Q3 2019 Earnings Call
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[laughter], ladies and gentlemen, thank you for standing by welcome to the under armour Inc.'s third quarter earnings webcast and conference call. At this time, all participants are when I listen only mode.
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I'd now like to hand, the conference over to your Speaker today, Mr. Atlanta legacy Senior Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you good morning, everyone, everyone joining us for under armour third quarter 2019 are all update call me.
These statements are based on current expectation are subject to uncertainties.
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You've answered either of these California, freshly and documents filed regularly with that you see all that can be dollar about flat out on their own.
We also referenced not for certain non-GAAP financial information, including adjusted and currency neutral for which we define this mornings release, we do non-GAAP analysis, the lead or discussions because we feel that the more accurately represent that's true operational performance underlying results.
You May also here I've heard of amount in accordance with U.S. gap right until it is reconciliations of GAAP non-GAAP measures can be found supplemental financial tables included in the press release, which identify quantify all food item provide mans view of why this information is useful to investors.
Joining us on today's call will be under our chairman and CEO , Kevin Plank, President and COO scattered Fred as Chief Financial Officer paper.
Following our prepared remarks, we want to call for questions with that I'll turn it over together.
Thanks, Lance and good morning, everyone.
I'd like to start today's call by touching on the announcement, we made a couple of weeks back that effective January Onest 2020, I'll be transitioning to under Armours executive Chairman and brand Chief.
Patrick Frisk will become our Chief Executive Officer.
This was my decision and the culmination of a rigorous approach to succession planning in partnership with our board of directors Patrick's proven commanded as business in the confidence we have about under Armours prospects as we shift from defense the offsets.
Inside the most transformative three year chapter in our history as my direct partner Patrick has helped strengthen the foundational elements of our current vision mission and values and co architected. The strategic playbook. We're currently executing against his demonstrative transparent style of leadership centered around a clear strategic vision on.
And then outright passion for our brand positions us smartly to reach our goal of making under armour, the best Athletic brand in a world.
This transition will empower Patrick type of freedom and oversight the holistically execute against our playbook.
Now anchored by our strategic pillars, a product story service and team, we have been decisive and proactively improving underperforming areas of our business, while balancing the investments necessary to deliver sustainable profitable growth over the long term.
And just like the athletes we serve this journey is about getting better better for our teammates consumers customers and our shareholders.
At the center. This pursuit. The very reason we exist is our mission under armour makes you better humble passion obsession that is fueled our company for nearly a quarter of a century I'm extremely proud of the powerful brand. We have built the global team that is our family and the athletes we continue to serve by equipping and inspiring them to push beyond.
Boundaries of what is possible.
Being under armour means showing up with integrity every day strapping on your hover amphadase putting into work recognizing the scars, while learning from them celebrating the wins and looking to tomorrow, where the hard work helps you get a little bit stronger faster and smarter.
All of this of course centers around three critical aspects of the Brad.
Making great product that has authenticated to the power of sport.
Magnified by incredible storytelling.
And delivered by a team that loves this brand.
These three things define who we are how we show up and ultimately how we will maximize our long term potential.
And moving forward in my new role as Brad Chief. These are the areas, where I will be focused to help reignite our growth.
Now looking at 2019, we continue to execute the play with patience and discipline.
From a product perspective with performance innovations like you weigh hover rush and recover we know that when our product delivers SPF, that's under armour style performance and fit we went in with athletes.
Armed with a shortened go to market calendar increasingly better segmented assortments and a clear pipeline of innovation to come we're building an arsenal that we'll continue to demonstrate why under armour is a choice alternative in an otherwise commoditized marketplace.
From a brand and storytelling perspective, where seamless physical and digital connectivity is table stakes for our consumer engagement, we've been working diligently to better activate our assets to drive the highest returns.
At the moment of training competition and recovery, we continue to see great potential in our ability to better personalized consumer touch points through a shopper data driven point of view.
And while we certainly realize some success in product specific marketing efforts over the past couple of years 2020 will be the first year since our transformation began that we will have the ability to put the right resources combined with the scale behind our brand marketing efforts.
In 2020, you will see a more singular powerful rooted in performance brand voice that harmonizes with elevated product marketing clearly and definitively telegraphing how under armour makes you better.
The early this year on our first quarter call I've mentioned that if we were to see additional top line of gross margin expansion above our plan, we may choose to further invest in marketing and product initiatives to support building the Brad against our long term goals.
As we close out 2019.
There are some changes to the topline that Patrick and Dave will take you through our gross margin is stronger than what we planned for just 90 days ago.
Along with ongoing cost efficiencies, we're taking this opportunity to proactively invest back into the brand through increased marketing sped, giving us a head start on 2020 and a deliberate shift from defense to offense for this brand.
This optionality should be seen as a sign that our efforts are beginning to pay off and a demonstration that we're committed to our long term strategy.
And in that respect I will close by underscoring that we're on track with the plan and metrics that we set forth at our Investor day in 2018 by staying disciplined in executing against this plan, we put ourselves in the best position to reignite growth to unlock the full potential of the under armour brand, we will with that I'll turn it over to Patrick.
Thanks, Kevin Good morning, everybody I might have a little bit of of course boards. This morning, but we had ourselves one heck of a football game here in Baltimore last night, so I'm going to power through this thing.
So when I joined underarm into summer of 2017. The one thing that struck me was a company wide relentless pursuit of innovation and attention to detail and the outright grid that goes into making all athletes better. This obsession is omnipresent and infused into our culture, one that prides itself on serving athletes and an unmistakable decided to win.
This same vigor has been applied and everything we've done over the past few years to continuously improve our operations and executional abilities and I'm pleased with the progress, we're making and although we may see some puts and takes in the short term. There is no departure from my confidence in delivering on our long term plan. Our foundation continues to get stronger our stock.
Structure process systems and leadership are in place and our discipline in patients our steadfast as we worked wrap up 2019.
With respect to the announcement that I'll be assuming the role as CEO January Onest, I'm humbled and honored by the trust of both Kevin and our board of Directors has placed in May.
Both professionally and personally it's a perfect opportunity for me to blend more than 30 years industry experience with my life long leveled sport in human performance. We are truly just getting started.
So now, let's turn to our third quarter results.
I'll start by addressing three areas of our business that I'd like to focus on given our results direct to consumer footwear in Asia Pacific starting with direct consumer which came in slightly less than expected third quarter revenue was down 1% driven primarily by results in North America. The reasons for reduced volume are very similar to our second quarter with our outlet stores experiencing lower.
Traffic at slightly higher conversion that youre in our ecommerce business, we continue to see higher traffic, but lower conversion with relatively flat you are independent from general traffic challenges in North American outlets are full price stores are showing encouraging signs from some of the reset work that we're doing including new brand house concepts that have recently long.
For the full year, we now expect D to C to be up slightly.
Turning to footwear revenue into third quarter was down 12% slightly lower than what we had planned as expected. This result was driven by softer demand lower sales to the off price channel and improving service levels that are enabling us to meet customer demand in a timely manner.
Related to service levels footwear shipments our distributor differently in 2019 with increased amounts in this year second quarter compared to 2018, as we think about our opportunity in footwear, our expectations have not changed we're playing the long game and the work we've done to recalibrate the business reduced inefficient volume and improving.
Segmentation across price points are enabling us to drive greater focus on prioritization into the categories, where we believe we can win with a clear innovation pipeline delivered through a methodical launch cadence along with them in line go to market process that includes amplified marketing initiatives. We are confident in our ability to create a sustainable runway of growth.
Moving forward.
The third area I wanted to address this Asia Pacific region, we remain incredibly excited and measured in our approach to growing the brand in the quarter revenue was up 4% and included continued growth our DTC channel from both new door openings and ecommerce and as we laid out in our last call improved service levels across our international business, particularly with district.
Leaders have seen shipments distributed differently in 2019 with increased amounts in this year second and fourth quarters. Additionally, compared to 2018, new store openings are more heavily weighted toward the fourth quarter, certainly little bit lumpy, but inline with expectations.
Now moving on to the other regions revenue in North America was down 4% in the quarter, which was in line with the outlook. We provided on our last call. As a reminder, the primary negative impact on the quarter was driven by lower sales to the off by channel relative to last year on a positive note within our wholesale business, excluding sales to the off price channel yeah.
Year to date, we've seen a slight increase in full price revenue a good sign that the underlying business is trending healthier in EMEA revenue was up 9% driven by continued growth in our wholesale and direct consumer businesses within wholesale our results were positively impacted by improved service levels and earlier than planned shipments related to Brexit and finally red.
The New Latin America was down 4% result directly related to the change in our Brazilian business model, Excluding Brazil, Latin America revenue was up slightly in the third quarter driven by balanced growth in both wholesale and direct consumer.
As a reminder of the business model change in Brazil occurred in the fourth quarter of 2018. So moving forward. This change won't impact the year over year comparisons so before I wrap it up I'd be remiss to not talk about the incredible progress we continue to make an inventory management coming in well ahead of our expectations, we posted a 23% decline.
And in inventory improving service levels and much tighter buys to customer demand coupled with product selling through at a rate higher than we had anticipated means we have had lower returns and therefore don't have as much excess product to sell in the off price channel, while Dave will provide more color on our full year outlook. It is important to note that this shortfall.
In sales to the off price channel is a contributing factor to our updated revenue outlook for the full year.
So in closing as we finish out 2019, I have never been more confident in the long term strength for this brand this team and our path forward Dave.
Thank you Patrick let's dive right in third quarter revenue was down 1% to 1.4 billion or flat on a currency neutral basis.
Looking down by channel, our wholesale business was down 2% to 892 million driven by plan lower sales to the off price channel timing shifts relative to distributor order flow and third quarter impacts related to continued service level improvements, which shifted some sales into the second and fourth quarters.
Direct to consumer revenue was down 1% to 463 million, which was slightly lower than expected due to continued traffic and conversion challenges primarily in our north American outlet and ecommerce businesses.
Licensing was down 6% to 30 million a result, driven by softer demand from our partners in North America.
By product category apparel revenue was up 1% to 986 million.
Footwear revenue was down 12% to 251 million driven by the factors Patrick previously discussed.
Accessories revenue was up 2% to $118 million.
And our connected fitness business was up 22% to 39 million, primarily driven by higher subscription revenues and a onetime development fee from a partner.
To give a little more color here, along with our connected products continuing to drive increased brand strength.
Newly launched training plans for Jim Workouts, and nutrition plans for premium members add to our growing confidence that we are building more sustainable momentum in this business.
From a regional perspective, North America was down 4% in our international business was up 5% both in line with the outlook, we provided on our last call.
Turning to gross margin, we saw a 220 basis point improvement to 48.3% in the quarter.
Looking into the positive factors, we realized approximately 90 basis points of channel mix benefits, primarily due to a lower mix of sales to the off price channel.
80 basis points from continued supply chain initiatives related to favorable product costs and lower airfreight.
And 40 basis points related to prior year impacts from restructuring efforts.
As seen a expense increased 4% to 551 million, which was better than expected due to our continued cost management efforts as well as unrealized marketing spend that will be utilized in the fourth quarter, coupled with lower than planned depreciation from timing of store openings and capital expenditures.
Third quarter operating income was $139 million.
Interest and other expense net was 6 million.
And our effective tax rate for the third quarter was approximately 22%.
Taking this to the bottom line net income was 102 million or 23 cents and diluted earnings per share.
On our balance sheet, we continue to make great progress cash and cash equivalents were up 147% to 417 million.
Total debt was down 26% to 592 million.
Capital expenditures were up 10% to 21 million.
And as Patrick detailed inventory was down 23% to 907 million, which was better than expected.
Turning to our 2019 outlook.
We now expect revenues to be up approximately 2% compared to our previous expectation of 3% to 4%.
Driven by lower than planned excess inventory to service the off price channel.
Ongoing traffic and conversion challenges in direct to consumer and continued negative impacts from changes in foreign currency.
Relative to gross margin, we now expect improvement of approximately 90 to 110 basis points compared to our prior expectation of 70 to 90 basis points in improvement compared to 2018 adjusted gross margin.
Due to ongoing supply chain initiatives, including more favorable product costs and lower airfreight, coupled with additional channel mix benefits from lower off price sales.
Lastly, recall that in 2018, we had approximately 40 basis points of negative gross margin impact due to our restructuring efforts.
Therefore on a GAAP basis gross margin in 2019 should be up approximately 130 to 150 basis points.
As we noted earlier, we've made the strategic decision to reinvest a portion of this upward revision in gross margin along with underlying cost efficiencies together approaching 20 million to fund incremental digital and marketing investments in the fourth quarter.
In this respect we now anticipate holding SNA flat as a percentage of revenue on a year over year basis.
Even with this additional investment we are updating our full year outlook for operating income to reach the high end of our previously given range of 230 to 235 million.
Moving forward, our efforts to create greater efficiency agility and leveraging our cost structure remains a key priority and focus for our company.
In this respect we will continue to balance key long term strategic investments with a disciplined commitment to driving operating margin rate improvement.
Interest and other expense net is planned at approximately 30 million and our effective tax rate is unchanged at approximately 22%.
We expect our diluted EPS to be at the high end of our previously given range of 33 to 34 cents, which includes about one penny of negative impact related to the performance of our licensee in Japan.
To provide a little more color there our Japanese licensee is currently working to address a number of strategic and operational challenges and building out and beginning to execute against the plan.
And finally, given the continuing improvements and efficiencies we are experiencing within our supply chain. We now expect end of year inventory to be down at a low double digit rate.
Now I'd like to take a moment to provide color on a few of the main drivers of our fourth quarter revenue growth expectations.
First cleaner inventory positions and improving service levels around the world are enabling us to more efficiently meet our wholesale demand closer to need.
As anticipated all year more timely delivery should serve as an incremental benefit to Q4 as we begin to ship product for spring floor sets.
Second DTC with assumptions based on measured improvements in traffic conversion and new door openings also supported by an easier prior year comparison in North America, we expect to see some Q4 improvement.
And finally, we expect our licensing business to be up in Q4 due to contractual royalty minimums. In addition to a settlement related to one of our North American partners.
Before we turn it over the call to the operator for today I'd like to break from our typical company policy of not discussing any regulatory or litigation matters and briefly address an article published yesterday regarding an investigation by the SEC and the U.S. Department of Justice.
We have been fully cooperating with these inquiries for nearly two and a half years to this effect. We began responding back in July 2017 to their request for documents and information, we firmly believe that our accounting practices and disclosures were appropriate.
Now back to the quarter at hand.
I'd underscore that we're staying disciplined focused and methodical in our tactics, which includes delivering innovative premium product amplifying our brand to connect even more deeply with our consumers and strategically managing our business when an eye toward constant operational excellence.
We have made great strides in our transformation.
Strides that are beginning to harness the energy power and strength necessary to deliver prudently as we work to grow our brand over the long term.
With that we'll open up the call for your questions operator.
Thank you as a reminder, chaska question you will need to press star one on your telephone to withdraw your question press the pound key please stand by what we compile the culinary roster.
Our first question comes from Alex Waldis with Goldman Sachs. Your line is now open.
Hi, guys. Thanks, so much for taking the taking the question. This morning, I wanted to stop by taking into.
The change in revenue guidance and little bit so.
You give three key reasons for this slightly lower revenue guide could you, possibly help us to size each of those in terms of its magnitude on the change.
And then perhaps most specifically on the.
North America backdrop as part of the trial as the low tide and can you apps, perhaps explain what's changed since we spoke last quarter in terms of outlet traffic or in terms of that online conversion, which is which is weighing on sales growth a little bit.
Sure ounces as Dave.
First of all relative to the updated guidance, we did talk about the three main drivers there.
Liability of excess inventory for the off price channel is lower than we anticipated also the weaker expectations on DTC and also the foreign exchange rates.
Quite frankly, all three of those are fairly similar in an impact for us as we finished out the year, there's not one that's really driving larger than the other relative to the updated guidance in Q4.
And we think about North America, you know in Q3 would the down 4% largest driver was the decline in the in the lower sales to the off price channel.
DTC was a little weaker than expected, but then on the flip side, we were able to over deliver a little bit on the wholesale side some of that with the operational improvements were driving and when you think about Q4, obviously, we're applying higher growth rate in Q4 someone that is the service level improvements that we mentioned and being able to ship more of that spring product earlier in Q4.
Than previous Q4, and 18, but also some of the DTC improvements to a degree of new commercial door concepts, which were excited about the amplified marketing and we've talked about.
Improved E com fulfillment levels and then also just having an easier comp for Q4 for North America as well so a lot of different factors going into that Patrick you want to add some more color well I think.
I said a little bit in my script, you know the plan is still the plan right were third third quarter out of a 20 quarter plan and what we feel really good about is the leadership. That's all in place in North America thing Stephanie has done an phenomenal job onboarding and it's really hitting the ground running the continued stabilization and strengthening our.
Asian, which gives us an opportunity to reinvest into the brand earlier than we had originally planned which is.
Very exciting for us and we also feel very strongly about the.
The actual content that we're going to deliver against that and then there's some good news like Dave said right. We have the handful price trending better which is great for us we're winning with the winners we believe in the marketplace, we're growing where we need to grow.
And we feel good about how we have thought about Q4 in terms of being balanced there. So.
I hope that gives them a bit more color, adding to what they've said.
Thats helpful. Thanks, so much for the color on one one follow up if I may on the.
Reduced sales to off price now planned for the year can you help us on to understand what's driving that is it better full price sell through perhaps in the wholesale channel is it kind of better supply chain.
Operations than you had previously expected.
I think it's a common hi, Alex its Patrick again, it's a combination of both so we're able to service the business better as we go into the season other words delivering the right stuff to derive plays the right time and the product is also better. So we believe that the the type of product, we're now putting into the marketplace. The fact that we have less all.
Product on the shelves.
Is helping.
Drive the sales and then ultimately that then.
Gives you less returns right. So it's a combination of these three things thats really helping us now.
Decrease the amount of inventory that we have for the oil price channel quicker than we first had anticipated.
Fantastic. Thank so much will occur.
Thank you Alex.
Thank you. Our next question comes from Jonathan Komp with Baird. Your line is now open.
Yes, hi, Thank you I'm wondering first just follow up on the North America business could you just comment on where you expect that to fall for the full year 2019 and then.
I think it spend three years of decline in topline for that business do you expect going forward that you'll be able to reverse that trend.
Hi, Jonathan This is Dave when you think about the full year North America, we expect to be landing down slightly on the full year versus international which should be up at a low double digit rate.
Obviously, there's a lot of great things that we're working on we're excited about 2020, but we'll be giving more color on that in early February .
Okay, Great and then Dave I wanted to I just follow up on your comment up the lateral inquiries into the county Prime is and really two questions I think first.
I wanted to just ask maybe more insights on.
Your view internally of material out materiality ended the.
Yes, indeed any comments there relative to the presence of of document requests for the last several years, but just just hearing about it now and then secondly can you just give a little more insight internally kind of the degree of resources being applied and any sense of distraction from any of the request involved.
Yeah, Jonathan you know, we can certainly appreciate that you'd like us to provide more details regarding that matter. However, we are prohibited from doing so.
That said the most important message I think to conveys that we firmly believe that our past accounting practices and disclosures were entirely appropriate and we've been fully cooperating for the past two and a half years on this.
So now we're focused on 2020 and beyond you know we feel like our foundation is strong and we're looking forward to reigniting the under armour brand as we continue into the next chapter and we'll leave it that for now.
Okay understood.
Thank you Jonathan Thank you Jonathan Thanks.
Thank you. Our next question comes from Erinn Murphy with Piper Jaffray. Your line is now open.
Great. Thank you good morning.
First bigger picture question. If you comes round out a year three of your initial turnaround plan on a really nice job keeping inventory lean hitting your bottom line. Despite just broader macro noise, but kind of to that point of the first question sales happen a little bit light for what Reaccelerate sales from here and are there any tweaks that you need made to the five year plan April .
Yeah.
Hi, This is Patrick.
Thanks for the question I I love that question, because I can answer it very confidently that the plan remains the plan and if you remember in Investor day, we laid out and that 20 quarter plan and protect us How's timeframe that we're currently in that were turned the corner to in 2020 nothing has changed there.
The short term a few puts and takes here and there, but ultimately we're still confident enough plan and when you do these kind of turnarounds. It takes time because you have to actually worked through the calendar. Unfortunately, it's a it's kind of.
The way it works when you when you will enter into a 20 to 24 month calendar and you start to do the work.
We feel really good about how we think about the future this brand and all the work in the foundation that we've done.
And we're going to continue to work through that plan and as we turn the corner now into the perform with balance chapter which is the next chapter.
We feel we have the product we have the marketing we have the team to be able to really drive the business more going forward. So we're happy about it and one of the things and that it. Let me is weighing on that as well that I covered in my script.
First of all Big picture, we know that great brands and George So our job is continue to remind ourselves and demonstrating why the world should see under armour is that it were special and the reason that we exist.
We've talked about the ability for us start playing offense and I mentioned that in my prepared comments as well about moving in creating room that we can actually begin to invest here in the fourth quarter, and especially as we turned the quarter and into 2000 in 20 that we're going to be even more aggressive where you will finally of get I guess gives the ability to see the benefits of the.
True go to market with with strategy supply chain product marketing sales all hitting an AD flying at the same time and so we know that we're not expecting perfection. The first time that version two will always be better the version one but you're about to see a really harmonize play come from this company and some will be able to deliver on a consistent basis due to the culture in the process that we've been able to implement.
Put into this brand. So we are looking to light our brand up more effectively and holistically since our transformation began in one of the new criteria that we have for that is using data really as a a high accelerate into how we're making those decisions and it really smart about the way that we're spending our money. So we are continuing to work on quieting our company in amplifying our.
Brand and we really look forward to that happening in 2020.
Great. Thank you go to that response, and then just a follow up maybe Kevin. Thank you.
How you answered that last question, but can you just here a little bit more about the pace of innovation in 2020, both on the apparel and footwear side anything you can share with us today, but I know I'm sorry, the BTD I think thank you so much.
He will I think we've got so many franchises that we have the company beginning with the fundamentals in the foundation of the basics hearing Coldgear, it's amazing how much smarter, we get as the weather started to turn here in the last week or so.
I'm watching things begin to accelerate for us is at such an anchor and aspect for our business, but I think it's really holistic I think this is part of the process. We've had in the go to market of truly setting up this funnel of technology and innovation that points toward specific date, where we can either a launch and now it's building that franchise.
Things, we've done like Curry rock, a rock product hover, our overall trading line and it also being able to do it and talk about it through amplified moments of things like building spacesuits for the new Virgin Galactic program and taking eight technologies, we have in our inline commercial products that are demonstrating are capable of going to space.
And so I think innovations the heart and soul and I think it speaks to the focus and the commitment that we have to the athlete us really narrowing the range in the target that we have for our consumer of identifying it as this focus performer and so building product for them that will help them train compete and recovering it's going to really be our differ.
Yes, I think and I think you see of showing up you see it showing up in sports marketing and weather was a as Patrick mentioned the Patriots in the and the Ravens going out at last night here in our backyard and watching the excellence of Tom Brady, We continue to help drive and innovate with with athletes like that and that perspective.
Or if it's.
Relative teenagers like Soto for the nationals, winning the National Championship are winning the World series last week I mean, the the innovation I think that commitment of this brand is really consistent.
And we'll continue to see come from us over and over so we've got platforms. We have franchises. We continue to have an innovation pipeline that we're really excited about and it will only get stronger shower going forward.
Okay.
Thank you. Our next question comes of Randy Konik with Jefferies. Your line is now open.
Hi, Thanks, I, just patching and Kevin I agree great brands and door, just want to get your perspectives and theres other lesser.
You know enduring brands that kind of can create noise in the marketplace.
One of those you see in the market in the U.S market lower priced.
Greetings and for has been gaining some traction for some time, how do you think about those those lesser enduring brands that are that can come and go how many impacting the market from a pricing perspective wholesale order perspective, where are we in that kind of cycle from your perspective with these other or.
One or two lesser known brands that are kind of impacting the market, particularly on the apparel side right now just want to get your perspective, there first thanks.
Hi, This is Patrick I think I'll kick it off and I'll see if my porphyria wants to chime in.
You know what's interesting with our transformation has been this evolution in terms of how we think about creating product and services for.
A specific consumer mindset, thats really allowed us as an organization to become incredibly consumer centric.
And this has been an evolution over the last two years, it's not that the company wasn't consumer centric before it's just that we're now able to use data much more like Kevin said much more purposefully to actually I understand what matters to this consumers and when we think about other brands that are coming out for or you know entering into the marketplace in the category awareness.
Space and there is a there's a there's an opportunity today of course to do that more easily than ever before but there's also some really big hurdle is once you get to get some scale you know in terms of sourcing and an ability to innovate.
Long term, where we believe that we now have set up the and ability to to understand what problems. We're trying to solve for and how to actually make our focus performer better that is now taking on a whole new scientific level that I believe is going to be a game changer for the company going forward, but I don't believe that these smaller.
The company's Ken can sustain to the same degree that we can because.
It's actually do do that it does matter in this in this space, especially when you're when the stakes are as high as the or four for brands like Us where we play on the national and international.
Fields everyday so we feel very very good about how we've transformed ourselves from from just making great product to actually making great product for a specific consumer driven by data and an incredible.
Attention to detail and process I don't know, Kevin you want to chime in because you've got the history of ill, let me I'll take it step back maybe and sort of reflect on what it means of where we find success.
Today marks the 56 earnings call that I participated on and what I think a reflect on that it's it's how much of the external noise that continues to come at a public company yet the ability of how we manage that and more importantly, how we put the blinders on to focus on ourselves and not be concerned about the others. The outside in either who's a buffer who could be below.
But really with this relentless sort of NRG and probably mild paranoia have always thinking about what's next in how we can obsess on the next rate product in the for us to be the first to deliver it for you.
And I don't think Thats changed at all I think we have now is where we were built by many forces a personality and enforces of energy and forces of will you know to underline underpin that with really the most the world's most dedicated team and processes and systems that can keep up with it and do it on a repeatable basis is a position we're in now and so whoever's.
Mission is being above or below you know we're prepared for it but most importantly, we understand that are our criticality towards success. The definition of what will actually get US there is our ability to focus on ourselves to block out the noise in the keep marching forward and always going through you'll see that and feel that from this brand today, you'll continue to see that through 2020 going for.
Lord and I can't wait for the future.
Great and then currency just across the clarity on footwear side of things.
It sounds like the reduction of sales into the off price channel impacted.
The growth rate of that.
Category. So how do you guys think about normalized growth rate of the footwear category going forward and discuss some of that.
The wins and losses in the category, obviously hover seems like being a nice win for you guys from a platform perspective, just curious on how we can think about the long term growth algorithm off the footwear business going forward. Thanks, guys.
I'll start off day, maybe you want to chime in but.
Ultimately for Us Footwears, playing the long game, we talked little bit about innovation here earlier today, and how well we have been able to place the hover platform in the marketplace. The run performance marketplace, specifically and how successful that's been it's taught US a lot and I think the teams now have a much better understanding of what it takes to.
Do a orchestrated discipline play in the footwear space, which is very different than what it is in the apparel space.
But we've also been reducing inefficient volumes throughout this year and especially in Q3, we are annualizing some off price coming out of 2018, there's some shifts in timing between Q2 in Q4. This year ultimately for for footwear. This year, we're expecting to grow were flat year to date.
And we're expecting to grow in 19, and we expect that to accelerate as we go into the out years and we're very encouraged by what's happening in our performance run and also in a women's training footwear, so you're seeing a bit of a shift in terms of.
The footwear portfolio, if you like that we have this year.
While we have like Kevin alluded to earlier here very very strong belief in our footwear innovation pipeline going forward I don't know, Dave do you want to add some color yeah, right I guess I would just a quick reminder, you know the Q3 growth rate down 12%. We had expected Q3 was going to be lower growth rate for the reasons that we already mentioned and you know as we think back to Investor day in and.
Expecting that footwear growth from a CAGR perspective long term is going to be a fair amount higher than apparel, possibly double apparel, we still believe in that and we've got the momentum for that's we're excited about talking about that further in early February .
Thanks, guys.
Thank you.
Thank you. Our next question comes from Edward Yruma with Keybanc capital markets. Your line is now open.
Hey, good morning, Thanks for taking my question I guess, just first kind of housekeeping question.
So you're not guiding to 2020 at but just maybe contextualize how much the improve service level is strong into Fourq. You said, we could start to think about I guess or one Qs and the correctly and then second bigger picture, Kevin I know, we've talked a little bit about footwear. How pleased have you been with the follow through on hover and then I guess some of your competitors have multiple kind of cushioning lines I guess when can we expect some something similar.
From under armour. Thank you.
Yes, where this is Dave we have talked a lot. This year about the improving service levels, which were really excited about and you know when you think about shipments towards the end of June and shipments towards the end of December that's when those can those impacts of the improving service levels can really benefit us and that's we're anticipating for Q4. So what is something that we've been fourq.
Adjusting for quite a while at this point.
We're expecting that to continue when we think about Q4 of 2020. So from a full year perspective next year. That's all considered and you know, although we're excited about 2020, and where we're going where we're driving we're going to hold for the comment on that until.
First week in December but.
Patrick if you want to add more Taylor and Kevin Kevin is yet Edward Let me, let me address that because I think you bring up a good valid point of as starting as an apparel company. It had us adjusting to what does it mean to make footwear and from the learning curve going back to 2002, making my first chips to speaking to the right footwear factories of understanding how we can be there'd be effective.
Of knowing what that would mean in the time that it would take so the investment. We've made there is extraordinary and we're now set to run and all the way down to the things that make it important from an innovation standpoint of having the right product and making sure that were segmenting correctly the distribution truly a holistic approach to how we're thinking about it. So today, we sit with roughly four we called.
Midsole technologies for our footwear Microalgae charged hover and something we've just launched actually in a truly segmented manner, which is called liquefy. So we are we're continuing investments and you'll see more midsole technologies come to bear in 2020, as well going forward and just watching the evolution the sophistication right.
We began to build in our in our footwear capability is something that's frankly taken US 15 years to get to this point, but we're ready to run and we understand what it can mean as we continue to unlock footwear, having the right product the right time right price.
We believe that we are we're certainly going to be a player. There bill. It takes his billion plus dollar business and build something really important hash out yeah.
I.
Great question, and it's a really important one in footwear and to Kevins point, we have.
For different technologies today, and it's really important to us in terms of how would that has enabled us to think about segmentation as well.
This year to some extent, but even more so going forward. We believe there is an opportunity for us to add some additional.
Cushioning technology.
At the very high end of this spectrum.
So we're going to be if we're going to be focused on doing that in the very near future, but we believe that you know the unlock for footwear for any company has to be able to drive franchises on these platforms.
We've demonstrated that we now are starting to understand how to do that and that is definitely to kevins 0.1 of the unlocks for the company going forward.
Great. Thanks, so much guys.
Thank you.
Thank you. Our next question comes from Bob troubled with Guggenheim. Your line is now open.
Hey, guys. Good morning, just two questions for me paid the first one is when you look at North American market and your performance. There do you Siteline on when you think you can return to positive growth in North America and then the second question. Then I have is can you just update us on the margin difference.
Essential in footwear, and apparel and and if you've been able to really close the gap between the two thanks.
Thanks, Bob I'll start this often I'll hand, it off today and I'll give you a little color on the margins.
As we think about.
North America, we haven't changed our thoughts in any way compared to what we told you guys at the Investor Day in December last year, It say its a.
There's a time.
Rice into how we think about those things its and a lot of that starts with leadership.
We now we have what we believe strong leadership in place we have a strong go to market. We have started to really see the effects of cleansing ourselves.
In our in our wholesale channel we've seen the early success of opening three new brand houses full price in North America, and the last quarter as the first time, we do that in a very very long time, all three of them are performing at or above plan, which gives us great encouragement for the additional ones, we're going to open up next year and it also show.
So is that when we show up in the right way as a brand through the end consumer in full price.
And with the entire breadth of our innovation and our brand.
For them and they respond which is very encouraging to us. So I think a combination of of the work that we're doing in wholesale. The addition of a better work we're doing in our full price stores in North America in combination with moving onto a new E com platform.
And new E. Com site next year, that's going to greatly enhance our ability to serve as the customer.
And layering on top of that the additional marketing that we plan to do so.
We're very excited about the fact that we're going to actually start doing that earlier at the back half of this year, which is a few months earlier than we would've hoped and allow that comes on the back of the stable Foundation. The hard work to make sure that we're really doing.
The work that needs to happen in terms of driving the business the right way.
And with that I'll hand over to Dave and he'll give you a little color on the margins.
Yes, Bob relative to gross margin.
We will have been working hard driving footwear forward someone that is volume some of that is the the cost improvements we've been driving through.
The supply chain efficiencies in the new go to market process. So you know over the last few years, we continue to drive forward and increase our footwear gross margin. So we are closing that gap versus apparel, but it is still pretty substantial GAAP at this point.
But we are definitely chipping away at it every single year.
We are gaining anywhere from 100 to 200 basis points each year on the gross margin increase for footwear.
So we're going to keep driving that forward and continue to close that gap.
Huge cash.
Thank you Bob.
Thank you. Our next question comes from Jim Duffy with Stifel. Your line is now open.
Good morning, Thanks for taking my questions.
First one for me I wanted to ask about gross margin you're tracking ahead of pace there to what extent guys do you view that as a a pull forward of benefits versus reflective of a new foundation upon which you can continue to see improvement and what are some of those key levers for improvement as we look around the corner to next year in and beyond.
Yeah. Jim This is Dave I mean, you know as you think about what we delivered in Q3, obviously, we mentioned the bigger ones with the lower off price sales in the quarter and also the continuing supply chain issues of product costs and airfreight.
There were a couple of smaller puts and takes two we saw some smaller benefits from higher connected fitness mix.
And so it would you think about what's driving into Q4, you note continued channel mix benefits with licensing and higher DTC mix will help us out in Q4, the supply chain initiatives are probably the biggest one that carry through the whole year, including Q4, and we expect from carried into 2020 as well with the product costs and lower airfreight.
So we're continuing to drive on all of those and then as we've mentioned on many of our previous calls we continue to work towards stepping down our mix of off price channel and that's something that we'll continue to do as we step into 2020.
So a lot of the Tailwinds that we're seeing this year with product costing with airfreight with stepping off the off price channel with higher DTC mix all of those things should continue to drive forward as we go into 2020 and beyond.
Okay, Great and then you spoke to a planned step up in brand marketing turn from defense offense, and you guys. Maybe foreshadow some of the marketing initiatives, we should be looking for in fourth quarter and into 2020 is it going to be more brand specific or product specific you plan to spend more digital or more through.
Additional marketing channels any color there would be helpful. Thanks.
Thanks, Jim This is Patrick what's really exciting about what we're going to during Q4 as we were able to spend against more upper funnel brand marketing, which is helpful for us as we as we'll take learnings from that and enable.
More.
Precise bound if you like in 2020 and 2020, it's all going to be about 360 degree approach to marketing so.
Over the last two and a half years, we've been building capabilities to be competing with the.
Other people in our space in terms of how to think about everything from digital.
To social media to auto home, what at whatever you want and understanding that.
That impact an effective we'll have more on the consumer that we're focused on we weren't able to do that necessarily three or four years ago, because we didnt have the capabilities, we have diligently been putting those capabilities in place and we're now starting to understand much better how to unleash them and thats truly what you'll see in 2020 as a key.
Coordinated play like Kevin said, we will go and market ourselves across every channel that we need to market our ourselves across to make sure that we're increasing consideration with the consumer and so it will be a holistic approach to both upper funnel marketing and also.
Sports moments marketing, where you'll see under armour show up what our athlete show up and so we're very excited about that so we're really starting the journey in terms of how to think about that a little earlier this year, taking the learnings to apply them to do an even better job for 2020, and Jim a little just little perspective on that too.
I'd say.
I would probably be in alignment that we haven't we haven't done that type of top of funnel storytelling to our consumer in several years and so bringing this back getting this amplitude when you're looking for the from two of what's different now versus what can we expect differently going forward is you're going to hear about this brand are going to here's your interstellar story, that's for sure Yeah Thats grew with it.
Great. Thank you.
Thanks very much.
Thank you. Our next question comes from Paul The Jewish Citi Research. Your line is now open.
Hey, guys, Paul less right.
Can you maybe give a little bit more color on the deceleration any APAC segment.
Just a deceleration that youve seen since the first half of the year any color you can add by country.
In terms of where you've seen the biggest drop off how you're thinking about.
For Q and into next year, and then second curious what drove the Capex guidance lower for the year was there any of that that was a timing shift from just how you're thinking about capex for next year as well. Thanks.
Shortfall this is Dave.
Relative to APAC, the 4% growth in Q3.
We had always planned at this was going to be our lowest quarter of the year for APAC.
From a channel perspective, DTC does continue to drive growth in both retail and E Commerce, which has been great.
The timing of shipments have been a little bit more out of Q3 relative to flow with the distributor orders.
So it's more Q2 in Q4 heavy and then also with the improved service levers, we're we're delivering more to the actual demand, which puts a little bit more in Q2 in Q4 as well.
You can kind of expected going forward as you think about 2020 that the quarterly flow be a little bit more normalized because those distributor revenues are going be more heavily weighted in Q2. In Q4. We also have bigger ecommerce events that are normally in Q2 in Q4 as well.
When you think about kind of driving forward through Q4 international in general we're continuing to see those improving service levels, which is great.
We have larger amount of door openings in Q4, both partner and known doors.
And then also as Patrick mentioned, we finally normalized Latin America business would that Brazil model change that we've been discussing.
So a lot of factors going into that on seeing that growth for Q4.
When you think about Capex to your question there.
A couple of things that we've changed a little bit.
The full year, we're still driving hard as far as investments in DTC expansion.
New APAC office investments.
APAC and Latam S&P investments I'm, all well within our Investor day operating principle range of 3% to 5% of revs.
You think about some of the things that brought down why we're guiding lowered the 180.
Someone that is around store build cost efficiencies, which has been great to drive through some of its timing of digital initiatives timing of office renovations and related efficiencies and then also some cost savings as we completed our new distribution center here in Baltimore.
But some different puts and takes there.
Got you then just one follow up on on the APAC any anything you could talk about on on country. If you would want to think about it in terms of point of sale where are you seeing the strongest response to the product may be talk China's specifically progress there anything you can give on.
Country by country basis. Thanks.
Yes, Hi, Hi, Paul This is Patrick.
When we think about eight pack, we're very happy with the performance across a pack actually and I think the investments we've made that Dave alluded to which has been expanding the China office and also you don't putting our new Hong Kong headquarter in place as really enabled our leadership teams there too.
Continue to work that we're doing to really penetrate the market through category and also distribution in terms of opening stores.
As we told you guys at Investor Day, we're on plan to do exactly that but also working hard to protect the premium positioning of the brand.
And we have been evolving into China business ball over the past couple of years and we're now in a in a in a place where we believe we have a really strong.
Foundation in terms of our distributors and doing a great job for us there than it should team has in place.
So we feel really good and I think as an added thing too I think as relates to the APAC. We're also very happy with our sourcing model that we have only having about 10% of our product that comes into the EU as being sourced out of China. So we're protected from that perspective as well. So I think both the front end on the back end is working incredibly well for us in APEC.
Thanks, guys. Good luck.
Thank you.
Thank you.
Thank you. Our next question comes from Jay sole with you've yes. Your line is now open.
Great. Thank you so much Kevin just want to ask you about how your day to day will change.
Now that you're title has changed what it give us more color on that then secondly, I know you guys didn't talk about whether its impact in Threeq you, but it was like a warm September I think will bleed into this this is going to gain I wonder if that has an impact on your business and then Kevin did mention that you've seen the business accelerate in the last couple of weeks I assume that's weather related you talk about what cold weather through November might need to that business relative to.
Got it is that you gave.
Thank you.
Yes. Thank you Jay So let me just start by adding some clarity around the decision why how I got here 47 year old what does that mean my goal is to build our goal is to build an external brand and we're not going to stop until that happens, which obviously that's a long that's a self fulfilling prophecy. It's going to can go on forever, you got to get the flywheel going and I build.
Leave that we've started that but it's also thinking about something that we can do with a brand as I say break great brands do indoor but setting this up truly for the long term.
Patrick in my partnership has really grown over the last several years in having the ability to bring in it and I'm really proud of being able to find someone like Patrick who had the perfect balance of industry experience and expertise with frankly, just professional maturity of being able to coming in and handle a situation, where we had to lead.
Into heavy transformation for ourselves the business and as a brand and going through the last.
Two or three years of really Rightsizing this business getting ourselves in line and seeing some of those benefits come through as things as clear as whether its inventory of gross margin improvement as reducing what we're doing of taking down those were looking for off price of just getting our inventory levels clean and really getting ourselves structured and the professionalization.
The company wasn't meaning that we weren't professional before it's just taking our company from five to 10 billion is really different different step.
I want to be clear is that our love under armour in it. It is now today Tomorrow will always remain my full time.
Priority in job I also want to declare that this is my decision for all those reasons that I've just mentioned in gone through and what I think what we have now is the strength that Patrick and I have combined really creates a force that I think is unmatched in our industry and I think it's really unique for business as a whole and so the way that we balance that we work together.
No tirelessly with each other and communication and making sure that were aligned but also making sure that Patrick has the freedom the ability.
To lead and do the part that he can you know running the day to day aspects of the business and really running a management business, but notably a partnership will continue to move forward, but as I said Theres three places, where I think I'm going to have the best impact and it's not going to be from of the.
Sort of the.
I don't know, how do you say HR and legal and some of those things of with the ability for me to really focus on the elevating product amplifying our story really empowering our team and really simplifying my job description to that of jus obsessing on product you know I got to spend more than a dozen hours last week in a product line review and it was just terrific abroad.
And one of the shoes, and new product technologies have out and I stared at this thing all weekend when it's just the the ability for us a things like that and that capacity I think is one of the aspects you'd be at unlock and so.
We do pretty well, we put our backs to each other and face out and we're looking forward to that this slight.
Great and then if you could just talking about the question on the weather in Threeq and Fourq you would you what you've seen in terms of the acceleration in last couple of you said the great. Thank you.
So so Jay maybe maybe I can add little color to that I think we've seen a gradual acceleration in the in the back half of this year.
As as there is not just the weather, but actually our execution that's coming to play here too.
And we believe that yes, we turned a corner into 2020, we're going to be even more well positioned to benefit from the executional aspect of putting the play together now supporting it also with the with a little bit more purposeful and heavy up marketing effort.
Got it okay. Thank you so much.
Thank you Jay Thank you Jay.
Thank you. Our next question comes from Omar Saad with Evercore ISI. Your line is now open.
Thanks for taking my question two questions first one I wanted to ask about.
LASG worried mentioned weaning the consumer off some of the online promotions, it's been a little bit of a challenging and a drag on the business a little bit can you give us an update on where we are in promotionality and getting the customer little bit more use of the fact under armour is not going to be is on sales and has been the last couple of years and and then I've a follow up for Kevin.
Yep sure Hi, Omar this Patrick Yes that is a balance as you as you go through then the turnaround if you like where the transformation.
And as you are trying to.
Wash through some of the it that some of the excess.
That is a there's a time component to that of course, and you're not immune of course to what's going on around you in the marketplace and what we're trying to do as a company is really balancing the two companies.
Tended to do so and it's a gradual process. We think we have a good plan for ought to do that in beyond 2019.
And it will be a gradual process for us, but but ultimately.
What we've been saying all along has been that we're going to drive. This this brand to a more premium positioning again and we're absolutely determined to do that so we'll add a little bit more color, perhaps in the next call on that but I think it's something that we're looking forward to and and depending on where you on the world and what channel you're in were more or less.
Accessible with that and it depends a lot on the type of inventory that we have in the channel.
Thanks, and credible and then and then Kevin if I could ask as one last question a view.
Congrats to both by the way as you think you talked a lot about product and it sounds are going to be a lot more focused and that's sounds where lot of your passion lies.
Maybe you could talk a little bit at a higher level, how the under armour approach to building product product lines and platforms as evolves from from the earlier days and and how your role will fit in thanks.
Yes. Thank you Omar I think just adding some some holistic perspective to what's what's happened over the last several years here and we use word transformation.
Really repositioning our business restructuring reorganizing resetting the processes. So that we can be a clear and and and make sure that theres not double work happening as that we just get as efficient and lean as possible.
You can tell that my my energy of course it it sits within.
The dream in the vision that we have for product, but one of the best things. We did as you know we implemented a go to market process, we implemented a global operating model in creating a four regions with.
APAC and EMEA, Latin America, and North America.
We also went to category management, which really allows us to put to consumer at the center of everything we do.
Both men's and women's to allow us to really align ourselves in this process is.
I've I've mentioned before third people talk about sort of that growth of getting to 5 billion getting a 5 billion with something that we roughly got close to at around 2016, and then we've been fighting in since that time since end of 16.
We were telling you that we're going to grow our revenues nearly half a billion dollars over that period of time through through all this transformation in some of the things we've had to do with the restructuring charges.
Pain that we had to go through with things like risk for our teammates have just getting this business set up an organized and why I think we say really quieting the company and amplifying the brand.
It's a matter of us executing and the good thing about this there isn't a massive change coming it's a matter of us just putting our heads down and really going to work and that's what we look forward to doing I think in this next chapter as we head and moving through the end of 19 and really had forward into 2020, so under Armours ready to run its tough getting 5 billion I'll tell you.
In this industry as a reason why there's only a couple three or four companies that have done in at this point.
But we're looking for the next chapter and we are set up we are ready we're ready to build would be that great brand that we we talked about so often.
Thank you best of luck.
Thank you very much thanks Omar.
Thank you and our next question comes from John Kernan with Cowen. Your line is now open.
Hi, Thanks for taking my question. This is Jared were on for John You gave some color.
Surrounding the ships out of Q3 into Q2 in Q4 based on the service service improvements I was wondering if you get the either quantify that or talk about.
What products that is that that is benefiting on what geographies.
Yes, Joe This is Dave we don't actually quantify that will just trying to give a little bit of extra color. The majority of that we've expected as we planned out the year you know fair amount of it is a international with distributor flow and that being more heavily weighted to Q2 in Q4, but then also again those service level improvements when you think.
Talk about the product that we would be shipping in late June early July in the product we ship in in late December versus early January those are the two phases, where improving service levels can be most impactful in a good way and it's the play we want to continue to run as we go into 2020.
So those amounts are not dramatic but there are enough that we wanted to know can give extra color around that.
And we're going to continue to drive forward and hopefully we can continue to operationally improve you know each month as we move forward.
Thats a one quick follow up are you thinking any pricing, especially with the perhaps come come aboard.
Right now we're in a very good position, we've been very proactive starting years back and kind of mitigating the amount that we imported into us from China and so we feel pretty good about that are relative to all the enacted terror tariff policies that are out there with list three and list for a four be all that's considered.
And our outlook and we feel like we're in a really good spot so.
We're working with our vendors a and continue to drive forward in our sourcing strategy.
But we're well prepared for it.
Yeah, Hi, thank you.
Thank you.
Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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