Q2 2021 Under Armour Inc Earnings Call
[music].
Good day, Thank you for standing by and welcome to the under Armour, Inc. Second quarter earnings webcast and conference call at.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone.
Be advised at today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to you speak of today.
Lance of Laker.
Most of the VP Investor Relations and corporate development. Thank you. Please go ahead.
Good morning, and thank you to everyone for joining us for under armour of second quarter of fiscal 2021 earnings Conference call. The information provided on today's call will include forward looking statements that reflect under Armours view of its current business as of August 3.2021.
Statements made are subject to risks and uncertainties that are detailed in documents filed regularly with the SEC and of Safe Harbor statement included in this morning's press release, both of which can be found on our website at about dot under armour Dot com.
It's important to note that the ongoing uncertainty related to COVID-19, and its potential effects on the global retail environment could continue to impact our business results moving forward.
We may reference non-GAAP financial measures and 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 in our press release, which identify and quantify all excluded items and provides our view about why we believe this.
<unk> is helpful to investors.
Joining us on today's call will be under armour, President and CEO, Patrik, Frisk and CFO, Dave Bergman.
But before I hand, it over to Patrick like to take a moment to recognize Carrie Gillard and the fact that this is her last earnings call with under armour as an $8 of half year veteran of this iconic brand at my partner and Investor Relations for the past 4 and a half years, it's been a heck of a journey to say the least number.
Half of the entire executive team Youre determination work ethic and expertise has been truly appreciate it and you will be missed can't wait to see all of the great things Youll accomplish in your next adventure.
With that I'll turn the call over to Patrick.
Thank you Lance end. Thank you Carrie good morning, everyone and welcome to our second quarter conference call to.
The halfway point of 2021 are better than expected results continue to validate that our multiyear transformation is working.
With a stronger top and bottom line performance relative to our previous outlook, perhaps more importantly, we're also driving higher quality growth margin expansion and greater profitability against our pre pandemic 2019 results.
In fact diluted earnings per share through the first 6 months of 2021 are greater than the full year of 2019, so all in a great first half.
Reflecting on the past 18 months amid of historically challenging environment due to the COVID-19 pandemic I am incredibly proud of Undrawn. This global team and the way we've worked to hold ourselves accountable to our strategic playbook by continuing to sharpen our focus the operating model of financial discipline, we have ingrained within our culture.
Service of cost in check and balance to deliver premium products and experiences to our consumers end customers and by driving higher quality revenue through our cost and class of operational excellence and applying what we've learned at consistently refining and orienting towards brand right profitable growth means we are better positioned today to drive greater returns to our share.
Our holders than we were before the pandemic started.
And yet with.
David uncertainty related to Covid, which as of late is trending unfavorably in key sourcing countries in southeast Asia. The resiliency, we have earned over the last year and a half will continue to serve as an asset while we navigate the second half of 2021 in this respect we're focused on the things we can control staying grounded in our 4 strategic.
Pillars strengthening of the under armour brand improving our operating model amplifying of D to C focused approach at increasing our capacity to return greater profitability across the company.
Starting with strengthening our brand and the proactive decision we've made to reinvest some of this year's upside into additional marketing efforts. This flexibility is empowering us to amplify our middle of to top of funnel activations geared at increasing awareness attraction and consideration for the under armour brand at.
As we work to connect with new athletes and inspire our existing ones. We are centered on our brand attributes resilience hard work hard and edge and.
In the second half this will come to light more holistically as we illustrate the journey to compete to the process of training setting goals struggling and ultimately realizing the results.
Through at team sports loans supported by consistent messaging via the only ways through our third quarter Activations highlight the importance of mental strength of.
Often overlooked aspect of training and its relationship to unlocking an athlete's full potential.
Certainly coming out of a long stretch of Covid restrictions and his team sports hopefully open up more broadly at this fall. We believe this is a timely effort to draw consumers into the psyche of that is uniquely under armour as we work to make them better.
So starting this month by of social media television and streaming beyond to Lookout for Chase Young Chan Alexandre Arnold tie Harris of Nick Merck's, among others, helping to highlight mental training and the role at place in achieving once personal performance goals as we say at under armour. If you train your mind you train your game.
So while theres still more work to be done to unlock our full marketing potential I am pleased with the progress we're making in aligning our go to market with focused performers at the evolving needs of our key retail partners around the world not to mention the incremental marketing investments, we're making in 2021 are really geared at setting us up for more strongly.
In 2020 to as awareness and consideration should lead to increased conversion as we strengthen our connectivity.
In product our strategy remains firmly rooted in an athlete's journey to support leading with insights and data to provide solutions. They didn't know they needed and now can't imagine living without with.
With quite a few product highlights during the quarter I'll start by recognizing the incredible milestone that our partners at Virgin Galactic achieved a few weeks ago with their commercial flight to space.
To pay to play a part in pushing the boundaries of what is possible. We are excited to see what the future holds as new barriers to get broken inspiring all of us to strive for more.
In apparel second quarter highlights included strong sell through of our ISO chill running products featuring of UA innovation that key to cooler at heart conditions. We also saw strong sell through in men's unstoppable bottoms and women's leggings, including Meridian and are no slip waistband technology.
<unk> continued to build on its momentum as well with meaningful increases in our Infinity and cross back products and we also saw solid results in tops, featuring a rush technology and finally project rock apparel continued to build on its strong momentum as well with an excellent response to new drops.
In footwear flow of velocity performed well in all regions acid hover fathom end market up to including significant growth against last year's already strong performance are charged to pursue to in a short 9 footwear offerings also posted substantial numbers demonstrating continued success in our segmentation strategy to bring primo.
Some innovations across all price points, Inc.
<unk>, we saw success on and off court with our current flow <unk> signature shoe as well as retro styles that we pre released in APAC all good signs of momentum as we work towards the launch of the Curry 9 late this year and finally, the project rock <unk>, which combines UA hover and try based technologies for <unk>.
Highly comfortable and stable training platform was also a standout.
Switching gears to our next area of focus which is continuous operating model improvement our second quarter results demonstrate once again that our ability to service increased demand with efficient effective execution is getting better create.
Creating product at the right price and getting it to the right place at the right time is at the core of how and when to empower. This the adage holes success is doing the common things on common new well simple, perhaps but precisely at the core of our strategic playbook in what we're obsessing on a day to day basis.
Turning to our regions. We believe it's most helpful to compare our results to 2019 since last year's second quarter was an incredibly unique period and we believe this 2 year stack better represent at some of the progress, we're making and the overall performance of our business.
Starting with North America, I'd underscore how happy we are with improving our ability to drive higher quality revenue through sharper segmentation tighter inventory management and delivering consistent service to our customers versus 2019, North America revenue was up 11% in the second quarter and about 3% for the first.
Half of the year.
Now in context, it's important to keep in mind that these comparable periods have some key differences, including a significant increase in our direct to consumer business offset by considerably lower sales to the off price channel lower overall promotional and markdown activities and supply constraints engineered to put us in a more advantaged position in the market.
Please.
All of this of course is geared at continuing to lift the under armour brand to more premium level in our largest market.
And to that point as evidenced by our gross margin results. This strategy is working from a channel perspective, we feel good about the pace, we're earning back space with our key North American wholesale partners driving full of price revenue and showing up both digitally and physically in a more comprehensive way than ever before.
Revenue from our owned and operated stores is up meaningfully in the quarter versus the same period in 2019 and includes improved quality and composition of sales.
For the full year, we expect our north American business to be up at a low twenties percentage rate compared to 2020 versus 2019, North America will be close to the same revenue, which taking into consideration of the factors I've mentioned less off price lower discounts and promotions and tighter supply constraints, along with our exit of undifferentiated.
<unk> retail, which starts in Q3 at least my confidence that we're setting ourselves up for improving brand right profitable growth in 2022 and beyond.
Turning to our international business, we expect revenue to be up at a mid <unk> percentage rate versus 2020 or up at a high twenties.
<unk> rates 1 of the 2 year stack.
The Asia Pacific region, we remain laser focused on ensuring our brand remains firmly positioned in athletic performance, while staying agile and of quickly evolving marketplace with second quarter revenue up 25% versus 2019 or up 35% for the first half on a 2 year stack our results gives us confidence that the additional <unk>.
Investments, we're making into marketing CRM digital Activations and store expansions are working to drive greater brand affinity amid a highly competitive backdrop.
Next up at the EMEA a region that is also seeing pockets of Covid resurgence, but also delivered strong growth for under armour second quarter revenue was up 43% over 2019 and up 44% for the first 6 months of the 2 year stack within D to C. We recently upgraded our e-commerce site platform to improve our capabilities.
<unk> and functionality as we focus on driving more seamless shopping experiences for our consumers EMEA wholesale growth was balanced across our full price and distributor businesses looking at the rest of the year, we remain confident that our strategies to drive greater reach in connection to our consumers are working well at.
Finally, our Latin America region, where second quarter revenue was up 17% over 2019 or up 7% for the first 6 months of a 2 year stack as discussed at our last call. We have begun transitioning our business in certain countries to of strategic distributor model, which we expect to impact revenue more negatively in the back half of this year so as to.
Still working through this transition as we re architect this business for improved consistency and we believe better profitability.
Switching to our third pillar, which is our focus on elevating our DTC business with a 33% increase of revenue for the second quarter end of 32% increase for the first half versus 2019, we're pleased to see the results of our multifaceted strategy to come to fruition.
Conjunction with consumer behavioral shifts throughout the pandemic and an even greater appetite for product and brand experiences that are personalized unique and premium.
Advancing how we show up in stores and online to meet their needs.
All of this of course, it starts with our retail and distribution teammates who are at the backbone of our business playing an essential role in how we sort of focused performance at.
Ensuring that they feel valued and appreciated we increased our minimum pay rate to $15 per hour in our U S business as part of a larger effort that includes professional learning and development opportunities and additional incentive plans.
In combination these actions will allow us to drive better connectivity across the consumer journey.
From a non store perspective, we experienced improved traffic trends at higher average selling prices in the quarter driving better productivity and more normalized promotions.
Longer term, we remain focused on building the capabilities necessary to become a best in class retailer by creating incredible experiences in our full price brand house stores and better leveraging our factory house locations to drive greater overall profit.
In our E Commerce business revenue was down 18% in the quarter of result that we anticipated being the most challenging of the year considering to shift to online in 2020. Following the retail lockdown that said given the work we did to exit the highly promotional elements at this business experienced in 2019, along with the investments we.
Made in our platforms and teams over the last 18 months and we're very encouraged by of 53% of second quarter increase versus 2019, we're a 55% increase for the first 6 months under 2 year stack throw in that we expect our e-commerce business to be up at a high single to great in 2021 and that puts our growth.
<unk> up nearly 50% on a 2 year stack.
So to wrap it up ill end with our last area of focus driving profitability to increase shareholder value over the long term.
Based on our updated full year outlook, which includes revenue being up at a low to mid single digit rate versus 2019, and our adjusted EPS being up meaningfully our strategy to return to profitable brand right growth is working with.
With a high quality and composition of revenue, including significantly reduced off price sales and less promotions and discounting we're driving more productive dollars through our P&L.
That are contributing nicely to margin improvements and greater EPS, demonstrating the results of our transformation and the stronger foundation, we have built over the past couple of years at with that I'll hand, it over to Dave Thanks Patrik at.
The halfway point of 2021, our second quarter results demonstrate that the strategies, we've been executing against and the foundation. We've worked hard to reset to increase under armour capacity to return to sustainable profitable growth to shareholders are working.
Our operational execution has never wavered against an incredibly challenging and dynamic global market punctuated by Covid over the last year and a half.
Our attention to under armour focused performers and delivering best in class innovations and premium experiences have never been sharper and.
And all of this has come together to target full year topline bottomline and working capital performance at better than pre pandemic levels.
In the second quarter revenue was up 91% to $1.4 billion compared to the prior year.
Versus our previous outlook. This overdrive was primarily due to higher demand across our wholesale and factory house businesses and.
And of course in general our second quarter results were up against last year's significantly restricted retail environment due to the peak of Covid impacted store closures.
From a channel perspective, our wholesale revenue was up 157% driven by broad based growth as we lap the most significant impact from the retail door closures in the prior year. Additionally, most of our Q to wholesale overdrive was due to stronger sell through and higher demand in North America.
Our direct to consumer business increased 52% led by 234% growth in our owned and operated retail stores, partially offset by an 18% decline in e-commerce, which faced a difficult comp as it was the primary business driver of last year's second quarter.
Our licensing revenues were up 276% driven by increases in our North American partner business.
By product type of.
Apparel revenue was up 105% driven by strength in our train golf and run categories.
Footwear was up 85% driven by a run and team sports categories.
In our accessories business was up 99% driven by hat bags and sports Matt.
From a regional and segment perspective.
Second quarter revenue in North America was up 101%.
In wholesale we continue to drive lower markdowns with tighter inventory, enabling fuller price to sell through.
Within DTC, we saw strength in our owned and operated stores given the easier comparisons to the prior year when most of our locations were closed for the quarter.
This was partially offset by a decline in our E Commerce business, which Conversely was up against a particularly tough comparison to last year.
In EMEA revenue was up 133% driven by growth in wholesale and DTC with significant strength across our wholesale and distributor partners.
Revenue in Asia Pacific was up 56% with balanced growth across all channels.
And in Latin America revenue was up 317% driven primarily by lapping of store closures in the prior year.
As we move into the back half of the year, we expect the transition of certain countries to distributor models to negatively impact topline performance, particularly in the fourth quarter.
Second quarter gross margin came in better than expected improving 20 basis points to 49, 5%.
Driven by 570 basis points of pricing improvements due to lower promotional activity within our DTC channel along with lower promotions and markdowns within our wholesale business, which was significantly impacted by the pandemic in the prior year.
And 100 basis points of benefit due to changes in foreign currency.
Offsetting these improvements was a 460 basis point negative impact from channel mix, primarily driven by a lower mix of e-commerce and a larger mix of wholesale.
Including a higher percentage of off price sales and last year. When this channel was essentially closed for most of the quarter.
Additionally, we realized 170 basis points of negative gross margin impact related to the absence of my fitness Pal, which will remain a headwind throughout 2021.
And finally at 10 basis point negative impact within supply chain as our continued benefits and product costs were more than offset by higher freight and logistics costs due to developing COVID-19 related supply chain pressures.
Overall versus our previous outlook for second quarter gross margin, we experienced lower than planned promotions enabled through higher demand along with driving more favorable pricing.
SG&A expenses were up 14% to $545 million per.
Primarily due to higher marketing costs and expenses tied to store operations given most retail locations were closed throughout the second quarter of 2020.
Relative to our 2020 restructuring plan.
We recorded 3 million of charges in the second quarter, an amount less than we had anticipated due to the timing of specific executions, such as the realization of lease and contract terminations.
Throughout the plan, thus far we realized $483 million of pre tax restructuring and related charges.
As detailed last September of this plan contemplates total charges ranging from 550 to 600 million.
It is important to note that all remaining charges are related to initiatives outlined in 2020, meaning nothing new has been added in 2021.
For the quarter for the third quarter, we expect to realize approximately $40 million to $50 million in charges related to this plan.
Moving on our second quarter operating income was $121 million excluding.
Restructuring and impairment charges adjusted operating income was $124 million.
After tax we realized a net income of $59 million or <unk> 13 of diluted earnings per share during the quarter at.
Excluding restructuring charges loss on extinguishment of $250 million of principal amount of senior convertible notes.
And the noncash amortization of debt discount on our senior convertible notes.
Our adjusted net income was $110 million or 24 of adjusted diluted earnings per share.
In this respect we are proud to report that in the first half of 2021, we have already surpassed our full year 2019 diluted earnings per share so and of great position to finish out 'twenty to 'twenty, 1 with strength against pre pandemic levels.
Inventory at the end of the second quarter was down 26% to $881 million as we continue to drive improvements throughout our operating model along with experiencing some inbound shipping delays due to COVID-19 related supply chain pressures.
Our cash and cash equivalents were $1.3 billion at the end of the quarter and we had no borrowings under our $1.1 billion revolving credit facility.
With respect to debt during the second quarter, we entered into exchange agreements with certain convertible bondholders for $250 million and principal amount of our outstanding convertible notes and terminated certain related capped call transactions.
We utilized net $247 million in cash issued 11 million shares of our class C stock and recorded a related loss of approximately $35 million, which is captured in other income and expenses.
This transaction $250 million of our convertible bonds remain outstanding.
Next let's move on to our updated 2021 outlook, where based on better than expected performance in our second quarter, we flowed through the upside for a meaningful increase for our full year.
That said, although recent consumer trends continue to track positively we remain cautious with demand in the overall marketplace due to both the COVID-19 pandemic.
And developing manufacturing and logistics challenges in key sourcing countries in southeast Asia.
Accordingly, today's outlook is subject to our business continuing to under the same general macros, we've seen most recently.
With no significant shutdowns of manufacturing partners or retail or logistics disruptions, along with continuing improvements within the global retail landscape as we progressed through the second half of 2021.
That said, let's start at the top with revenue, which we now expect to be up at a low twenties percentage rate for the full year.
This reflects the low twenties percentage increase in North America and of mid Thirty's percentage increase in our international business.
For gross margin on a GAAP basis, we expect of full year rate to be up 50 to 70 basis points against our 2020 adjusted gross margin of 48, 6% with benefits from pricing and benefits from changes in foreign currency being partially offset by the sale of my fitness Pal which carry.
At a high gross margin rate along with higher expected freight expenses.
The gross margin improvement relative to our previous outlook is due to improving benefits within pricing, partially offset by increased freight expense related to port congestion and logistics costs, which remains a rapidly evolving situation.
Versus 2020, we expect a high single digit rate increase in SG&A a rate that is less than half that of our revenue growth at.
<unk> laid out previously it is important to remember that specific to 2021, we are taking advantage of our improved outlook and proactively making incremental investments, particularly in marketing to build even deeper connections with our consumers.
Additionally, the other significant part of the overall increase in SG&A is higher incentive compensation, which is up against 2020, when we realized significant reductions against target levels.
All of this expected high single digit rate increase in SG&A in 2021.
On an absolute dollar basis.
About 1 half of this is related to incremental marketing, 1 third related to higher incentive compensation and the balance related to our other underlying SG&A.
On a 2 year stack the most significant drivers of SG&A dollar growth or the incremental marketing investments and higher incentive compensation, we expect in 2021.
Beyond these items, our underlying SG&A is planned to be up only slightly against 2019 base.
As we look ahead remaining disciplined around SG&A and striking the right balance between growth productivity and profitability is our top priority.
With that we now expect operating income to reach $215 million to $225 million this year.
$340 million to $350 million on an adjusted basis to.
Translated to rate, we expect to deliver an operating margin of approximately 4%.
And adjusted operating margin just north of 6% in 2021.
All of this takes us to an expected diluted earnings per share of 14 to 16.
Or excluding restructuring charges the loss on early extinguishment of convertible senior notes and noncash amortization of debt discount on these convertible senior notes, we expect adjusted diluted earnings per share of 50 to 50 to <unk> in 2021.
In summary, our full year outlook reflects the combination of the overdrive, we've realized in the first half of 2021, along with improvements across our business positioning us to deliver growth and stronger profitability relative to 2019.
Next before giving more color on how we're thinking about the balance of the year I'll highlight some headwinds that impact us more directly in the second half of 2021 income.
Including.
Lower expected sales of our sports masks.
Supply and demand constraints.
The absence of my fitness Pal.
Lower expected sales to the off price channel.
Changes to our Latin American operating model and.
And the exit of undifferentiated retail, which began in the third quarter.
Looking at quarterly flow, we at third quarter revenue to be up at a low single digit rate in the fourth quarter to be relatively flat to finish out the year.
Next we expect third quarter gross margin to be up 130 to 150 basis points due to pricing benefits and channel mix as we anticipate lower promotional activity and lower sales to the off price channel.
These benefits will be partially offset by the absence of my fitness Pal.
Higher expected freight costs.
And changes in product mix, driven by lower sales of sports masks.
For the fourth quarter, we expect gross margins be down due to negative impacts from the absence of my fitness Pal channel mix, driven by lower licensing revenue and product mix driven by a higher percentage of footwear and lower sales of sports masks.
Bringing this to the bottom line, we expect third quarter adjusted operating income to be $95 million to $105 million or 13 to 15 of adjusted diluted earnings per share.
So to close out of.
Operational excellence.
That's the ability of strong balance sheet and consistent financial management when combined form of model that's allowed us to transcend pandemic challenges proficiently.
Looking at the next 6 months and to set up all of these accomplishments provide for us going into 2020 to.
We believe under armour is well positioned to deliver on our next chapter of profitable growth.
With that I will turn it back to the operator for your questions operator.
If he would like to ask a question at this time simply press Star then the number 1 on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
And your final question comes from the line of Erinn Murphy of Piper Sandler.
Good morning, I guess my first question Patrick It's for you on North America, you talked about seeing that region got close to 2019 levels. Despite some of the structural and strategic changes that you've made can you just share a little bit more about what's the price view year to date to the positive on the underlying growth here in this region and then as we.
Exit 'twenty 1 how are you thinking about the long term growth algorithm for North America.
Hi, Alan Thanks for the question.
I think in general the.
Ability that we've had to execute if you remember a year ago, we talked on this call about how we were going to continue to drive our innovation and go to market pipeline and continue to be become more consumer centric and focus on being able to deliver at.
Across all channels better.
I see now the results of that really playing into it and that in combination with the with the demand constraints that we've put in to make sure. We're putting the right product in the right place to the right time is playing out with the consistent messaging that we've been able to deliver against that I think the consumer patterns of course were very hard to predict.
<unk> in 2021 versus 2020.
And I think we have been.
Pleased with how the consumer has returned to some degree right into into a full price retail and at our outlets and also continued to to shop online our ability to fulfill demand in terms of doing a better job.
Of delivering a better experience better product better messaging more consistently is really what youre starting to see the effect of so really at the essence of it is our strategy is working.
And we're able to execute against it when we look at look at forward into into next year I think the way to think about the current environment is there's a lot of uncertainty right and Dave Dave highlighted this in terms of what we're seeing with.
The development of COVID-19 here in the back half.
But we've built resiliency and an ability to adapt to be agile end.
We're ready for twists and turns in the road, but we're not going to sway of our strategy of.
Direct to consumer focus the focus performer and being the best we can be in athletic performance.
Great. Thank you and then if I can follow up just on net supply chain.
<unk> been very challenging for everyone really can you share kind of what youre seeing real time, how much longer are the lead times coming out of southeast Asia, and I think going back to your Investor day of Vietnam with maybe 23% exposure back then what is that now and is there any work around that you were needing to do to secure a steady flow of best of at.
Steady flow of inventory as possible.
Yes, I think it's at first of all there and I think it's of developing situation and I think that's something we're all dealing with across the industry and the industries I should say.
And you're right. We did talk about at in our Investor day and at that point at.
It was a little bit lower than it is today.
We're really happy with how we have planned our sourcing strategy and we talked about that actually at the Investor day, and we've continued down the path that we talked about.
We're not reliant necessarily in all categories. So much on APAC, we have a very balanced sourcing strategy across the world end today Vietnam. For example that you mentioned is about a third of what we do but at split right little bit between apparel and footwear.
It is important to note that we also have a good.
Presence in Europe, Middle East and as well as South America Latin America in terms of our sourcing strategies, So we're well balanced.
Does that mean, we're not going to have potential issues developing well.
In our outlook here given the.
Our current view.
Of course things will continue to develop but again agility here at a well balanced sourcing platform.
Probably puts us in a maybe a little bit better position than most but it's going to be.
<unk> of developing situation.
Thank you so much at all of that.
Thanks Darren.
And your next question comes from the line of John.
Kiernan of Cowen.
Excellent. Thanks for taking my question.
Patrick can you talk about the returns you're clearly, earning on the top of the funnel and performance marketing.
Investments you made in the first half of this year, how we should think about them in the back half of the year, particularly.
Within North America.
And how that fits into the revenue guidance for the back half of the year.
Yes, I think.
Thank you. Thanks, Thank you John I think Dave and I and the team now we're starting to feel really comfortable with that.
At the capabilities that we've put in place in terms of our ability to read and react as it relates to the.
Messaging and the media.
We're seeing through our ROMI models.
What that means now for the back half of 1 of the reasons that we're choosing to invest is that we're understanding so much better what happens to every dollar that we put into the marketplace and we have seen an opportunity based on not just of first half this year, but also to back half of last year and the investments. We've made that there is an opportunity for us to drive media.
Sufficiency more in the upper funnel so that means.
Perhaps not so much driving more revenue this year, but really preparing ourselves for the future so putting money into the top of the funnel so to speak to drive the brand.
Will give us a pay off down the line.
We're not just doing that in North America, we're doing at also in Europe.
In specific countries as well as in China.
And.
We believe that that's a really important for US right now to continue to enhance the brand and we believe that with the capabilities that we've built we're now able to do that in a very measured and strategic way and looking forward to.
Ramping it up here in the back half.
Understood.
Can you maybe 1 for you the business generated a 9% adjusted operating margin in the first half of this year. It's the highest the company has ever generated by far.
Im just curious the path to a double digit operating margin doesn't seem that far away, but can you talk to the drivers.
But you think we'll get there we've never seen the business.
Lower from a margin standpoint in the back half of the year as we at relative to the front now so I'm.
I'm just curious given how strong your margin performance was in the first half.
If you could talk to the long term drivers back to that double digit operating margin.
Any timing around that would be helpful as well. Thank you.
Yes, John I think maybe I'll take that in 2 parts I mean, if you think about playing out at the back half of this year.
We mentioned a lot of the back half headwinds around whether it be my fitness Pal demand constraints.
<unk> undifferentiated retail et cetera.
That are going on in the back half from a revenue perspective, we also mentioned some of the pressure on gross margin in the back half relative to.
Some of the additional freight and logistics costs et cetera. So some of those things are coming into play in the back half of this year and then also as Patrik just highlighted we're heavy hitting up marketing of fair amount in the back half of the year as well from a spend perspective.
And then last I would just point out that.
DTC is a higher percentage as we get towards Q4 that brings with it more operating and SG&A costs as well. So there's a lot of things coming into play relative to kind.
Kind of tempering operating margin in the back half of the year versus the front half of the year.
As we think about playing that forward.
At our absolutely driving down that profitable growth journey now.
And we're excited about that and we do believe that we will be able to get to a double digit operating margin in the future, we're not ready to speak to what year that will be.
But I mean, there are a lot of different opportunities to be able to get there whether it's continued improvement on kind of gross to net revenue with the health of the business that we're driving.
Whether it be continued gross margin opportunities relative to DTC mix, increasing and continued scale and costing benefits from that.
And then also obviously we've done so much work on the SG&A and.
Cost base front that we really look forward to being able to leverage that heavily as we step into 'twenty, 2 and beyond so a lot of different opportunities. There that we'll be excited to be able to speak more to in the future.
Awesome. Thank you.
And welcome.
And your next question comes from the line of Jim Duffy from Stifel.
Thank you good morning, guys couple of questions for me.
A lot of shifting stands in the environment right I'm trying to understand the impact of stimulus can you guys maybe speak to what you saw with retail door productivity cadence across to 2 and into July.
Alright.
Hi, Jim I'll kick it off it's Patrick here.
Yes, it's good good good to talk to I think the way to think about stimulus is that it certainly had an effect on the consumer keeping to consumer in the market.
We think that that's now also.
As we think about August September and especially Q3 here turning into what could be of more.
I got to be careful what I say here, but at more normalized back to school, perhaps in terms of we think that for us as a brand at the back to school and also the back to sports right back to his team sports is going to be an opportunity for us specifically.
So I do think that the stimulus has played an effect of course on here on the first half of the year end.
We think that as things maybe normalize here a little bit more in terms of the pattern of the consumer that's going to help drive business in the second half of the year end I don't know if you want to add a bit more color there day I think.
You covered it pretty well.
Great and then Patrick it's really encouraging to see the brand successfully engaging with consumers in the U S and selling more full price.
How does this lead you to thinking about pricing power is it too soon to ask consumers for more on like for like products or do you feel of the brand isn't at position to price for value and offset some of the rising input pressures.
So I think it's it's a.
At the way to think about at I think is that as we are now in.
This year and from an enrollment perspective, we clearly are seeing as everything comes together for US is that we're able to sell more full price product at lower discounts and our gross to net.
Is continuing to improve and Youll see thats coming through in the gross margin.
In the future though.
As you kind of think about that into 'twenty, 2 and beyond there is certainly opportunity for us to.
Kevin.
Have some power.
Like in terms of the brand continuing to improve to also raise prices.
And we will do that as as we always try to.
And I think we will have more opportunity now as we become stronger as a brand.
So more to come on that.
Thank you.
And your next question comes from the line of Brian Nagel from Oppenheimer.
Good morning.
Hey, good morning congratulations.
Brian.
The question I'm going to asking it to.
A bit of of follow ups from the other questions but.
Well I mean, theres a lot of crosscurrents in the consumer environment right now.
A lot of companies are kind of good numbers youre doing so here on the back of a significant.
Our repositioning investments you've made over last few years itself. So as you look at the business today, and giving you of what's happening to backdrop, how much do you think.
The acceleration of strength, we see him to first half of 'twenty..1 is a reflection of all of them.
1 of what under armour has been doing to reposition and then on top of that our U C.
Evidence of that the new products, you can distributions really helping to drive these to.
<unk> gains.
Yes, Hi, Brian It's Patrick that's of Great question, and I think what we're really proud of at under armour has to balance.
That you see coming through end.
Our growth is balanced and it's holistic right. If you think about our ability to grow across all of our regions grow across our categories.
And to do that everywhere with a better gross to net.
Our ability to execute to get the right stuff to the right place at the right time and to be able to build franchises, especially in footwear is something we never were able to do before.
And I'll just like to point out here is specifically in the wrong category I think in the last.
A few years.
We've done a great job.
Instilling a franchise mindset on our hovered platform, where we now have 6 or 7 franchises and we're now into things like to Sonic for in the market not to end the infinite 3 and so forth and this year of layering on top of that in the pandemic year.
Halfway post pandemic year, whatever you want to call it.
Actually an elevated expression in terms of of franchise with the flow that came out in early spring that did incredibly well what was interesting for US was the fact that to hover platform continued to.
Perform incredibly well, especially at the market out of $150. So now running shoe at $160 and we just introduced at flow, but also at ESC a few weeks ago and that is also cranking. So I think it isn't as easy as saying that we are just following the trend I think that we.
We're doing all of the things I, just talked about with constrained demand.
With making sure that we are.
<unk>.
Running at better play in terms of profitability and to execution. So it's really truly I think of holistic approach from under armour.
And what we I think we're proving out as at this focus that we put in place around athletic performance to focus performer sticking to that strategy being consistent executing well is now playing out.
That's very helpful. I appreciate patrik.
Just a follow up question.
We head towards back to school, because you're talking about at about this with you or your outlook comments, but have you seen any sort of started to have this.
At resurgence of Covid in certain markets across the country have you seen any disruption to your to your businesses that is happening.
Well I think we at <unk>.
Currently we see at more from a southeast Asia perspective, as it relates to store closures for a little bit for example, under supply chain that we've talked about before.
We're not necessarily seeing at yet with the consumer I think in North America, but at this a little money right. Because you've also got back to school happening. So people really have to get out there to get stuff.
So I think it's a little early.
Yet here in North America does that mean, it's not going to come I don't know I think your guess is as good as mine I think.
The way we're approaching it though is the fact that what I've seen from our teams here at under armour is an incredible resiliency and an ability to adapt and be agile in this pandemic situation and its built at resiliency for us. So we are ready to be able to navigate twists and turns here in the road going forward.
With that agility and the new operating model. We have we have very strong leadership that are able to execute.
At every level.
But we do believe and that's what Dave called out in his in his remarks that it's going to be twists and turns in the road here as we look in the back half of this year for sure and it's going to be a little bit different depending on where you are.
Europe is.
In and out of a little bit.
North America is still holding but probably it's going to be a few twists and turns and then we have the supply chain in southeast Asia at to deal with so it's a very fluid.
Fluid moment right now I think in terms of what's going to happen next.
Alright, I appreciate all of color congrats thank you.
Thanks, Brian.
And your next question comes from the line of Matthew Boss from J P. Morgan.
Great, Thanks, and congrats on a nice quarter as well.
Thanks, Matt Thanks, Matt So.
Patrik, maybe as we think about potential for day for the more normalized world that you laid out that hopefully we see in the back half and beyond.
I guess, maybe where do you see product execution product to opportunity across apparel and footwear today versus how best to think about the evolution of your game plan on the product side as we think about 2022 and beyond.
Matt. Thank you for that question. It's 1 of my favorite questions because 1 of other things. That's so exciting about under armour right. Now is our innovation pipeline and we've talked to you guys as I sat here.
To Aaron earlier today, we decided last year as we went into the pandemic that we were going to execute on our innovations on our end our go to market, which is what we've done.
<unk> increased at.
Laser focus that we have on consumer Centricity is also helping us understand how to cadence things how to tune things.
And how to really drive not just our innovation, but our go to market Holistically. So we have now learned as a brand how to drive franchises in footwear. We have also learned how to drive specific initiatives like curry like the rock.
But we've also learned how to do all of that.
Executing excellently all.
All the way upstream so for us, it's really about continuing to Plano stick to the strategy execute to play stay consistent spend a little bit more in marketing to drive the brand and when we come out of this pandemic, we're going to be ready for growth.
Okay.
Maybe just as a follow up David on the expense side, what level of revenue growth do you believe is necessary to leverage SG&A multiyear. If we were just thinking or looking for a baseline about how to think about the model going forward revenues to expenses, how best to think about it.
Matt It's of Great question at this.
This point, we've highlighted how.
Outside of marketing and outside of incentive compensation. This year, we expect underlying SG&A to only grow to 2% to 3% and at that same underlying SG&A versus 2019 is just growing slightly so I think those are pointing towards where we've been able.
To drive that cost base towards.
I'm not saying that that's what the growth will be next year, but I am saying that we are into a much much better place and I think patrik and I combined with our leadership really have the right financial discipline and understanding.
Combined with enterprise mindset to make sure that we're prioritizing our investments and not letting that cost structure get to any any.
Any much larger standpoint at longer terms. So we're continuing to to look at each spend we're continuing to prioritize we're continuing to.
Also invest in the key areas that we believe are critical for our growth.
But at the same time, we've got to make sure that we continue to leverage so.
We are well positioned as we go into 'twenty, 2 and beyond there's a really solid understanding.
The leadership of how to drive that growth more profitably going forward and that's what we're going to be looking to do.
That's great color best of luck.
Thanks, Matt.
And your next question comes from the line of Simeon Siegel from BMO capital markets.
Thanks to everyone. Good morning, Congrats on the ongoing progress really nicely done.
Patrick if I can go back just to contextualize, the North America, Amit So having North America reps almost hit at 19 is really fantastic to your point about the difference in the health of those reps can you just speak a little bit about how the 'twenty, 1 AUR and units would compare to 19 embedded within that full year Guide and then you touched on it but maybe how are you thinking about.
As you move forward AUR in units going forward, just as we think through channel mix and a different implications of our quality of sale. Thank you.
Yes. Thank you.
I would say that in general.
Gross margin tells the story here to a large extent in your <unk> or positive more or less across the board.
And we believe that there is we talked to is that about pricing power here before we believe there is opportunity for us as we go forward and whats exciting is some of the examples I've given already in terms of footwear for example, the ability for us to push upward right in terms of the day of $160 flow for example of that just came out this.
And we tend to forget that if you back up to 2018.
When we when we launched of Hubbard platform, which was really our first foray into a concerted effort at at driving into the run category of footwear category. If you like we started at that point at a 100 to $120. We then took ourselves up into 100.130 to $150 and then we now went up into 1.
Hundred $60 that kind of thinking of progression as we as we drive franchise is also an apparel whether it is in a rush technology.
Other than our ISO channel technology.
It's the same sort of thinking you're right. We are building franchises. We're building an ability to to drive the AUR is up over time as the brand gets stronger and the teams are doing an excellent job of orchestrating that play because it isn't orchestration at the end of the day.
You got to do it in a very determined and appropriate way and everything's got to come together and I think that is what you see is an ability to execute on that from the brand. So that should give everybody optimism for the future I think maybe 1 further comment to on North America. When you when you compare back to 2019.
<unk>.
We're getting close to that same level, but that's also with cutting our third party off price liquidation channel pretty.
Pretty close to in half since since 2019, so even with that headwind being able to get back to that level and do it at a much more premium way in a less promotional way is something that we're really excited about.
Yes, that's what I was trying to figure out it would seem that even on the same level of Brad Youre doing at on fewer units. So speaking to the house comment let me correct and then and then David sorry, if I missed it did you guys just to.
The mass business from last year can you remind us how large it was just to that we understand we underlying growth rate that's embedded in the guide.
The rest of the year.
I appreciate the interest in that.
It was definitely a decent business for us that we built up a lot in the back half of last year and it continued to be at a reasonable business for us in Q1, and Q2, and we are expecting that to diminish a fair amount in Q3, and especially Q4 of this year.
And it is a driver within our accessories product category, but we haven't been giving the exact dollar of percentage of that of that amount.
Got it alright, thanks, a lot guys, congrats and best of luck for the rest of the year.
Thanks Simeon.
Yeah.
And your next question comes from the line of Sam Poser from Williams trading.
Good morning, Thank you for taking my questions.
I first would just I wanted to just to understand some of you talked about demand constraints or are we really looking at supply constraints built into the guidance.
To Sam This is Dave Great question, and I would say that to be honest at it's a little bit of both.
We've definitely employee demand constraint that.
We started to go into a little bit last year from a planning perspective, but the real impact is coming into this year relative to.
Buying much much tighter demand, especially with certain accounts non premium accounts or things like that that we've been we've been stepping out of.
So there is certainly is of demand constraint impact going on that we're expecting to be bigger in the back half of the year and we're doing that for the right reasons.
But in addition, yes, our forecast does contemplate some of those supply chain pressures, we are seeing a little bit of delays in some of our product.
And that could lead to some cancellations here and there in other pressure points. So we have included that in what we expect in our outlook for the back half of the year to a reasonable degree so it's a little bit of both of them.
To more than just 1 quick follow up on that your exposure to the southern part of Vietnam, where most of the issues are right now.
What kind of exposure do you have there and when would that impact.
The supply going forward, taking out of it you know all of the truck issues and all of the other things just tried to focus on that.
Yes, Sam I think coming back to the fact that we have about 1 third of our.
Supply chain coming out of all of our supply coming out of Vietnam and about half is it's about half and half of apparel and footwear.
And.
Currently we have experienced some some things happening already right from Vietnam in terms of what the impact is not just on the actual manufacturing, but also to your point to logistics and some.
Some port congestion and container availability and other things.
But I Couldnt give you at this point to an exact number from south versus north to be honest with you. It's about a third in total that we have coming out of there but.
We're monitoring it end.
As you know it's a it's a very fluid situation right now in terms of what's currently going on and how that thing is spreading.
Thanks, and then lastly.
I think it is to pump to John <unk> question.
On the marketing.
Youre spending a lot of the marketing to build for the longer term, which I appreciate but are you. It sounds like based on the results that you saw in the second quarter net.
Of this long term marketing is turning into.
Youre getting short term benefits on this long term marketing and if so how much of that may be built into the back half guide.
Yes, absolutely we are seeing some of it that's clear.
It's not just in North America. It's also we're seeing some of that happening in EMEA as well.
And in terms of of that expectation because of everything that we're playing out in terms of demand constraint and how we're thinking about inventory levels and how we're driving that.
We don't really have an opportunity to let's say drive a tremendous amount of of.
Upside based on the marketing would you would you agree with that Dave would you say it differently no I mean again most of that spend and that increased investment that we've been opportunistic around and planned for in the back half of the year is more top of funnel brand related marketing, it's not as much related to <unk>.
Direct E com or things like that so we do expect more of that benefit to be in 'twenty, 2 and beyond but.
Obviously some of it helps with brand awareness and consideration in the current year.
And we are probably seeing some favorability from that but again the back half of the year, we do have to be careful with the supply chain pressures, we just talked about.
And some of the delays and impacts of that could have along with the other headwinds that we outlined.
Thank you very much and continued success.
Thanks Sam.
Operator, you there.
Yes, our last question comes from the line of Paul Lewis.
Great.
Hi, guys. This is Kelly on for Paul Thanks for taking our question.
Looks like your revenue guidance end.
Just curious to Jeff North America sales will be down low to mid end and.
At that at the University of 2019.
Is that in the first half I was just curious if you could help us understand the impact of exiting undifferentiated retail in North America.
Within that guidance and any any more details of the strategy. How many retail partners do you have how many of you expect to at Cagny at all.
Over time and should we expect to you guys at any bigger accounts are at the smaller independents and then just lastly.
How much do you expect to recapture within your own DTC channel. Thanks.
Yes, I mean, the outlook that we have from North America does contemplate a bigger impact in the back half of the year relative to the demand constraint work, but then also exiting the undifferentiated retail.
We been in that kind of 12 to 13000 dollar range that we're going to be working down towards about 10000 doors.
And that is in process of lot of that has to work that we're driving through and the changes that we're implementing this year. So most of that will be behind us.
And that exit is not really a huge part of the headwind, but it is a factor.
And when you think about those accounts again, you know the accounts that were exiting most of them are not large partners. Most of them are going to be partners that we feel are not <unk>.
Important to brand as well or not is aligned with focused performer there could be some very low volume or low margin doors for us.
And so we're being very strategic in how we approach that.
And although the number of doors that we are decreasing as significant because of lot of them are smaller volume at doesn't have as dramatic of an impact.
On revenue for 'twenty, 2 and beyond.
Got it thanks, and then EMEA.
Shelf space gains with key retailers in North America, which is great to see could you just to elaborate on how exactly that's materializing in the day.
Our apparel business is footwear net.
And then just more broadly which area of the business are you feeling most optimistic about.
Further yourself to take gains at <unk> and beyond.
But I would say, it's broad and it's across categories and it's happening incrementally season over season end.
A lot of it is with the new product that's coming out right that's driving at the brand the innovation.
And it's great to see that it is happening also in footwear right now so for us.
We're going to continue that and that is the plan, we're going to earn back to shelf space end.
Better sell throughs higher AUR as better gross margins. So all of that stuff helps right to drive and that's why it's also important for us to do this extra marketing spend this year is to continue to also make sure that we're driving the awareness and consideration to help our wholesale accounts. So that we can ultimately.
Earn back even more shelf space, but we're making good progress I'm very very pleased with it. It's again very balanced very holistic end value very much broadly for the brands. So that's good news and more good news to come here at for ultimately.
Okay.
Great. Thank you and congrats.
Thanks.
Thank you.
Thank you that will conclude our second quarter earnings conference call. Thank you very much.
Okay.
This does conclude today's conference call. Thank you for your participation you may now disconnect.
Yeah.
Okay.
[music].
Okay.
[music].
Okay.
[music].
[music].
[music].