in the business now, it gives us a tremendous amount of perspective. And looking over the areas in the years where we've been really effective and the years that we still moved forward, but maybe we haven't been just quite as loud. So we what we want to do is we want to go back to this concept around cluster marketing, and the idea there is to create holidays. So holidays are places where basically the entire brand meets at once. What we want to do is consolidate our spend to tighter, but louder messaging, and so we're planning on several brand holidays this year. So to give you probably the best descriptive idea of what we're doing, it's about to happen in a few weeks here, and within the span of about 4 or 5 days, you'll see several things coming from the brand. First of all, we're going to kick it off at the PR event in New York in the second week of February. That will be announcing some of the innovations we're bringing to market. Things like our new Spine Venom running shoe that's coming out, we're very excited about on the footwear side, as well as probably the marquee product that we have which is our Armour 39, our biometric measurement device that I went into a bit of detail in my script on. So this is something we think is going to finally apply some data and take away the subjective into the type of workout I had by -- that was typically judged by the size of sweat stain in my gray T-shirt, to actually giving some hard facts as to how did I work out and giving you a score around this thing called willpower. In addition to that, we're opening a brand-new retail concept down here at Baltimore, that again, the primary focus of that store is giving us the ability to showcase things that maybe don't get the opportunity to see as big or as loud and proud as we believe where we are as a brand, in some of our wholesale distribution. And it's things like what we're doing with Footwear and when people walk into our stores, they'll say, "My gosh, I had no idea you made all these styles and colors and you were so broad." It's because a lot of this has been -- people living with a footwear brand, we were maybe 2 or 3 or 4 years ago. And so we see the ability to really accelerate that as well as to our consumers, and frankly, to our wholesale partners as well and demonstrate to them what our brand has the ability to look like at retail. And then capturing and sort of timing the whole thing together we've got this new "I will" campaign that will be kicking off, which is our brand-new creative, you'll see it in 30 sec -- 60 and long form, 90 and 2 minute versions of it, but effectively telling you what our brand is. It's explaining to you what does the idea of "I will", and this is not just a local or domestic, because as I get into the answer to your next question about international, we were pleased with the strides that we're making and the foundation that we're building in global, but it's important that we begin to tie the success we have here in the states around the world and so "I will" will be a global campaign. It will be something that a voice will be heard in all 61 countries that we currently do business in today. So when you hear from us, you may see us quiet at points during the year, but when we're loud, you're going to really hear us. And so I guess that's where you'll see from -- where in the past, and maybe helping Brad out with his answer, had been a more smoothed out approach the way that we approach marketing. We're going to take those dollars over what was 12 weeks and you'll probably see them condense in about 2 or 3 weeks. As I take on international, we continue to believe it's a true opportunity for us, and still thinking about our business as a global business. Global companies define their growth by -- or their success by -- where more than half of our revenues should come from outside of our home country. That's still remains to be the way that we think about our international opportunity. But when we think about where we'll start seeing meaningful impacts that maybe you guys would see in a bigger way, it's 2015 and 2016. Now along the way, we're not asking you to wait that long either. Because we're laying additional foundation and resources and putting points on the Board. So just a couple of things, Europe, you heard us talk about Europe and we've been there since 2006, I -- we generally believe that we are close to the tipping point of what's happening in Europe. We're doing more than USD 60 million today, and it's taking us awhile to get to that number, but we feel very good about it. We're leveraging things and what you see like our relationship with Tottenham who's currently sitting in fourth place in English premiership right now. We've got new distribution. We just opened up a new concept shop inside of Harrods, that is doing terrific to date. So it's establishing that presence of people asking a question of how can we be successful and we're seeing that the consumer wants us, it's just a matter of us really meeting that demand with appropriate distribution of course with the right product mix. Looking at around the world and shifting over to Japan for a second. It's our oldest market, our most mature market, and frankly, it's our most successful market as well. We've been in Japan for 13 years now. And we did nearly USD 200 million in 2012. Now, they continue to be on a growth trajectory that is in excess of what we are even doing here in the States. So the limit or the size of how big that market to be, I think we're still waiting to see, but they're growing in again, our partner there, Dome Corporation, [indiscernible] are doing an unbelievable job for us, and it is truly, it's not a company doing business in Japan, it is Under Armour of Japan. They've got 23 doors open in Japan right now of wholly owned stores because they have such a large wholesale business, 18 of which are Outland. They have 5 specialty stores as well. And you'll see them increasing a number of specialty doors that are there. Probably most importantly, when I talk about international is leadership. Bringing Charlie Maurath on to our organization and again, it's still inside of 6 months, 6 months, but his impact has been extraordinary. Charlie joined us in September 2012 from Adidas, where he's been for 22 years and ran nearly -- took a business of running all of Latin America for them from just under $300 million in 2003 to more than $1.7 billion for them. Charlie is in the process of building out his teams in key markets in Europe and Latin America and China. And we're leveraging his expertise in Latin America and prioritizing the strategies that we have in each of those markets. So there's a lot of things where we're coming in and a lot of the things that Charlie learned from his past experience that are really going to pay dividends and save us a lot of time. So within that, some of the early moves that Charlie made was taking somebody from our outdoor business in Kevin Eskridge, he was a guy who's a real killer for us here and took our outdoor business from under $30 million to more than $150 million and Kevin and his family moved over to China this year. And so getting on the ground and more importantly, getting local with the team that we're building underneath Kevin, someone who understands the UA, DNA and understands our culture, as well as combining that with local knowledge, is something that's been a real opportunity. We've got 4 stores open in China right now, 2 of which are Under Armour owned, the other 2 of which are a partner that we have in Beijing, and our e-commerce site just launched in December. So we feel pretty good about it. As I mentioned, I think global for us, as we -- we're very fortunate to have the 20-plus-percent growth numbers we're putting up in our apparel business, moving our DTC to nearly 1/3 of our total business, as well, and so between those 2 markets, it allows us to make these longer-term investments of things like -- we're seeing the progress coming in footwear and more importantly, what you see in the international. So I use that 2015, 2016 as a bogey. It's pretty consistent with what we've talked about, international will come on in a meaningful way. But I tell you with leadership like Charlie and some of the team he has from the leadership and next year that we have in Europe and what we have in China, we feel very good about that.

Our next question comes from the line of Omar Saad from ISI Group.

Wanted to follow up on the specialty store you're opening up in Baltimore. Can you talk about how -- and I think Brad alluded there might be 2 openings this year. Can you talk about how that's different from your last efforts in the specialty retail department? Obviously in the more of an urban location as opposed to a mall, but can you talk about the product mix and merchandising strategy for the store and what you hope to accomplish with it?

Yes, Omar. Well, I think we want to learn. We went at -- when we looked at specialty retail, 3 or 4 years ago, I don't think -- I think we still have a long way to go in terms of putting our infrastructure in place. And more importantly, we had so much work to do in our wholesale distribution. Now, I'd tell you, there's still a tremendous amount of work with our wholesale partners because first and foremost, we love our wholesale distribution and hopefully, I think you see from some of the presence we have there, that they feel pretty good about us as well. We're going to start casting -- February 16, we open our new Harbor East store, and most importantly, we're going to learn a lot, and we're going to learn a lot about the consumer, and I think as we grow as the brand, it's important that we have this closer relationship with the consumer, the same way that we learned in our e-commerce channel. There's a way that we can learn watching a consumer walk in and seeing what products are compelling. The primary goal here is for us get closer to that consumer and again, a place that we can tell the full Under Armour story in this environment. I mentioned those 2 product categories of, a, our Women's and having a larger and a more important presence because I don't believe that our Women's gets enough credit for the size of the company that we built there. We're nearly a $400 million Women's business in 2012, and it's still on an amazing trajectory of growth right now, and that's $400 million at wholesale mind you, and it's close to $800 million at retail. And we think that the idea of how we can show products and showcase products like Armour Bra, but more importantly, our new Studio line is having rave reviews and something that's coming across very, very well. So what we've done and our team has done to build out our Women's team is paying great dividend for us. I mentioned Women’s and Footwear because that will be the focus and what will be unique about the store also is that footwear will actually be in the center of the store. And so it'll be a real primary focus when the consumer walks in, of not people walking and saying, "Oh my gosh, you sell shoes, too?" versus, "Wow, this is a footwear brand." Because we believe that we're the ones that need to take the lead in making that bold statement of being a footwear brand. You're also going to have an innovation area, you're going to have clear messaging of features and benefits, lay out flexibility, and there'll be this real simplicity, it almost feels like a personal shopper for the consumer. So it'll be a way to really make buying Under Armour easy and get us away from being so item driven where it's a cold gear mock or maybe a heat gear tee, and a very much more collection driven. And again, if we had a goal from the store, it's saying that, as we evolve and you heard us -- and you talk about in my script too, the emphasis we have in our wholesale presentation of moving us away from being frankly just quite so item driven to adding and driving more collections there. So we want to be prescriptive in how we teach athletes how to dress, and we'll have people in our stores that are specialists and experts and allows us to showcase new products like Armour 39, where you can really get the product and the explanation out there. So again, this is a store in our backyard. We're very conservative with declaring what this is going to be other than we think it's going to help us learn a lot, it'll be a place that I can stop on my way home from work and we can see how consumers are shopping and really get a sense of understanding retail.

Okay. It sounds like it's a brand messaging store. But it's also aimed to be -- with the hopes of being profitable and replicable on a larger scale, is that correct?

Yes, first and foremost, we specifically did not use the word flagship, and I don't believe in the idea of leading with marketing or flagship where, oh, it's a loss leader for us. We should make money in everything that we do. And so our approach to this store is no different than that, and that's why we say 8,000 square feet is maybe bigger than you'd say a 5,000 or 6,000 may feel right. So we want enough room to tell a brand presence, but 100% we believe that our intent is to make money in the store.

And then real quick on the Armour 39, is that an offshoot of the Es, Under Armour's E39 product innovation that you guys had on some of your athlete least last year? Is it embedded in the apparel? Is it some sort of arm band, a wrist band or is it related to the Footwear? Any insights you can give there?

Yes, it's the evolution of the same products and this is the -- there's attorneys in the room, but I'm going to tell you the attorneys got the better of me. We had to come down to the naming of this thing. But it's a perfect product. It's the same product, and again, we've had this product in the market for 2.5 years. And so we've been testing it, refining it, now we're finally ready to go to retail with this product. And so it's something that what you saw, again, Cam Newton and Julio Jones, 2 of the stars of the NFL that you'll see today, when they went through the NFL combine more than 2 years ago, the same product they were wearing. And so we've evolved that into something that has commercial application. And as I said, it'll give the consumer at home the ability to finally measure themselves beyond being on a lift core or a treadmill, but what happens from the full-time that you're in the gym, the full-time that you're exercising and taking the subjective away, as I said earlier, the size of the sweat stain on your T-shirt into actually what is my willpower score? And that's something given on one-to-ten basis and allows an athlete to measure and say, well today, I was a little better than yesterday, and tomorrow I'm going to be a little better than today.

Our next question comes from the line of Michael Binetti from UBS.

So thanks for all the help today on the components that are going to be contributing to the revenue growth in 2013, and as I think about that, it was kind of the detail you gave to us, seems like might be a good time to ask about how you think about the long-term gross margin potential of the business. Back in 2011, I think you were targeting 50% gross margins, Kevin as you look at the places you're going to be taking the brand over the next few years, how are you thinking about gross margins today?

Michael, I can jump on that one to start with here -- I mean, our vision of long term gross margin hasn't changed. We do believe that, over the long run, that our gross margin should start with a 5. That being driven by continued innovations in the marketplace, which would justify the price points and justify the margins for the product to get there, first of all. Second of all, obviously, direct-to-consumer is a help in the mix equation for gross margins also. So nothing has changed relative to our vision of, over the long run, getting up to that kind of 50% plus gross margin goal.

Okay. And then this one might be for Kevin, with -- Kevin, with footwear, there's obviously been some changes on the team there. So do you think as new leadership moves in, we'll see the footwear program take change of direction over the next year or 2 or your approach to that market? Or do you look at the platforms you have now like Spine and the new basketball shoes and will be more of an evolution of those platforms that you've already launched?

I think we -- look, we've very pleased, I think, with the direction in how we've been moving as a footwear organization, and we're especially pleased with the team that we have a place in footwear. The thing is that, since we've added $1 billion in revenues in the last 3 years, we've added new skill sets and the evolution of the team of what makes the most sense with us. At the end of the day, we've had to make a lot of these decisions over the last 7 years, since being public, but it's also come out to netting us 31% CAGR top and bottom line in that same period of time. So as our business evolves, so does the need to consistently build and recalibrate our leadership, and so what we're doing is we're taking my original partner, Kip Fulks, who is a guy who, first and foremost, he's a product guy. And I want to make sure of the assumption that people understand and know about Kip as -- he runs supply chain because he's a great leader. He's running footwear because he's a great leader. But he also understands product at the same time. And we'll -- again, his primary focus is to get in -- to help us continue to build out our footwear team, because even where we are crossing the quarter billion dollar mark, we feel there's a tremendous opportunity in front of -- and a long way to go. When I say a product guy, it means Footwear's reported to Kip for the past 2 years, in addition to innovation. So he understands the things that are in the pipeline and really the way that we're going to pull the trigger there. And the reason we're able to do that is because we've done such a good job hiring within Kip between Jim Hardy coming onboard on the supply chain side, he was doing an excellent job for us. And what Henry Stafford has been able to do on the product side for us. We're able to focus Kip more on the footwear side. With shoes as a whole though, I don't want to stop the message at sort of where we've been as much as where we're going. First of all, with some of our track record, we've been in shoes for 7 years, and our first category there was football cleats. But frankly, it took us 7 years to get to this place where we are now where we're making -- telling product from the consumer, things like that Highlight cleats that we point out at $130 price point, the pair is -- wasn't a ton of pair, but it was the fastest selling speed shoe that you saw at sporting goods this year to our retailers who carry the product. And more importantly, the level of the lift that, that provided us was we went from a market share of a -- that started with a 2 to a market share that started with a 3. So it comes back in driving home the point when we innovate, we will win, beyond just 1 particular product, but we sold more $50 to $100 product because we are selling that $130 product as well. So you'll see us continue to push there and things like running -- our pipeline is full, Spine Venom as I mentioned, kicks off in the middle of February. Our new Charged 2 products, we've got a new product called Toxic 6, which is launching. We've also got a another, you'll see another running concept from us this year. In basketball, we've had success on court with many of our players are playing very well from Brandon Jennings from the Bucks, and Kemba Walker and the Bobcats, and Greivis Vasquez, and Ray Felton from the Knicks as well, DeAndre Jordan with the Clippers. Plus we've got another 8 or so players that are also wearing our brand, they aren't being paid money. They're wearing it because it's good product. So many of these things just take a little bit of time. And the good news is, that we have a very young athlete base, including people like -- if you all saw it in the Australian Open, you watched Sloane Stephens who is definitely one of our next athletes at 19 years old, who is the first teenager to ever beat Serena, and move on to the semifinals at the Australian, so -- and her first comment I think from the announcers was, how cute her shoes were. But more importantly than being cute, was the fact that they actually worked. So we're very proud of that, and we're also moving to a place where, yes, it does matter if shoes look great too. So we feel like we're making great progress and we feel very comfortable that Kip is going to do a great job for us and we'll continue to build out and evolve that team.

Our next question comes from the line of Eric Tracy from Janney capital.

I guess if I could, Brad for you focus a little bit more on the supply chain, perhaps the learnings, you said Jim McCarthy and the team have come on. I understand the cadence still sort of a bit of a constraint in the first quarter, but maybe just talk about sort of the upside opportunities in the back half, and as we enter into '14, sort of what these opportunities to drive further gross margin expansion from the supply chain?

Yes, Eric, we've talked a lot about the supply chain challenges over the last few quarters and the impact to our results in the back half of 2012 relative to having to airfreight some product in, to get product in on time to meet demand. Some of that -- some of those challenges are going to be consistent as we get into the front half of this year, especially in Q1. Some more heightened airfreight than usual again, just to kind of make sure we're meeting demand on time. And it's the same type of issues we had from last year. It's relative to a few factories that we onboarded during the course of last year. And some challenges around the onboarding of a few factories. So that will be consistent to the front half of this year. As we start moving through the year, the thought there, in the supply chain side, and the short run here is to move some of the supplies, especially on the fleece categories where we had some of -- most of our challenges last year, to move that to more consistent historically reliable suppliers of ours. That will help with obviously delivering on time, but in the short run, that will come at a little bit of a cost especially in the back half of the year when some of that moving of products starts to hit the market. Lessons learned really to get to 2014 and forward and Jim has done a really good job looking at this and his team is -- capacity in general, planning longer term capacity and where we need to be, not just in the next year or 2, but further out years 3 and 4, and making sure that we can onboard factories in the right -- at the right pace and at the right time. And that will be the important part of our long-term strategy in the supply chain. So we do kind of see this, kind of air freight issue at the back half of last year, first part of this year. And then kind of the switching of the factory base the back half of this year to be more of a short term need to meet demand, longer term doing a much better job of planning out capacity and onboarding new factories at the right pace.

Okay. And then, maybe Kevin for you. Again apparel is holding up really, really well. I think there's probably misinterpretation of being saturated domestically, that goes without saying. In terms of the distribution expansion beyond the core, particularly on the Men's side of the business, how do you balance continuing that expansion in support of the apparel growth without potentially sort of diluting or getting maybe cannibalization within that cold channel?

I think it begins by having and continue to drive great growth within our existing base. So if you did your check, I think the expectation that we believe our existing distribution has from us is that, we're the company that continues to deliver double-digit comp growth in their stores. And so finding ways to do that is, it isn't putting the same things in there, but finding newness, frankly showcasing innovation, and it's not always -- and they can be simple innovation too. It's -- the charge from the Storm platforms, they'll each be $200 million businesses for us this year that frankly it didn't exist in 2010. When you look at, again, some of that simpler innovation, it's things like fleece, our Fleece businesses this year was on fire, not literally, but up 50% for us. So you imagine taking a simple category like Fleece and driving that kind of growth, that is a wheelhouse product: Our Charged Cotton business, plus 90%; our Storm platform, plus 300%. So when you look at apparel, we're still not servicing the appetite of our consumer, within and through our core base. So when I mention we like our distribution, they like us very much, we understand where our bread and butter, and we'll continue to make sure we take care and that we build out things in taking time as you heard me hopefully very thoughtfully talked about the retail presentation expansion will have in our wholesale distribution. And at the same time, we do see opportunities, so you'll continue to see more and we could spend a lot of time talking about Dick and I think some of the headway that we have there as they continue to be a headline for our brand as we are presented in the marketplace, but you also have great things happening with Academy inhibit. There's over 30% growth there, driven by space expansion in Women's and youth that we have there. Our youth business is unbelievably healthy, particularly as we move into things -- Sports Authority has done very well. The new management team is really getting settled in there. And we're cleaning up the business. It's becoming more profitable. And we expect to see double-digit growth from Sports Authority in 2013 as well. So as you look at sort of where you'd expect to see us to some of the new places you are seeing us. Last year, we told you that we are going to spend 2012 and we were going to be exploring the department store channel. So fixing up some best in class partners that we have there: Macy's, Dillards, Nordstrom, Belk, Lord & Taylor, Bloomingdale's, Meyer, it was the business that we primary focused on underwear and youth, and we put that in about 700 doors throughout 2012. We like the doors we're in, we think there's about another 200 doors potentially we could go on in 2013 as well as we look. But we're going to start doubling down and becoming better in the stores that we're already doing business in. For instance with Macy's, we're doing shop-in shops in some of the obvious place with place you'd expect like Herald Square, Union Square, State Street in Chicago, so we'll be -- we want to increase that presence and we want to make sure most importantly that it's not just a couple of shirts hanging on a rack, but that our presentation is important. I think it's one thing you'll hear from us. So what we want to demonstrate again, going back for a second to what we're looking to come from the specialty store model, it's that, when you walk in that store, you'll see that the Under Armour brand is important. Our products are important, our innovation is important, that the presentation is important. And we want people to walk in and we want them to say, wow, I see it what the vision can look like of how you could look in my store and I want them to think like that as well. Is that our goal for that is not cannibalizing existing stores or distribution. Our goal for that is going to be strategic, because we still believe there's a large need for -- or want or desire for Under Armour that it's currently going unmet. And so we'll continue to find distribution that fits that idea. And that fits our brand, and you'll continue to see frankly our brand open the aperture of where consumer has come to expect us as well. But we're not going to jump from chapter 1 to chapter 30. So hopefully you'll see patient growth, and I think we're demonstrating that growth the whole time while continuing to put points in the board. That statistic of 31% CAGR top and bottom line since our IPO is something we're proud of and especially doing it again in 2012 where there's a lot of wind or noise out there about difficulties, we still put 25% on the Board. So I think that's what frankly you've come to expect from us and we're very proud of that type of performance.

Our final question comes from the line of Kate McShane from Citigroup.

With regards to the warm weather, which has been on everyone's mind the last 2 winters. I wondered if there was any insight into any possible strategy change with regards to the change in flow of product or the change in mix for next winter or subsequent winters.

Yes, Kate, let me jump on that first. First of all, our inventories is in really good shape right now. We've had some great cold weather, obviously as you felt last several weeks, and that's really had things moving at retail. It doesn't have a big effect to us. It's been helping our partners out in getting things cleaned out as they start looking forward to 2013. We've been doing several things from repositioning. I mentioned that growth that we had in baselayer. We made a decision, I think we were in this position in the fourth quarter particularly, and we all had our fingers crossed sitting, around waiting for it to get cold. And we realized that, that probably wasn't the best model or way for us to be thinking about our business. And so we made a conscious decision to stop being so weather reliant. And for a company whose 2 basic categories of business were something called HeatGear and something called ColdGear, that was a pretty big shift. So keeping that DNA and that explanation to our consumer of how they shop our brand, intact, we started adding things like a lighter fleece product. Something that isn't just as much about keeping warm as much as it has more style, it has more relevance to it. So I think you've seen us take that. Our apparel business in the fourth quarter was up 25%. But moving away from weather reliant is something that allowed us to keep that in what was probably the most challenging fourth quarter that anyone has seen in a very long time. We are more, and I think that's, hopefully, what comes across, we are more than just figure on apparel side, a cold-weather compression brand. Compression is, I mentioned that stat in my script, and think about that, in 7 years when we went public, compression was 64% of our business being just 14% today. So we continue to ebb and flow with the market as it makes its demands above, and I think more important, we continue to tell the market what we think was our point of view. When we add newness and innovation in the assortments, we're going to win. Again, as I mentioned about not just being a cold gear mock, $50 company, we have that and we've enhanced it. And we've come to our Evo cold gear. But that's not a product that's in high demand, when it is, 65 degrees outside in December. So that's where the Storm cotton and the Charged cotton, the platforms have really been helpful for us. And again, continuous flow where, what we've done I think on our merchandising side and Henry and his teams and -- up and down the line have really done a great job, is getting to where we've got more product flow. That's not 2 shipments a year, but we're really answering the needs of the consumer as the weather change. So with that, we'll continue to emphasize more versatility in our assortment with weatherproof items like fleece, which, again, I said grew 50% in 2012, and you'll see us continue to push that, but our partners are doing a great job for us, I think, anticipating the market and product and I think we feel pretty good about the flow that we have from an innovation standpoint in apparel. And I can tell you, we did good things, but between Sonic baselayer and -- we've got a new technology people have been talking about at the outdoor show we unveiled last week as well, that we'll be unveiling soon. We've got a lot of great things in the pipeline and it's a competition. It's a competition to be a featured product from Under Armour. So it's our job to edit, it's our job to make that decision for the consumer. And hopefully we'll build and continue to build that trust with the consumer, that it's great product at a fair value. More importantly it's something that works.

And Kate, just relative to -- on the dollar side of how we're planning the flow through the year, and it kind of ties in what Kevin is talking about here. You should be -- if you look at kind of the quarterly revenue growth, relatively consistent across the quarter as far as revenue growth, but a little bit more heightened growth in Q2 and Q3 versus Q1 and Q4, again, not a significant difference, but just how we're planning the business right now. A little bit of a timing difference. Q1, Q2 it's just more timing in general. Q4, is kind of going to your point of coming out of 2 warm winters still trying to get our arms around what that means. As Kevin mentioned, obviously, our product has expanded and it's much more versatile right now, even with warm winters, but still trying to get our arms around what these two warm winters mean, also, have not -- had bookings for Q4 come in yet. So that's kind of the timing difference there in Q3 and Q4 relative to revenue growth.

Okay, that's great. And if I could just sneak in one more question. I think you mentioned, Brad the incremental cost of footwear during the quarter. I just wondered, what that was from and how many more quarters we can expect to see that pressure?

Well, as we've talked historically, Kate, footwear gross margins are well below our apparel margins right now. And as footwear grows quarter by quarter, that could have an impact to our gross margins. In Q4, technically Q4 really isn't a big footwear quarter for us in general. But we do see in the fourth quarter sometimes is, the sell-in of some of the spring product for the next year. Specifically this fourth quarter was around our baseball cleats. If you remember last year, we had a very, very strong baseball season. Had very strong sell-in and sell-through of baseball cleats. A lot of our customers on the wholesale side wanted to make sure we got product on the floor in times set coming off that success last year, so we had some shipments of baseball cleats in December.

Thanks everyone for joining us on the call today. We look forward to reporting to you our first quarter 2013 results, which tentatively have been scheduled for Friday, April 19, at 8:30 a.m. Eastern time.

Wait, Ravens, 35-33, final prediction, go Ravens.

There we go, thanks.

Bye-bye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day