Q2 2020 Under Armour Inc Earnings Call
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Thank you and good morning, everyone joining us for under armour second quarter 2020 earnings call.
Information being are being made available on todays call includes forward looking statements that reflect under Armours view of its current business as of July 31st 2020, as well as considerations for future events that may impact our business moving forward.
These statements are subject to risks and uncertainties that are detailed in documents regularly filed with the FCC and the safe Harbor statement included in this mornings press release, both which can be found on our website about dot under armour Dot com.
It's important to note at this time, but the global Cobot 19 pandemic has had he continues to have a significant material impact on under Armours business.
Given the continued high level of uncertainty around the duration and extent of the viruses near and long term impact to the global retail environment content discussed on todays call could change materially at any time.
Accordingly, future results of operations could differ materially from historical practices and results or current descriptions and estimate some suggestions.
On today's call, we may reference non-GAAP financial information, including adjusted and currency neutral terms, which are defined under FCC rules in this mornings press release.
You May also hear us refer to amounts in accordance with U.S. GAAP.
Reconciliations of GAAP to non-GAAP measures can be found in the supplemental financial tables included in this mornings press release, which identify and quantify all excluded items as well as providing management's view about why we believe this information is useful to investors.
Joining us on today's call will be under armour, President and CEO, Patrick Frisk and CFO, Dave Bergman.
Following our prepared remarks, we'll open the call for questions and with that I'll turn it over to Patrick.
Thanks, Laos, good morning, everyone and thank you for joining us on todays call before we discuss our second quarter results in a significant impacts that the corona buyers pandemic continues to have on our business I'll start by underscoring the incredible resilience that fortitude our teammates are demonstrating in these uncertain times.
I think true to our strategy mission and values were prioritizing safety, while advancing our E commerce and retail capabilities proactively managing costs and working to execute smarter faster and more efficiently for our consumers and retail partners.
Well I topline results did come in a little better than we originally anticipated for the quarter. We're encouraged by some of the initial call up and conversions were seeing we continue to anticipate significant impact to our business in the near term due to the pandemic based on a high level of uncertainty around consumer sentiment and shopping behaviors.
I'll leave the financial details of our quarter to Dave et cetera. My comments on the actions were currently taking to navigate this dynamic environment.
There are four main areas under armour hyper focused on right now.
First we're working to rebuild the brand through increased engagement and consideration with our target consumer the focus performer.
Second we're further evolving our operating model to simplify the way, we work and collaborate including accelerating that digitization of our go to market process to drive greater efficiency and speed.
Third Reprioritizing a D to C first approach to elevate our brand experience and deepen our connection with under Armours consumers and finally through all of these efforts were heightening the discipline on profitability and reconstructing our ability to drive sustainable shareholder value over the long term.
Starting with rebuilding the brand emitted dramatic migration to at home that outdoor training running in fitness, we're focused on elevating our digital connection with our consumers utilizing our through this together platform, we've been able to drive increases and brand engagement and consideration through targeted content social events and key Influencer workouts.
As a result of connecting these dogs, we've seen a significant increasing usage and our digital lap community as well a steady meaningful increases in new users throughout the quarter.
After six months of activating a reengineer marketing and brand platform. We believe that consumers are getting more consistent clarity about who we are and what we stand for human performance company Wood products designed to make you better.
Given the success, we've seen with our quick adaptation to consumer shifts in the first half of 2020 I feel that we are well positioned to continue to manage through this period of uncertainty around the consumer and the overall marketplace. So wherever training may take athletes whether at home on the field or back to the Jim will be there to connect even more deeply through pre.
New product content and experiences.
Premium has been and we'll continue to be core to under Armours brand positioning in this respect we are working both to strengthen and in some cases earn back that consumer promise, one innovative product and premium experience at a time retrenching from the past few years, especially in North America requires prudent and purposeful marketplace management, what the right.
Balance of product and service to meet consumer demand pretty cold, we entered 2020, what the healthiest global inventory position that we've had in several years wanting to protect that aspect as best as possible. The acted decisively and aggressively to cut originally planned back half inventory buys for example in April and May we reduced our inventory.
Repurchases for the back half of the year against our original plan by nearly 30% response to covert impacted demand expectations.
So while undoubtedly punitive to our topline given an expectation of higher discounting and promotions across our space and the second half of this year. We believe this strategy to be prudent to ensure continued progress towards rebuilding our premium brand positioning.
It doesn't mean, however that we have post our innovation agenda or postpone new product releases for this coming fall to winter. We're on track same plan same discipline with our product pipeline and a long term strategy focused on protecting and ensuring under armour as a premium athletic performance brand.
Now moving to our secondary or focus which is the continued evolution of our operating model before coal that work was well underway to further streamline our business to increase our ability to execute more quickly by simplifying the way we work collaborate and make decisions using this pandemic impacted period as an accelerant, we're going even deeper identity.
I find the areas of opportunity within our business along with additional strengths. So that we can maximize the value we create for consumers customers and shareholders instilling a digital first approach throughout under armour is critical to this evolution.
In this respect with continued to build on the progressive we've made with our go to market process. After moving to a 17 month calendar. The first fully redesigned season of which launched in the first half of this year, we knew that additional digitization could drive even greater efficiency and agility into the way we work and that's been the plan with the exception that this more digitally.
Integrated go to market vision was supposed to place more holistically in 2021.
Making the most out of the current environment. The team stepped up and we've got to work and I'm extremely proud to say that we're now well ahead of schedule in this respect so what does this mean exactly it means that more of our products are designed and developed into three D. Digital environment that we're transitioning to fully digital sampling and now have completely did.
A little selling capabilities across all of you away and much of it has already been put into action as we held our first virtual sales meeting for spring Summer 2021, just last month from materials product creation and global vendor partners to retail space visualization sell in training and the communication of key features and benefits.
Our external buyers overwhelmingly agreed that it was a very positive selling experience.
Third as the prioritization of a D to C. First approach specifically elevating the importance of ecommerce and full price retail to deepen our brand connection with under Armours consumers. This obviously ties back to our first initiative with respect to the premium aspect of our brand and although a global effort, we see it more acute opportunity, particularly in North America and the near to midterm.
Yeah.
From an ecommerce perspective, we're continuing to refine our personalization and content to better compete in today's highly dynamic market. Just last week, we lost on new North American site with which now in lines. The majority of our global ecommerce business on one platform that we believe is agile and scalable for the future.
To support the additional functionality data and processes that the new platform will allow us. We're also working to stand up the CRM program to drive higher engagement with consumers and established this capability for the brand.
Turning to product and led by strength in our E Commerce channel during the quarter I'd start with a run category and highlight the hover makana, which at $150 continues to be a top seller and advance. Our overall you a hover platform. This is also helping to support our connected footwear strategy as well with year to date footwear Activations having.
Nearly doubled over the prior year period and customers completing their first connected workout up more than 150% over the same period, a trend that has accelerated throughout called it.
But it's not only footwear, that's doing well, it's also run apparel, including the fly by and launched shorts and the ISO chill short sleeve shirt, which utilizes a unique material technology to disperse body, helping you state cooler in the heat of the summer.
Overall, we remain very encouraged by the emerging strength of our run category and that's we look toward the back half of 2020 after years of development well introduced our fourth cushioning platform, which will launch first in basketball and that quickly move to run for spring Summer 2021 further capitalizing on the momentum we're building as we all.
For under Armours, most pinnacle running footwear expression yet.
We're also seeing positive trends and building momentum within our women's trained category from leveraging deep athlete insights into product creation targeting consumers through successful marketing activations like our anthem at product videos to stunning inclusive imagery, coupled with simple language that explains exactly what our products do we're speaking directly to the folks.
His performer as a result, we saw strong demand in the quarter for a number women's products, including the play up short, our infinity and mid prospects sport bras and them Iridium Pan which continues to be a strong seller.
Following our efforts to make pp for Marilyn area hospitals, which to date, we've delivered more than 5 million masks and 4 million gallons. We leveraged this expertise into meeting a specific need for athletes.
The result is the UAE sports mask, the signed four and tested by athletes. The UAE sports mask features a three layers system of high performance, you aim materials, including ISO chip fabric engineered for all day comfort in and out of sports initial demand has been extremely strong. So we're working hard to catch up with orders as quickly as possible.
And with respect to brick and mortar retail from a full price perspective, our long term opportunity to showcase the depth and breadth of our brand in a controlled premium environment remains significant and the reset work that we're doing to evolve our store concepts toward scalable brand right formats continues to be a key focus for us with a number of new concepts.
And experiences either being tested or at the ready for deployment. We're looking forward to these expressions, helping us to connect even more meaningfully with our consumers and finally through all of these strategies and efforts, whether our own retail or wholesale business, we're working to reconstitute our ability to be profitable over the long term when the global market stays.
A life. However, the new normal is defined we believed that the efforts were putting into building the under armour brand strengthening our supply chain prudently managing inventory employing a more favorable cost structure and harnessing reengineer demand creation engine puts us in a better positioned to benefit from shifts in consumer behavior and an increase.
During the more discerning athletic consumer and with that ill hand, it over to date.
Thank you Patrick to say that this quarter was unprecedented would of course be an understatement, but I would start by saying that I believe that we have the right strategic operational and financial strategies in place to help under armour navigate the short to mid term challenges, while emerging a considerably more focused brand and disciplined company over.
The long term.
With respect to our second quarter results. It's important to note that through mid may about 80% of the locations were under armour sold globally, we're close due to cobot 19.
And even though we believe pent up consumer demand combined with accelerated door openings, especially in June in North America drove more favorable trends than we anticipated as expected the pandemics still had a significant impact on our results with that let's dive right in.
Revenue was down 41% to 708 million, which was better than the 50% to 60% decline that we previously anticipated.
This was due to more favorable results across both wholesale and DTC.
From a channel perspective in the quarter, we had 58% decline in wholesale revenue result that was better than expected primarily in North America due to quicker than anticipated store reopenings and stronger than expected demand through partners online sites.
Our direct to consumer business was down 13% driven by the negative impacts of store closures offset by strong E commerce growth.
Our licensing business was down 76% driven by demand impacts related to covert 19, and ongoing challenges with our licensing business in Japan.
By product type apparel revenue was down 42%.
Where it was down 35%.
And accessories were down 47%.
From a regional and segment perspective.
Second quarter revenue in North America was down 45% driven by owned and wholesale door closures, coupled with significantly lower year over year sales to the off price channel.
As of today, most of our owned and wholesale partner doors have reopened.
In EMEA revenue was down 39% also driven by the negative impact of Coven 19 related store closures offset by strength in our ecommerce business.
As of today most of the doors have reopened in EMEA.
Revenue in Asia Pacific was down, 20% driven by lower traffic in brick and mortar locations offset by strength in ecommerce.
And similar to North America, and EMEA most of the doors in this region are also open.
In Latin America revenue was down 72% driven by the negative impacts of coven 19, as less than 50% of owned and partner retail locations were opened by the end of June.
We estimate that as of today about two thirds of doors have now reopened in this region.
And finally, our connected fitness business was up 3% driven by subscription growth.
Turning to gross margin.
We saw a 280 basis point improvement to 49.3% in the second quarter with benefits, including approximately 480 basis points related to channel mix, including significantly lower year over year sales to the off price channel and increased DTC mix, primarily from our ecommerce business and.
130 basis points related to a pack and connected fitness, representing a larger mix of total revenue.
This was partially offset by about 280 basis points of covert 19 related pricing and discounting impacts.
And 70 basis points related to changes in foreign currency.
SGN expense declined 15% to 480 million.
Primarily driven by reduced marketing spend in addition to other cost cutting initiatives to mitigate topline impacts from cobot 19, including lower incentive compensation and reduced variable expenses tied to revenue.
In the quarter, we recorded approximately $39 million in restructuring and related impairment charges.
Including 28 million in noncash and 11 million in cash related charges.
As a reminder, our restructuring plan covers estimated pre tax restructuring and related charges in the range of $475 million to $525 million.
Year to date, we have recorded approximately 340 million of charges of which 326 million is non cash and $14 million is cash based.
Our second quarter operating loss was $170 million.
Excluding restructuring and impairment charges adjusted operating loss was $131 million.
After tax we realized a net loss of 183 million or 40 cents of diluted loss per share.
Excluding our restructuring and the noncash amortization of debt discount on our convertible debt.
Our adjusted net loss was 141 million or 31 cents of adjusted diluted loss per share.
With respect to our 2020 outlook.
As Patrick mentioned, given the ongoing high level of uncertainty related to the cobot 19 pandemic and its potential economic ramifications, we cannot reasonably estimate impacts on our full year at this time, therefore, we're not providing detailed outlook on todays call.
We do however expect these conditions to continue to have material impact on full year financial and operating results.
With that said I will provide some high level color on how we're thinking about the back half of the year.
Although recent consumer trends from what we believe is pent up demand have been more positive than we anticipated, especially during June and July we believe in the near term there will continue to be challenges and uncertainty with respect to consumer demand and the overall marketplace.
For under armour. There are three main areas, we believe are likely to impact the back half of our year.
First.
As consumers return to stores it is difficult to forecast the rate at which normalization might take place as well as demand relating to shopping behaviors and conversion.
It is also difficult to predict the course of the pandemic in the us and other parts of the world and whether there could be a retrenchment within the marketplace.
All of this means that we're planning for our business to continue to be significantly impacted during the back half of the year.
Second.
As Patrick mentioned, we acted quickly in the first half of this year to proactively and significantly reduce planned inventory purchases amid the quickly evolving landscape.
As a result, if the second half of the year recovers at a rate higher than we're planning for we may not have adequate supply to meet higher demand.
And finally.
Given the dramatic impacts across the retail landscape due to store closures and inability to reduce supply as fast as demand, we're anticipating that a highly promotional environment will materialize in the second half.
This aspect combined with the critical mass of sales to the off price channel being planned in the third and fourth quarters.
Should contribute to a meaningful gross margin pressure for the balance of the year.
That said it is important to note that we're continuing our strategy of reducing our exposure to the off price channel and our planning this channel to represent a mid single digit percentage of overall global sales in 2020, another meaningful year over year Stepdown.
All in we are planning that revenue could be down as much as 20% to 25% in the back half for the year.
Within this window, we anticipate a larger declined in Q4 due to expected year end timing impacts from cobot 19 related to customer order flow and shifts and supply chain timing, which should result in more spring product deliveries in early 2021 versus late 2020.
With respect to SG $9. We're currently planning for it to be a bit higher in the second half of 2020 compared to the first half due to higher marketing investments and variable expenses associated with our DTC business.
Before opening up for QNX.
I'd like to briefly touch on some of the great work our team accomplished to preserve cash and further prioritize liquidity to strengthen our ability to navigate short and mid term challenges and cash flow needs.
Two items, we executed quickly on where an amendment to our credit facility and the issuance of convertible bonds.
Related to the credit facility. The amendment was negotiated in May and provides improved access to liquidity during this period.
With our convertible bond offering we were able to successfully raise additional capital to provide even greater liquidity.
It is important to note that the cash generated from this transaction was used to pay down part of the outstanding balance of our revolver.
We ended the second quarter with 1.1 billion in cash and cash equivalents and 250 million outstanding on our amended $1.1 billion revolving credit facility.
So when looking at our net cash and debt position from March 31 to June 30, we were able to essentially hold flat.
Our ability to maintain the same level cash during the quarter with a 41% decline in revenue speaks to the point and purpose of our strategic actions and the confidence we have in our ability to manage our business through these uncertain times.
With that I'll turn it back to the operator for your questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press the star and the number one key on your touched on telephone to withdraw your question pressed upon key.
Our first question comes from Edward Yruma with Keybanc. Your line is now open.
Hey, good morning, and thanks for taking the question I guess as we look forward obviously, some innovation in the product pipeline as you start to meet with some of your wholesale partners given their current inventory situation, what's the receptiveness to kind of.
Taking a chance in some of your product feedback coming and then I guess as it relates to off price are you having to take back inventory from existing wholesale partners. Thank you.
Hi, Ed I think out started off in a if you want to add some color today.
In general as I said in my script, we're very happy with how we have continued to plan, our innovation and product to launch through the back half of this year and into spring of next year and as I said, we've had numerous products working really well for us across our train.
Got it wrong categories as we've gone through this spring and subsequently I think that gives perhaps.
Our.
Our partners out there.
An indication of what could be in 2021.
And we're happy with how we're thinking about the innovation pipeline because as I said, we're now going to layer on another.
Platform in our footwear offering and that's also going to help US continue our journey here in the run space. So overall very happy with our ability to execute our go to market and that I think is probably the main thing that gives our our partners confidence in our abilities going forward.
And I think as we as we think about.
The landscape right now I think I don't know if you wanted adds a little bit of color. There, Dave I think I think it would be better fuel Ed relative to you asked about liquidation and returns.
From returns perspective, it's really different region by region and account by account but.
Because we were very strategic I think in our in our sell in our selling expectations.
The weeks of stock that our wholesale and retail partners have is very reasonable right now so.
Although there could be some returns and we're obviously planning for that in certain regions.
We're not expecting a massively larger amount of returns and then before I think because we were very strategic and coordinated in how we sold in.
And with the current environment is so we feel like we're in a reasonable spot. There. We also feel that we've got enough availability within our outlets to be able to move any of the returns that we do get without having to overly rely on the third party off price channel, which were continuing to step down as a mix of our business year over year.
Great. Thank you.
Our next question comes from Randy Konik with Jefferies. Your line is now open.
Yes, Thanks, a lot I guess, Patrick can you give us some perspectives on how you're thinking about.
Balancing marketing impact on on the consumer for the brand in terms of you've seen a lot of I guess was impressed that talks to the company continuing to look at its different marketing contracts are different items.
You have out there trying to pull those back you did talk a little bit about.
During the marking a little bit in the back half just curious on how you think about long term marketing.
As it as it relates to the level of marketing dollars, but also how you're sleeping those marketing dollars in different buckets, perhaps going forward than you have.
In the past now be Super helpful. Thanks.
Hi, Randy Thank you for the question I.
First I would like to say that we really are empathizing with our with our.
Athletes out there right now, it's an incredibly difficult time for them. They don't know when they're going to be back on the pitch on the field.
And we're trying to do the best we can to support to support them in this and this really difficult time.
But as it relates to to the contractual agreements, we have and the the assets that we do have.
Under armour as a brand that is grounded in team sports and that's one of the unique things for US is that we're one of the three four brands in the world that actually have permission to be on field is that the quarter. What we do it's where we were born that's where we're going to continue to make.
You know our presence felt.
So we are very much committed to staying on the pitch on the field and but also to support our athletes and what we call. The focus performers out there in their journey to two to train to compete and to recover that holistic journey.
So as we think about how our marketing will evolve going forward, we're committed to to the majority of the contractual agreements we have out there, but we've also talked about the fact that as part of our restructuring. We we continue to look at things that make sense and my not makes us for us in that journey going forward that we're making decisions accordingly.
Okay.
The reality is that if you want to have an asset you've got to be able to activate and and that is the important part of it right. The equation of what you own and how you then activate that it really.
Down delivers the potential impact that you might have led to consumer that you want to achieve to strengthen your brand and what we're seeing now as we get smarter and smarter with our investments in terms of the tools that are out of beta bill available to us as it relates to understanding.
Our spend impact our ability to strengthen our brand, we're making the appropriate shifts in terms of the investments to enable that and that's looking a little different quite frankly to how we used to think about it. We're much more informed were better inform now we continue to test and understand.
What we should do and how we make every dollar go longer for US if you like.
And Thats really whats going to help guide us going forward due to a larger extent them before.
We're going to continue to spend on marketing and Dave mentioned that a little bit here before.
We're going to continue to be spending and we're going to continue to spend smarter and going forward and what we're really encouraged by in the first half of the year is as the results that we see in terms of engagement. So I was a longwinded answer, but I thought I'd give you little bit more color on that.
Yes very helpful. Thank you.
Our next question comes from Matt Mcclintock with Raymond James Your line is now open.
Yes.
Hi, yes, everyone. Good morning.
Patrick just kind of staying with EMA marketing and strategy number one that you've outlined in terms of increased brand Goldsmith can you maybe talk a bit connected fitness and health how your thoughts around connected fitness or vaulting is that increasingly being you the something more about brand awareness or brand engagement driver as opposed to something that sells to that ultimately will sell more shirts and shoes or.
Or if you're intending to somewhere surplus or you see that channel still.
Can you talk more about conversion and your plans for conversion. Thanks, Yeah sure absolutely Hi, Matt you know, we're so excited about the work that we're done.
On the connectivity.
Overall our.
Of our of our especially our map my Ron initiative that we've had going on this spring unless we shifted from the campaign or the brand platform that we started the year with the through this to gather platform into sorry, the the only way is through to through this together, which became a whole digital initiative for US we were able to activate.
That through to our App World and one of the big initiatives. There was really around the coaching as it relates to run specifically and the connectivity with our footwear and as I said in my in my in my prepared remarks, we were able to double the engagement level in this last.
Quarter.
So what we're seeing is not just the engagement going up but actually also the workouts going up so we're seeing engagement going up we're seeing that connectivity in terms of people that are actually activating the app against the footwear to help them run.
Further faster longer and better.
And that's very.
Encouraging to us if you then think about what we're doing around CRM, the loyalty and how we're going to be able to tie that into keeping that consumer the focus performer engaged with us longer and more often.
That is down a very.
Interesting future for us as it relates to.
Our did digital ecosystem, if you like so for US it's all about that journey of trained compete recover it's all about.
Keeping the consumer engaged understanding to consumer more deeply understanding the moments in time, we can connect with the consumer deliver against the expectation of the consumer engage with the consumer and also and not just product, but also content right to make them better.
Thanks for that just as a quick follow up on the mask business.
They sold up pretty quickly.
Can you talk about the supply chain Burnaston, just your ability to get capacity to replenish that business.
Yes, absolutely and I think here's one or the areas, where thats really exciting to us first of all I'd like to just.
Coleman on on the enormous work our teams did to step up to help out in the.
Hospital World, if you'd like in the first responder world here in Maryland, especially with Johns Hopkins and University of Maryland.
We've made about 5 million masks and about 4 million gallons year to date, and we continue to make them to help.
To help with that effort that spark you know this idea and it was great. Because this is an area where Kevin jumped in as well and when we had a lot of fun with this.
Because we saw a need for for the athlete here of course, because we realize that the athlete was going to have to you know face the same kind of difficulties in terms of protective gear.
So what we did was we used a lot of the ideas around our innovation center and the work that we did there and quickly developed.
This this mask, which is a very sophisticated sophisticated mask in terms of having a three layer construction.
That is.
Very comfortable to wear and also safe to where of course, but more importantly is specifically done to do sports and so you can use it in and out of sports what was interesting with that was also the supply chain part of it. So we actually did not take a simple approach to it we actually were.
I don't really deep and and used a lot of the technology and knowledge that we also have and making brawls for example for women to help us make.
Make these these masks so we've been ramping up the supply chain demand is incredibly strong for the mask.
And.
We now have a complete supply chain.
Up and running and were seeing.
Our ability to meet demand increasing week by week, but demand is very strong and the second is strong across the world.
Thanks for the color best of luck.
As a long answer I'm, sorry, but I just want to give you a bit more color.
Our next question comes from Polish way with Citi. Your line is now open.
Hey, Thanks, guys I'm curious if you can talk about the plan to use off price in the back half to clear inventory, how much money that channel relative to the second half of last year and I'm curious if it was you not wanting to sell.
Goods to them in the second quarter was it them not taking product because their stores have been closed I need to clear through their their inventory and I'm. Just curious if there is certainly you can quantify.
New customers funding your brand.
The online channel. Thanks.
Yeah, Hi, Paul This is Patrick I'll start and then I'll hand over to Dave for little bit more depth on the financials first of all you know we see in the back half I'd like to call out three things in terms of how we think about the back half right, we think about demand variability.
And the second one that Dave talked too, which is inventory availability you know some the actions we took in the first part of the year to action. When we saw demand go down and in terms of our inventory buys and then third is that promotional environment that we see going ahead. So so for us in terms of how we think about the off price and liquidation Chan.
No. We as you guys all well no we have been on the journey to make sure that our inventories.
It's something that we manage well and as a consequence continuously continue to drive down in that channel. So so we've been doing that as we thought through the inventory availability for the back half of the year on day, maybe you want to give a little bit more color there to give them the better sense, yeah, I mean relative to.
The liquidation a couple of things keep in mind, one we made excellent progress on inventory last year, so coming into this year.
We were we were cleaner than we've been in a long time in the.
The inventory that we did have a lot of it was not order excess so that basically means that Q1 of this year. We did have third party off price liquidation, but it wasn't huge quarter for us than Q2, you know a lot of those partners third party off price partners.
Had shut down their doors and most of them, we're not accepting inbound delivery. So we we had essentially little to no third party off price sales in Q2, and you see that as a big benefit in our gross margin for Q2, so what that essentially means is even though we're stepping down third party off price as a channel as a mix.
The business.
This year versus last year, which is great and we're continuing that journey. It does mean that our liquidation is significantly more back half weighted than the front half of the year and so that will clearly.
Add a lot of pressure on our gross margin in Q3 in Q4.
But and then also on gross margin just the ticked a little bit further there's going to be a lot of pressure in our expectations around a very promotional environment. We believe a lot of the companies out there have a lot of excess inventory that they're going to be trying to on load in Q3 in Q4, and it's going to make it a very price pressured environment.
And we are planning and expecting for that and that has a dramatic impact on gross margin year over year in Q3 in Q4 as well.
And then the question you mentioned around E commerce and new customers.
We're absolutely excited about the momentum we have.
Within E Commerce, and there is quite a few new customer.
Sponsor is that we're seeing come through whether it be.
Some of the new mass business that we see coming through and then also overall in general So we're excited about the new customer traction there we're not.
Disclosing the actual rates are quantities there.
But we are excited about that momentum and a fair amount of new customers coming in to be part of the brand online with us.
Okay. Thank you good luck.
Our next question comes from Cinelatino with BMO capital markets. Your line is now open.
Thanks, guys good morning, and nice performance in this environment.
So just a follow up on the gross margin for longer term as you work to reactivate brand can you talk about where you see that opportunity and then Patrick can you just help US you think about the DTC business maybe to elaborate can you help frame why you think under Armours DTC Nam underperform historically, just springboard about where it goes from Matt. Thank you.
Hi.
In terms of the direct consumer.
In general.
The answer to a little bit of a different way and I'm not can try not to be too long winded, it's above consumer centricity.
So the majority that were on and have been on.
For the last.
Three years has been around.
Truly understanding where to compete who were four and as a result of that those two.
Hone our brand positioning so the decisions we make in terms of how to invest and how to drive our business going forward will be decided ultimately by how the consumer juices or would like to we're best engages with us and as a consequence of that.
We were we are tuning all of the different abilities and capabilities that we had.
In our.
Quiver tools to execute against that and I think ultimately would it also will enable us to do is build a more premium brand, which is ultimately will where in the business to do.
So so that's what we've been doing and I think what you're starting to see now as an ability for us to execute through the go to market.
And to actually do that on better platforms, you know our new ecommerce site that just launched for example, I hope you guys amount a chance to look at its wonderful much faster much better better content better product descriptions everything is great on that side and that's one of the that's one of the things that you now see coming from under armour, our CRM that we're building to support that.
The new store concepts that we have in the pipeline.
That that are that are about the rollout.
All of that playing and cohort to support our go to market and it's all based on consumer Centricity. So so really that's the way to think about it.
And what can you repeat the first question you had before the DTC question I'm not sure we heard you.
Sure, Yes, which is as you, whereas the gross margin opportunity as you re elements brand in the long term someone asked this year.
Yeah, I mean, we do see continued gross margin opportunity longer term, we've talked before about the great strides our supply chain has made in consolidating our vendor base and then also just from a GTM and supply chain perspective, all the SKU rationalization work, we've done which helps our gross margin as well so there's a fair amount.
Of costing improvements that we're still continuing to see.
Unfortunately, this year that is more than offset by the promotional environment that we believe we're going to be experiencing here, but.
We expect those benefits to continue.
And then again as we continue to.
Work down that journey relative to the third party off price channel.
That'll have a little bit of a gross margin tailwind as well as a mix of our business as that goes down.
And then we are focusing very heavily on DTC and in general would that continued pursuit, whether it be E com whether it be.
Better brand houses from our commercial concepts around the world that mix will also be a little bit of a tailwind on gross margin for us and then the other thing we've mentioned in the past two is that APAC continues to be.
For full year basis growing faster than the rest of our regions and that's our highest gross margin region. So we see multiple.
You know tailwinds that will help us as we move forward longer term.
One item that we've mentioned that'll be a little bit of a headwind is as we continue to increase footwear out a little bit of a higher rate than apparel going forward. That's still has a lower gross margin for us now we're been improving that as we scale up and as we work with our vendor base and supply chain is doing a phenomenal job with that but at this point, there's still a gap between our.
Apparel and footwear gross margin so as footwear continues to grow faster than apparel that'll be a little bit of a headwind, but we're excited about driving forward in the future.
Great. Thanks size, that's not the rest of the year.
Thanks.
Our next question comes from John Kernan Mccalley. Your line is now open.
Just to kind of new so maybe I mean.
Hey, guys. Good morning, sorry about that congrats on a net groups at a tough environment.
Good progress.
So thanks, Steve could you walk through the channel assumptions.
And maybe even the geographical assumptions embedded in the revenue.
Outlook for the back half a year.
Between DTC and wholesale and then also in North America International.
Yes, I mean at this point kinda like we said on our prepared remarks. It is very fluid still really trying to understand.
How this pandemic is going to impact region by region channel by channel up there is going to be increased outbreaks or not is is not easy to to be able to drive through so.
We're not going to give detailed outlook from that perspective.
Again, we continue to.
Be very excited about the momentum that we have on the DTC front, especially E com.
So you would probably.
It's probably safe to anticipate that we'll be able to drive DTC.
Little bit better than wholesales, we've run through the back half of the year.
But we are being cautious we are trying to be as prudent as possible and then just as a reminder.
With the amount of inventory production that we cut back on.
Early on as we saw the impacts of coated in estimating what that would be to demand that means that we could have supply constraints in the back half of the year, if things actually go more favorable than we currently anticipate.
But at this point, we're not giving detailed region by region or channel by channel guidance for the back half.
Got it. Thank you and then maybe just a follow up on.
International obviously, if we go back to the Investor Day in late 2018 International is a big.
Hotline opportunity and margin opportunity it looks like international space.
A much more difficult margin.
Profile in the first half of this year than North America, how do we expect international profitability to fit into your overall.
Outlook in the back half a year and that will that continue to face more more headwinds from a margin standpoint than North America.
I think that the easiest way to price summarize that is our strategy in our belief in our long term plans and the increased ability to drive a lot further into all those opportunities internationally and become much more profitable internationally all remain the same.
I would say that I'd be cautious in looking at 2020 as a year to base anything off of it is such an abnormal year relative to the cobot impacts how each of the regions are dealing with that how we're working with our account base.
How we're focusing so much on DTC, but I think as we move forward into 21 and beyond.
You can expect us to continue to drive international growth with a massive amount of opportunity that we still have there and continue to be much more profitable in future years from an international perspective, which is going to helping a lot of ways. So I wouldn't look at the first half as an indicator.
I would but in our minds, we're still sticking to the plan, we believe in that plan and the opportunities are still there.
That's great. Thanks, guys best of luck.
Our next question comes from Jason Yes. Your line is now open.
Great. Thanks, So much Patrick I was just ask you about your wholesale channel distribution. If you just take a step back how does that pandemic impact your view of how you'd like to see the companys wholesale channel distribution, maybe evolve over time and how do you feel about the number of brand houses that you currently have in North America would you see an opportunity to increase that.
Or you pretty happy with where it is and then secondly for Dave can you just sort of clarify your views on gross margin for the second half. The year are you, saying that the pressure that could happen from the very promotional environment will result in overall gross margins being down year over year or is there isn't a piece of the overall gross margin picture, where maybe some other components like mix or whatever.
Good havent been offsetting effect on gross margin. Thank you.
Hi, Jason I'll kick it off in terms of how we think about that always come back to the consumer Centricity idea again right. I mean, we're so focused around how the consumer prefers to engage with the brand and what makes sense for the consumer that ultimately that's going to guide how we think about our distribution.
And again, we're all we're on a.
Trajectory here too to rebuild and more of the premium approach for the brand in general that's where we're playing that's how we look at ourselves that how to consumer looks at us. So so ultimately that will guide our decisions, having said that do we believe that there's going to be some contraction in terms of.
A wholesale distribution in general and yes, there will be winners and losers for sure in this marketplace and and.
We will make.
For sure. So there's some adjustments in how we think about our distribution going forward based on how we see the brand continuing to make to make progress going forward. So we've already talked about the liquidation channel here a little bit today.
I think there are other areas that we're looking at tightening up a distribution that makes more sense for us going forward as it relates to our own direct to consumer.
Yes, absolutely, we believe that Theres, an opportunity for us to open more full price price retail actually around the world. We still have a fairly small amount of full price stores.
And I think it for us.
That.
It is an opportunity and we're doing that through the the initiative of the new store concepts different store concepts to be able to address that.
So so.
Ultimately, it's an omni channel fulfillment model that we're building towards that is going to enable us to better engage.
And meet the end consumer expectations. So Dave do you want to add a little bit of color around.
Gross margin.
Yes, I mean relative to gross margin, there's definitely a lot of uncertainty there we're doing our best to try and kind of read the tea leaves and see what we think is coming.
But as we look at about the at the back half for Q3 Q4, Yes. We do think there is going to be a pretty promotional environment out there with a lot of the.
A lot of the brands moving through a lot of inventory. So we are expecting that to be a pretty big impact negative year over year for Q3 in Q4.
And then the other piece again is the fact that our third party off price again, even though a lower mix of our business. This year and we're continuing that journey is all back half weighted and in addition to that being back half weighted which creates gross margin pressure in Q3 in Q4.
We also anticipate that the pricing on that off price channel liquidation could be a little bit lower as well.
Based on all the inbound they might be getting from various brands. So those are the two biggest pressures we see in Q3 in Q4 gross margin.
And yes, we do believe that that that could drive the full year to be down year over year from gross margin.
Basis point perspective for us.
Got it okay. Thank you so much.
Our next question comes from Paul Trussell with Deutsche Bank. Your line is now open.
Good morning.
I wanted to circle back to the topline.
Is there any additional color you can give on how you exited.
To Q and some of the momentum you saw into July.
Maybe discuss overall E commerce growth well the response that you saw.
On the Chinese consumer versus.
That of the European and North America consumer Thank you.
Hi, Paul This is Patrick I'll kick it off and on handed off today like I.
You know it's interesting when you look at what's going on in the World right now and I think that.
The current environment is really what's driving a more conservative view from us because of the variability in demand that we see developing what I mean by that is there is there's a pockets here and there were things are opening up closing down and it's going to continue to happen. We believe in the back half of the year at least in the foresee.
Double future what that actually means at is is I think really hard to predict right now because there is a general a sense of encouragement, but at the same time very inconsistent so for us.
When we think about what we see in China that is really two months ahead of the curve of the rest of world certainly the consumers come back in and a shopping again, but but the traffic levels are still not back to where they were before they consumers has to 10, but when they do shop, they convert better which is generally.
What's happening across the world. So most of our stores as we said in our script is all our open now but traffic has hasn't returned to the pre coated levels anywhere in the world Yep and and you know a it continues to be inconsistent so.
Yes that means it is appropriate to take conservative view going forward because I don't believe anybody can reading the tea leaves right now so.
That's how we're thinking about our business and Thats how were managing it.
Dave you Okay understood.
Okay.
Our next question comes from Kimberly Greenberger with Morgan Stanley. Your line is now open.
Great. Thank you so much Patrick I just wanted to follow up on your.
Marketplace management commentary I'm wondering if you're thinking of refining or maybe reducing your wholesale partner list, particularly here in the U.S. and then I'm just a follow up for Dave on inventory when you look at the back half of the year in this year.
Is it possible to quantify how much.
Much you had reduced receipts in the back half of 2020 as compared to the back half of 2019. Thanks. So much.
Okay, well I'll start with the marketplace. Thank you Kimberly for your questions.
I think the what you're seeing right now playing out is as I said before you know there there are winners and losers and you know our job I think is as we build a build the brand stronger is to make decisions that you know our or considering that so.
We will try to win with the winners that's the approach that we're taking but it's got to be done in a brand right way for US right. So we've got to be able to.
Grow our brand our presence stronger wherever we're being distributed and Thats part of our growth strategy going forward and we'll make the appropriate decisions based on based on where we feel it as it has the right place to be.
And I think the market put you see now is kind of self regulation going on and the consumer will ultimately also help that because of traffic and the inconsistency that you currently seeing so we'll look continue to see we believe this play out in the back half of the air in terms of winners and losers, but no. Our aim ultimately is to have a destroy.
Fusion that reflects our brand and the opportunity and ultimately we'll do that I understand the consumer and better. So Dave do you want to pick up on that yeah, Kimball relative to the inventory in production.
We haven't given year over year back half changes in in production levels, but we.
We did mention that 30% that that in April and May we were pulling out of production for this year versus our original plan.
You know when again, we'd also mentioned that you know DTC is probably going to be in a little bit better place for us than than wholesale where we're making sure that we're planning our business very very cautiously.
We think we have the right inventory levels in bound to meet what we think is the adjusted Cobot 19 demand.
But again, there's just there's a lot of uncertainty so it's difficult to really call the ball there.
But we think that we've lined up the production reasonably well with with demand and we did that very very quickly to try and get ahead of it and also to make sure that we weren't leaving our inventory vendors hanging we wanted to make sure that we were adjusting things well ahead of time.
To make sure that they could adjust for that themselves. So it's been a collaboration with our vendors.
Great. Thank you.
Our next question comes from Brian Nagel with Oppenheimer. Your line is now open.
Hi, good morning, Thanks for taking my questions.
Morning.
So all merge maybe a couple of questions together, but clearly a very very fluid environment, how how are you thinking about or.
Dealing with.
Back to school.
And then the second question I have bought to talk of price promotion the potential for price promotions in the back half a 20.
Right.
Are you see price promotions now is that a factor now is that something more years anticipated within the channel. Thanks.
Yeah. Thanks for that question. That's really good question, Brian I think that's one one that would all we're all really of trying to understand at this point, we're kind of in some states in North America right now in back to school timeframe and and.
I think the question here.
Couple of different things play into this the first is our schools going to be open second is our sports going to be played for us specifically as it relates to under armour and and there's a lot of uncertainty about both of those and I think we think that this will affect the shopping.
Behaviors to some extent of back to school.
Sometimes it could be a sport, sometimes it could be a category.
Little early to be able to give you color around that but I can tell you that and that is an unknown in the marketplace right now so it could be that what happens instead is that people become more weather.
Inclined in terms of shopping potentially.
So so it's hard to tell you know it's still so early in the season that we don't have any really good reads on it yet but.
It's going to be different that's one thing that certain Dave.
And Brian I think relative to price promotions so far.
We experienced some of that in Q2 already as we mentioned in our in my gross margin walk.
Versus prior year, so where we already saw some pressure from that in Q2, and we expect to see more pressure from that as we go through Q3 in Q4.
As more of the doors are open and more people are trying to push through inventory. So.
Again, we're seeing some of that and we expected to increase more as we go further into Q3 in Q4.
Got it I appreciate the color. Thank you.
Welcome.
My last question will come from Chris Svezia with Wedbush. Your line is now open.
Hi, Thanks for taking my questions I Hope you all well I guess just to go back to you for you just on SG nine one moment I'm just curious.
You expected it is actually increase year over year in dollars are just starting to increase relative to trend lines that you saw in the second quarter, maybe more specifically where are those since you know dollars or go into more more specifically into the back half.
Yeah. I mean, you know we are expecting to manage has seen a down year over year, but again, there's a lot that's going on there. We are working through a lot of different reductions that we started in Q2 and that we continue to work through around how we approach.
Incentive compensation, how we approach.
Capital expenditures and the depreciation from that obviously, we've been very strategic in how we go about our marketing and that was definitely lower in Q2. So there's a lot of work behind the scenes were also driving through all the restructuring efforts as well and again, we're excited about the fact that we were already down that road in January.
Texturing plan, it could really leverage the expertise and the momentum from that.
During this call the period to make sure that we continue to dig deep too to get our cost structure into a better place. So.
A lot of work still to do you know, we're not we're not happy yet where we are to be honest.
We do see SGN, a being higher in the back half than the front half, which I mentioned again a lot of that is continued marketing investments that Patrick mentioned and feeling really good about the return on those investments and the prioritization of those investments.
Which are a lot focused on brand and a lot focused on digital.
You know, but also with DTC ramping back up and having so many stores closed in Q2, there's a lot of variable as she needed a comes along for the ride with having most of those doors now open and expected to be open for most of the time during the back half of the year. So definitely expecting yes, you may be higher in the back half than.
Got it okay. Thank you and just a housekeeping just on a fifth Avenue store I'm, just curious I know, there's some special accounting treatment for that but just curious if there's been any progress on subleasing that facility and any thoughts on the time horizon on getting that done.
Yeah, we are working through that you know we have some pretty reasonable assumptions in the charge that we took.
In the prior quarter to make sure that we're not going to get really surprised there and we're out in the market. We're working on it nothing big to report yet at this point in time, you know the cobot environment is a little bit of a tough timeline for that.
But we feel optimistic and we're staying at it.
Okay I appreciate that all the best here. Thank you. Thank you.
That concludes today's question and answer session.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect everyone have a great day.
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