Q1 2021 Under Armour Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the under armour first quarter 2021 earnings webcast and conference call. At this time all participants are in a listen only mode at.
After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to Lance of Liga as VP Investor Relations at corporate development. Thank you. Sir Please go ahead.
Good morning, and thank you to everyone for joining us for under armour is first quarter of fiscal 2021 earnings conference call.
Yesterday after the close of market, we announced that we've entered into a settlement with the U S Securities and Exchange Commission resolving of previously announced investigation related to disclosure and the impact of certain pull forward sales for the third quarter of 2015 through the fourth quarter of 2016.
This settlement relates to our disclosures and does not include any allegations from the SEC that sales. During these periods did not comply with GAAP.
The details of the settlement are outlined in our press release, and we are happy to put this behind us.
The information provided on today's call will include forward looking statements to reflect under Armours view of its current business as of May for 2021 statements are made subject to risks and uncertainties that are detailed of documents regularly filed with the SEC and our safe Harbor statement included in this morning's press release, both of which can be found at our website at about at under armour Dot com.
It is important to note that the ongoing uncertainty related to COVID-19, and its potential impacts on the global retail environment could continue to impact our business results moving forward.
We may reference non-GAAP financial information on today's call, including adjusted and currency neutral terms, which are defined under SEC rules. In this morning's press release, you May also hear us refer to amounts under U S. GAAP.
Reconciliations of GAAP to non-GAAP measures can also be found on our press release, which identify and quantify all excluded items and provides our view of about why we believe this information is helpful to investors.
Joining us on today's call will be under armour, president and CEO of Patrik, Frisk and CFO, Dave Bergman.
Following our prepared remarks, we'll open the call for questions and with that May the force be with you and now I'll turn the call over to Patrick.
Thank you Lance and good morning, everyone and welcome to our first quarter 2021 conference call with the continued disciplined execution of our strategic playbook, we're happy with our results, which marks of better than expected start of our year.
As with many companies our year over year comparisons are affected by the significant COVID-19 impacts we experienced in 2020.
Putting these dynamics of side for a moment at perhaps what we're most encouraged to see at this early point in a year.
On a two year stack that is skipping over 2020, we're running a better higher quality and more profitable business.
As even more evidence of course of the strategies, we have employed over the past couple of years, including significantly reduced sales of the off price channel proactive supply constraints against demand signals there.
Early days of exiting undifferentiated distribution and certainly on the on annual basis. The absence of my fitness Pal, which we sold at the end of last year.
By staying focused on athletic performance operational excellence and connecting even more deeply with our consumers. These efforts are beginning to drive more consistent results, particularly in North America, our largest and most challenged business over the past couple of years at the highest level, we are executing well strategically operationally and financially Kevin.
These and other factors, including market dynamics and continued strong momentum in fitness and wellness. We are meaningfully update of our outlook for the year with revenue now expected to grow at a high teen percentage rate, bringing our business essentially back in line with our results from 2019.
As our transformation continues to translate into improved momentum for under armour. There are no changes to the strategies, we outlined earlier this year.
The brand continuous operating model improvement elevating of direct consumer focused approach and staying disciplined about returning greater profitability and value to shareholders.
We're seeing this construct I'll take a few minutes to highlight some of the progress we're making in these areas starting with brand strength.
From a marketing and consumer engagement perspective, our global campaign. The only way is through its delivering a singular under armour voice with hopes of performers in 2021, we are evolving these efforts to bring the ecosystem of how we engage and inspire athletes across both physical and digital experiences into even better alignment.
These factors driven by more robust data driven decisions of cost and consumer insights feedback loop at are meaningfully improved outlook gives us confidence that this is an opportune time to amplify the momentum even more greatly in the second half of this year as such we plan to make additional investments to support our marketing efforts.
To help drive awareness and increased conversion. These accelerated investments will primarily focus on North America and critical countries like China, and Germany, but we are still significantly underpenetrated from a brand awareness perspective.
Next this product as a premium athletic performance brand the products that under armour deliver sort of marketplace must meet and exceed of consumers high expectation of performance fit and style on family to make them better.
So whether it's bringing newness and excitement for women with our cross back end affinity Prost and no slip waistband leggings for the next generation of Rush and ISO chill apparel for all athletes our go to market process storytelling and operational excellence are helping to drive more robust consumer demand.
Taking a moment to talk about our run category. We continued to be quite pleased with the success of our under armour hover franchise assets broaden our appeal on preference among runners by offering multiple price points on seasonal newness to inspire loyalty during the first quarter, we saw strength in hover Sonic market on an infinite at all.
Also successfully launched our most pinnacle running footwear ever with the UA flow of velocity of wind price at $160. This product is delivering well against our expectations. It's also pushing performance with data from our map of my around digital App, telling us that runners wearing of these shoes are on average going farther and faster than any other UA running.
Shoot.
While still early very exciting to see.
Switching gears for a secondary of focus which is continuous operating margin improvement with the critical mass of our transformation now behind us appropriately rebased cost structure and Optionality at scale smartly with future growth. We believe we are firmly on the path to returning to double digit operating margin over the long term.
This of course, it's not on one of Don strategy. There is no finish line.
Net instead of an ever present focus on getting better better process more optimal structure more efficient systems and vigilance around our decision, making by region channel product, we are constantly challenging ourselves to leverage our foundational of horsepower by being more precise and return based on the investment choices, we make at the global.
Company to advance our strategic and financial goals.
Looking at our business by region, Let's review how some of this is playing out.
I'll start with North America, which by many accounts I believe to be in the healthiest position. It's been end in quite a few years from both a brand on financial perspective high quality revenue driven by a sharp focus around tight inventory management proactive demand constraints, improving segmentation and servicing our customers well puts us at the sweet spot of <unk>.
Our strategy to return to brand drive premium growth.
To support this confidence and recalling my earlier of two years Stack example, we see our full price wholesale business in North America in 2021 being meaningfully healthier than the same business in 2019.
Keep in mind. This is despite several headwinds in the comps at including proactive demand constraints exiting undifferentiated retail a significant reduction of sales to the off price channel and overall promotional activities. So when taken in total an encouraging sign for the future of our business.
The other side of this equation is on direct consumer business in North America, where we remain committed to reducing our promotional activity and driving improved store of digital productivity at.
A lot of traffic challenges persist in our physical stores. The business is performing above plan and we expect it to deliver solid growth in 2021.
Shifting next for Asia Pacific, while short term pandemic driven impacts continue to percent traffic challenges on higher promotional activities across the region. We remain confident in our ability to navigate these dynamics to emerge a stronger brand.
Opportunistically, given an accelerated shift to online purchase behaviors investments into CRM and digital Activations remain center stage in our playbook to driving better brand affinity in the long term from of direct to consumer perspective, we remain appropriately cautious concerning the right balance of return on those investments relative to the environment and sustained premium.
Next up is EMEA and even the ongoing impacts from COVID-19 at related restrictions are tempering, our near term growth expectations of that Theres no change for expectations for this crucial market with stronger than expected bookings coming in for the fourth quarter. We remain encouraged by our strategy is to tightly manage inventory.
Investing in brand awareness and consideration there.
The reception for new products combined with the strength of our go to market is enabling us to build strong demand among key wholesale and distributor partners and within our direct consumer business, while our stores are a bit more challenged due to pandemic restrictions like last year. Our E. Commerce business continues to serve as a healthy offset to drive growth.
Finally on Latin America region as discussed on our last call. We have begun transitioning our business in certain countries to of strategic distributor model. While we expect this change to negatively impact our revenue in 2021 over the long term. We believe it will help drive greater profitability and provide a better opportunity to increase brand awareness.
And affinity across this region.
Now moving to our third priority elevating of direct to consumer focused approach consumer shopping preferences continues to blur the lines between physical and digital demanding that brands create unique personalized experiences that integrates seamlessly into their lives for our drummer we believe building out the capabilities to execute a powerful.
Omni channel strategy will enable us to create more connected shopping experiences across all consumer touch points.
From a non store perspective, our first quarter results led by improved traffic trends at higher average order values, along with higher gross margins due to reduced promotional activity are encouraging signs for how we're thinking about our long term opportunity at retail in the near term. However, even amid optimism from recent trends will continue to keeping up.
Our opioid level of conservatism in the mix.
Globally, our E Commerce business was up 69% in the first quarter, representing approximately 45 per cent of our total direct to consumer business and included solid growth across all regions with better than expected conversion.
Given the outside strength of E Commerce in 2020, and the continued shift to online due to the pandemic. We are hyper focused on better understanding of consumer journey and building greater digital capabilities to unlock even deeper connections with athletes and ultimately while it's left to be seen about how sticky last years E. Commerce results are against this year's perf.
Formats, we're confident that making additional investments in our sites teams and processes to support our long term growth expectations is money well spent.
Bringing all of these strategies together needs of throughout last focus maintaining our discipline around profitability to drive sustainable shareholder value over the long term with our expectation of revenue being up at a high teen rate for the full year I am pleased with our progress on our expectation to deliver on adjusted operating margin in line with 2019. This is.
Nice step up towards a double digit rate over the long term.
So to wrap up I'm pleased with the progress we are making our transformational strategy to architect of global operating model capable of driving sustainable and profitable growth is on track with a solid start for the year, it's about continuing to execute the play with patients and allowing the processes tools and structure, we've built to drive improved capability.
These across under armour and further enable our ability to compete for premium brand right growth and with that I'll hand, it over to date.
Thanks Patrik today's results are strong evidence that our transformed operating model can efficiently serve strong demand for the under armour brand against the continued backdrop of uncertainty due to the COVID-19 pandemic with.
With an outstanding start for the year, let's dive right in with our first quarter results.
Revenue was up 35% to $1 3 billion compared to the prior year. This was better than expected due to higher demand across our wholesale and DTC businesses.
From a channel perspective, our wholesale revenue was up 35% keep.
Keep in mind approximately two thirds of this growth was due to a Q4 'twenty for Q1, 'twenty one shift related to COVID-19 impacts connected to customer order flow and changes in supply chain timing as noted on our last call in.
In addition, most of our Q1 wholesale over delivery was due to stronger sell through and higher demand from our North American customers.
Our direct to consumer business increased 54% led by a 69% growth in E Commerce.
44% growth in our owned and operated retail stores.
Our DTC results were better than expected, primarily due to higher average order values and retail and higher e-commerce conversion rates.
Our licensing business was up 9% driven primarily by North America.
By product type apparel revenue was up 35% driven by our train and run categories.
Footwear was up 47% driven by a run and team sports categories at.
On our accessories business was up 73% with most of the growth being driven by sports Matt.
From a regional and segment perspective.
First quarter revenue in North America was up 32% driven by growth in our wholesale business, which was driven in part by Q4 to Q1, COVID-19 impacted order shifts.
Additionally, we saw strength in our North American DTC business with factory House and E Commerce, leading the way for growth.
In EMEA revenue was up 41% driven by growth in wholesale led by our distributor business, including the Q4 to Q1, COVID-19 impacted order shifts as.
As well as strength in e-commerce.
It is important to note that EMEA continues to face significant impacts due to COVID-19 with about one third of our owned and partner of mono branded doors closed at the end of the quarter.
Revenue in Asia Pacific was up 120% with balanced growth across all channels, including our wholesale business, which partly benefited from Q4 for Q1, COVID-19 impacted order ships at.
As a reminder stores in APAC were closed through most of Q1 2020. So we are comping of more significant COVID-19 impacts here than in our other regions.
In Latin America revenue was down 9% driven primarily by lower wholesale results, partially offset by growth in E Commerce.
First quarter growth margin was significantly better than expected with of 370 basis point improvement at the 50% driven by approximately 270 basis points of pricing improvements due to lower promotional activity within our DTC channel, along with lower promotions and markdowns within our wholesale.
Business.
In addition, we experienced 130 basis points of supply chain benefits, including improved inventory levels, resulting in lower reserves and product costing improvements.
And finally, we realized 50 basis points of favorable channel mix due to a lower mix of off price sales at a higher mix of DTC.
Offsetting these improvements was about 140 basis points of negative gross margin impact related to the absence of my fitness Pal of factor, we expect the impact of throughout this year.
Overall versus our previous outlook for first quarter gross margin.
Sort of tighter inventories driven by stronger than expected demand and lower promotions.
This resulted in a reduced requirement for inventory reserves, along with more favorable pricing.
SG&A expenses were down 7% to $515 million, primarily due to lower legal and marketing costs versus the prior year.
Relative to our 2020 restructuring plan, we recorded $7 million of charges in the first quarter, an amount less than we had anticipated due to slower than expected execution, Inc.
<unk> Q1, we've now realized $480 million of pre tax restructuring and related charges.
As detailed last September this plan contemplates total charges ranging from $550 million to $600 million.
It is important to note that all remaining charges are related to initiatives that we determined in 2020, meaning we are not adding anything new in 2021.
We expect to incur approximately $35 million to $40 million of charges in the second quarter as we work towards completing this program in the second half of 2021.
Moving on our first quarter operating income was $107 million excluding.
Restructuring and impairment charges adjusted operating income was $114 million.
After tax we realized net income of 78 million for 17 of diluted earnings per share during the quarter.
Excluding restructuring charges and the noncash amortization of debt discount on our senior convertible notes.
Our adjusted net income was $75 million for 16 of adjusted diluted earnings per share.
And finally inventory at the end of the first quarter was down 9% to $852 million a clear indicator of the improvements we've made to drive a more efficient operating model.
Now moving on to our updated 2021 outlook.
Recent consumer trends continue to be more positive than we anticipated we remain cautious with respect to demand and the overall marketplace due to the COVID-19 pandemic.
Therefore, today's outlook is predicated on our business continuing under the same general macros, we've seen most recently with no significant shutdowns.
As well as moderate improvements within the greater retail landscape as the year progresses.
That said, let's start at the top with revenue, which we expect to be up at a high teen percentage rate for the full year.
This reflects the high teen percentage increase in North America and of low <unk> percentage rate increase in our international business.
And while we see improvements across our regions more robust demand in North America is driving most of the gain relative to our last outlook.
From a channel perspective, our Q4 bookings have come in better within our wholesale business than our initial expectations.
As discussed we are focused on managing our inventory tightly, including constraining supply to meet demand and exiting undifferentiated retail, particularly in North America.
In our DTC business, we also expect to see stronger results drive through the remainder of the year with retail store growth far outpacing that of e-commerce.
Given that business is up against some difficult comps in 2020.
For gross margin on a GAAP basis, we expect of full year rate to be up approximately 50 basis points against our 2020 adjusted gross margin of 48, 6%.
With benefits from pricing and supply chain efficiency, partially offset by the sale of my fitness Pal, which carried a high gross margin rate.
The growth margin improvement relative to our previous outlook is due to improving benefits within pricing, partially offset by changes in channel mix and increased freight expense related to port congestion and logistical costs, which remains a rapidly evolving situation.
From an SG&A perspective, as we stated on our last call. We believe we have appropriately rebased, our cost structure to scale for future growth.
The improved discipline and processes we employ.
Help ensure we stay return based with the Optionality to invest in critical areas like marketing and our DTC and international businesses.
As patrik laid out we intend to take advantage of some of our improved outlook in the second half of this year with incremental investments, particularly of marketing to continue driving the underlying momentum we're seeing.
In this respect we expect SG&A to be up at a rate that is approximately one half of that of our revenue growth.
In addition to these incremental marketing investments.
Other significant part of the overall increase in SG&A relative to our prior outlook is higher incentive compensation when compared to a year that saw significant reductions against target levels.
When combined these marketing investments and planned higher incentive compensation represent about three quarters of the increase in our year over year SG&A dollars, meaning without them. The underlying SG&A is planned up slightly at about 2% to 3% in absolute dollars, which is consistent with the initial outlet.
We provided earlier this year.
That said remaining disciplined about controlling costs and ensuring the right balance between growth productivity and profitability is our top priority.
After these factors, we now expect operating income to reach approximately $105 million to $115 million this year.
Or about $230 million to $240 million on an adjusted basis.
Translated to rate, we expect to deliver on operating margin of approximately 2% or an adjusted operating margin of approximately four 5% in 2021.
All of this takes us to a diluted loss per share of approximately two to four.
Or excluding restructuring impacts about 28 to 30 of adjusted diluted earnings per share.
To sum it up we believe we are appropriately updated our outlook to reflect the improvements we see across the business.
And to reiterate some of the comments, we made on our last call headwinds should be taken into consideration for our full year outlook, particularly in the second half including.
The absence of my fitness Pal.
Continued supply and demand constraints there.
For the exit of undifferentiated retail, which starts in the back half of this year.
Changes to our Latin American operating model.
And lower expected sales of our sports matter.
For a little more color on the quarterly flow, we expect our second quarter revenue to be up approximately 70%.
As we lapped last year's significantly shuttered retail world with the highest regional growth seen in North America, and Latin America.
Next we expect Q2 gross margin to be down about 120 to 140 basis points, primarily due to the following negative impacts.
Channel mix with e-commerce being a considerably lower portion of the overall business when compared to last year at.
And within the wholesale channel, we expect a higher percentage of off price sales versus last year's second quarter when off price was predominantly closed.
Additionally, the absence of my fitness Pal will negatively impact per quarter.
And finally, we anticipate increased freight expense from a supply chain perspective relative to the prior year as we worked through ongoing logistics and transportation challenges.
These negative factors are expected to be partially offset by an improvement in pricing due to lower planned promotional and discounting activities along with some tailwind from changes in foreign currency.
Bringing most of the bottom line, we expect second quarter adjusted operating income to be approximately $40 million to $45 million for about four to six of adjusted diluted earnings per share.
To close out.
With an incredibly focused strategy led by of talented passionate team and improved operations from our multi year transformation.
We believe under armour is well positioned to deliver on our expectations for 2021 and beyond.
With that I will turn it back for the operator for your questions.
At this time, if you would like to ask a question. Please press star one on your telephone keypad again Thats Star one to ask a question we will pause for just a moment to compile the Q&A roster.
Your first question is from the line of Erinn Murphy with Piper Sandler.
Great. Thanks, good morning, and congrats on the team there.
I was hoping you could spend a little bit more time patrik talking about the north American landscape. It sounds like the outlook here is a lot brighter than you would've thought three months ago, which seems like the main reason for the guide up today can you just share more about what Youre seeing and then really on the wholesale order book of I'm very curious whats implied in the back half given the second quarter strength that youre seeing.
It seems like you'd still left some wiggle room. There. So just any insight from David dwell on what the retailers are looking at for the second half. Thanks, so much.
Good morning, Erin Thank you well, let's start with North America.
For us thinking about North America today on the journey that we've been on I mentioned in my script that we feel that the North America businesses in a healthier position this year than it's been in a very long time.
And that has to do with the quality of of what's in the market for US right now as a brand.
And the fact that we understand the consumer better on what's working for them, we're leveraging that into our go to market. We're also leveraging on marketing spend more efficiently and we're doing that at through the enrollment work for return on investment and marketing model that we that we now have here at under armour.
And this whole go to market that we started to.
Deploy in early 2020 that makes us better each season.
Part of that is the execution that you are now seeing across innovation across gender across various categories and across the.
The world and in North America, being our biggest business. It just has a disproportionate impact we believe.
But we're also seeing strength in the fitness and wellness industry that we're benefiting from them for sure.
We believe that's going to continue as we go into the rest of <unk> 21 on beyond at this point.
So on law to be proud of from the team there's definitely of spring and a step at this point in terms of how we think about North America execution is of course of everything and we are executing we're getting the right stuff right place at the right time, better innovation better product better marketing all coordinated and the consumers responding.
Dave I don't know if you want to add a little bit of color there, yeah, and I think maybe what I would just remind on when we think about back half North America.
The demand constraints work that we've put in place we think at the right thing for premium growth.
But that that has a little bit of an impact on back half, but then also the plans to exit undifferentiated retail.
And really focus on premium side.
As more of a back half impact for North America as well.
And then also we mentioned the sport mass business is a factor as well for us being down back half versus back half of last year. So a couple of different factors that are going on there and then we are still operating in highly uncertain times with COVID-19, So we're trying to be prudent with our planning as well.
Got it fair enough and then if I could just ask a follow up on what Youre seeing in the Womens Department right now just had at men's versus women's kind of.
Perform on that 35% apparel growth in the quarter. Thank you.
Yes womens.
Really as we came into 2020 of our women's business started to show meaningful improvement in a lot of that I would attribute to better product better communication better marketing.
And at.
Across both tops bottoms as well as footwear, we're resonating with the consumer right now in many different styles.
To make a call out I think what's really encouraging for me in a rum category for for example in the footwear space.
On the launches that we've had around the flow of velocity wind.
Continuing with the Hubbard, marking on Sonic and Internet is resonating for both genders and then when it comes to apparel for women.
Infinity Cross.
Brawl as well as on Meridian leggings and many other products that we are now innovating into for women as it relates to leggings like no slip Waistband for example, which has really been a great innovation for US. This year are all resonating. So it's more comprehensive it's across more styles, it's across categories at tops.
Its bottoms Thats footwear.
And instead of a holistic approach that we're taking to the business.
Head to toe through the go to market, but it's also about the communication, we're showing up in a way that the consumer expect under armour to show up in.
And it's resonating so very very excited about what that might mean for us going forward.
Great.
Thanks, Aaron Thank you Eric.
Your next question is from the line of Jim Duffy with Stifel.
Thank you good morning, everyone I wanted to start on the inventory position, given where you guys would come from what I'm really pleased to be asking this question, but I'm curious as you look at the accelerating demand how you feel about the inventory position do you feel you have enough to capitalize on the demand that's materializing can.
Can you give us an update on your capacity to chase should.
Demand outstrip your supply and then I have a follow up on that share.
Jim Good morning. This is patrik I'll start it off and I'll hand, it over to day, maybe it can give you a little bit more color too well.
We came into this year and we've talked about this now for the last six months in the last two calls around this notion of demand constraint. What it means is is that we're tightening how we think about inventory across both in terms of exiting undifferentiated retail.
<unk>, which is exiting somewhere between two to 3000 doors that will take full effect in the back half of this year.
We're also tightening the buckets that sit in inventory things like order replenishment in at once.
Dialing it in better making sure that we have of course, the right product at the right place but.
But not necessarily spreading ourselves thin across but being very very selective with our investments at.
The reality is Jim that.
We won't have to.
Tremendous amount of opportunity too.
On capitalized on accelerating demand beyond what we're actually seeing and what we're thinking about right now simply because we are constraining ourselves.
As part of them on that we're running right now and we believe very strongly in because we do want to continue to tighten up the availability of bad inventory and making sure that we're staying as clean as we can in every channel and every point of distribution.
And as it relates to chase, that's going to be something that we're not going to do so much of in 'twenty, one and we're doing that also to be.
Careful with what we're seeing right now in terms of everything that's happening in supply chain, we think that would be a very risky proposition at this point. So we're being very careful with any sort of chase for the back half of 2021 of that and also do you want to add some color on that thing at.
Patrick I think you covered it pretty well.
And then.
Patrick can you spoke to this in your prepared remarks, but thinking about the foundation of revenue for 'twenty, one of much healthier base of business in prior years more direct to consumer as a percent of the mix I'm curious as you look relative to prior years.
If we were to think about units versus ASP and that revenue base, how would that shape up is there any way to frame.
The ASP accretion that you've seen over a couple of year period relative to that 2019 base and then do you see opportunities with your tighter inventories healthier revenue base to leverage pricing power and the product line.
Yes.
It's a little different when you go across in terms of what's going on.
All of this of course is driven by a combination of factors. One is the actual availability of inventory one is the better products that youre launching in the better ability to launch product well right, which is resonating with the consumer in other words, you're getting a.
Bang for your Bakken both ends in terms of.
Us being able to be more premium.
As it relates to less promotional activity in our own channel.
In terms of markdowns driving our our average selling prices up.
It's also resulting in less markdown in the wholesale channel because of our innovation.
Is it matching our inventory levels. So the weeks on hand are lower and as a consequence of selling our product better at which means that we're not diluting.
Gross to net so much.
And what we're seeing right now with this approach that we've taken is that all of those things are happening simultaneously.
And it's about balance right, it's about balance in terms of how much inventory you have.
In those different channels and buckets and how you are able to communicate your innovation of new products stores to the marketplace, which we're doing much better and I would just highlight also the fact that if you think about the digital revenue aspect of this the work that we've done on our e-commerce over the last eight.
18 months specifically.
As it relates to what we did midway through last year for example, with the New North America and site and our ability to merchandise better be faster. We're now also upgrading the European sites to the same standard as the North America side, but on the same platform, which will enable us to capitalize on the more on being better.
Also on digital in the back half of the year I don't know David you want to talk about some of the gross to net.
Yes, I think just to kind of sum it up maybe Jim with a healthier mix that we're seeing versus 2019.
That does bring along higher AUR and average order value of <unk>. So we are seeing that progress.
We're excited about continuing to drive that healthier business forward.
Excellent. Thank you guys give us the goodwill.
Thanks Chip.
Your next question is from the line of Randy <unk> with Jefferies.
Yes. Good morning, guys. A quick question. So just on just to be a little more specific on the improvement at sell through is there any kind of quantification you can give us on the changes you've seen on sell through improvement, let's say today versus that of another six months or a year or two years ago, just give us some perspective there.
And maybe a little more color on the differences any changes you've seen on that sell through.
In apparel versus footwear and the business. Thanks.
Randy This is Dave we typically don't quantify the sell through changes but.
What I would say is that the.
<unk> improved the bigger improvements that we started really seeing in sell through.
Really back half of last year and continuing forward through Q1.
And we're excited about the fact that that's also leading towards less need for promotions less need for markdowns.
Less need for returns so again.
On the revenue dilution aspects of that have been fairly favorable as well as we continue forward and that's helping from a gross margin perspective, that's helping from an inventory management perspective, and taking back less returns and also making it at maybe a little bit easier also to manage that off price third party mix and that kind of 3% to 4%.
Range that we think is kind of a sweet spot as we go forward. So.
We continually monitor the weeks of stock that are at our wholesale partners, which has been at very very healthy levels for for really two to three quarters now and we continue to see that we continue to have great partnerships and discussions with our key accounts.
And we're excited to working together with them to maximize sell through as we continue to move forward.
Great. It's helpful and then maybe a follow up on <unk>.
Your journey and path towards our long term thought process around.
Double digit operating margins can you give us some framework on how youre thinking about how the.
On the DTC business more specifically online kind of factors into your assumptions in kind of the way youre thinking about the margin structure across the business around around that channel distribution.
Yes, I mean, there's a couple of different things going on there Randy of Great question, we are definitely on that journey towards double digit operating margin.
It is going to come in a couple of different ways. You are right. We are going to continue to lean forward on DTC and really the best expression of our brand and driving those touch points with the consumers that will.
<unk> mix up a little bit of our revenue as we go forward.
Keep in mind, though that a lot of the doors, we opened in APAC, our partner doors and those go through wholesale so that might temper, the increasing mix of DTC a little bit.
But you will continue to see the DTC see mix go up and with that comes generally higher gross margin.
When you couple that with a lot of the costing improvements at our supply chain has been driving over the last few years. So part of that journey has continued.
Positive developments on the gross margin front, but then also theres kind.
Of a two part story within SG&A.
As you know when you start to mix up in DTC on a revenue side that does bring with it a little bit more in SG&A and operating costs with rent and everything else. So that does pressure kind of the SG&A to revenue a little bit but with all of the extensive work we've done with rebase the cost structure on the operating model and restructuring we feel like we're in a really good spot.
It's kind of re basing that cost structure to be able to leverage a lot better as we grow and that's what we're going to be doing as we go into 'twenty, two and beyond so you'll continue to see a little bit of improvement SG&A to revenue a little bit of improvement of gross margin and that's really kind of the simplest way to to lay out the journey of the double digit operating margin. So we're excited.
At about running forward on that.
Super helpful. Thanks, guys.
Your next question for you from the line of Paul Trussell with Deutsche Bank.
Yes, good morning, and congrats on the very strong results and momentum.
I wanted to continue on the margin conversation if you can give a little bit additional detail on the updated forecast for <unk>.
SG&A this year.
Second half in particular, I think of prior guidance for the year with slight growth. So it certainly sounds like there is a major step up so just wanted to better understand that.
At the prior Guy did not include that majority of of marketing investments that you now plan on making and it also sounds like Youre assumption is maybe little incremental revenue.
Despite.
Brand building campaign that Youre pursuing.
Yes, Paul this is Dave.
Excluding the incremental investments that we're making into marketing and that we plan and incentive comp. We do expect the rest of SG&A to growth slightly which is what we had mentioned on our on our last call.
And this is similar to what we expected coming into the year driven by continued investments into retail and international offset by <unk>.
Savings initiatives related to our restructuring and our capital preservation strategies from 2020.
Along with lower legal expenses as well so.
You are seeing a.
The increase from our last forecast, especially in marketing as we want to invest more on the brand and continue that momentum in the back half of the year.
And then you are seeing a higher expectation of incentive compensation with the improving results.
But again, we feel good about the cost structure as we drive into 'twenty, two and going forward and these increases that we mentioned versus the prior outlook are not long term commitments. So it is something that we can continue to adjust and as we move into 2020 to continue to rely on that reset cost base.
Understood. Thank you and then I guess, just my follow up maybe just turning to on.
Other geographies outside of North America could you, maybe just give a little bit more detail on what youre seeing.
In Europe.
In China specifically.
And then also how to think about the Latam business.
Yes, Hi, Hi, Paul this is patrik.
While Europe, maybe I'll start there very quickly as most of you know it's locked down basically as it relates to retail apart from the UK that open up a few weeks ago and we've seen the business day of rebound really well after the reopening.
And we expect Europe to gradually open up in this quarter.
And then it might be a little of balance sheet.
Opening up closing down on openings. So we'll see how that all of that plays out of the back half of the year in terms of China.
We're really excited about the progress we're making there in terms of our digital space in terms of our E com and the opening up of of additional doors. This year, we're doing that and of careful manner, making sure that we're.
Prioritizing profitability of course, but we have seen the traffic rebound, especially in the outlet business, but I would say that China is a more promotional market now than it was before COVID-19 hit so we're watching that and just trying to understand when the new normal so to speak will be there.
But from a traffic perspective traffic has been stronger in the outlets and full price and continues to be strong online.
And we're going to continue to build out of stores in China in this year and accelerating from last year of course, but we're looking for quality again over quantity there.
And Brian on Latam.
It's really continued focus on profitability.
And continuing some of the potential distributor model shifts.
To continue.
Prove.
Both predictability and profitability while building the brands. So that's that's kind of our continued driving of Latam.
Thank you best of luck.
Your next question is from the line of Brian Nagel with Oppenheimer.
Hi, good morning.
That's one of its results.
That's my first question.
Just with regard to the <unk>.
Sales for you, particularly because of the significant improvement with sales we saw here in Q1.
So I'll kind of merged two points together Patrik, you mentioned of product launches.
I can take my question of as a way to breakout can you help us understand to what extent.
These new products, whether they be in one of other categories are helping to drive the sales. The second recognize there's a lot of moving parts here, but.
Is there any way that you look at your business day stimulus.
But right at stimulus has helped to drive sales.
Okay.
Brian I think the way to think about what we're seeing with the brand right now is I would use the word holistic.
And the reason I'm doing that is because the growth that we see in the brand really is global it really is across categories, it's across gender and it's really happening.
In both apparel and footwear in the U S. I would say that it's hard to.
I understand exactly how much of that is driven by the stimulus.
Or not but certainly some of it is but also at the same time on let's say and at what traffic is still down right in retail so.
Yes.
There is certainly some stimulus going on but we've also been very good at converting at a lot better both in our e-commerce business as well as our retail business and we're seeing that consumer convert into higher priced product, that's where being less promotional so I <unk>.
Think holistically, we're doing a better job of executing across our categories across gender across our innovation across our go to market across the globe.
And Thats really whats going on at this point and I think Brian also I think it's important to note that just in general the fitness and wellness sector is doing very well continues to be pretty strong amid COVID-19.
Strong consumer behaviors workout tendencies et cetera. So.
Obviously, that's a benefit as well.
Great and if I could thank you for all of that and then just one follow up.
Two of those points, but again sales clearly much better here in Q1.
As you look at the landscape.
Hopefully heading towards a post COVID-19 World do you think should there be bigger market share opportunities for.
And Robert on your meaning are you seeing signs of competitive fallout.
That could be because of crude oil into a better market share as we pull out of the crisis.
I think to Dave's earlier point Brian.
The sector, we're in right now at.
Thetic performance wellness health.
It's going to we believe continue to be of growth sector.
And I don't think that you have fully seen any any dramatic fallout in our sector yet because it is buoyant.
So.
I think it's kind of come down to being in our case very consumer centric understanding of the expectations on consumer understanding of consumer journey delivering against their expectation with great product, great marketing to make them better which is why we're here.
And at that way, we will stay competitive and we will get better every time because of our go to market is engineer that way, it's engineered for us to continue to get better and to make our focus perform of consumer better.
And as long as we're focused on that we're going to be okay.
Yeah.
I appreciate the color. Thank you.
Thanks.
Your next question for you from the line of John Kernan with Cowen.
Yes.
Hey, good morning, Thanks for taking my question.
Hi, John.
David wanted to go back to gross margin, obviously, a lot of upside in Q1, you took the guidance up for the year.
Q2, Theres, obviously decline and it looks like fairly flat in the back half of the year.
How much has the increase in rate.
Some of the other areas of inflation like commodity inflation effect at your gross margin outlook for the back half of the year.
Yes, I mean, it's definitely been of factor and one that we've been discussing a lot lately John I mean, obviously globally. There is a lot of pressure on logistics on container availability.
Short delays things like that end.
I believe our supply chain has done a remarkable job navigating that to date, but it is challenging and so.
We do have some of that pressure built into this updated forecast.
I wouldn't say that it is.
On a massive factor, but it is big enough that we wanted to call it out and that we actually did adjust our forecast to make sure that we're we're covering for it.
The good thing is is that the improvements that we've been seeing versus our expectations and our pricing ability, including the lower promotions markdowns off price.
And then also inventory reserve assumptions relative to the health of our inventory.
Those improvements are actually outweighing, the new tougher news relative to freight and logistical challenges so.
Net net thats, why youre seeing a little bit of the higher outlook that we're giving for the full year on gross margin than our prior call. So we're monitoring at our supply chain is on it.
And we're we're navigating it fairly well at this point.
That's helpful. Thanks, and then maybe on the revenue side.
Versus the 2019 pre COVID-19 day.
How do we think about how youre planning the back half of the.
The year it looks like.
Overall up low single digits or so I'm just curious.
What are the macro assumptions embedded in that you came into the year, taking a fairly conservative view of the overall macro environment. Then came in and there was a fair amount of upside to your Q1 outlook I'm just curious.
How you are thinking about at the back half of the year from a bigger picture perspective, both in North America and international.
Yes, I think again.
It really gets back to.
A lot of positives relative to the momentum of the business improved Q4 orders coming in.
So a lot of a lot of favorable developments, but we got to just continue to think about the fact that there are a fair amount of those back half headwinds as well, which are not as it related to health of the business. So the sale of my fitness Pal.
85% to 90% of our connected fitness segments. So that's a pretty big impact for back half of the year. The demand constraint work, we've been talking about exiting undifferentiated retail, which doesn't really come into play until back half of this year.
On the Latam business model changes at more of a back half impact and then the sport mass business as well so.
Those are definitely some some pretty decent sized headwinds.
Relative to 2019, I think again the biggest call out is just overall health of the business.
<unk> of accounts.
And we're excited about continuing to kind of drive that forward.
That's helpful. Thank you.
Thanks, Sean.
Your next question is from the line of Matthew Boss with Jpmorgan.
Great. Thanks, and congrats again on the nice quarter.
Thank you Scott.
So Patrick you cited accelerated marketing at the potential opportunity to drive greater brand awareness.
If we took a step back where is overall brand awareness today, and where do you see the lowest hanging fruit as we think about marketing maybe as we think about men's women's or apparel versus footwear.
To think about.
Our marketing journey, if you like in terms of inside of our go to market at really began last year with the only way is through early in the year that we don't have to switch to through this together in March when everything went digital.
But on the advantage of that once we learned a lot and with our new tools at our modeling capability that we have we were able to actually use of time, especially in the digital space to really learn what works for under armour in terms of how to think about it resonated with the consumer to make them better.
No.
As David and I saw the numbers improve here this year.
Now, it's much easier for us to make the decision to invest back into the brand because we understand what buttons to push and we understand what kind of returns we should be expecting at.
<unk>.
It is really around building brand top of funnel now for us in the back half of the year more so than we thought we would be able to do coming into the year. So it's just that understanding of what works for us as a brand and having the right asset base to be able to activate against in the right <unk>.
Base to really connect with the consumer and then raise the engagement level, both from an awareness and consideration perspective. So very excited that we're able to do this and it should really set the stage for US also for 'twenty two.
Great and then maybe Patrik is we think post pandemic.
Do you think the athletic industry exits crisis, and what do you what do you see at a reasonable annual revenue growth rate for under armour I think in the past you talked about mid to high single digits is that still the best way to think about under armour on an annual growth rate and then with that lastly, David.
He is SG&A.
Slightly so is that now with the pieces that we have is that the best way to think about SG&A dollar growth multi year again only given the pieces that we have today is that the best way to think about it.
I'll kick it off Matt I think when we see what's going on right now on the marketplace, we're being a little bit cautious of course in terms of what the future holds post pandemic as it relates to the consumer.
Still busy working and making sure that we're building our foundation of strong as it possibly can be here in 'twenty, one and going into 'twenty, two where in the long game here for us in the long game for us at terminal. So we're going to continue to make the right decisions to make our foundation is stronger.
And make no mistake undrawn on returning to growth where growth brand. We have a growth mindset I think the difference now it's a holistic growth mindset across topline bottomline spend everywhere so for us.
We're going to be.
Very excited to at some future date to have all of you come to our Investor day, and we will be able to lay out the future.
For all of you David you want to add all of it yes, Matt I completely understand the interest in discussing longer term revenue growth rates, but we're just not in a spot where we want to talk about that yet.
We continue to drive forward and we're really really excited about this foundation that we've laid and as we're driving through 2021.
And relative to SG&A end going forward.
Due to all of the work that we've done yes, we will be able to leverage SG&A more as we go into 'twenty, two and beyond and continue to work that SG&A to revenue percentage down as we go forward over the next couple of years.
Relative to what growth rate that relates to.
Probably discuss that a little bit more at a future date, when we're ready to discuss more about the revenue growth as well.
Alright, Thats good luck.
Thank you Matt.
Your next question is on the line of Sam Poser with Williams trading.
Good morning, Thank you for taking my questions a couple of at will.
On your increased marketing spend I mean, we've seen this from lots of other companies when they start investing more on the direct to consumer marketing, you'll see and then you'll see sort of a faster.
Our response to the sales increases. So the question is how much of your revised sales plan is reflective of your increase.
Direct to consumer marketing.
Good morning, Sal This is Patrick Thats, a great question and just to clarify that.
The marketing spend that we're now driving in the back half of that predominantly is going top of funnel versus down funneled in performance marketing, where you would see most of the quick return so to speak so we're really balancing and making sure that we're driving towards a more balanced funnel, it's something that we've been wanting to do.
For quite some time and we've been somewhat hindered by because we have had also a lot of commitments in the past too too tied tied to long term contracts at all the things that hasnt really permitted us to go up funnel and drive brand marketing and that's what we're able to do now so hence my commentary a little bit around how we're not <unk>.
<unk> for the future and really a lot of that top of funnel of marketing is really to set the stage for 'twenty two and beyond doesn't mean, we're not going to spend down in the funnel. We have already planned that to support the revenue that we now have guided to.
So this is really about additional brand marketing that we're talking about Dave I don't know if you want to add on yeah, Sam I think just to take that a step further.
The majority of the or the largest piece of our increase in our revenue outlook is driven from the wholesale side.
And to Patrick's point, the revenue that we are seeing is incremental versus our last call theres not much of that is that is directly tied to the increased marketing. So it is much more of the opportunity for longer term investment in the brand.
And so we will see more benefits from 'twenty, two and 'twenty three relative to these investments.
Let me, let me just follow up on.
I mean, your direct to consumer business has been was very good both in your stores end.
On your digital business.
No.
That digital incremental digital marketing isn't as expensive as doing sort of bigger picture of things. So are you increasing your digital.
Consumer direct consumer facing marketing.
In the back half of that part of the increase even though I understand it's larger picture stuff.
Yes. It is at is something that was of.
My commentary earlier of gas, what we have been able to learn.
Through a lot of the new Cape.
Capabilities tools and all of the things that we've put in play that we were able to actually accelerate in 2020 due to the pandemic at.
A lot of that spend that now going into the back half of the year is in digital even though it's top of funnel, it's actually digital top of funnel.
And that is absolutely what's going on.
Okay, great. Thank you very much.
Thanks Sam.
Your final question is from the line of Jay sole with UBS.
Great. Thank you so much David.
My question is just about the normal inventory reserve requirements.
Normally take that you sort of maybe you did not take this quarter and the pricing gains that you had how did the reserve requirements of this quarter and the pricing that you got compared to what you would expect to see at a normal quarter in terms of.
It was better but I mean, it's sort of been planned to be better, but there was upside can you just give us an idea of how those two factors really impacted gross margin.
Yes, I mean, I think the best way to look at it would be that.
It wasn't exactly the driving factor for year over year again year over year, we've talked about the 370 basis points, but as far as versus our actual expectations. It is definitely a factor.
We obviously have move through inventory very very well, we set ourselves up well on the back half of last year for tighter supply chain management.
But then coming into this year with the incremental drive through in Q1.
And then also with the updated forecast we are running even healthier inventory than we originally thought and the mix of that inventory is healthy as well not just the level of inventory and so when you add those things together and our ability to sell through.
More at full price it does have an impact in Europe.
The required reserves are lower than anticipated, we haven't broken out the exact basis point of.
That difference versus our prior outlook, but it is meaningful enough that we wanted to call it out.
Understood and if I can ask one more just on the balance sheet.
There's a lot of cash on the balance here at not much more of that there would be at the end of a normal Q1 day.
Guidance suggests you'll generate a decent amount of free cash flow this year.
What's the plan for how the balance sheet might change over the course of the year end is that is that taken into account I was just on the guidance right, but I mean, just maybe give us a sense of how the balance sheet might change.
Yes, I mean right now again, we are very focused on continued working capital improvements Capex prioritization and all of that work has been going very well and you see that coming through the numbers and you see that in the updated forecast. So yes, we do intend to be able to drive continued free cash flow this year.
And we will be at a pretty high cash balance as we drive through the remaining quarters of this year.
Right now we.
Happy with being very very liquid and very nimble as well.
And we mentioned on the last call that would we consider something like maybe debt buyback or something along those lines. We are considering it but at this point in time, we feel really good about where we are.
And we're continuing to.
Be nimble and drive forward so.
More of that in the future, we're continuing to work on that but we feel good with where we are.
Got it alright, thank you so much.
Thank you Jay.
There are no further questions.
This concludes the under armour first quarter earnings webcast and conference call. Thank you for your participation you may now disconnect.
Thank you thank.
Thank you.
Thank you.
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