Good morning and welcome to Under Armour's Q3 2024 Earnings Conference Call. All participants are in listen-only mode. [Operator Instructions] Please this event is being recorded. I would now like to turn the conference over to Lance Allega, SVP, Investment Relations, Treasury and Corporate Development. Please go ahead, sir.

Thank you. Good morning and welcome to Under Armour's third quarter fiscal 2024 earnings conference call. Today's event is being recorded for replay. Joining us on today's call will be Under Armour President and CEO, Stephanie Linnartz; and CFO, Dave Bergman. Our remarks today will include certain forward-looking statements that reflect Under Armour’s management's current view of our business as of February 8, 2024. These statements may include projections for our business at the present in future quarters and fiscal years. Forward-looking statements are not guarantees of future business performance and our actual results may differ materially from those expressed or implied in the views provided today. Statements made are subject to risks and other uncertainties detailed in this morning's press release and documents filed regularly with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Today's discussion may also include the use of non-GAAP references. Under Armour believes these measures provide investors with a helpful perspective on underlying business trends. When applicable, these measures are reconciled to most appropriate U.S. GAAP measures, reconciliations of which, along with other pertinent information can be found in this morning's press release and at about underarmour.com. With that, I'll turn the call over to Stephanie.

Thank you, Lance, and good morning to everyone joining today's call. Let me begin by saying that despite a challenging retail environment and consumer buying behavior that was inconsistent market-to-market, we are pleased with the results we achieved in our third quarter. With revenue in line with our November outlook and better than expected earnings. As I approach my first year at Under Armour, I am genuinely inspired by the power of the brand and our commitment to the strategies we are undertaking to unlock our full potential. Following our Protect This House 3 plan launched last spring, I am pleased with our progress in driving global demand creation and our focus on evolving and simplifying our approach to connecting with consumers. I also feel good about how our efforts are shaping up to deliver elevated design and products to the athletes we serve in nearly 100 countries around the world, strengthening our ability to drive success across our largest growth opportunities in footwear, sports style, and our women's business. With respect to driving U.S. sales, this remains a multiyear journey and candidly, we have much more work to do to become a healthier business capable of returning to growth in our largest market. As detailed previously, inconsistency has permeated our U.S. business over the past years. And how we go to market across consumers, customers and geographies, how our product is created and delivered with a consistent design language, channel segmentation, and how we show up in our own physical and digital businesses. With a critical mass of work underway and additional analysis that will yield more work and decision points in the months ahead, we are on the right path to addressing these inconsistencies and turning them into strengths. All of this will take time and it starts…

Thanks, Stephanie. And good morning, everyone. Our third quarter revenue was down 6% to $1.5 billion, which aligned with our outlook. On a regional basis, North America revenue declined by 12%, coming in at $915 million, which was in line with our expectations. Wholesale was down meaningfully due to challenges in our full-price business, partially offset by growth related to inventory management strategies, which included increased sales to the off-price channel. Our North American DTC business was down slightly during the quarter. EMEA revenue was up 7% to $284 million, or up 2% on a currency neutral basis. This was driven by strong growth in our DTC business, related to improved traffic trends across our retail and e-commerce channels. Our EMEA wholesale business was also up during the quarter. APAC revenue was up 7% to $212 million, or up 8% on a currency neutral basis. We saw solid sales growth within our retail stores, and wholesale was also up during the quarter. China was a leading contributor to third quarter growth. And finally, our Latin American business was up 9% to $70 million in the quarter, or up 3% on a currency-neutral basis. From a channel perspective, wholesale revenue was down 13% to $712 million, with decreases in our full price and distributor businesses, partially offset by higher sales to the off-price channel. Direct consumer revenue increased by 4% to $741 million, due to a 5% increase in our owned and operated store revenue, and a 2% increase in our e-commerce business. And Licensing revenue decreased 2% in the quarter to $29 million, driven by declines in our Japanese and North American licensee businesses. By product type, Apparel revenue was down 6%, driven primarily by declines in our train and outdoor businesses, partially offset by strength in our sideline and…

[Operator Instructions] Our next question comes from Simeon Siegel from BMO Capital Markets.

Hey, thank you. Hey everyone, good morning. Great. Good to hear from you. Nice progress, guys. So, I mean, just wondering if you could share a little bit more on your broader color, on how you're viewing North America landscape. Maybe, how are you guys thinking about, when you think about the proactive inventory management, feel like you're in a good place, and maybe versus competition, just any color there. And then if we can just, any thoughts on freight and promotions embedded in the full year guidance? Thank you, guys.

Sure. So, I'll start, and then Dave, I'm sure we'll jump in. And good morning, Simeon. Thanks for your question. As it relates to North America as we highlighted in our prepared remarks, the softness in North America is largely being driven by wholesale. And as the year went on, we saw continued softness in that channel, including at once and replenishment wholesale orders. That's a big piece of the puzzle in North America. And then if you really particularly look at the holiday timeframe, there was quite a lot of promotional activity that impacted our performance and others. As it relates to inventory, I'll turn it to Dave in a second, but our inventory continues to trend to be in a much better place for Under Armour and the industry overall, I'd say though, that doesn't necessarily mean there'll be no promotional activity. That really ties to demand. So there's not always that one to one correlation. I think people think could be the case. So I think we're really, really excited about the game plan we have for North America. I'd highlight, again, Cara Trent coming back to lead that business. She has a great track record from her time in EMEA. Terrific leader, terrific relationship with wholesale partners, disciplined segmentation, great targeted marketing efforts that have been driving the brand in that part of the world. And we know she's going to bring those same skills and leadership back when she starts her role in about a week here in North America. So we're excited about the work underway and our efforts around marketing, product, and distribution, which I'm sure we'll get into in the further in the Q&A. Dave, why don't you weigh in on inventory? That's a specific question.

Yes, I mean, I think you covered the inventory pretty well in that the market, we think, is coming back to normalization at this point maybe a little bit longer to go, but pretty close. However, we are still seeing a fairly promotional environment out there, even with the inventory levels at the retailers in a lot better place. So I think the retailers are being fairly cautious and still really trying to keep clean after a year or two of obviously having more than they wanted. So we do see some of that promotional impact on gross margin continuing a little bit. And so you asked a little bit about freight and promotion relative to our assumptions on the full year outlook or essentially Q4. And I would say that from a freight perspective, we've seen the rates normalize pretty well at this point and they had really stopped with the big increase in our fiscal Q4 of last year. So when we think about Q4 of this fiscal year as we finish out the year, we're kind of at a more stabilized freight rate in Q4. So that's not going to be a huge tailwind for us in Q4. However, we are starting to work more deeply with our inventory vendors and have made a lot of progress on some of the costing initiatives there, which we're seeing some of that benefit favorably for Q4 of this year. And then I did mention relative to the promotion levels, we do anticipate it continuing to be more promotional than normal for a while here. And so we're continuing to expect that in our full year forecast as well.

Our next question comes from Jay Sole, UBS.

Great. Thank you so much. My question, just a little bit on Europe, if you could just maybe touch on that business, how the wholesale channel there is looking if it's different than sort of the comments that you made about the U.S. And then Stephanie, I'd love to hear a little bit more about the product innovation pipeline, what you see coming over the next couple quarters and really into the Olympics perhaps. We'd love to hear your view on that. Thank you.

Yes, sure, of course. As it relates to EMEA in Europe, we are -- that continues to be a strong market for us. The brand is doing very well there. That being said, we mentioned this in the remarks, we're seeing a little bit of cooling there with the consumer, particularly in Eastern Europe and some of our distributor markets. But again, the European market, particularly in England and Spain and France, is very strong for us. Let me touch on products and I'll let Dave jump in on Europe as well. But on the product side, I mean, we have a lot to be excited about. With Yassine just started last week, but we're super excited to have him as our new Chief Product Officer. And of course, as we've shared with you about five months ago, John Varvatos joined us as our new Chief Design Officer. And there's just a lot of exciting things happening on both the apparel side and the footwear side. So let me hit a couple things that we're excited about on the apparel side. We continue to see a lot of traction with our Meridian product for women, where we're really winning with women is in legs. I'm sorry, it's bottoms and tops, and particularly with bras, we're having a lot of success there. I mentioned that we've got some exciting new things coming with our unstoppable franchise that's really going to be terrific. And our core base layer really has some new upgrades in terms of fit and color waves and we're excited about that on the apparel side. On the Footwear side, we have some real traction with Curry and the Curry 11. I'm excited about what's happening with our running footwear, in particular with our Velociti Elite, and Infinite franchises.…

I mean, I think the only thing maybe that I would point out is we have a lot of strength moving forward in Europe, which is great to see. I think one of the points that is a little bit of pressure is just some of the Red Sea shipping disruptions do impact us a little bit there. And that is part of what went into our outlook tightening, is that we see about a one point headwind from the Red Sea impacts, and that's primarily related to EMEA. And then obviously, there's some geopolitical challenges in that region as well that we're dealing with. So we're working through that. And that's really when I'm mentioning that one point headwind that's really talking about fourth quarter and how do we see it finishing out the year.

I'd add one more thing on the product side just really quickly. I should have mentioned because it's getting a lot of traction is with our SlipSpeed Mega, which we did a soft launch at the UA All-American game. We did a soft launch there. We have a very cool activation at the Super Bowl this weekend. But the SlipSpeed Mega is a very cool shoe that I think is really resonating with consumers So that's another on highlight on the footwear front.

Our next question comes from the Laurent Vasilescu, BNP Paribas.

My question, I was hoping to drill down on North America wholesale, if possible. Could you possibly quantify how down North America wholesale was for the quarter or just your expectation for the year? So the audience could better understand the dynamics within this channel. Are you starting to see have a conversation with North American retailers regarding restocking of inventories particularly for the back half of 2024? And then just Dave on that point on the Red Sea, understand there's some delays, but can you maybe just share with the audience how you -- how much your contracted out and when do you renegotiate your contracts with the shipping merchants?

Yes, so I guess a couple things, North America wholesale is definitely a pressure point We've talked about that we've talked about kind of the softer orders as we saw coming in through fiscal or fall winter ‘23 and also a little bit relative to spring summer ’24. We haven't been quantifying the actual percentage for the channel within a region. But definitely is a pressure point and we're continuing to see an experience where our DTC channels in North America or performing much better than where we are with wholesale. I think again the retailers are being very cautious right now even though the inventory levels at retail are in a much better place and that's why we're continuing to see some of the promotional levels as well. When you think about the Red Sea impacts, we are seeing some impacts there from shipping disruptions, mainly impacting EMEA. The impact includes some increased shipping costs as well, not just some delays. And to kind of think about that, about 20% or so of our global peril comes through that area, so it is meaningful to us. We're mitigating that through regional air freight, adjusted shipping lanes, differing forward buys, PO prioritization, et cetera. So and with all that, we don't really see any concerns with daily operations of our inventory vendors in that region, but again we are estimating for Q4 about a one point revenue headwind because of the delays and mainly the impact on the EMEA region, and that's considered in our tightening of our outlook for the Q4.

Our next question comes from Bob Drbul, Guggenheim.

Hi, good morning. Stephanie, just a, I guess, a bigger picture question for you, but you've made a significant amount of new hires, new leaders since last summer. When I look at the list and think about it, Chief Design Officer, Supply Chain, Product Officer in Americas, when you think about all these new leaders in the organization, how should we think about the time it will take for the organization to actually absorb the leadership changes, the impacts on the culture, the execution, eventual change in field of the years ahead?

Well, good morning, Bob, and thanks for that question. During my first year, my top priority was building out the right team and to build out the right team to address some of the inconsistencies and challenges that we've had in the past. And you're right, there's been a lot of change. Let me just put a little more color around it. This is, I've been in the job for about 11 months coming up on my first year, but since last summer, we've filled the following jobs. Let me just tick through them quickly. Chief Consumer Officer, Jim Dausch, Season Marriott Executive, a lot of experience in product, marketing sales, and brand. A new Chief Communication Officer, Amanda Miller came from PayPal, bringing us real PR horse power. New Chief Design Officer, John Varvatos, great experience with his own company, Ralph Lauren, Calvin Klein, Converse, a new Chief Supply Chain Officer, Shawn Curran, a 30-year veteran at the Gap, who was most recently the COO at Old Navy, but held various positions at that company over the years. A new Chief Product Officer Yassine Saidi, who started again last week, as I mentioned, coming from some powerhouse brands, and most recently owning his own company, so he's got that entrepreneurial spirit. A new President of the Americas just starting, Cara Trent, an industry in UA, that trend, we talked about how spectacular she's going to be in her new role. I mentioned that Kevin Ross will back fill Cara in EMEA. A 25-year veteran of the industry, knows UA was with us for nine years, but experienced at TaylorMade and YETI in addition to Under Armour. We did also, I didn't mention this, but in my remarks, we did hire a new SVP of Direct to Consumer for the…

Our next question comes from Sam Poser, William Trading.

Thank you very much for taking my question. I've got three, and I'm just going to read them all up. One, when we think forward, do we anticipate that the SG&A is going to go down, and then you mentioned the Olympics, is that going to be like a pump up of investment sort of at the end of Q1 into Q2 of next year? And then two is what's the base of like, what's the base sales you look at for North America? Are we close to it? And then on product, it's like use of logo. You've got some good stuff going on with some of the unstoppable apparel, the Fat Tire, the Forge 96 that really don't scream with the big UA logo and seem to be doing generally better than most out there of the non-Curry product. And I just wondered, sort of directionally how you're thinking of logo use and stuff like that and maybe, exploiting some of those styles that are sort of quiet or don't make the list that often but appear to have pretty good demand? Thanks.

Yes, Sam, this is Dave. I'll take your first two questions and then maybe I'll hand off to Stephanie on the logo. Relative to SG&A and going forward, obviously this is an area that we continue to focus on. We worked hard over the past few years to become more agile from a cost structure perspective, but we do have more work to do. We understand the areas of highest returns and we're continuing to validate those and also understand where the best investments need to go. So this is a continual work in process. We continue to drive further savings within our hiring or incentive comp, tightening up our marketing prioritization, spending, travel and entertainment, et cetera. And we're going to continue that work as we drive into next year. So could we drive SG&A lower potentially? And that's our focus is to be able to be as optimized as possible and we're going to keep working with that. Relative to North America, I think your question is have we hit kind of base sales level for North America? And I would say that's kind of a loaded question because there's a lot of decisions within that and we know that we want to continue to strive to be more premium. We know that we want to make some right choices as far as backing off on some of the deeper discounts, for example, on our website. So all of that goes into the blender as we think forward. And as we get to our May call, we'll be getting into much more details on kind of fiscal ’25 and beyond. And then as far as you mentioned the Olympics relative to SG&A, and is that going to be a heavy investment? Obviously, we're going to activate some things around the Olympics, but it is not a large investment for us, so it shouldn't be a big pop in SG&A for us in any way. Stephanie, do you want to take the third point on logo?

Sure, of course. And good morning, Sam. Thanks for your questions. On the logo front, I mean you highlighted some of our best performing franchises when you mentioned Unstoppable. I put Meridian in there, Baselayer. And I think our design teams always do a terrific job of finding the most appropriate and elegant and stylish way to place our logo. And so we'll continue that's in the very able hands of Yassine John Varvatos as we think about logo treatment. I think there's a broader point I'd like to make though around where we're headed with Sportstyle, because I think that that's going to be a really important part of our story in the years to come. Let me define Sportstyle again. We are not trying to be anything other than authentically Under Armour, and performance is in our DNA. It always will be. For us, Sportstyle is that intersection of performance and style, and they're inextricably linked. I think what you'll see from us, and we're thinking about Sportstyle is really more of an evolution versus a revolution. We started with Phase 1, which is remerchandising and remarketing products to demonstrate that non-active use occasion. And some of the franchises you mentioned, Unstoppable and Meridian would be great examples of where we have an opportunity where we have great, particularly on the apparel side, Sportstyle offerings, but we need to market them differently and we are doing that. And then Phase 2 is really when we'll see more new products. We've already done some limited run capsules and some smaller collections or groupings of items. But again, it's not until spring, summer ’25 plus, where we think we'll see more mass in terms of new product given the product creation cycle. But again, throughout all of that, our talented design teams will be figuring out the best way to place the Under Armour logo for maximum return. So again, we're excited. We're excited about where we're headed with product, including the best use of our logo.

Just one last thing. I mean, the one thing about the logo is that like on the Forge and some of these other ones, they're more dis, they're there, but they're more discreet. So it makes the shoe more flexible rather than having the big Under Armour logo like on the side of the shoe, which then makes it more active. Having it more discreet seems to would make it more style regardless of what the design of the shoe is or apparel for that matter.

Yes, again, I think it depends on what's the particular item and what's its use. And so we'll continue to always be evolving and looking at the best way to, like I think, like all world-class brands, the best way to use our logo. But you gave an example with a couple items where it was less smaller, but I think we'll continue to evolve and work on that.

Our next question comes from Jim Duffy with Stifel.

Thank you. Good morning. Prepared remarks and comments are fairly deliberate about your subdued expectations for the North American marketplace, the timing for inflection. Can you give us some perspective on what you're hearing in your discussions with wholesale partners? What are their forward thoughts on consumer spending behavior? What's the messaging on subdued orders despite what seems to be pretty well managed channel inventories? What are they asking of Under Armour at this point? And then I have a question on DTC.

Yes, I'll start and then I'll kick it over to Dave to add his perspective. And we talked about the pressure that we're seeing in North America this year. And as we think about heading into fiscal year ‘25, I think we can see some anticipated continued bumpiness. When we think about the fall, winter ‘23 order book, that of course has an impact on the order book coming up. I should note we're in the middle of it right now. So we're not going to comment on fiscal year ‘25 in any detail today. But I think it's fair to say for the first part of the year we'll see some continued bumpiness. Dave can jump in on that. But I think what we're working very, very closely with our wholesale partners to make sure that we have the right assortment, and we are continuing to work with our wholesale partners as we deliver more better and best products to make sure that we get those better and best products on their shelves. And so our wholesale partners are incredibly important to us. When I think about our strategy on that side of the house, it really is all about getting more shelf space and better product in our existing partners, but then opening new doors of distribution, too, on the wholesale side. And that ties to having new product offerings. So that is an important part of our business. I think, again, particularly in North America with Cara coming back to lead our charge there, she has tremendous relationships with wholesale partners. I think that's going to just further bolster our success in this area. But I know you had a question on DTC, but let me let Dave jump in on wholesale if he wants to add any other information.

Yes, I mean, I think we've talked, as Stephanie mentioned, around kind of the environment and the continued discounting, which is a little bit of a headwind. I would say the other thing is we're kind of finishing out the year, moving into next year is again, we are looking to try and push harder into more premium distribution. We've got some good early reads on mall penetration and new doors there, which is good. And then also, we're going to continue to edit and improve our segmentation as well as we move into next year. But again, it is a little bit bumpy out there still, and it's still a pretty promotional environment.

Thank you. And just quickly on the DTC, you spoke to your intent to be less promotional in North America at DTC. That seems to suggest you're planning for declines in fiscal ‘25, lapping more promotional compares in fiscal ‘24. Is that a fair assessment?

Yes, so, Jim, we're not going to get into details on fiscal ‘25 yet, but I will say as it relates to own DTC channels. Let me start with our website and our Shop App. We've made a lot of progress on the functional side of that channel, things like improving mobile speed, better search algorithms, upgrading product description pages, et cetera. So there's been a lot of great work done on improving conversion and having a more functional website and Shop App. At the same time, and I think this is where you're headed, we do have plans to reduce our dependence on promotions. We need for ua.com and our Shop App to be the most premium expression of our company. It's our largest storefront when you think about it. So we are going to reduce our dependency on promotions. Could that have some reduction in revenue? Yes, it could. But at the same time, it will lift ASPs, it will drive profitability, and it will lead to a much better, more premium experience for our customers. So that's one piece of the DTC channel. The other part is our stores, our physical stores. I mentioned this in my prepared remarks, but we have a great effort underway to reimagine the Under Armour brand house of the future, a smaller store format curated with more premium offerings and easier to shop experience. We're going to be piloting our new concept later this year with a goal to roll out more full price brand houses in the years ahead. We know that our ratio of factory to full price brand houses is not where we want it. So there's a lot of effort underway to think about our physical space as well. And we all know that those two are inextricably linked, meaning the physical and the digital. So we've got a lot of great work underway on the direct-to- consumer front as it relates to the future.

Our next question comes from Paul Lejuez with Citi.

Hi, this is Kelly on for Paul, thanks for taking our question. I just wanted to dig in a little bit more on the growth margin. It looks like you're guiding up 200 basis points or so in the fourth quarter. And you mentioned some costing initiatives, just wondering if you could elaborate on that and if there's any sort of raw materials deflation that is benefiting you guys and whether that can continue into FY25. And then on the freight side, well, it's no longer going to be a benefit. Is there any chance with some of the Red Sea pressures that freight could become a headwind to the gross margin in the next 12 months based on what you're seeing today? Thanks.

Yes, Kelly, this is Dave. Relative to Q4, there are definitely a few puts and takes that we're seeing there. We do expect some continued supply chain benefits in Q4. And but that’s shifting a little bit more towards the product costing initiatives that we're working on with our vendors that we're going to starting to see those benefits in this Q4 and then looking to see full year benefits next year. The freight component, obviously we saw pretty substantial tailwinds in Q1, Q2 and Q3 of this year. But again, those have kind of normalized for Q4, so not as much of an increased year-over-year for Q4. Now, to your point, relative to the Red Sea, we are seeing some increased shipping costs, but we're probably in the neighborhood of $1 million or $2 million there, not something that is significant at this point. So we're managing through that. And that's all considered in our tightened outlook as well. And then, a couple of the things that are going to be a little bit of headwinds for Q4. We do believe that the kind of promotional environment is going to continue a little bit longer, so that's assumed in our Q4 as a headwind and potentially a little bit of FX pressure. So those are kind of the main puts and takes as we think about Q4.

Got it. And just lastly for me, any way to quantify or could you quantify for us the percentage of your off-price sales this year, particularly within North America and how that's trending relative to historical? Thanks.

Yes, we've worked really hard over the last few years to really get our inventory management into a good spot and manage the off-price channel and what we feel is a pretty healthy range. And so we were targeting in the 3% to 4% of global mix of third-party liquidations and that's generally where we're running. In fact, as we finish out this year, this fiscal year will probably be at the lower end of that 3% to 4% total mix relative to North America. It's not that different but we don't really get into the mix per region per se.

Our next question is from Alex Stratton with Morgan Stanley.

This will be our last question too. So Alex, I'm just going to let everyone know this can be our last question, so appreciate it, but go ahead, Alex.

Yes, no problem. Thanks a lot for taking this one. So Stephanie, you noted a lot of leadership changes. I just want to drill down on kind of how you think about when they can start to have an impact on the P&L from a timeline perspective? And then also in the meantime, because understanding that can't be done immediately, what are the KPIs in your view that you're watching, that we should be watching for signs of some of these initiatives flowing through?

Sure, of course. Well, these leaders have hit the ground running, so I think they're impacting the business right away. I don't want to tick through each one of them again, but for example, I use, John Varvatos is just as an example. He's been here five months, the day one he started looking at things like set, finish, trim, color. So we're seeing the leaders have an impact on day one, but it will take time in terms of a bigger, broader impact across the business. In terms of the KPIs that we're going to be looking at, I mean, it depends on the area, but let me hit on some that we're really focused on. In terms of the consumer and marketing KPIs, we are constantly keeping an eye on our loyalty, our UA rewards, signups, and equally important activations. I mean, the loyalty program will be the backbone of our consumer strategy. It's all about customer acquisition and all about customer activation. And I mentioned some of the good progress we're having there in terms of not only signups, but increased spend from our loyalty members. And then on the marketing front, there's all sorts of leading and lagging indicators that we'll be looking at. And I'm sure over the course of our time with you, sharing updates on things like, search, demand. I mentioned in my prepared remarks some of the progress we're having with social media. We've really changed our marketing approach to be more product focused, more digital, social, always on. That's where the consumer is. And so we're always looking at the metrics on that critical marketing channel, MPS scores, increased earn media. Then we'll be looking at more lagging indicators as we move forward, increased full price sales, faster sell-through of our…

Our team's on the field.

Our team's on the field, that's right.

Thank you for attending today's call for Under Armour, third quarter of fiscal 2004. This now concludes today's call. Have a great day.