Q3 2020 Under Armour Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and.
Welcome to the under armour Inc. third quarter earnings webcast and conference call at this time all participant.
I know it sounds like.
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I would now they can't accommodate speaker today man I make a VP of Investor Relations and corporate development. Please go ahead Sir.
Good morning, and thank you everyone joining us for under armour is third quarter 2020 earnings conference call. The information being made available today includes forward looking statements that reflect under Armours view of its current business as of October Thirtyth 2020.
Considerations for future events that may impact our business moving toward state.
Statements made today 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 of which can be found.
At our web site at about under armour Dot com its.
It's important to note that due to ongoing uncertainty related to COVID-19, and its potential effect on global markets. We continue to expect material impacts on our business results.
With uncertainty about the duration and extent of the virus is immediate and long term impact on the global retail environment.
Content discussed on todays call could change materially at any time.
Accordingly, its future results could differ meaningfully from historical practices and results or current descriptions that estimates and suggestions.
On today's call, we may reference non-GAAP financial information, including adjusted currency neutral items, which are defined under FCC rules in this mornings press release.
May also hear us refer to amounts under U.S. GAAP reconciliations of GAAP to non-GAAP measures can also be found in the press release, which identify and quantify all excluded items and provides our view about why we believe this information is useful to investors.
Joining us on todays call will be under armour, President and CEO, Patrick Frisk and CFO, Dave Bergman.
Following our prepared remarks, we'll open up the call for questions with that I will turn over to Patrick.
Thank you Lance and good morning, everyone and welcome to our third quarter 2020 conference call before we discuss our results I'd like to pass along under Armours, well wishes and the hope that you and your loved ones are staying healthy and safe during the ongoing cold at 19 pandemic.
For this and many other reasons 2020 has proven to be a challenging and transformational year for under armour in an uneven global economic environment. We've continued to make tough decisions across our business to ensure that our base is stable and we have the agility to return to profitability in the near term over the long term we are confident that the actions we have taken.
Have created an operating model that we believe can deliver consistent value to our consumers and customers as well as sustainable returns to our shareholders.
Backed by a stronger foundation enterprise level discipline, and green shoots across many areas of our business. We believe that we are well positioned to compete for premium brand right growth as we work to fulfill our mission vision in 2021 and beyond.
In this respect you've heard me speak many times over the past year about our mission vision and values diesel.
These elements unify our global culture, there why we are here and what we do what we do our north star and Excitingly as we work to close out this body of work and install the final cornerstone of our re imagined house, we are shifting to become a purpose led organization.
In our transition from being product driven to purpose led we didn't have to go very far to find our purpose.
At the intersection of our distinct strengths and then obsession with improvement under Armours purpose is we.
We empower those who strive for more.
For those who show up with relentless persistence day in and day out to train compete and recover pushing themselves past the limits of what they thought was possible and being just a little bit better than they were before this is why we exist and why under armour athletes know we've always got their backs.
With 2020, nearly complete I am proud of our team's work and believe that the critical mass of our transformational challenges behind us.
Our target consumer and operational playbook are well defined and understood.
While I lead the financial details of our quarter today, our third quarter results are tangible evidence of the progress we've made with our business to be sure. We have more work to do and of course it remains a highly uncertain environment with a pandemic so to that effect, we're staying focused on the things. We can control. This includes four key areas.
We will fortify our company and a power ambitions as a premium athletic performance brand.
First is continuing to strengthen the brand through increased engagement, then consideration with the focus performer second or further refinements to our operating model to drive efficiency across all end to end processes for our consumers and customers.
Third is prioritizing a direct consumer focused approach to elevate our brand experience and deepen our correction with under Armours consumers.
And finally through all of these efforts were continuing to amplify our discipline around profitability to drive sustainable shareholder value over the long term.
Starting with strengthening the brand our global brand marketing platform and the execution continues to fuel a well orchestrated singular voice that is driving greater engagement and consideration among folks performers.
We are successfully activate your assets more effectively across physical and digital touch points.
Allowing for more personnel personalized activation through a sharper data driven point of view.
A couple of areas, where this momentum is showing up in our womens and footwear businesses two of our largest long term growth opportunities.
Taking a moment to touch on each of these I'll start with our women's business.
Within our train category for the quarter key innovations like the Infinity broad Meridian Pan showed continued strength, making the case for the most popular under armour women's products of 2020.
Within footwear authenticating ourselves as a premium player remains paramount to our long term success.
By more deeply understanding analyses performance journey, whether it's training competing or recovering our innovation pipeline and ability to elevate our offerings continue to fuel our product engine.
One highlight on the quarter was the launch of our first ever women specific basketball shoe the UAE hover break through to date, it's been well received in the marketplace and demonstrates our commitment to delivering innovative performance solutions for the focus performer.
We're also very excited about the upcoming launch of the create basketball shoe, which would be the first footwear to feature under Armours newest and fourth christening platform you way flow.
The most technical cushioning offering an under armour is history, you way flow performs precisely as it sounds fluid light an unfailing as it eliminates all distractions for the athlete by using a revolutionary material and streamlined the sign that removes a typical rubber outsole in translation the UAE flow technology allows us.
To create our most obedient and highest traction footwear yet.
You really flow is also set to launch and are running platform in early 2021 as under Armours, most pinnacle running footwear expression yet we're very excited about bringing this innovation is running as we believe it will help strengthen our consideration among consumers while elevating our premium performance positioning.
And finally, I would be remiss not to mention our connected footwear platform, which a couple of weeks ago hit an incredible milestone, surpassing 1 million pairs of shoes that have been connected to our map my around App. This is an accomplishment that we are incredibly proud of as we drive deeper into the intersection of data connectivity product and experiences.
Turning to our second area of focus I'd highlight our operating model evolution.
Throughout 2020, we have continued to refine how we work to ensure we are appropriately position from a strategic operational and financial perspective for the size company. We are today, while being set up to scale responsibly, along with future growth. All of this of course is centered around an absolute focus on profitability.
And with that our improved go to market process and highly disciplined inventory management has afforded us flexibility as we navigate these uncertain times, including dynamic changes in consumer demand in.
The third quarter demand proved to be much higher than we had anticipated, especially in North America.
Fortunately, our second quarter carryover product, meaning inventory that went unfulfilled due to store closures during that period allowed us to meet part of this unexpected demand.
Additionally, inventories sold through at lower than expected discounts and markdowns. These factors helped us.
Post flat revenue results in the third quarter versus our previous expectation of being down 20% to 25%.
Looking at the balance of the year as we stated in our last call we cut our inventory purchases by about 30% for the back half of 2020.
This along with more planned spring product deliveries in early 2021 versus late 2020, and a few other drivers that Dave will detail means we continue to expect topline headwinds in the fourth quarter that said our fourth quarter outlook has improved from our July thirtyth expectation.
As we turn into 2021, we're also focused on prudent marketplace management and working proactively to ensure that we show up in distribution that is brand right profitable and capable elevating the under armour brand with folks performers. Accordingly, we have begun identifying certain on differentiated retail partners prime.
And in North America to more meaningfully reduce our wholesale footprint, starting next year and into 2022 and beyond to be clear wholesale remains a crucial part of under armour is future, but as the broader retail landscape continues to evolve so must we.
Switching gears to our third area, which is prioritizing a direct consumer focused approach.
Our efforts remain centered around becoming a best in class retailers capable of providing a premium under armour experience whenever and wherever consumers directly engage our brand.
Starting with the E Commerce, which continues to be a bright spot. This year, we saw more than 50% growth globally during the quarter and now with the majority of our global ecommerce sites on one scalable platform. We are working to unlock more robust functionality to power our CRM efforts to help us drive more resonant and personalized interactions with our consumers.
In our brick and mortar business, we continued to make progress in evolving our store concepts towards more scalable brand right and profitable formats, while continuing to invest in the capabilities needed to operate as a best in class retailers.
Across our company, we are holistically embracing a direct to consumer focused approach obsessing every moment along to consumers brand journey to help us make better decisions to drive greater relevance and connectivity.
Taking all of these strategies together brings us to our last priority, which is an ability to deliver sustainable brand right profitable growth and therefore returns to our shareholders over the long term.
It's well understood throughout the organization that we must empower our earnings potential as one of the most essential elements of our investment thesis.
As we sit here today I believe that our operating model transformation driven by brand elevating strategies centered on the focus performer and an increasing the more appropriate cost structure is strongly aligned with our long term goals.
Now before handing it over to Dave I'd like to touch briefly on another announcement that went out this morning related to our decision to sell myfitnesspal platform, which is the largest part of our connected fitness business segment.
My fitness Pal has an impressive record of innovation and strong user growth that has enabled it to sustain its leadership position and scale as one of the world's most popular food and fitness tracking apps. However, as we work to more sharply define our strategy over the past few years. It became evident that my fitness Pal did not fully align as a core.
Asset with our target consumer needs to focus performer.
In this record from an under armour perspective, we believe this divestitures sharpens, our long term digital strategy by simplifying our consumers brand journey and increases our ability to better harness the power of Mapmyfitness platform as we work towards a singular cohesive ecosystem.
From an myfitnesspal perspective. This move provides an excellent home for the brand and its passionate team mates with a new owner, who will holistically focus on driving that business going forward and with that I'll hand, it over to Dave.
Thanks, Patrick considering the current uneven economic environment all in all I'd say, we executed well in the third quarter as we work to meet higher than anticipated demand let's.
Let's take a look at how we did starting with revenue.
Third quarter revenue was flat at $1.4 billion compared to the prior year, which came in better than expected due to higher than anticipated demand across our wholesale and DTC channels.
From a channel perspective, our wholesale revenue was down 7% lower sales in North America, where the primary driver of this decline despite performing better than our previous expectations due to higher than expected customer demand.
Our direct to consumer business increased 17% driven by continued strength in our ecommerce business relative to our previous plan, we experienced better than expected traffic trends in our ecommerce business.
Our licensing business was down 15% driven primarily by our license business in North America.
By product type apparel revenue was down 6% driven primarily by declines in our team sports and train categories.
Footwear was up 19% driven by considerable strength in our run and train categories.
Finally accessories was up 23% with all of the growth being driven by our new sports masks, which we just started selling in the second quarter of this year.
From a regional and segment perspective third.
Third quarter revenue North America was down 5% driven by lower wholesale revenue due to ongoing impacts from COVID-19, and reduced off price sales.
These headwinds were partially offset by strong ecommerce growth in our DTC business in the quarter.
In EMEA revenue was up 31% driven by growth in our wholesale business as some shipments with distributors shifted from Q2 into Q3 due to the impact of COVID-19.
Additionally, we saw solid growth in our DTC business.
Revenue in Asia Pacific was up 15% driven by growth in both wholesale and DTC.
In Latin America revenue was down 15%.
Driven by continued negative impacts from the COVID-19 pandemic.
As of September Thirtyth about 80% of locations, where the brand is sold had been reopened in this region. However.
However, within DTC, our E commerce business delivered very strong growth for the quarter.
And finally, our connected fitness business was down 6% due to a onetime development fee recognized in the prior year's quarter, partially offset by higher subscription revenue in the current year's period.
Third quarter gross margin was down 40 basis points to 47.9% due to approximately 130 basis points of negative impact from COVID-19 related pricing and discounting.
In about 20 basis points of negative impact related to product mix as our footwear business skewed higher as a percentage of total revenue.
These items were partially offset by about 60 basis points of supply chain benefits, primarily driven by product costing improvement.
And 60 basis points of positive channel mix, which benefited from lower year over year sales to the off price channel as well as increased DTC mix.
Relative to our previous expectations for gross margin in the third quarter. Our results were significantly better than expected as we experienced higher than anticipated demand, which allowed us to sell in and sell through with considerably less discounting and markdowns than we had initially anticipated.
SGN expense was generally in line with last year's third quarter at $554 million.
In the third quarter, we recorded $74 million of restructuring charges and certain impairments related to long lived assets.
As a reminder, we expect to incur a total estimated pre tax restructuring and related charges under this plan in the range of 550 to 600 million primarily in 2020.
Year to date, we have realized $410 million in restructuring and related impairment charges and $140 million from impairments of long lived assets and goodwill.
We continue to expect about $40 million to $60 million of related savings for the full year.
Our third quarter operating income was 59 million.
Excluding restructuring and impairment charges adjusted operating income was $133 million.
After tax we realized net income of $39 million or nine cents of diluted earnings per share.
Excluding restructuring charges as well as the noncash amortization of debt discount on our senior convertible notes and deal costs related to the planned sale of my fitness Pal. Our adjusted net income was $118 million or 26 cents of adjusted diluted earnings per share.
From a balance sheet perspective, we ended the third quarter with $866 million in cash and cash equivalents.
No borrowings outstanding under our $1.1 billion revolver.
And finally inventory grew 17% ending the quarter at $1.1 billion.
Turning to the balance of the year I would like to take a moment to provide some color on our fourth quarter expectations.
In the fourth quarter, we expect revenue to be down at a low teen percentage rate.
This outlook reflects meaningful improvement from the previous expectation that we gave on our last earnings call driven in part by the more robust consumer demand trends, we experienced in the third quarter that have continued into October.
With that being said in addition to ongoing general uncertainty around COVID-19, there are a few areas, we see as revenue headwinds in the fourth quarter.
First as mentioned on our last call timing impacts from COVID-19 related to customer order flow and changes in supply chain timing is expected to result in more planned spring product deliveries in early 2021 versus late 2020.
We anticipate this change will negatively impact our fourth quarter by approximately nine percentage points compared to the prior year fourth quarter.
Additionally, we expect our fourth quarter licensing revenues will be down about 50% due to significantly lower contractual royalty minimums, along with contract settlements meaningful in last year's fourth quarter on a comp basis.
Finally, as we continue to manage the marketplace with a keen focus on brand right premium growth.
Lower year over year sales to the off price channel will also serve as a revenue headwind.
That said, we now expect off price as a percent of global revenue to be approximately 4%.
For the year.
Which is at the lower end of our previously disclosed range so excellent progress there.
While promotional activity levels in the fourth quarter have improved relative to our prior outlook. We continue to expect them to be significantly higher than last year as such we believe this will put meaningful downward pressure on gross margin in the fourth quarter.
Now before transitioning the queue in a while.
While it is not our typical practice to provide color for the upcoming year on this call we would like to make a few initial observations about how we see our business developing in 2021.
Of course, all of this is predicated on our business continuing on the same general path and macros that we've seen most recently and moving them forward into the new year.
Meaning we're assuming no major retail or other business shutdowns or other adverse economic impacts related to any accelerated COVID-19 flare ups.
With that said from a revenue perspective, there are a few things that we currently anticipate will serve as headwinds in 2021, as we work to drive premium brand right growth.
First is the sales my fitness Pal, which today represents nearly all of the connected fitness segment revenue. So following the close of that deal that revenue goes away completely.
Second as we alluded to earlier, we will begin to exit certain undifferentiated wholesale distribution, primarily in North America, starting next year.
And over the next couple of years, we expect to more meaningfully reduce our overall north American distribution points by about two to 3000 doors. So heading towards about 10000 doors by the end of 2022 in our largest region.
And finally within DTC, we continue we plan to continue to pull back on promotions and discounts to drive our premium brand positioning, which we expect will result in some near term implications on topline results.
Yet continue to support healthier margins as well.
Next when framing up gross margin and SG nay.
It's still too early for specific color, but given our expectations around improving quality of revenue and our disciplined focus around cost management, we expect to have more agility and the interplay of these line items to manage our bottom line better as the year develops.
And with respect to our bottom line and arguably one of the most critical parts of our turnaround.
We have line of sight to delivering slightly positive earnings per share in 2021.
In closing.
We're proud of the progress we've made and to reiterate once again, we believe that the critical mass of our transformational challenges is behind us at this point.
That's not to say, we necessarily expect smooth sailing from here on out but from a strategic operational and financial perspective, we believe that we are better positioned to capitalize on our strengths moving forward with.
With that we'll turn it back to the operator for your questions.
Thank you as a reminder to ask a question you need to press star one on your telephone so let's try a question press the pound key to stand back as we compare the Q and analyst day.
Our first question comes from regimen.
Capital markets. Your line is now open.
Hey, good morning, and thanks for taking the question guide.
Patrick as you start to you clearly rebase the business built the healthier base of business and are now kind of seemingly orienting toward growth long term are there particular categories that you think are well suited for this focus performer, where we should start to expect some outside growth and then also as you introduce this new cushioning technology is this is this.
Product that will be at scale next year or is this a pinnacle product that will take a while to work through the lineup. Thank you.
Yeah. Good morning, yes.
As it relates to the categories that we are looking at.
To be our growth drivers so to speak going forward. We still believe that there is a tremendous amount of opportunity for us in our some of our core team sports and men's training category, but what we've seen this year that we're very excited about as is the energy in our in our women's business.
We have a number of different products, both in apparel and footwear that are working very well for us now infinity brawl fly by Schwartz and Meridian pounds Meridian infused.
The marketing issue for women, the Phantom to us etcetera, etcetera. So so we see definitely women's continuing to be a big part of our growth and footwear footwear is going to continue to to help drive the growth going forward and as you talked about and the platforms. We now have four plan.
Forms in the marketplace and they all play a role.
And in terms of how we think about the positioning of the brand and I'm one of the things that were very proud over the last three years to have accomplished is really the ability to start to build franchises and you've seen that through our hub or franchise flow will be another franchise that sits on top of hover at a at the most pinnacle expression of the brand.
Thank you.
Thank you. Our next question comes from Randy Konik with Jefferies. Your line is now open.
Yes. Thanks, a lot. So I gave you gave us good perspective on.
Reducing the wholesale doors I guess my 10000 by 2022. So it's just a medium term what's the what should we be thinking about again from a mix perspective on revenue by wholesale versus E com versus.
Our directly owned stores, how do we think about that and how do you think about that impacting obviously should be a positive margin shift, but how significant can we expect that to be over the medium term.
Yes, I mean, we're not at a point, where we're going to give a lot of details as we go into 21, we're just trying to stay high level, we still got a lot of work to do to fine tune next year, but we are looking as a company to lead more from a DTC approach focused on consumer Centricity to drive best experiences unlock potential full price retail.
Leverage factory house for inventory management et cetera, and definitely invest in digital across owned and wholesale partners. I think one thing that's a little bit tricky for us, though to remember is even though we're going to be focusing a lot on DTC.
The model branded stores and APAC are mainly partner owned and that runs through our wholesale revenue.
So from a mix of DTC to wholesale you may not see a significant change in the coming years, but the actual mono brand stores and kind of full view of the brand in those stores will increase.
As well.
Got it last one more question.
Sounds like Patrick you'd be you'd be much more bullish on.
The wins that you're seeing late in the aluminum business, what's kind of been the breakthrough there have been more marketing or just noticing on the product and then just related then just separately as well.
On the mass side as an owner how many now are you seeing loss also helping to drive a possible within the E. Commerce business, we saw a lot of growth in the quarter and how we should be thinking about lost at least for the foreseeable few quarters, helping to drive.
The channels of distribution and a constant going forward. Thanks.
Okay. Thanks, Thanks, Rami, so I'll start with the slow with women's and then I'll switch over into the Max masks, you know with womens. It did its a result of what we've done starting to at the beginning of this year remember again 2020 was the first year that we were able to fully deploy our go to market strategy across.
All categories are the brand.
But but more importantly, with it with a very strong singular message that we knew was going to resonate with both men and women.
On the back of that we also knew that we had better product that was delivered on time and with the right marketing. So this is really what you're seeing is our is our go to market.
Really starting to fire.
Fire and.
As it relates to women.
We have been as I said before successful across many different products.
So it isn't just one product here or there it's the entire head to toe approach.
And ultimately it is execution through our go to market that you're starting to see Si play up and its been consistent through the year. So it isn't something that just started lately. It's it was there in spring and summer. It's now they're in fall and we believe it's going to continue into next year and.
You know I think for US women's is definitely one of the growth engines, but it's really nice to see how our brand is now resonating across both genders.
The mask.
As an interesting.
One for us because we decided very early on that the mask was going to be something that we made for athletes. So our approach to go with the mask and make it a sports mask and actually marketed as some as a tool that you use when you're working out has been the differentiator for us it's a high quality product that with high functionality.
Great fit and now also with a number of different colors and then last one that we were just released with the rock has been really successful as well, which is more kind of an upscale version if you like or the mask. So for us we're going to be looking at that as a as a segment in itself. You. If you if you like inside of assessors, where we have more products coming out around that.
And in terms of whether you're able to convert the people that are coming onto our platforms by just the mask. That's one of the things that we are working to do based.
Based on the new E Commerce platform that we have and the capabilities. We are building with CRM and loyalty so big opportunity there for us going forward.
Thank you.
Thank you. Our next question comes from Simon said go with BMO capital markets. Your line is now open.
Thanks, Good morning, guys really nice progress great job.
Patrick as as you as you guys continue to elevate the brand can you speak to how you're thinking about you are opportunity from here. It doesn't have to be next quarter, but just as you're thinking about where that opportunity lies and then Dave along those lines any help on taking a step back and thinking through the longer term EBIT margin recapture opportunity. Thank you.
In terms of in terms of.
One of the things that we're very proud of this year is that we'll be able to grow our margins in a year, where we're taking a lot of revenue out of the top line and and to be able to do that you've got to be able to command a price for your product.
And were clearly able to do that with less discounting and more premium pricing more premium positioning.
In some of the areas that you are seeing that especially I would say is in our footwear. This year. We've launched that we started by launching the mocking already India, which was a big success for us our highest price running shoe ever at a $150. We actually then came in with two more $150 shoes defense and two in the PR three.
Rock training shoe all of them selling through really well so for us being able to now compete at that premium level also in footwear and in combination with less discounting and more premium across the board.
It's going to help drive.
Everything up for us and the most important bellwether. There of course is the margin something we're very proud of maybe you want to add some color on that Dave, Yes, I think relative to longer term EBIT.
We're excited about kind of returning to that long term profitable growth journey next year and.
And we're going to keep marching forward, there's there's a fair amount of opportunities across all fronts. As we think about gross margin with the business going forward.
Relative to DTC mix relative to running a much healthier percentage of of off price channel sales.
And overall, just continuing to execute so much more cleanly than we may have done in prior years.
Then as far as you know wrapping up this restructuring plan. We're very excited about how deeply we have been able to go and how well we've been able to transform our operations to be more effective and efficient and be able to dropped off without more next year and into the next few years after that so.
You know from gross margin percentage to estimate a percentage of revenue where there's opportunities across the board. There. So longer term. Our absolute plan is you know to March that up to 10% plus which year. We hit that is something we will get to at our next investor day, but we're excited about the progress we're making in stepping into next year.
Great. Thanks, a lot nice job in the best luck for the rest of the year. Thank.
Thank you.
Thank you. Our next question comes from Alex and General Office with Goldman Sachs. Your line is now open.
Good morning, and thanks for taking my question I had another question on the.
Planned to allow to two to 3000 undifferentiated wholesale doors.
Wonder if you could share with us what percentage of North America revenue sales represent and what the profile of those stores are they predominantly small chains ought to change.
Department stores, what did those look like.
Sure Hi, Alex This is Patrick so for for the next couple of three years, we will be it will be a work in progress.
And it will be across.
And every size of customer I would say I know part of it is larger customers. Some of it is the tale that you're cutting.
Ultimately for US it's important that our brand shows up the right way and that were able to drive the brand. The way that we feel is the venture be driven and that will be the approach that we take.
That's very clear and then my second question is related to E. Commerce, you continued to see strong growth in that channel.
It continues to be a priority.
I Wonder if you could update us on where we are in terms of profitability about channel and what the.
Estimates need to be made in the offer that.
Yeah, I'll start and then I'll hand, it over to Dave.
One of the great things that we were able to accomplish in this quarter I'm very proud of this we were able to switch over from our aging very aging something that we actually put into the market in the early two thousands our old homegrown platform onto our new E. Commerce platform that we had already been running for a few years in Europe, we did that in July.
Hi, without missing a heartbeat and.
Very proud of the ramp down ramp up to only seven days team did a phenomenal job.
The benefit of that is that we're now more or less on one platform around the world apart from China.
The second benefit to it is that we will be able to.
Benefit from of course best practices across the world, but also an ability to merchandise and ultimately drive our new CRM and loyalty programs onto that platform as well and which has the added benefit that is something that will start to happen throughout 2021.
And will ramp as we get get into the back half of the year, Dave do you want to add some yeah I'll just add a little bit I mean, we were super excited with how well the new platforms performing and globally, having growth over 50% in E. Com in Q3 is a great Testament to that to the team has done just a phenomenal job cross functionally on standing that up in and around the world driving.
Forward on that platform.
And we expect that to continue to be a strong growth area for us in Q4, as well and as we move into 2021 and to Patricks point I think the key investment areas that we've been really really diving into a little bit last year a lot. This year and continuing into next year is on the CRM front the personalization from the loyalty program front, where we are.
Going to be rolling out various pilots around the world and then expanding it globally and then also overall just really expanding.
Our omni channel capabilities, as well and leveraging and come through that also so lot of fronts that were investing their digital is a massive area of opportunity for us. So we're excited about it.
Thanks for the color.
Thank you.
Next question comes from Matthew Boss with JP Morgan. Your line is now open.
Great Thanks, and congrats on the progress.
Thank you Beth document.
Patrick maybe just to circle back on North America, and not to beat a dead horse here on the 20% door count that you guys are making and maybe just size that up relative to the 3.6 billion dollar revenue base. In 2019 is it best to think of that revenue base in North America now is at peak or.
How best to think about the market size, you're targeting by the end of 2022, I guess really the question is about the sales transfer you see as you've caught these doors relative to direct to consumer growth.
Yeah, I think first of all I just want to make it very clear we're going to grow in North America.
I think thats incredibly important to state I think the composition of that growth is going to change over time.
The exact.
The exact measurement of what grows and what what goes back we're not prepare to of course to talk about here today, but we believe that we're going to be able to execute growth with a different mix going forward.
And I think.
We quoted 2000 or 3000 doors coming down but.
And I know you are equating that to a percentage of total doors that we may have at this point in North America, but I wouldn't translate that to a same correlation relative to revenue because there is a big piece of that is that is kind of a tale of a of smaller partners. So yes, we will give more color on that at our next call as well second and I think I would say the other thing is.
And of course, everybody on the call here. There is this overhang hedge for all of US right around coded where what we're talking about here is is.
Pending any massive flat flare ups of coal that around the world right. So that's of course that's of course, an unknown at this point.
Great and then just a follow up on the SGN a front. So you've guided 40 to 60 million cost savings. This year from restructuring as we look to next year, you've said expect multiyear cost savings I guess, how should we think about SGN a next year into.
In terms of flow through versus reinvestment would SGN $8 next year be down year over year.
At this point.
We're not really to give ready to give a lot of color on next year. I mean, we led in here with a little bit of tidbits just on on top line to be able to frame things up for you, but as far as more detailed down below the line items, we want to be careful there it's still early.
You know to your point, we are looking to invest in certain areas on the digital front.
On the innovation front et cetera, also with international growth.
But the amount of cost savings were driving out of the restructuring plan will be significantly higher next year than the 40 to 60 million that were quoting this year. So we will absolutely see.
Pretty nice development, there as far as SGN Ada revenue next year.
But whether or not it's going to be flat or grow a little bit or go backwards, a little bit we'll leave that to the next call. That's.
That's great color congrats again.
Q.
Thank you.
Next question comes from Dan Murphy with Piper Sandler Your line is now open great.
Great. Thanks, good morning.
Good question following up on E com that credit that over 50% could you just share how that breaks down by region, and then where do you see that digital mix by the end of the year.
Yeah, I mean, the the E com growth is really broken down pretty well across all of the regions I think that you know we're seeing.
Pretty healthy growth in every single region, there's not there's not one region that is really struggling at all from an E com perspective, especially in this current environment with the with Covance. So we're pretty excited about the investments that we've made there and how well we are moving forward.
And just on the digital make by the end of the year.
We're not actually giving a full kind of digital mix at this point, Okay got it understood and then putting button, but it would be higher okay. That's good and then in the fourth quarter. It was helpful context, I know, there's a lot of moving parts that you gave but I'm curious if you could contextualize a little bit more on your comment on the demand in.
Prepayments quarter today, particularly given the recent locked down in Europe. Thank you.
Sure you know a couple of different things there I.
I think that when we had our last call. We've got to remember back in July we were still getting our arms around the cobot uncertainties and therefore, we were very conservative in that previous planning, we ultimately saw much better demand than expected as did our wholesale partners. So it was both you know on the wholesale front and on our own direct.
Its consumer front, so we had the better sell in better sell through how we were able to use some of the Q2 2020 unfulfilled inventory from the store closures at that point and also this actually ended up translating to less than expected cancellations on the wholesale orders you know even when product was in certain sir.
Stance is slightly delayed due to cove it they werent canceling those orders, which we had anticipated maybe they would and that was because again the sell in and sell through that was going well.
You know and we also did so at meaningfully less discounts and promotions than we originally anticipated from a regional perspective or the majority of the upside in Q3 came from North America, which we mentioned, but also better momentum than expected in EMEA as well. So you know all told as a result.
We have also increased our Q4 expectation from what was originally the down 20% to 25% to to now down low teens, so really excited about the momentum there.
Thank you.
Thank you. Our next question comes from Jay settled with FBR. Your line is now open.
Great. Thanks, so much I want to ask about the comment that off price is going down to 4% of sales could you tell us what off price was at the peak or whether it was you know whatever 2015 16 like what percent of sales at off price represents a b.
Yeah. Jay this is Dave we won't give the exact percentage, but you know it was never exceeded 10% in any of those years. So it was below 10, but certainly it wasn't all the way down to the four that were estimating Atlanta this year.
And do you think that number from 4% can go lower as we go into 21 and beyond.
I think theres, a probably a little bit more opportunity. There you know I think we're getting into a healthy spot here. This year can we can we push it a little bit further next year I think we probably could you know that 3% to 4% range is a pretty comfortable range as we leverage our outlet stores the right way, but make sure we have the right mix of newer products.
In the outlet stores as well just to have a good a good merchandising experience for our customers. So we don't want to overly rely on the off price channel.
So we think that 3% to 4% range is a pretty healthy spot yeah, and I would say just to add on the back of Dave's. If you think about that.
That volume from a brand like under armour compared to other people you know that's that's a that's a pretty healthy mix, we think it's hard to to.
Not not have some of it of course as long as you have a wholesale business and we think that that 3% to 4% is probably the right right number for us.
Got it thank you so much.
Thank you. Our next question comes from Michael Binetti with Credit Suisse.
Hi, This is Nathan.
Hey, guys morning, Thanks for taking my questions and great job on the quarter.
David I guess just high level as we as we look.
Oh, you did over 200 million of EBIT last year sounds like you've got a meaningful quality sales initiatives here that you've got delayed.
Good line of sight on we've seen the impact that can have on margins around the sector based on the early planning you're doing do you have line of sight back to that level of 200 million plus an EBIT in the planning Creed or you referenced the 2022.
So definitely appreciate the question you know we're excited about the future too but look at its early you know we typically don't even speak to 21 on this call and we wanted to give some color. So we've got to be careful there. There's a lot of work still to do were absolutely planning to grow in 2021, where absolute.
We plan to grow in North America in 2021.
And continue to move forward relative to EBITDA dollars and rate.
I think we do need to just keep in mind too as we think about next year at least you know what some of those red revenue headwinds would be as we work to drive premium brand right growth the exits of the undifferentiated retail we talked about.
We talked about also less promotional activity on the DTC front, and then don't forget the sale of my fitness platform. So that means that assuming that that is executed.
Late in this quarter closes late in this quarter that revenue essentially goes away completely next year. So we got to keep all those things.
In mind.
You know as you size up 2021 growth expectations, but you know we're excited to have in line of sight to slightly positive EPS and being back on the path to long term brand write profitable growth and we'll give you more details on the next call a and then longer term at the next Investor day.
Let me follow that on the fourth quarter gross margin guidance I'm, obviously very smart to remain conservative you can given what's going on but it was third quarter much better than you'd feared.
I'm I'm curious you know where you see that the pressure as you look at the quarter and I know some brands said that I'm sure you know see you're doing some of this too but I think you. Some brands have said, they're taking some actions to start showing the customer some holiday type initiatives. Early in October are you seeing promotions in the marketplace ramp at all in your categories.
Yeah, we certainly are and as we look forward to closing out this quarter and.
We do think that the promotional environment is going to be pretty heavy this quarter.
A fair amount heavier than it was in Q3, so bigger pressure in Q4 than than Q3 year over year. We also think that even though we're decreasing off price sales in Q4 year over year, we think the pricing on that off sells off price sales could be challenged based on so many other brands trying to push into.
That channel so that's probably a little bit of a headwind in Q4 gross margin as well plus on the revenue side, you know I mentioned licensing.
Potentially being down 50% year over year in Q4 based on lower MRG fees and some.
Some true ups that were in Q4 of last year that we're comping and that's obviously an extremely high gross margin piece of business. So those three are kind of the bigger headwinds for Q4 with the promotional environment being the biggest.
You know, we'll get a little bit of a tailwind from channel mix with DTC and also the lower mix of off price sales, but also continued product costing benefits that the supply chain has been driving so you know a couple of favorable items, there, but they're going to be definitely more than offset by the negatives I mentioned, especially the promotional environment as far as.
Our current view.
Okay. That's really helpful. Thanks, Thanks, a lot for everything.
Oh.
Thank you. Our next question comes from Kimberly Greenberger with Morgan Stanley. Your line is now open.
Great. Thank you so much good morning.
Wondering.
If you can think about teen sports potentially coming back in 2021.
Is there any way for us to understand that the potential revenue benefit that might carry for you.
And then secondarily I wanted to just ask a little bit about the inventory.
I think you mentioned you cannot fall inventories by.
Around 30% or second half inventories by around 30% and I'm I'm looking at the inventory balance here at the end of third quarter add up 10%.
Is that leftovers spring summer product and what's that that strategy or the plan with any sort of a prior season merchandise that you might have on the balance sheet. Thanks.
Thanks, Kimberly this I'll start this off and will impact Im a little bit here would do it with Dave in terms of team sports you know it's been a it's been a.
No really emotional roller coaster I think for for under armour. The in terms of the support that we have been trying to give to our athletes and teams out there has been really really rough for the athlete going through this whole pandemic and a lot of the kids out there that or they're not able to do their sport to weren't able to do their sport.
So the whole back to school kind of normal normal team sports.
And and seasonality of our all of our business has really been thrown off this year.
I would say, though that some of it has come back a little bit as as we've seen the back half of Q3 and into Q4, but but of course in a totality for a season on this back half and also to a large extent the spring team sports been really influx. We are trying of course to understand what that.
Means for next year, but I think the reality is nobody really knows I mean, the teams are still making decisions as we speak around winter sports and I think it's going to be the same situation when they talk about spring sports later on so.
It's something that we're going to be trying to dial in and we're going to dial it in a little bit later than normal simply because we don't know how.
How how would the yeah. The seasonality of no things are going to play out and I think in terms of inventory I would just say that quality of inventory that we have today is good and then I'll, let Dave Phil.
Fill in the blanks, yeah from inventory perspective, you know we finished this quarter at 17% up which was little bit better than we anticipated because we obviously had a lot bigger sell in and sell through than we anticipated. You know there is a larger portion that is tied to spring summer product you know that we couldn't affect in time from the pandemic that was still coming in in Q2, we.
We're able to use some of that to fuel the Q3 overdrive, which was nice.
We are comfortable though with the mix of inventory you know with demand versus access and our ability to utilize the off price channel to a lower degree and also you know definitely leverage our factory houses for a more broad.
Brand right approach to dealing with that you know there's still a lot of uncertainty out there right now, but we do believe that we'll end the year around 10% growth with inventory.
You know the decision to reduce backup inventory purchases certainly will benefit us as as as we progressed through the quarter, but we feel very comfortable with where we're going to land and being able to address that remaining inventory in a healthy way throughout next year.
Thank you.
Thank you. Our next question comes from Omar Saad [laughter] line is open.
Good morning, Thanks for taking my question nice quarter guys. Thanks, I wanted to ask I wanted to ask about the divestiture of the digital assets.
Maybe Patrick you can put it in context, how the organizations view of how to use digital technology and how to use data has evolved over the last several years and where the focus is now and I also would love for you to touch on the.
New flow cushioning platform, maybe give us a little bit more detail I think it said it didnt need a rubber outsole, maybe a little bit more detail around.
Around that platform. Thanks, sure Yeah, Hi, Omar So first of all you know the the sale of my fitness Pal is of course, something that that we considered at great length, then and the whole idea is really that you know as we get more and more focused and we get.
Dialed into the focus performer it was clear to us that actually the.
The the consumer that was on the my fitness Pal Didnt skew necessarily as strongly towards the consumer that we're targeting and as our other apps did and I'm talking about now Mapmyfitness and next success, we've had there with our connected fitness and connected shoe.
So the decision was was hard but it's the right thing to do because it also enables my fitness Pal to get a great home and for that team to be able to grow their business without having to.
Be under under armour, so to speak so for for the for that team for that business I think it's a great decision for under armour. It's also great decision because we can now focus on what we're been intent on doing the whole time, which is building one ecosystem for under armour.
So for us.
You know that my my math my fitness will be at the very core of that and I was just talking earlier about the fact that we just had a 1 million shoe connected and we continue to see especially through this pandemic an incredible gravitation to do that app and the work that that team is down there has been phenomenal and we think that all the things.
We've learned about while we have owned these apps over the last four or five years has led us to this decision where we now feel that we can accelerate that part of the business and integration to do a better job for the consumer ultimately to connect and engage one thing I'd also clarify an MSP is just that we anticipate closing that deal late in Q4. So.
The outlook that we're giving today for Q4 does include a full quarter of full connected fitness revenue. So it is definitely comparable to Q4 2019, just if there was any questions on that and then Patrick I think there was a question on flow. Yeah. There is I would say that with flow I'm. We're very excited it's right you know, it's it's not a truck.
Additional shoe because we don't actually have an rubber outsole on the shoe. So it is actually one unit and that gives us a lot about advantages in terms of weight, but also the performance of the shoe both in terms of cushioning and.
Well, we would like to call.
Separation ability is going to be like no. Other shoe out there. So there's a lot of advantages that we have in weight and flexibility and in traction that goes beyond anything that we've built before we think is going to be a real advantage in certain.
Certain sports, especially in basketball as you think about separation ability so.
We're very excited about a curve is very excited about it.
We're going to be starting that product in basketball as we said and then we're going to flow into [laughter] running in early 2021, and that's also very exciting for us because it gives us a pinnacle technology and running not that hover isn't doing a phenomenal job for us but this is this is really a a shoe that will give you a super.
<unk> power. So we're very very excited about it.
Thanks for the color best wishes.
Thank you. Our next question comes from John Kernan with Cowen. Your line is now open.
Hey, good morning, and thanks for taking my question Congrats on.
On the quarter.
Wanted to touch on international hasn't come up as much in it was a source of.
Upside surprise for sure in this quarter and.
Appears you're gaining some share in EMEA and Asia Pac or some of your bigger competitors I want to.
Wondering if you just talk to the demand sensing you're seeing there I know there was a shift in EMEA and it benefited the corner, but even with that deals like you had a pretty good quarter internationally versus your own expectations and certainly versus your peers. So how should we think about international in the fourth quarter and then as we head into 2021.
Yes, Hi, John This is Patrick so I'm very proud of the work that the teams have done I think this strategy is the same right. So there is a more premium approach for us both in APAC and EMEA.
It's a very strong focus around the focus performer based on all the work that we've done over the last three years, we are deploying that now into the market with the go to market in 2020, and what's really very good is the fact that the same products that were marketing across the world are working so for example, the maxing out it worked across the world.
The Phantom to work across the world the womens Infinity and meridian pounds to work across the world. So the product teams have done a phenomenal job, making sure that you know our key stories are really resonating across the world. We've also spent the last three years cleaning up the marketing Europe and the team there has done a really good job repositioning.
Brand and doing it from a premium perspective doing it from a from a focus performer head to toe perspective in both men and women that we're seeing now also success in our run category not just in EMEA, but in part an APAC. So having said all that positive stuff I would I would say that in a pack in the back half of the year we have been.
Conservative in terms of opening.
Partner doors simply to make sure that we're doing what's right for the brand in this pandemic.
So even though we had a great performance.
We believe that there is.
Very good prospects for continued growth in the APAC region as it relates to mono branded stores as well as E. Commerce of course, but really what you're seeing play out now is a coordinated orchestrated play with innovation and go to market, playing playing to our strengths across the world and really validating.
And our focus and our approach at a more premium level, so what I'm, especially excited about actually across the world is the quality of sales and that's that's really important to US right now Dave do you want to add something yeah, John I'll, just give a little more quantitative color to your Q4 question. When you think about what we mentioned.
On the spring 21 product shipping more in early 21 versus late 20 that does impact wholesale in a pretty big way as we mentioned and so when you think about international businesses for Us EMEA and Latin America have a bigger percentage of true wholesale so they're definitely gonna have a bigger.
Negative impact in Q4, whereas Asia Pacific, even though it has a big mix of wholesale that that wholesale is really more mono branded stores. So.
So they technically wouldn't have as big of an impact on that spring summer 21 timing shifts. So just to give you a little bit of color you'd probably see more favorable Q4, APAC and more challenged EMEA and Latin America, just because of that flow change.
As we move through the balance of Q4.
All right great best of luck into year end. Thanks. Thank.
Thank you.
Thank you and ask a question will be from Jim Duffy with Stifel. Your line is now open.
Hi, guys nice work.
Thanks, Jeff Thanks, everyone.
Personal for now first of all welcome.
More color on what are you still in other words realigning the cost structure.
Look there's more to come in in 2021, how much of that is just the elimination of the life fitness talent endomondo associated expenses versus incremental labor, particularly interested in your call. It circa 421 about the greater agility on the expense structure.
Or elaborate on what you mean by that.
Yeah, Jim I guess, a couple of things one you know I commented that relative to our restructuring plan, we expect to be able to execute through the majority of that and most of those charges. In 2020. However, there probably will be a little bit of spill over of that into Q1, and maybe a tiny bit into Q2.
Next year, so thats part of it and how well, we execute and the timing of that does impact the ultimate a savings of those activities, but then across the board, we're really really digging deep here and understanding you know each of the details of our cost structure weve been benchmarking it against a three different.
[noise] providers to be able to really triangulate what would be the best.
The goal for us to go after in each of our different spend areas and we're going to continue to leverage that and the discipline into next year. So.
No I'm not necessarily saying, you'll see SG Nay go backwards significantly next year, but you will see us continue to prioritize where we spend and really understand the return on those spends a and b very very diligent in where that goes to be investing in the areas for long term profitable growth and that's that's really what we're excited.
At about and I think when we when we talk about the agility for next year, it's really just stepping back and understanding that you know we have done so much transformational work over the last few years and we're finally getting to the place where those final pieces are coming together and we can start to leverage that operating model in a really solid way going for.
Forward and that's what we're really excited about and so that does speak to the s. una and improving significantly from initiating a percentage of revenue next year, but also you know as far as gross margin. You know we continue to see the benefits of what the incredible supply chain team has been doing relative to working with our vendors.
Ours, and with volumes, increasing being able to drive better costing there better visibility the SKU rationalization work that we've talked about over the last year or so is continuing to come to fruition and in better costing and then continued DTC mix and then also you know we still feel longer term a pack is going to be one of our higher growth regions.
And and APAC is a higher gross margin and a higher.
Operating or EBIT rate a region for us as well so.
Couple of different things going on there, but we think that we're going to be able to be more nimble more Jill agile and we've done a ton also to solidify the balance sheet and be able to drive through there. So we've got we've got a lot going for us as we step into 21.
Just one more quick question on the balance sheet can you speak about perhaps or use of proceeds from the sale divesture and cash flows and how.
How are you thinking about reducing debt balances.
So we're we're going to hold back on that until till the next call. You know we've got a lot of different things that we're working through but at a high level. Obviously, we're planning to end the year a in a very favorable position from both a cash on the balance sheet perspective, and zero continuing to be outstanding on our 1.1.
Billion revolver, and then how we move forward relative to that cash and use of that cash we're going to wait and discuss more on the next call.
Thank you guys.
Yes.
Thank you Jim Jim.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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