Q1 2022 Under Armour Inc Earnings Call

[music].

Good morning, everyone. Thank you for standing by and welcome to the transition quarter ended March 31st Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session and to ask questions. During the session you will need to press star one on your telephone.

And please be advised that today's conference is being recorded.

And if you require any further assistance you May press Star zero.

I'd now like to hand, the conference over to your Speaker today, Mr. Lance <unk> Senior Vice President Investor Relations and corporate development.

Good morning, and thank you to everyone for joining us for under armour is transition quarter ended March 31, 2022 earnings conference call. The information provided on today's call will include forward looking statements that reflect on Armours view of its current business as of May six 2022 statements made are subject to risks and uncertainties detailed in documents regularly filed with the SEC.

And the Safe Harbor statement included in this morning's press release, both of which can be found on our website about under armour Dot com is important to note that the ongoing uncertainty related to COVID-19, and its potential impact on the global retail environment could continue to impact our business results. 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 in our press release, which identify and quantify all excluded items and provides our view about why we believe this information is helpful to investors joining us on today's call will be under armour, President and CEO Patrik Frisk.

And CFO David Bergman.

Go ahead Patrick.

Thanks, Lance and good morning to everyone on today's call will review results from our transition quarter that ended March 31, 2020 to provide our initial outlook for fiscal 'twenty three.

Having successfully executed a multiyear transformation after delivering the best year in Undrawn Ms history in 2021 results for our transition period came in lighter than we had expected due to ongoing supply challenges in the emerging COVID-19 impacts on our Asia Pacific business. These trends, which we believe to be temporary I would also expect it to impact <unk>.

Fiscal 'twenty three is shaping up.

They will discuss these elements later in our call yet despite these near term headwinds the underscore the confidence we have in our long term growth potential over the past few years. Following the completion of a multiyear transformation, including work to reset our strategy operations and financial discipline will strengthen our brands delivered higher quality revenue and our <unk>.

Managing our business for improved profitability, including improved margins cash flow and return on capital.

The engine that makes this modern work most efficiently as profitable top line growth.

This is my number one priority as CEO we've.

Believe our direct to consumer footwear women's and international businesses will drive this growth over the long term across these drivers our growth strategy is anchored in five platforms engineered to accelerate our ability to scale and grow the under armour brand.

First as consumer Centricity, which lies at the core of our reason for being to activate our purpose of empowering doses drive for more we are committed to having a deep understanding of our athletes are functional and emotional needs and their behaviors and preferences as they complete their journey from discovery to purchase to advocacy by incorporating insights data and.

<unk>, we work to ensure we evolve as consumers evolve, creating repeatable connection points. Our second platform product engine is the creation of industry, leading innovations. These inventions wrapped in art enable athletes to train compete and recover at the highest level possible.

Leveraging consumer insights ensures our product is optimized for performance style.

And cultural elements through our train compete and recover architecture. Our constant focus is on delivering tangible performance advantages to drive loyalty always ensuring we deliver products that athletes didn't know they needed and now can't imagine living without <unk>.

Third is our go to market platform, which is how we manage the marketplace balancing product creation storytelling and experiences with strong commercial relationships. Among our wholesale partners. We've made considerable progress here by optimizing our workforce is calendar delivering increasingly better segmentation and ultimately ensuring that wherever and whenever.

We show up consumers are engaging with us brand right premium way.

Fourth this end to end planning, which is another.

Innovating product platform as we work to solve complexity, among our product creation and lifecycle management sustainability logistics and finance are forecasting we're collaborating on ways to bring supply chain discipline company functions suppliers and customers in sync to create the most optimal ecosystem possible.

We completed work on many of the individual components of this effort. We are now focused on connecting them to get even sharper and more efficient as we grow.

Finally, as Omnichannel excellence, which targets delivering a seamless premium experience across all brand touch points.

<unk> and voice of the consumer capability will utilizing a channel agnostic approach to mapping out the purchase journey identifying and reducing friction points along the way. Furthermore, harnessing the power of our e-commerce platform to improve performance and speed along with endless aisle buy online and pickup in store and flex payment capabilities.

We're driving a more enjoyable digital experience.

Adding even more horsepower to this effort and taking lessons learned from our successful successful program implemented in China over the past year, we plan to launch our loyalty test pilot in North America by the end of 2022.

This program will engage consumers more deeply with all facets of our human performance system by our content events rewards and community based interactions all to make the focus performer better.

Additionally, we continue to evolve our brand house in factory House store call centers, strengthening our ability to deliver an efficient and well balanced balanced multichannel experience.

Combined these platforms activate a powerful ecosystem, how we show up to empower and deliver performance for under armour athletes at the sharp point of connectivity and inspiration we lead with team sports and our incredible roster of sports assets and so far in 2022, we've seen incredible examples of Undrawn <unk>.

This happened.

Starting in basketball, we were thrilled to see 29 under armour LTE double eight teams qualify for this year's men's and women's March Madness tournament and they left at all on the court playing with the hunger Gritten Swaggered that our athletes are known for.

Starting and ending the season in first place and playing in our women's specific flow breakthrough two shoes, the South Carolina Women's basketball team brought our second National Championship home to Colombia, built and designed for women. The breakthrough through two is optimized anatomically for the best fit support and grip on the court looking to this fall we're excited to add <unk>.

<unk> three for this highly coveted franchise.

The NBA Stephen Curry hit a record 16, three point is on its way to 50 points to win MVP and the eighth consecutive all star game of Paris in February wearing his signature Curry nine basketball shoe.

Stuffs impact off the court is equally impressive and Undrawn was proud to stand with them, having donated to the Cleveland Metro School district to support their basketball programming.

And the other conference Joel and beat is having its best year ever becoming the first international player in history to win the NBA, scoring title and is in the running for overall MVP for the current season.

We are also honored that our partner Dow an undrawn one goal 2022 Edison Awards in the performance based design category.

Robert less units sold technology used in our UA flow lightweight basketball and running shoes was assigned to bring energy return shock absorption and traction to in house field Cushing and speed without sacrificing durability. We are proud of the work we've done together with Dow to bring this innovative technology to market that serves our purpose of making athletes better.

While improving manufacturing efficiency and reducing material usage.

From a global football perspective, we recently announced our partnership with Aston Villa Center back end cap in Taiwan mix. In addition to our training product and his boot of choice Uhm mechanical main cited our values are significant factors in signing with US which is well aligned with this plant for community to give backs on empowering access to support this isn't.

Outstanding example of how under armour being purpose led it's attracting the talent, we believe exemplifies the balance necessary to build an eternal brand.

Next up major League baseball is well underway and we're excited to watch our athletes build on their momentum from last season from Bryce Harper is 2021 national MVP and his signature UA Harper sixth fleet that delivers speed traction in power.

Freemen building off last year's World series performance. There is another fantastic season of baseball ahead of us.

And we'd be remiss not to call out jordon speed for taking home its 13th PGA tour victory with its RBC heritage Triumph in Hilton head pulling out of wind following a sudden death playoff building.

Building on the excitement of this win we're also incredibly proud to share that our 10 year partnership with Jordan has been extended by another four years through 2029.

These are just a few examples of how we drive brand affinity utilizing the best athletes on the planet Halo that manifests itself through a run train and recovered products and in the second half of 2022, we have several exciting innovations coming and a rug business. We are driving loyalty through our innovation franchises a strategy that hits two.

Over a long term growth drivers footwear and women's.

<unk> success from our basketball business, we are excited to launch our first ever women's specific running footwear with the UA flow synchronicity expected this fall.

With the mid so optimized for ground field and geometry engineered round her anatomical differences, we see this as a game changer in how under armour makes you better.

Also launching this fall our re imagine versions of two of our most popular hub of franchises.

Hubbard Phantom three delivers improved stepping comfort with newly developed knit advancement and for the very first time, a 100% full hover platform for even more advanced cushioning. The UA hover incident for long distance running shoe features less Robert underfoot for more flexible sensation balanced by a former carrier for more.

<unk> footprint as the miles flyby.

We are equally excited about upcoming apparel launches as well a few highlights in our trane business include expanding our high performance UA Rush technology. This fall rush is the signed with mineral line fabrics to return infrared LNG to your body, helping you work harder and recover combined with a seamless and smartphone technologies, we're redefining fit.

Form and function across performance tops bottoms and bras and.

And finally, when athletes recover consistently they're able to push themselves to become better enabling higher performance levels than ever thought possible.

In this respect it's time, we reinvent that a classic and we're doing just that this fall we are launching our next evolution of fleece across all collections. This new incredibly warm and lightweight materials will be featured in one of <unk>. Most popular franchises armour fleets with an improved athletic fit premium finishing details.

I'm honest scratch. Additionally, this full fleet age.

<unk>, 80% sustainable recycled fiber so in a way to targeting 100% recycled materials in 2023.

Another highlight and in line with our core value of acting sustainably our investments in amplifying our sustainability efforts, including building a new global headquarter here in Baltimore.

This new brand center will help fuel our next chapter of growth and our goal of using 80% renewable energy by 2025, and a 30% reduction in greenhouse gas emissions by 2030.

Within sustainability, we are focused on three main areas first from a materials perspective, we are working to redefine yawns to include fabrics that have improved stretch drive faster performed better and most importantly, our 100% recyclable.

From a chemistry standpoint, we are leveraging solutions and high efficiency dyeing processes that yield improved colors, while reducing water usage and improving wastewater quality and finally from a process viewpoint as we continued to utilize even more recycled material in our own manufacturing methods. We are working hard to establish a <unk>.

Hilarity model to ensure we are leaving our homefield cleaner and less depleted them before.

Or would come on this when we released our 2022 sustainability report, which is expected this fall.

Turning to our longer term view.

I'd like to emphasize my confidence and the balance was struck among our strategic operational and financial principles to fuel sustainable profitable growth.

And while we work.

Done to grow the brand over the past few years has come to fruition growth for the company at least in fiscal 'twenty three will be tempered compared to how we see the trajectory developing in the years that follow.

Close by underscoring that under armour is a growth company with an incredible opportunity ahead of us our fundamentals are strong underlying brand strength is improving and our confidence remains unchanged that said it is essential to look past near term pressures and focus on the long standing and pluses the price of freight supply chain challenges and Covid nine.

<unk> are not as powerful as the global passion for sport.

Confidence, we are well positioned to deliver on our promise of growth as we work through 2023 and beyond and now I'll turn it over to Dave.

Thanks, Patrick with that let's review our results for the transition quarter that ended March 31 2022.

Our revenue increased 3% to $1 3 billion in the quarter compared to the prior year. As a reminder, we mentioned on our last call that we expected transition quarter revenue to be up at a mid single digit rate.

That expectation included an estimated 10 percentage points of revenue headwinds related to reductions in our spring Summer 2022 wholesale order book from supply constraints associated with ongoing COVID-19 pandemic impacts.

Since providing that outlook.

APAC revenue has been affected by inbound shipping delays driven by COVID-19 disruptions.

In addition, we encountered restricted store hours and store closures in China due to COVID-19, which caused significant reductions in retail traffic.

Together these developing challenges weighed on our transition quarter revenue by about one five percentage points.

So revenue would have been in the middle of our expected range, excluding the impact of these events.

Clicking into revenue by channel.

Wholesale was up 4% to $829 million, driven primarily by increases in our distributor and off price businesses.

Keep in mind, our off price business was still within 3% to 4% of our total revenue, where we expect it to remain for fiscal 'twenty three.

Our direct to consumer business was up 1% with 2% growth in ecommerce sales and flat results in our owned and operated stores.

This e-commerce represented 45% of total DTC sales in the transition quarter.

Our licensing revenue was up 23% driven by a timing shift in APAC and solid growth in North America.

From a regional perspective, North America revenue was up 4% to $841 million, including growth in our wholesale and DTC businesses.

EMEA saw strong results with revenue up 18% driven by growth in our wholesale and DTC channels.

Revenue in Asia Pacific was down 14% due to COVID-19 related inbound shipping delays and challenging market conditions amplified by retail store closures and restrictions in China.

And then Latin America revenue was down 6% impacted by shifts in our business towards the distributor model, which we completed in the third quarter of fiscal 2021.

By product type apparel revenue was up 8%, primarily due to strength in our training and team sports categories.

Footwear was down 4%, primarily due to COVID-19 related supply constraints.

Spite this we saw growth in our train and outdoor categories.

And finally, our accessories business was down 18% due to expected lower sales of our sports Max compared to last year, which we anticipate normalizing by the second quarter of fiscal 2023.

Our transition quarter gross margin fell 350 basis points year over year to 46, 5%.

This was driven by 330 basis points of Covid related supply chain impacts driven by elevated freight costs, particularly for ocean freight which came in considerably higher than we had expected along with increased airfreight utilization.

80 basis points of unfavorable channel mix related to higher sales to the off price and distributor channels, which carry a lower gross margin.

30 basis points of unfavorable regional mix.

And 20 basis points of negative impact from changes in foreign currency.

These headwinds were partially offset by 120 basis points of pricing improvements due to better pricing or sales to the off price channel and lower promotional activity within our DTC business.

SG&A expenses were up 16% to $594 million, primarily due to increased marketing investments higher salaried and non salaried workforce wages due to last year's compensation increases for our teammates and higher consulting services.

Related to our 2020 restructuring plan.

We recorded $57 million in the transition quarter, bringing our planned total to $571 million of pre tax restructuring and related charges.

With this I am pleased to announce that we do not anticipate any further charges under this plan and thus our 2020 restructuring plan is now considered closed.

Next operating loss was $46 million in the quarter.

Excluding restructuring and other charges adjusted operating income was $11 million, which was below our outlook due to lower than planned APAC revenue and higher freight costs.

After tax we realized a net loss of $60 million or 13 of diluted loss per share in the quarter <unk>.

Excluding restructuring charges of $57 million, our adjusted net loss was $3 million or one of adjusted diluted loss per share.

Moving to the balance sheet.

At the end of the transition quarter inventory was down 3% to $824 million driven primarily by inbound shipping delays due to COVID-19 related supply chain pressures.

Our cash and cash equivalents were $1 billion, and we had no borrowings under our $1 $1 billion revolving credit facility.

And we're putting that cash to work.

In February we announced our share repurchase program, a two year 500 million authorization that helps create value for shareholders, having already executed $300 million of this program.

We are well underway.

Next let's dive into our fiscal 'twenty three outlook.

Given our fiscal year change please keep in mind that the comparable periods. We are using are the corresponding quarters from the trailing 12 month period from April one of 2021 through March 31 of 2022.

Accordingly, we will refer to this as our baseline period.

With that let's dive in.

At supply challenges and COVID-19 related impacts in China conspire to impact fiscal 'twenty three we expect these headwinds to impact under armour in the near term with more positive momentum developing as the year progresses, and what we believe to be temporary issues normalize.

As a reminder, the achievement of our outlook is dependent on current macroeconomic factors.

Including supply challenges COVID-19 impacts inflationary pressures and geopolitical risks not getting worse from what we're seeing today.

With that we expect revenue to be up 5% to 7% in fiscal 'twenty three compared to the baseline period of $5 7 billion, reflecting mid single digit growth in North America, and low teens growth in our international business.

This expectation includes approximately three percentage points of headwinds related to our strategic decision to work with our vendors and customers to cancel orders affected by capacity issues supply chain delays and emergent COVID-19 impacts in China.

To click down a bit more we expect the first half of fiscal 'twenty three to be the most heavily impacted by order cancellations and supply chain delays.

We also expect the emergent COVID-19 impacts in China to lessen as the year progresses.

As a result, we expect total company sales growth to gradually improve as the year develops with our highest year over year revenue increase is expected to be in our fourth quarter.

For gross margin, we expect a full year rate to be down 150 to 200 basis points from the baseline period rate of 49, 6% due to expected inflationary pressures on freight and product cost.

Unfavorable channel mix and changes in foreign currency.

We anticipate our most significant declines in gross margin to be in the second quarter as elevated freight costs, particularly for ocean shipments peak against our year over year comparisons.

And then as these cost fine balance, we expect a smaller decline in the third quarter with year over year gross margin improvement anticipated in the fourth quarter as we finish out the year.

From an SG&A perspective, we expect total spending growth to be slightly below our 5% to 7% revenue growth rate in fiscal 'twenty, three as compared to the baseline period.

Considering these factors, we expect fiscal 'twenty, three operating income to reach $375 million to $400 million compared to the baseline period of $424 million and adjusted operating income.

As a percent of revenue. This represents an operating margin of approximately six to six 5%, which compares to a baseline period adjusted rate of seven 4%.

We expect diluted earnings per share for the fiscal 'twenty three to be in the range of 79 to 84.

Versus the comparable comparable baseline of 47.

This includes a 28% benefit from a favorable tax allowance release related to anticipated profitability in key tax jurisdictions, we expect to realize in the fourth quarter.

Of this 28 benefit 16th of this amount is related to prior restructuring charges and therefore, our adjusted diluted earnings per share is expected to be between 63 and 68.

This compares to adjusted diluted earnings per share for the baseline period of 68.

Next I'd like to provide some color for the first quarter of fiscal 'twenty, three where we expect revenue to be flat to down slightly versus the prior year quarter.

This includes about 10 percentage points of headwinds from proactive reductions and cancellations to our order book due to COVID-19 related supply constraints previously discussed.

Due to higher freight costs, we expect our first quarter gross margin to be down approximately 250 basis points compared to the prior year.

Taking this to the bottom line.

We expect a first quarter operating income of $25 million to $35 million.

This should translate to two to three of diluted earnings per share.

In closing we are on offense, even amid this continued highly uncertain environment and.

And though the year ahead face temporary headwinds we are confident that the work we have done to transform our business along with the strength of the under armour brand sets us up to grow more meaningfully delivering sustainable profitable growth over the long term.

Now I will turn it back to the operator for questions operator.

Yes.

As a reminder to ask a question you will need to press star one on your telephone until we draw. Your question you May press the pound key.

First question comes from the line of Steve So of UBS. Your line is now open.

Great. Thank you so much.

Just wanted to ask you about the revenue guidance for the fiscal year talking about a mid single digit growth rate North America can you just talk about where that growth is going to come from whether by channel or by product category. Thank you. So much.

Yes, Jay this is Dave.

Haven't really broken it down too much yet in detail within the release, but.

In general we did say that for the full year, we expect North America to be mid single digit and for international growth to be low teen.

If you break that down a little bit further.

Definitely believe footwear will be growing much higher than our apparel growth.

And we think about some of the supply challenges we've been talking about.

More effected footwear last year as well, so definitely expecting footwear to grow a fair amount faster than apparel in fiscal 'twenty three.

But we're not actually breaking down by channel at this point.

Alright, thats it could follow up and maybe Patrick you talked about your confidence in the long term outlook could you sort of maybe connect.

Fiscal 'twenty three is going to look like versus your longer term view of what kind of sales growth do you expect from under armour and what kind of margins you expect.

Sure I think first of all thanks for the question Jay and I just wanted to make sure that.

Set the record straight a little bit here.

We came into our last call.

Being very adamant that we saw some of these developments.

Currently are still with us here on the.

On the supply chain and logistics side.

We'll be werent.

As visibly at that point in time was what happened towards the end of the last quarter, which was the developments in China and also the even further acceleration and freight cost all of these things.

But we believe are temporary and of course there was a.

Somewhat of a frustration I would say in the team because we do feel that we have demand for the brand in the marketplace across the world.

The actions that we've taken both in the quarter that we just came out of where we had also pulled back on auto order stock simply to make sure that we could get things here on time.

Again, staying disciplined in making sure that we're not getting ahead of our skews in terms of building too much inventory in an uncertain environment. The same thing plays into 2023.

Like Dave just said, we have a 10 point headwind just in the first quarter.

And orders that were canceled that demand that was actually there.

So there is certainly a bit of frustration, but at the same time, it's temporary the underlying demand for the brand is there.

The brand is getting stronger the work we've done around transformation is working our operating model is foundation of the fundamentals are really good right now for us. So we have to get through this temporary time that we're in right now get out on the other side and like Dave said and I also said in my script.

We feel good about growth going forward and.

And also we feel good about <unk> ability to continue to grow our margins back again so.

This is a temporary state for this brand and there is certainly a bit of frustration in the teams because we had to make these decisions.

If we hadn't made them, we would have been sitting most likely with inventory coming in late.

And we wanted to continue to stay discipline, we've done so much great work over the last few years and making sure that we have the right level of inventories. We came again into this quarter I would say, even lean right with a negative three inventory.

Would I like to have that a little bit higher probably right at this point, but reality is also when I look at it longer term.

We will start to build back inventory in the back half of the year to Dave's earlier point and will start to get healthier.

Revenue growth perspective, as well in the back half of the year as we accelerate out of this temporary situations. So I just wanted to give a little bit more color for everyone on the call.

In terms of how we see the situation right now.

Hey, maybe to take that a little bit further this is Dave we talked about the three percentage points of headwinds in fiscal 'twenty three.

So if you kind of adjusted for that you would point to an 8% to 10% kind of underlying range for fiscal 'twenty, three but based on where we are with our relationships and where we are with our long term planning, we see fiscal 'twenty four with the ability to grow more than that so we're excited about that we're excited about continuing to.

Improved gross margin after fiscal 'twenty three.

And then also even deeper leverage on the SG&A with all the cost structure work and finally, bringing a restructuring plan to closure so.

Definitely excited about launching into fiscal 'twenty four.

Got it very helpful. Thank you so much.

Next question comes from the line of Matthew Boss Jpmorgan.

Your line is now open great.

Great. Thanks, Patrick to your comments there so a number of moving parts.

<unk> are outside of your control, but is your overall assessment that you are getting at the underlying demand for the under armour brand today relative to three months ago is unchanged and then Dave just on the 5% to seven revenue outlook for this year and your visibility I.

I guess what are you seeing in terms of the order book visibility and the supply situation as you see it today, just trying to get a sense of your confidence in the five to seven today given the moving parts.

Sure Matthew I'll take the first part of that yes. The demand is there the same way it was on our last call.

And again.

Reiterate remember we we have the council product in the transition quarter, we talked about that already actually last fall in our earnings call last fall the last one for the year and.

In February we talked about it.

We also Dan mentioned.

Visibility we had into the first part of 2023 that they've now quantified for you today, but the demand the underlying demand is there.

And Matthew I guess further to your question more towards towards my angle.

I would say that.

From a revenue perspective, we've got on the wholesale side very good visibility for the first three quarters based on orders that we have and we're comfortable with that Q.

Q4 is something that will be kind of working through here in the coming weeks.

So I would say that we have very good visibility so far on the wholesale side DTC side I think we're planning very appropriately based on traffic and what we're seeing in our ability to drive conversion.

And then when you think about the supply chain side.

Talk a lot about this on the last few calls.

About how the constraints with the factories created situations with the delays and the cancellations that we've had to proactively work through.

But our supply chain team is not sleeping they are pushing hard for us every day.

We believe that the availability is really going to open up for us in the back half of this year, especially as we kind of go through and finish out Q3 and start running into Q4 more uninhibited by by some of these issues. So.

I think we will see a more complete quarter for us in Q4, and then really driving without these headwinds per se in fiscal 'twenty four.

Great and then Dave on the gross margin outlook for the down 150 to 200. So if we think outside of freight could you just help walk through the assumptions youre embedding an underlying merchandise margin, specifically promotions and pricing and I guess my point is what's.

The overall health of full price selling in the athletic channel again, a number of moving parts.

What is the athletic inventory situation today any different than again, what it was three or six months ago, as we think about pricing and promotion and the rational environment that I think we talked about on this call.

Yes, I can start date, but just giving a little bit of color around what I see in the market and then you can.

Dig into some of the more detailed nuances there.

Would say that I think it's mixed at this point.

In terms of how I think about what's going on with inventory in the marketplace.

One of the reasons why we have been so.

Let's say considerate in terms of how we have approached.

The inventory.

The transition quarter and also in the beginning of 'twenty three is that we did not want to be.

Getting product in late that we would have to drive through a promotional liquidation to Dave's earlier point I mean, we're still looking to keep our liquidation number in that 3% to 4% range in 2023, and we see no reason why we can do that.

A lot of that is because we have been so diligent around this.

How that plays out for other players in our space I think will depend on.

Where you are.

In the world the tone, so geography, but also in terms of.

How much product do you have order potentially that might come in late et cetera. So I think we will see a mix.

View here as we develop into the year a little bit more.

Because simply there is going to be pockets of inventory here.

Here and there that is going to have to be liquidated and that's not necessarily the case for ongoing at all.

Dave you want to add more color.

Yes, I mean, I guess, a little bit more detail kind of on the year over year gross margin walk.

As far as the headwinds the largest we see as the freight costs mainly around ocean freight.

We don't anticipate that to settle very much this fiscal year.

And then the other piece of it is product costing.

When you think about the materials and the labor.

The impacts of inflation. So we're feeling some of that as well now we are working to counter that with some price increases, but that work and the actual.

Actualization of that isn't going to be until a little bit in Q3, and then more so in Q4, and then more of a full benefit of that in fiscal 'twenty four.

Relative to the region mix, not really much change or impact there on gross margin as.

As far as channel mix is a little bit of a headwind there with a little bit higher mix of distributor sales, which are a little bit lower gross margin.

And then we do have a tiny bit of headwind relative to footwear growing faster than apparel and accessories, obviously footwear for us we've talked about is a little bit lower gross margin than our apparel.

But as far as a kind of promotional discounting aspect.

We are not intending and nor are we planning on a big difference from from 2021 at this point, we want to continue to hold premium.

And drive the brand.

Great color best of luck.

Thanks Matthew.

Next question comes from the line of Paul Lewis.

Paul Your line is now open.

Hey, guys. Thanks curious if you can talk about are there are there any regions, where youre seeing orders getting canceled for demand regions, rather than you guys working with your partners from a supply chain perspective or is it all with you guys.

Working with those guys I mean with your partners to make sure inventories stay clean so I just want to make sure I'm clear on whether or not you are seeing demand driven cancellations at all and then just going back on the pricing question. How are you approaching pricing and trying to pass through higher prices on a regional basis, where do you think you have more pricing power versus.

The regions, where maybe you don't.

Yes.

Kick it off here, David maybe you want to add a little bit on the pricing at the ammo just some color on that too no. We're not seeing cancellations because of demand not being there that's number one.

Two in terms of pricing, we're being careful in terms of how we think about pricing.

It's not an across the board approach, we're being very very thoughtful about how we do it in terms of our families.

Categories.

The region allergy or at all.

But we see opportunities, we absolutely do and we have.

Look through let's say every single product that we make and we're making the appropriate adjustments, where we feel confident that we can drive them to and sustain them right. So so there is opportunity here, we think to sustain.

This increases here on the back of also building a more premium brand again and Thats really important as part of this journey that we're on so we are making great progress there, but to Dave's point again, it's going to be success would be coming into play here throughout this year and then be fully implemented in 2000 and for Dave I don't know if you have any more color you'd like to add.

Sure.

No I mean, I think thats pretty much pretty much summed it up I mean, we've been able to do some pricing action for fall winter of 'twenty two product.

And then a fair amount more that we're executing for spring summer 'twenty three product and then Theres a little bit of trail out of things. We still believe we have opportunity in fall winter 2003, So again it'll be a.

Build of the benefit on that pricing, but it's been very strategic.

Generally across the board increases, but in areas, where we really feel.

From a price value and innovation perspective, we have some opportunities in where we're excited to be able to drive that through and feel the benefit of that as we go further into the year.

What sort of range should we be thinking about in terms of what you've already taken and what you plan to take in terms of price increases.

Well, we're not getting into that much detail publicly but I would say that.

The majority of the benefit we will see towards the very end of Q4, and then a full year run rate benefit in fiscal 'twenty four.

As far as the actual percentage increases they vary depending on the product it is.

A very specific and targeted it's not abroad.

As a percent change.

Alright, Thanks Scott.

Thank you.

Next question comes from the line of Sam Poser.

<unk> send your line is now open.

Low trading thank you very much.

Let me ask about I'm going to go back on to the pricing.

Is the pricing like.

How much new product do you have as a percentage.

And on the new products are you, including that as price increases you brought up the the new fleet that you're bringing in for fall is that something that is now 15.

15% higher than it would've been a year ago because of all of this I mean.

Or do you have to cycle through new crop to bring enough new product and to get the payoff for the price increases that you are planning into 'twenty core.

Yes, hi.

Patrick maybe I'll start David you can take it back so I just wanted to add some color there because you were specific about some product.

I think it's a combination Sam because of course a.

Great opportunity to raise prices when you actually introduce himself.

To your point we have.

Great newness coming in in certain categories and when we do that that's absolutely an opportunity for us that we're going to take.

So that's correct. So Dave do you have do you have something else one yes.

Yes, no it's definitely both to your point, Sam and I think that.

There is definitely going to be a lot of opportunity relative to <unk>.

Carryover styles as we start to ship them back in for the coming seasons, what we have not been doing much of is going out onto the floor and re ticketing. What's out there that that has not been something that we've been pursuing a lot it's more.

We've been shipping in the next season or to Patrick's point as.

We're launching new product, but it is a combination of both.

So it just takes time to cycle through and then secondly, Patrick.

Patrick.

You mentioned your confidence of.

<unk> of the direction that Youre going.

We have a pause because of some external factors.

But.

Sure.

Looking back is there anything any.

Indicator you may have missed earlier, you sort of hit yourself in the head and said if we had just responded to this three months earlier, we sort of saw it but didn't taken citizens we should have.

Anything that.

You could.

It could kind of situation.

Well I think yes, I think it's a great question, Sam and <unk>.

Believe me you spent many nights trying to.

On that one through but here's the reality.

Could we have potentially right. If you think about where we were in fall and I'll just take everybody hear back a little bit in time, if you think about where we were last fall when we were starting to experiencing the shutdowns.

And the factory base.

And some of the impact that had and all it was all like a rubber band effect right. It took some time to.

And then the kind of accelerated and then actually you didn't have a lot of effect in the back half of last year, rather you had an effect coming into <unk>.

Through this this year.

And our sub quarter and when we saw that developing first of all we didn't know how long we're going to be constrained. So we took.

We took the kind of the high road of saying you know what we're going to make sure that we can we can make the things that we can deliver.

As much on time as possible.

Because we actually don't know, we don't have visibility right now to how much of a delay it's going to be we could have at that point said no, let's make all of it and Gamble and and then maybe sell some of it in future season I come back then to the discipline that we that we have been driving for the last three years ever since 2018, if you remember.

We've continued to wash through old inventory get our inventory levels in check improved our balance sheet to make sure that we're able to build a less promotional more full priced more premium brand again and I think we've been very successful with that and Thats, what I, what I mean in terms of the demand that we now see.

And also the premium station that we're coming back to the brand. So we could have done some of that but we chose not to and we took the same approach here.

Early in 'twenty, three where we also have the demand to absorb your points three points for the whole year and 10 points just in the first quarter of demand that was there.

The orders that we canceled because we knew that we were not going to be able to make it in time and when I say in time like way in time right. So this isn't like 15 days 30 days its more its much more than that so it would've been high risk for us and in an environment, where you have so much uncertainty.

Covid is still playing into things, where we're actually supply chain continues to play into things.

We just did not want to jeopardize future seasons.

For short term may be at this point and those those were decisions. We made that were based on external circumstances.

That's the kind of color I can give you on that Sam.

One last thing the average selling prices on your direct to consumer.

In the quarter year over year could you give us some <unk>.

Color there.

Okay.

Okay.

We haven't normally given that level of detail at this point.

But this isn't normal times, and it's sort of talk to the health of the business. So.

I think maybe you can make an exception for today.

If you have it on hand.

We can circle back with you.

Alright. Thank you very much good luck. Thank you. Thank you something.

Okay.

Next question comes from the line of Simeon Siegel of BMO capital markets. Simeon Your line is now open.

Thanks, Hey, guys good morning.

Can you how our inventory units versus the reported dollar change on the balance sheet and then maybe a follow up on that last one a little bit within the five to seven revenue growth could you tell us how youre thinking about AUR versus units and then just with today's guidance, bringing annual gross margin closer to the pre pandemic levels. Just how are you thinking about the right long term gross margin level. Thanks, guys.

So a couple of things relative to inventory.

Obviously, we have seen the cost of our inventory go up a little bit.

So relative to that it is more of a unit down.

Then the actual inventory value of our cost and Thats something that we would expect to.

As we as we continue through the year, we know that are costing on inventory will continue to go up a little bit as we've discussed in our in our gross margin.

Outlook.

And then relative to.

Kind of a price mix perspective.

We do see pricing.

Continuing to be something that has been a little bit stronger for us and therefore, the unit growth has been a little less than the.

The pricing difference and Thats something that we want to continue driving.

And then long term gross margins.

Long term gross margin.

Again.

This year is more of a temporary situation, we believe which is.

A lot of it is dealing with the freight situation not just the ocean freight costs, but also <unk>.

Airfreight utilization and we believe that as we get into fiscal 'twenty four we.

We will see much more positive improvement relative to that front.

And then as we go forward long term, we do believe that there is a lot of opportunity there to be able to.

Get to that 50% plus gross margin when you think about.

The APAC growth and that being a higher gross margin region for us when you.

CD over index growth that we're continuing to drive in the longer term relative to direct to consumer is a mix of business and the.

Gross margin benefits there as well.

We'll continue to see a little bit of long term gross margin headwind because of the footwear mix and intending to grow footwear faster than apparel.

But we believe that the other opportunities would more than offset that.

Great. Thanks, and then just one quick one if I can just given where the shares are you guys are obviously new to the repurchase.

Gain with the new authorization. So just any way to help us think about how you want to approach repurchases.

Yes.

Right now.

We executed the initial 300 million ASR of $500 million commitment and obviously, we'll be looking over the next year to two years on the right times to fulfill the remainder of that.

The remaining $200 million outside of that.

We continue to look at our long term planning and our long term capital and the uses of that capital. We're not right now at a point, where we're going to give.

Given indication of if we're going to roll right into another program or not but it is definitely something that we continue to look at.

Great. Thanks, a lot best of luck in the year guys.

Thanks.

Next question comes from the line of Michael Binetti of Credit Suisse. Michael Your line is now open.

Hey, guys. Thanks for taking our questions here.

I guess on SG&A, we just looking at the math you guys laid out for the year versus the quarter it looks like SG&A spend.

From like 97% in the first quarter down to like 1% to 4% rest of the year is obviously below where it's been running the last few quarters is that a good run rate as you think out longer term and maybe a little bit of color on what slows and the spending lines. After the June quarter to help us think alongside you there.

And then it was nice to see I guess, we're looking at things on a three year basis. You go back before Covid. It is nice to see the acceleration in D C.

In the quarter in total versus the December quarter.

I'm curious on wholesale though.

On wholesale inventories in the channel today, what you're seeing from competitors.

I know you said you don't have as much inventory as you wanted Patrick but do your retailers in the U S have enough in general or are they still hungry are you starting to see inventories build.

Yes, I think I'll start there. David then you can dig into I'll start at the end, maybe then hand it off to you I think.

What's interesting right now is.

The fact that I think everybody everybody's inventory is coming in.

In a somewhat disjointed fashion and what I mean by that is.

I think that is.

You could say in general that it's been hard in our industry to get the right stuff to the right place. The right time, we might have stuff that you can get.

Into the channel, but it's not necessarily always coordinated.

And I think we'll continue to see some of that play out here early in 'twenty three.

So I don't think that the inventory levels are extraordinarily high or anything like that at this point in time, it's the quality and the let's say the consistency on the agenda.

The composition of it that might be a little bit out of sync.

Out of order so to speak here and there.

Why it's so hard to give a.

And the exact.

Takeda.

The health of every channel is because it is it is a little bit helter skelter in terms of how things have come in.

Better in some places and worse than others and also the same would be could be set for categories.

Delivering some things better than other things so.

That's really what's going on right now I think it's playing out.

Ross categories and across geographies.

So.

Across channels, So Dave do you want to.

Yes, Michael relative to SG&A.

Correct and that the transition quarter was a pretty high SG&A quarter and that was planned that way, we actually closed the quarter pretty much right on where we had planned it to be and that was mainly a higher marketing investment that we have strategically decided to make in the transition quarter.

But then also the increased salary and non salaried workforce wages that we had talked about previously in last year about the investments there.

When you think about Q1 of 'twenty three we're kind of continuing that forward for one quarter and so you do see a higher anticipated spend in the first quarter of the year.

And part of that is to continue those investments in brand marketing and give us a little bit of a tailwind from a brand perspective, as we push into the back half of the year, when we have more inventory availability and more ability to kind of run there. So.

We do.

Anticipate leveraging SG&A and keeping it under that revenue growth rate that we mentioned of 5% to 7%.

I would say that the leveraging is not as significant as I would normally like and that is because of the revenue headwinds that we're talking about that we believe are temporary.

So as we step into fiscal 'twenty, four we would anticipate leveraging SG&A more so than what we're planning to do here in fiscal 'twenty three.

But hopefully that gives you some some extra color.

And would you say.

It looks like back of the year, you've got revenues growing like 7% to 9% and SG&A only one to four that's a considerable amount of leverage I mean as you look to 'twenty. Four is that I mean is that an appropriate framework do you think.

That might be a little bit aggressive assumption as we think about 2004, but.

Definitely leveraging better than what you would see full year 2003, okay.

Okay. Thanks, a lot guys.

Thank you.

Next question comes from the line of John Kernan Cowen John Your line is now open.

Good morning, Thanks for taking our questions guys.

Maybe you can talk to how Youre planning the balance sheet as we go through the remainder of the year it looks like the stub quarter.

That did see a fair amount of working capital volatility I think the cash flow from operations earned.

And about a little.

Over 300 million box, how do we plan working capital, particularly inventory and the balance sheet as we go through the remainder of the year.

Sure John a couple of things to think about there.

As we go into the back half of the year and the supply chain challenges free up more and we're able to meet more demand we will be bringing in more inventory. So you will see the inventory growth.

Go up a little bit in the back half of the year as we buy into that and get ready for that.

Demand that we can actually service better in the back half of the year and then also going into.

A bigger growth in fiscal 'twenty four so you will see that develop from an inventory perspective.

Relative to the rest of working capital, we're continuing to run it very tight.

We're in a very healthy position, where in some of the best aging positions around the world that we have.

We've been in now probably for the last.

Six months to nine months versus versus years back so cash.

<unk> cycle is still very tight.

The other aspect would probably be from a capex perspective.

We are going to be investing a little bit more in capex. This year than we have in the last few years, which hopefully should make sense, we tailored back during COVID-19 and some of those challenges and also during the restructuring period.

Whereas we've talked publicly about being in that kind of 3% to 5% range Capex to revenue, we were running more like 2% or less for a few years, whereas this year, we will probably run closer to the mid point of that of that 3% to 5% range.

And that is investing in retail store build outs, that's investing in fixtures and shop in shops within wholesale partners around the world.

That is investing in omni and digital.

But it also has to do with <unk>.

Starting to build.

Build out our new long term headquarters here in Baltimore, as well, which we're super excited about for our our teammates.

That's really helpful. Thank you just one final question for me just how do we think about China within Asia Pac Asia Pac had been a region that.

Our big growth region really during the pandemic and during your fiscal 'twenty, one how do we think about Asia and China in fiscal 'twenty, three and 'twenty four.

I think the.

If you think about APAC as a region.

The area outside of China.

Now I'm talking specifically about South East APAC, Australia, Singapore, Thailand, et cetera, and also I would say our market in South Korea is doing well.

China is with China is right now.

Were affected like everybody else in that market.

We'll continue to monitor and.

Manage.

According to.

How things develop Dave I don't know if you want to give some color on the magnitude of what we see that right now.

Yes, I mean.

Again APAC is the region is a very strong area for us to continue to grow China, specifically as we've talked about is experiencing some headwinds.

We don't see that as a under armour brand thing. It is more of a market challenge and then obviously right now with the Lockdowns in store restrictions that we're dealing with so.

I think the team is doing an excellent job and we are ready to continue growing the brand there, but there are temporary challenges that we are absolutely experiencing there and it's a combination.

The restrictions and the Lockdowns. It's also the impact that that has on transportation and therefore, our ability to be able to get product to the right place at the right time within China, and then just a little bit of overall softness continuing.

In the market for many of the international brands that aren't that aren't based in China. So a lot of play there, but we're continuing to move through and we see that situation.

Improving a little bit as we get into Q2.

And then even more so as we get into Q3 and Q4.

Okay.

Thanks, guys best of luck.

Thank you.

Next question comes from the line of Katy Fitzsimmons of Wells Fargo. Katy Your line is now open.

Yes, hi, good morning, Thanks Meredith.

Thank you Jim.

Wondering if you could kind of expand.

Maybe on some of the conversations with your wholesale partners, particularly here in North America.

93.

Yes.

How did you can you just.

The current health of the relations Patrick you'd probably be into.

But when we're thinking about fall holiday.

Your partner's books earlier.

Supply chain constraints that you're seeing even just how should we think about what some of those conversations are evolving.

And then Dave real quick just a modeling question just any thoughts on the tax rate here in 'twenty three thank you.

Yes sure.

Thank you Katie.

Wholesale perspective, with our wholesale partners in the U S. First of all we're now through the exit of all of the undifferentiated retail. So we're incredibly focused in the North American marketplace are our relationships are great I would say.

I would categorize it as the best I've felt about that since I since I got here.

And we continue to make great progress.

Across the board I would say so.

Excited about that.

Some disappointment of course in terms of our ability to.

Fulfill demand in the stub quarter to some extent, but also early in 'twenty three but.

To Dave's earlier point, we'll see inventory start to build back towards the back half of the year and into into our fourth quarter.

And I'm.

I am excited about the work that the teams are doing.

Dave.

Yeah and relative to the tax rate.

Its interesting Theres, obviously, a lot going on within our taxes right now but.

A couple of things to consider.

When you think about.

The benefit that we expect in Q4 that is a valuation allowance that were expecting to reverse based on.

Rebuilding profitability and kind of hitting that 36 month.

Trailing profitability factors, so that is definitely a benefit.

But we're looking at a tax rate, that's probably going to end up being in the.

High single to low double digit range.

All things are considered.

Still there.

Yes, yes.

I think we lost Kt Kt here either.

Savings.

Sorry.

One just on that inventory question you guys are speaking yes.

Supply and demand how should we think about that <unk>, maybe as we think about <unk> between.

Fourth alien DTC, maybe just given some of the game.

In the first half of the year.

Anthony I think efficiently meet the demand.

Right.

Dave do you want to take it or yeah to be honest, Katy I was having a little bit of a hard time hearing you. I think you were talking about is it inventory availability to service back half demand is that what youre getting.

It's growing is it how we prioritize them is what I heard.

Finchem yeah.

So I think yes go ahead.

Was going to say again, we do see a lot more availability opening up in Q3, and Q4, especially Q4.

We are prioritizing our.

Our key wholesale partners. The most and then also in conjunction with that our brand house and E Com channel, but I think as we get to Q4.

Pretty much all of our retailers should be able to feel kind of the full open availability of getting product to them. So it shouldnt have to be.

As much prioritization as we get into Q4.

Yes.

Okay. That's helpful. Thank you.

Well.

Next question comes from the line of Bob <unk> of Guggenheim. Your line is now open hi, Good morning, just a couple of quick questions for me on the marketing can you address a little bit sort of how youre planning the marketing spend <unk> endorsements.

In fiscal 'twenty, three and into 'twenty four and I was just wondering if you can maybe just give us an update on your kids business sort of where the trends are there and what youre seeing with that segment. Thanks, Sean.

Sure.

Our general space.

Span of marketing in a normalized environment would be somewhere between 10% to 11% we have been spending a little bit higher like Dave said them.

In the transition quarter, and we're going to spend a little higher here.

The coming quarter, but should normalize towards.

The back half of the year.

And we kind of.

Aim to stay in that kind of spam in terms of marketing going forward between 10 and 11%.

And of course, when it comes to the endorsements we have been.

Announcing some some pretty exciting things here lately I talked about in my script around extending Georgia for example, the entire mix center back for <unk>.

And others here and just lately so we'll continue to.

Adjust our portfolio.

<unk> that it makes sense for us as a brand as we go forward. The main thing for us when it comes to the relationships that we have is really our ability to activate them.

And as we move into the future and we continue to get better and better in terms of understanding first of all what.

What assets matter to us and we do that through return on marketing investment modeling that we do.

Mixed media approach that we have where we now have these tools in place where we can understand what makes sense for the brand and also what makes sense for either.

On the partner in this case.

And for US we now feel very good about the mix that we have.

And the rebalancing that we've done also through the restructuring over the last three or four years, and that's really exciting for us because we're now able to activate more of our.

Our partnerships than we've ever had been able to do before which is which is really exciting.

The kids business.

Alright, and the kids business, sorry, I thought David Okay.

The youth business.

Is healthy our youth business is healthy and we saw an.

An increase in <unk>.

Our team sports business in our youth business as we came into back to school in 2021 and that started to normalize more and that trend for us in terms of the strength of our youth business has continued.

And we are very excited about how we think about that going forward as we as we see.

Normalized back to school season, this year too.

Especially here in the U S in the back half of the year.

Thank you.

Thank you Bob.

Alright, Thanks, guys that'll that'll close us out for today I appreciate you participating and attending our call today and look forward to catching up with you. Thank you. Thank you. Thank you everybody. Thank you.

Thank you so much to our presenters and to everyone who participated in this concludes today's conference call. You may now disconnect have a great day.

Yes.

[music].

[music].

[music].

Good morning, everyone. Thank you for standing by and welcome to the transition quarter ended March 31st Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session and 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.

And if you require any further assistance you May press Star zero.

I'd now like to hand, the conference over to your Speaker today, Mr. Lance <unk> Senior Vice President Investor Relations and corporate development.

Good morning, and thank you to everyone for joining us for under armour is transition quarter ended March 31, 2022 earnings conference call. The information provided on today's call will include forward looking statements that reflect on Armours view of its current business as of May six 2022.

Statements made are subject to risks and uncertainties detailed in documents regularly filed with the SEC and the Safe Harbor statement included in this morning's press release, both of which can be found on our website about under armour Dot com. It is important to note that the ongoing uncertainty related to COVID-19, and its potential impact on the global retail environment could continue to impact our business results we may reference.

<unk> 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 in our press release, which identify and quantify all excluded items and provides our view about why we believe this information is.

Helpful to investors joining us on today's call will be under armour, President and CEO , Patrik Frisk and CFO David Bergman.

Go ahead Patrick.

Thanks, Lance and good morning to everyone on today's call will review results from our Crown second quarter that ended March 31, Slide 22, I'll provide our initial outlook for fiscal 'twenty three.

Having successfully executed a multiyear transformation after delivering the best year in Undrawn Ms history in 2021 results for our transition period came in lighter than we had expected due to ongoing supply challenges in the emerging COVID-19 impacts on our Asia Pacific business. These trends, which we believe to be temporary I would also expect it to impact how far.

'twenty three is shaping up.

They will discuss these elements later in our call yet despite these near term headwinds and underscore the confidence we have in our long term growth potential over the past few years. Following the completion of a multiyear transformation, including work to reset our strategy operations and financial discipline and strengthen our brand delivered higher quality revenue and our <unk>.

Managing our business for improved profitability, including improved margins cash flow and return on capital the.

The engine that makes this model work most efficiently as profitable topline growth. This is my number one priority as CEO .

We believe our direct to consumer footwear women's and international businesses will drive this growth over the long term.

These drivers our growth strategy is anchored in five platforms engineered to accelerate our ability to scale and grow the under armour brand.

As consumer Centricity, which lies at the core of our reason for being to activate our purpose of empowering doses drive for more we are committed to having a deep understanding of our athletes are functional and emotional needs and their behaviors and preferences as they complete their journey from discovery to purchase to advocacy.

Incorporating insights data and analytics, we work to ensure we evolve as consumers evolve, creating repeatable connection points. Our second platform product engine is the creation of industry, leading innovations. These inventions wrapped in art enable athletes to train compete and recover at the highest level possible leveraging consumer.

Inside ensures our practice optimized for performance style.

And cultural relevance to our train compete and recover architecture. Our constant focus is on delivering tangible performance advantages to drive loyalty always ensuring we deliver products that athletes didn't know they needed and now can't imagine living without <unk>.

Third is our go to market platform, which is how we manage the marketplace balancing product creation storytelling and experiences with strong commercial relationships. Among our wholesale partners. We've made considerable progress here by optimizing our workforce is calendar delivering increasingly better segmentation and ultimately ensuring that wherever and whenever.

We show up consumers are engaging with us the brand right premium way.

Fourth this end to end planning, which is another under armour innovating product platform as we work to solve complexity, among our product creation and lifecycle management sustainability logistics and finance are forecasting we're collaborating on ways to bring supply chain discipline company functions suppliers and customers in sync to create the most optimal.

It's impossible.

We completed work on many of the individual components of this effort. We are now focused on connecting them to get even sharper and more efficient as we grow.

Finally, as Omnichannel excellence, which targets delivering a seamless premium experience across all brand touch points.

Stablish and the voice of the consumer capability will utilizing a channel agnostic approach to mapping out the purchase journey identifying and reducing friction points along the way. Furthermore, harnessing the power of our e-commerce platform to improve performance and speed along with endless aisle buy online and pick up in store and flex payment capabilities.

Driving a more enjoyable digital experience.

Adding even more horsepower to this effort and taking lessons learned from our successful successful program implemented in China over the past year, we plan to launch a loyalty test pilot in North America by the end of 2022.

This program will engage consumers more deeply with all facets of our human performance system by our content events rewards and community based interactions all to make the focus performer better. Additionally, we continue to evolve our brand house in factory House store concepts strengthening our ability to deliver an efficient and well balanced multichannel.

When combined these platforms activate a powerful ecosystem, how we show up to empower and deliver performance for under armour athletes at the sharp point of connectivity and inspiration we lead with team sports and an incredible roster of sports assets and so far in 2022, we've seen incredible example.

So of Undrawn in making this happen.

Starting in basketball, we were thrilled to see 29 undrawn their LTE double eighteens qualify for this year's men's and women's March Madness tournament and they left at all on the court playing with the hunger Gritten swagger that our athletes are known for.

Starting and ending the season in first place and playing in our women's specific flow breakthrough two shoes, the South Carolina Women's basketball team brought our second National Championship home to Colombia, built and designed for women the <unk>.

Through to its optimized anatomically for the best fit support and grip on the court.

Looking to this fall we're excited to add number three to this highly coveted franchise.

The NBA Stephen Curry hit a record 16, three point, there's almost wait to 50 points when MVP and the eighth consecutive all star game a pass in February wearing his signature Curry nine basketball shoe.

Steps impact off the court is equally impressive and Undrawn was proud to stand with them, having donated to the Cleveland Metro School district to support their basketball programming.

And the other conference Joel and beat is having its best year ever becoming the first international player in history to win the NBA, scoring title and there is in the running for overall MVP for the current season.

We are also honored that our partner Dow an undrawn one goal 2022 Edison Awards in the performance based design category.

Robert less units sold technology used in our UA flow lightweight basketball and running shoes was assigned to bring energy return shock absorption and traction to in house field Cushing and speed without sacrificing durability. We are proud of the work we've done together with Dow to bring this innovative technology to market that serves our purpose of making athletes better.

While improving manufacturing efficiency and reducing material usage.

On the global football perspective, we recently announced our partnership with Aston Villa Center back and Katherine Tower mix. In addition to our training product and his boot of choice. The Uhm mechanical main cited our values as the significant factors and signing with US which is well aligned with his plan for community give backs and empowering access to support.

This is an outstanding example of how under armour being purpose led it's attracting the talent, we believe exemplifies the balance necessary to build an eternal brand.

Next up major League baseball is well underway and we're excited to watch our athletes build on their momentum from last season from Bryce Harper is 2021 national MVP and the signature UA Harper six clean that deliver speed traction empower to Freddie Freemen building off last year's World series performance. There's another fantastic season of baseball ahead.

Us.

And we'd be remiss not to call out jordon speed for taking home as 13th PGA Tour victory with its RBC heritage Triumph and Hudson had pulling out of wind following a sudden death playoff building.

Building on the excitement of this win we're also incredibly proud to share that our 10 year partnership with Jordan has been extended by another four years through 2029.

These are just a few examples of how we drive brand affinity utilizing the best athletes on the planet a halo that manifests itself through a run train and recovered products and in the second half of 2022, we have several exciting innovations coming and a run business. We are driving loyalty through our innovation franchises a strategy that hits two.

All of our long term growth drivers footwear and women's.

Translating success from our basketball business, we are excited to launch our first ever women's specific running footwear with the UA flow synchronicity expected this fall.

With the mid so optimized for ground field and geometry engineered round her anatomical differences, we see this as a game changer in how under armour makes it better.

Also launching this fall our re imagine versions of two of our most popular Hubbard franchises.

Hubbard Phantom three delivers improved stepping comfort with newly development advancements and for the very first time, a 100% full hovered platform for even more advanced cushioning. The UA hover internet for long distance running shoe features that's Robert under foot, we're more flexible sensation balanced by a former carrier for more.

Fishing footprint as the miles flyby.

We are equally excited about upcoming apparel launches as well a few highlights in our trane business include expanding our high performance UE Rush technology of this fall rush is the sign with mineral lines fabrics to return infrared energy to your body, helping you work harder and recover combined with a seamless and smartphone technologies, we're redefining fit.

Form and function across performance tops bottoms and bras.

And finally, when athletes recover consistently they're able to push themselves to become better enabling higher performance levels than ever thought possible.

In this respect it's time, we reinvent that a classic and we're doing just that this fall we are launching our next evolution of fleece across all collections. This new incredibly warm and lightweight materials will be featured in one of them under Armours. Most popular franchises armour fleece with an improved athletic fit premium finishing details.

I'm honest ash. Additionally, this false fleet is over 80% sustainable recycled fibers on our way to targeting 100% recycled materials in 2023.

Another highlight and in line with our core value of acting sustainably or our investments in amplifying our sustainability efforts, including building a new global headquarter here in Baltimore.

This new brand center will help fuel our next chapter of growth and our goal of using 80% renewable energy by 2025, and a 30% reduction in greenhouse gas emissions by 2030 with sustainability. We are focused on three main areas first from a materials perspective, we are working to redefine yards to include fabrics that have improved.

Stretch drive faster perform better and most importantly, our 100% recyclable.

From a chemistry standpoint, we are leveraging solutions and high efficiency dyeing processes that yield improved colors, while reducing water usage and improving wastewater quality.

Finally from a process viewpoint as we continued to utilize even more recycled material in our own manufacturing methods. We are working hard to establish a circularity models to ensure we are leaving our wholesale cleaner and less depleted than before more would come on this when we released our 2022 sustainability report, which is expected this fall.

Turning to our longer term view.

I'd like to emphasize my confidence and the balance was struck among our strategic operational and financial principles to fuel sustainable profitable growth.

And while we work.

Done to grow the brand over the past few years has come to fruition growth for the company at least in fiscal 'twenty three will be tempered compared to how we see the trajectory developing in the years that follow.

Close by underscoring that under armour is a growth company with an incredible opportunity ahead of us our fundamentals are strong underlying brand strength is improving and our confidence remain unchanged that said it is essential to look past near term pressures and focus on the long standing and pluses the price of freight supply chain challenges and Covid <unk>.

<unk> are not as powerful as the global passion for sport.

Confidence that we are well positioned to deliver on our promise of growth as we work through 2023 and beyond and now I'll turn it over to Dave.

Thanks, Patrick with that let's review our results for the transition quarter that ended March 31 2022.

Our revenue increased 3% to $1 3 billion in the quarter compared to the prior year. As a reminder, we mentioned on our last call that we expected transition quarter revenue to be up at a mid single digit rate.

That expectation included an estimated 10 percentage points of revenue headwinds related to reductions in our spring Summer 2022 wholesale order book from supply constraints associated with the ongoing COVID-19 pandemic impacts.

Since providing that outlook, our APAC revenue has been affected by inbound shipping delays driven by COVID-19 disruptions.

In addition, we encountered restricted store hours and store closures in China due to COVID-19, which caused significant reductions in retail traffic.

Together these developing challenges weighed on our transition quarter revenue by about one five percentage points.

So revenue would have been in the middle of our expected range, excluding the impact of these events.

Clicking into revenue by channel.

Wholesale was up 4% to $829 million, driven primarily by increases in our distributor and off price businesses.

Keep in mind, our off price business was still within 3% to 4% of our total revenue, where we expect it to remain for fiscal 'twenty three.

Our direct consumer business was up 1% with 2% growth in ecommerce sales and flat results in our owned and operated stores.

This e-commerce represented 45% of total DTC sales in the transition quarter.

Our licensing revenue was up 23% driven by a timing shift in APAC and solid growth in North America.

From a regional perspective, North America revenue was up 4% to $841 million, including growth in our wholesale and DTC businesses.

EMEA saw strong results with revenue up 18% driven by growth in our wholesale and DTC channels.

Revenue in Asia Pacific was down 14% due to COVID-19 related inbound shipping delays and challenging market conditions amplified by retail store closures and restrictions in China.

And then Latin America revenue was down 6% impacted by shifts in our business towards a distributor model, which we completed in the third quarter of fiscal 2021.

By product type apparel revenue was up 8%, primarily due to strength in our train and team sports categories.

Footwear was down 4%, primarily due to COVID-19 related supply constraints. Despite this we saw growth in our train and outdoor categories.

And finally, our accessories business was down 18% due to expected lower sales of our sports masks compared to last year, which we anticipate normalizing by the second quarter of fiscal 2023.

Our transition quarter gross margin fell 350 basis points year over year to 46, 5%.

This was driven by 330 basis points of Covid related supply chain impacts driven by elevated freight costs, particularly for ocean freight which came in considerably higher than we had expected along with increased airfreight utilization.

80 basis points of unfavorable channel mix related to higher sales to the off price and distributor channels, which carry a lower gross margin.

30 basis points of unfavorable regional mix.

20 basis points of negative impact from changes in foreign currency.

These headwinds were partially offset by 120 basis points of pricing improvements due to better pricing or sales to the off price channel and lower promotional activity within our DTC business.

SG&A expenses were up 16% to $594 million, primarily due to increased marketing investments higher salaried and non salaried workforce wages due to last year's compensation increases for our teammates and higher consulting services.

Related to our 2020 restructuring plan.

We recorded $57 million in the transition quarter, bringing our planned total to $571 million of pre tax restructuring and related charges.

And with this I am pleased to announce that we do not anticipate any further charges under this plan and thus our 2020 restructuring plan is now considered closed.

Next operating loss was $46 million in the quarter excluding.

Excluding restructuring and other charges adjusted operating income was $11 million, which was below our outlook due to lower than planned APAC revenue and higher freight costs.

After tax we realized a net loss of $60 million or <unk> 13, a diluted loss per share in the quarter <unk>.

Excluding restructuring charges of $57 million, our adjusted net loss was $3 million or one of adjusted diluted loss per share.

Moving to the balance sheet.

At the end of the transition quarter inventory was down 3% to $824 million driven primarily by inbound shipping delays due to COVID-19 related supply chain pressures.

Our cash and cash equivalents were $1 billion, and we had no borrowings under our $1 $1 billion revolving credit facility.

And we're putting that cash to work.

In February we announced our share repurchase program, a two year 500 million authorization that helps create value for shareholders, having already executed $300 million of this program.

We are well underway.

Next let's dive into our fiscal 'twenty three outlook.

Given our fiscal year change please keep in mind that the comparable periods. We are using are the corresponding quarters from the trailing 12 month period from April one of 2021 through March 31 of 2022.

Accordingly, we will refer to this as our baseline period.

With that let's dive in.

At supply challenges and COVID-19 related impacts in China conspire to impact fiscal 'twenty three we expect these headwinds to impact under armour in the near term with more positive momentum developing as the year progresses, and what we believe to be temporary issues normalize.

As a reminder, the achievement of our outlook is dependent on current macroeconomic factors.

Including supply challenges COVID-19 impacts inflationary pressures and geopolitical risks not getting worse from what we're seeing today.

With that we expect revenue to be up 5% to 7% in fiscal 'twenty three compared to the baseline period of $5 7 billion, reflecting mid single digit growth in North America, and low teens growth in our international business.

This expectation includes approximately three percentage points of headwinds related to our strategic decision to work with our vendors and customers to cancel orders affected by capacity issues supply chain delays and emergent COVID-19 impacts in China.

To click down a bit more we expect the first half of fiscal 'twenty three to be the most heavily impacted by order cancellations and supply chain delays. We also expect the emerging COVID-19 impacts in China to lessen as the year progresses.

As a result, we expect total company sales growth to gradually improve as the year develops with our highest year over year revenue increase expected to be in our fourth quarter.

For gross margin.

We expect the full year rate to be down 150 to 200 basis points from the baseline period rate of 49, 6% due to expected inflationary pressures on freight and product cost.

Unfavorable channel mix and changes in foreign currency.

We anticipate our most significant declines in gross margin to be in the second quarter as elevated freight costs, particularly for ocean shipments peak against our year over year comparisons.

And then as these cost fine balance, we expect a smaller decline in the third quarter with year over year gross margin improvement anticipated in the fourth quarter as we finish out the year.

From an SG&A perspective, we expect total spending growth to be slightly below our 5% to 7% revenue growth rate in fiscal 'twenty, three as compared to the baseline period.

Considering these factors, we expect fiscal 'twenty, three operating income to reach $375 million to $400 million compared to the baseline period of $424 million and adjusted operating income.

As a percent of revenue. This represents an operating margin of approximately six to six 5%, which compares to a baseline period adjusted rate of seven 4%.

We expect diluted earnings per share for the fiscal 'twenty three to be in the range of 79 to 84.

Versus the comparable comparable baseline of 47.

This includes a 28% benefit from a favorable tax allowance release related to anticipated profitability in key tax jurisdictions, we expect to realize in the fourth quarter.

Of this 28 benefit 16th of this amount is related to prior restructuring charges and therefore, our adjusted diluted earnings per share is expected to be between 63 and 68.

This compares to adjusted diluted earnings per share for the baseline period of 68.

Next I'd like to provide some color for the first quarter of fiscal 'twenty, three where we expect revenue to be flat to down slightly versus the prior year quarter.

This includes about 10 percentage points of headwinds from proactive reductions and cancellations to our order book due to COVID-19 related supply constraints previously discussed.

Due to higher freight costs, we expect our first quarter gross margin to be down approximately 250 basis points compared to the prior year.

Taking this to the bottom line.

We expect a first quarter operating income of $25 million to $35 million.

This should translate to two to three of diluted earnings per share.

In closing we are on offense, even amid this continued highly uncertain environment.

And though the year ahead face temporary headwinds we are confident that the work we have done to transform our business along with the strength of the under armour brand sets us up to grow more meaningfully delivering sustainable profitable growth over the long term.

Now I will turn it back to the operator for questions operator.

Yes.

As a reminder to ask a question you will need to press star one on your telephone until we draw. Your question you May press the pound key.

First question comes from the line of Jay sole of UBS. Your line is now open.

Great. Thank you so much I guess I just want to ask you about the revenue guidance for the fiscal year talking about a mid single digit growth rate North America can you just talk about where that growth is going to come from whether by channel or by product category. Thank you. So much.

Yes, Jay this is Dave.

Haven't really broken it down too much yet in detail within the release, but.

In general we did say that for the full year, we expect North America to be mid single digit and for international growth to be low teen.

If you break that down a little bit further.

Definitely believe footwear will be growing much higher than our apparel growth.

And we think about some of the supply challenges we've been talking about.

More affected footwear last year as well, so definitely expecting footwear to grow a fair amount faster than apparel in fiscal 'twenty, three but we're not actually breaking down by channel at this point.

Alright, thats it could follow up and maybe Patrick you talked about your confidence in the long term outlook could you sort of maybe connect what fiscal 'twenty three is going to look like versus your longer term view of what kind of sales growth you expect from under armour and what kind of margins you expect.

Sure I think first of all thanks for the question Jay.

Wanted to make sure that.

I set the record straight a little bit here.

We came into our last call.

Being very adamant that we saw some of these developments.

Currently are still with us here on the.

On the supply chain and logistics side.

But we werent seeing.

Seeing as visibly at that point in time was what happened towards the end of the last quarter, which was the developments in China and also the even further acceleration and freight cost all of these things. We believe are temporary and of course there is.

Somewhat of a frustration I would say the team because we do feel that we have demand for the brand in the marketplace across the world.

The actions that we've taken both in the quarter that we just came out of.

We had also pulled back on on auto order stock simply to make sure that we could get things here on time.

Again, staying disciplined in making sure that we're not getting ahead and top of our skis in terms of building too much inventory in an uncertain environment. The same thing plays into 2023 right.

Like Dave just said that we have a 10 point headwind just in the first quarter.

And orders that we've canceled.

That was actually there.

So there is certainly a bit of frustration, but at the same time, it's temporary the underlying demand for the brand is there.

The brand is getting stronger the work we've done around transformation is working our operating model is foundation of the fundamentals are really good right now for us. So we have to get through this temporary time that we're in right now get out on the other side and like Dave said and I also said in my script.

We feel good about growth going forward and also we feel good about <unk> ability to continue to grow our margins back again so.

This is a temporary state for this brand and there is certainly a bit of frustration in the teams because we had to make these decisions.

If we hadn't made them, we would have been sitting most likely with inventory coming in late.

And we wanted to continue to stay discipline, we've done so much great work over the last few years makes.

Making sure that we have the right level of inventories. We came again into this quarter I would say, even lean right with a negative three inventory.

I would like to have that a little bit higher probably right. At this point, but reality is also when I look at it longer term, we will start to build back inventory in the back half of the year Dave's earlier point.

We'll start to get healthier from a revenue growth perspective, as well in the back half of the year as we accelerate out of this temporary situations. So I just wanted to give a little bit more color for everyone on the call.

In terms of.

How we see the situation right now.

And Jay maybe to take that a little bit further this is Dave we talked about the three percentage points of headwinds in fiscal 'twenty three.

So if you kind of adjusted for that you would point to an 8% to 10% kind of underlying range for fiscal 'twenty, three but based on where we are with our relationships and where we are with our long term planning, we see fiscal 'twenty four with the ability to grow more than that so we're excited about that we're excited about continue.

To improve gross margin after fiscal 'twenty three.

And then also even deeper leverage on the SG&A with all the cost structure work and finally, bringing our restructuring plan to closure so.

Definitely excited about launching into fiscal 'twenty four.

Got it very helpful. Thank you so much.

Okay.

Next question comes from the line of Matthew Boss of Jpmorgan. Matthew Your line is now open great.

Great. Thanks, So Patrick to your comments there. So a number of moving parts that are outside of your control, but is your overall assessment that youre getting at the underlying demand for the under armour brand today relative to three months ago is unchanged and then Dave just on the 5% to seven revenue outlook for this year.

And your visibility I.

I guess what are you seeing in terms of the order book visibility and the supply situation as you see it today, just trying to get a sense of your confidence in the five to seven today given the moving parts.

Sure Matthew I'll take the first part of that yes. The demand is there the same way it was on our last call.

And again.

Reiterate number we we have the council product in the transition quarter, we talked about that already actually last fall in our earnings call last fall the last one for the year and.

In February we talked about it we also Dan mentioned.

Visibility we had into the first part of 2023 that they've now quantified for you today, but the demand the underlying demand is there.

And Matthew I guess further to your question more towards towards my angle.

I would say that.

From a revenue perspective, we've got on the wholesale side very good visibility for the first three quarters based on orders that we have and we're comfortable with that Q.

Q4 is something that will be kind of working through here in the coming weeks.

So I would say that we have very good visibility so far on the wholesale side DTC side I think we're planning very appropriately based on traffic and what we're seeing in our ability to drive conversion.

And then when you think about the supply chain side.

We've talked a lot about this over the last few calls.

About how the constraints with the factories created situations with the delays and the cancellations that we've had to proactively work through but our supply chain team is not sleeping.

We're pushing hard for us every day.

And we believe that the availability is really going to open up for us in the back half of this year, especially as we kind of go through and finish out Q3 and start running into Q4 more uninhibited by by some of these issues. So.

I think we will see a more complete quarter for us in Q4, and then really driving without these headwinds per se in fiscal 'twenty four.

Great and then Dave on the gross margin outlook for the down 150 to 200. So if we think outside of freight could you just help walk through the assumptions youre embedding an underlying merchandise margin, specifically promotions and pricing and I guess my point is.

What's the overall health of full price selling in the athletic channel again, a number of moving parts.

Is the athletic inventory situation today any different than again, what it was three or six months ago, as we think about pricing and promotion and the rational environment that I think we talked about on this call.

Yes, I can start by just giving a little bit of color around what I see in the market and then you can dig.

Dig into some of the more detailed.

I would say that I think it's mixed at this point.

In terms of how I think about what's going on with inventory in the marketplace.

One of the reasons why we have been so.

Let's say considerate in terms of how we have approached.

The inventory.

In the transition quarter and also in the beginning of 'twenty three is that we did not want to be.

Getting product in late that we would have to drive through a promotional liquidation to Dave's earlier point I mean, we're still looking to keep our liquidation number in that 3% to 4% range in 2023, and we see no reason why we can do that.

All of that is because we have been so diligent around this.

How that plays out for other players in our space I think will depend on.

There you are.

In the world in terms of geography, but also in terms of.

How much product do you have order potentially that might come in late et cetera. So I think we will see a mixed.

View here as we develop into the year a little bit more.

Because simply there is going to be pockets of inventory here.

Here and there that is going to have to be liquidated and that's not necessarily the case for ongoing at all.

Dave you want to add any more color.

Yes, I mean, I guess, a little bit more detail kind of on the year over year gross margin walk.

As far as the headwinds the largest we see as the freight costs mainly around ocean freight.

We don't anticipate that to settle very much this fiscal year.

And then the other piece of it is product costing.

When you think about the materials and the labor.

The impacts of inflation. So we're feeling some of that as well now we are working to counter that with some price increases, but that work and the actual.

Actualization of that isn't going to be until a little bit in Q3, and then more so in Q4, and then more of a full benefit of that in fiscal 'twenty four.

Relative to the region mix, not really much change or impact there on gross margin as.

As far as channel mix is a little bit of a headwind there with a little bit higher mix of distributor sales, which are a little bit lower gross margin.

And then we do have a tiny bit of headwind relative to footwear growing faster than apparel and accessories, obviously footwear for us we've talked about it a little bit lower gross margin than our apparel.

But as far as a kind of promotional discounting aspect.

We are not intending and nor are we planning on a big difference from from 2021 at this point, we want to continue to hold premium.

And drive the brand.

Great color best of luck.

Thanks Matthew.

Next question comes from the line of Paul Lewis.

Paul Your line is now open.

Hey, guys. Thanks curious if you can talk about are there are there any regions, where youre seeing orders getting canceled for demand regions, rather than you guys working with your partners from a supply chain perspective or is it all with you guys.

Working with those guys with your partners to make sure inventories stay clean so I just want to make sure I'm clear on whether or not you are seeing demand driven cancellations at all and then just going back on the pricing question. How are you approaching pricing and trying to pass through higher prices on a regional basis, where do you think you have more pricing power versus.

The regions, where maybe you don't.

Hi, Paul.

Kick it off here, David maybe you want to add a little bit on the pricing at the end about give some color on that too no. We're not seeing cancellations because of demand not being there that's number one.

Two in terms of pricing, we're being careful in terms of how we think about pricing.

It's not an across the board approach, we're being very very thoughtful about how we do it in terms of our families.

Categories.

The region Ality over at all.

But we see opportunity, we absolutely do and we have.

Look through let's say every single product that we make and we're making the appropriate adjustments, where we feel confident that we can drive them to and sustain them right. So so there is opportunity here, we think to sustain.

This increase this year on the back of also building a more premium brand again and Thats really important as part of this journey that we're on so we are making great progress there, but to Dave's point again, it's going to be success would be coming into play here throughout this year and then be fully implemented in 2000 and for Dave I don't know if you have any more color you'd like to add.

Sure.

No I mean, I think thats pretty much pretty much summed it up I mean, we've been able to do some pricing action for fall winter of 'twenty two product.

And then a fair amount more that we're executing for spring summer 'twenty three product and then Theres a little bit of trail out of things. We still believe we have opportunity in fall winter 2003, So again it'll be a.

Build of the benefit on that pricing, but it's been very strategic.

Generally across the board increases, but in areas, where we really feel.

From a price value and innovation perspective, we have some opportunities in where we're excited to be able to drive that through and feel the benefit of that as we go further into the year.

What sort of range should we be thinking about in terms of what you've already taken and what you plan to take in terms of price increases.

Well, we're not getting into that much detail publicly but I would say that.

The majority of the benefit we will see towards the very end of Q4, and then a full year run rate benefit in fiscal 'twenty four.

As far as the actual percentage increases they vary depending on the product it is.

Very specific and targeted it's not abroad.

As a percent change.

Alright, Thanks, good luck.

Thank you.

Next question comes from the line of Sam Poser.

<unk> send your line is now open.

Thank you very much.

Let me ask about I'm going to go back on to the pricing.

Is the pricing like.

How much new product do you have as a percentage.

And on the new products are you, including that as price increases you brought up the the new fleet that youre, bringing in for fall is that something that is now 15.

15% higher than it would've been a year ago because of all of this I mean.

Or do you have to cycle through new crop to bring enough new product and to get the payoff for the price increases that you are planning into 'twenty core.

Yes, Hi, Patrick.

Patrick maybe I'll start David you can take it back so I just wanted to add some color there Chris because he was perhaps about some product.

I think it's a combination Sam because of course.

A great opportunity to raise prices when do you actually introduce himself.

To your point, we have great newness coming in in certain categories and when we do that that's absolutely an opportunity for us that we're going to take.

So that's correct. So Dave do you have you have something else you won.

Yes, no it's definitely both to your point, Sam and I think that.

There is definitely going to be a lot of opportunity relative to <unk>.

Carryover styles as we start to ship them back in for the coming seasons, what we have not been doing much of is going out onto the floor and re ticketing. What's out there that that has not been something that we've been pursuing a lot it's more.

We've been shipping in the next season or to Patrick's point as.

We're launching new product, but it is a combination of both.

So it just takes time to cycle through and then secondly, Patrick.

Patrick you.

You mentioned your confidence of how.

Of the direction that Youre going.

We have a pause because of some external factors.

But.

Looking back is there anything any.

Indicator you may have missed earlier.

You sort of hit yourself in the head and said if we had just responded to this three months earlier, we sort of saw it but didn't consider since we should have.

Anything that you know.

Yeah.

You could.

Would it could only kind of situation.

Well I think yes, I think it's a great question, Sam and believe me you.

I spent many nights trying to.

Pound that one through but here's the reality.

Could we have potentially right. If you think about where we were in fall and I'll just take everybody hear back a little bit in time, if you think about where we were last fall when we were starting to experiencing the shutdowns.

The factory base.

Some of the impact that had in all it was all like a rubber band effect right. It took some time through <unk> and then that kind of accelerated and then actually you didn't have a lot of effect in the back half of last year, rather you had an effect coming into into this this year.

And our sub quarter and when we saw that developing first of all we didn't know how long we're going to be constrained. So we took.

We took the kind of the high road of saying you know what we're going to make sure that we can we can make the things that we can deliver.

As much on time as possible.

Because we actually don't know, we don't have visibility right now to how much of a delay it's going to be we could have at that point said no, let's make all of it and Gamble and and then maybe sell some of it in future season I come back then to the discipline that we that we have been driving for the last three years ever since 2018, if you remember.

We've continued to wash through old inventory get our inventory levels in check improved our balance sheet to make sure that we're able to build a less promotional more full priced more premium brand again and I think we've been very successful with that and that's what I, what I mean in terms of the demand that we now see.

And also the premium station that we're coming back to the brand. So we could have done some of that but we chose not to and we took the same approach here.

Early in 2003, where we also have the demand to sort of your points three points for the whole year and 10 points just in the first quarter of demand that was there.

Or does that we canceled because we knew that we were not going to be able to make it in time and when I say in time like way in time right. So this isn't like 15 days 30 days its more its much more than that so it would have been high risk for us and in an environment, where you have so much uncertainty.

Covid is still playing into things, where we're actually supply chain continues to play into things.

We just did not want to jeopardize future seasons.

For short term may be at this point.

And those those were decisions we made that were based on external circumstances.

That's the kind of color I can give you on that Sam.

One last thing the average selling prices on your direct to consumer in.

In the quarter year over year could you give us some color there.

Dave.

Dave.

We haven't normally given that level of detail at this point.

But this isn't normal times, and it's sort of talk to the health of the business. So.

I think maybe you can make an exception for today.

If you have it on hand.

We can circle back with you.

Alright. Thank you very much good luck. Thank you. Thank you something.

Okay.

Next question comes from the line of Simeon Siegel of BMO capital markets. Simeon Your line is now open.

Thanks, Hey, guys good morning.

Can you how our inventory units versus the reported dollar change on the balance sheet and then maybe just a follow up on that last one a little bit within the five to seven revenue growth can you tell us how youre thinking about AUR versus units and then just with today's guidance, bringing annual gross margin closer to the pre pandemic levels. Just how are you thinking about the right long term gross margin level. Thanks, guys.

So a couple of things relative to inventory.

Obviously, we have seen the cost of our inventory go up a little bit.

So relative to that it is more of a unit down.

Then then the actual inventory value of our cost and Thats something that we would expect to.

As we as we continue through the year, we know that are costing on inventory will continue to go up a little bit as we've discussed in our in our gross margin outlook.

And then relative to kind.

Kind of a price mix perspective.

We do see pricing.

Continuing to be something that has been a little bit stronger for us and therefore, the unit growth has been a little less than the.

The pricing difference and Thats something that we want to continue driving.

And then long term gross margins.

Long term gross margin.

Again.

This year is more of a temporary situation, we believe which is.

A lot of it is dealing with the freight situation not just the ocean freight costs, but also.

Airfreight utilization and we believe that as we get into fiscal 'twenty four we.

We will see much more positive improvement relative to that front.

And then as we go forward long term, we do believe that there is a lot of opportunity there to be able to.

Get to that 50% plus gross margin when you think about.

The APAC growth and that being a higher gross margin region for us when you.

The over index growth that we're continuing to drive in the longer term relative to direct to consumer is a mix of business.

On the gross margin benefits there as well.

We will continue to see a little bit of long term gross margin headwind because of the footwear mix.

Intending to grow footwear faster than apparel.

But we believe that the other opportunities would more than offset that.

Great. Thanks, and then just one quick one if I can just given where the shares are you guys are obviously new to the repurchase gain.

Again with the new authorization, so just any way to help us think about how you approach repurchases.

Yes.

Right now.

We executed the initial $300 million ASR of $500 million commitment and obviously, we will be looking over the next year to two years on the right times to fulfill the remainder of that.

The remaining $200 million outside of that.

We continue to look at our long term planning and our long term capital and the uses of that capital. We're not right now at a point, where we're going to give.

Given indication of if we're going to roll right into another program or not but it is definitely something that we continue to look at.

Great. Thanks, a lot best of luck in the year guys.

Thanks.

Next question comes from the line of Michael Binetti of Credit Suisse. Michael Your line is now open.

Hey, guys. Thanks for taking our questions here.

I guess on SG&A, we just looking at the math you guys laid out for the year versus the quarter it looks like SG&A spend.

From like 90, 10% in the first quarter down to like 1% to 4% rest of the year is obviously below where it's been running the last few quarters is that a good run rate as you think out longer term and maybe a little bit of color on what slows and the spending lines. After the June quarter and help us think alongside you there.

And then it was nice to see I guess, we're looking at things on a three year basis to go back before Covid. It is nice to see the acceleration in D C.

In the quarter in total versus the December quarter.

I'm curious on wholesale though.

On wholesale inventories in the channel today, what you're seeing from competitors.

I know you said you don't have as much inventory as you wanted Patrick but do your retailers in the U S have enough in general are they still hungry are you starting to see inventories build.

Yes, I think I'll start there David that you can dig into I'll start at the end, maybe I'll then hand, it off to you I think.

What's interesting right now is.

The fact that I think everybody everybody's inventory is coming in.

In a somewhat disjointed fashion and what I mean by that is.

I think that is.

You could say in general that it's been hard in our industry to get the right stuff to the right place. The right time, we might have stuff that you can get.

Into the channel, but it's not necessarily always coordinated.

And I think we will continue to see some of that play out here early in 'twenty three.

So I don't think that the inventory levels are extraordinarily high or anything like that at this point in time, it's the quality and the let's say the.

Consistency in the composition of it that might be a little bit out of sync.

Out of order so to speak here and there.

And that's why it's so hard to give a.

And that exact indicator of the health of every channel is because it is it is a little bit helter skelter in terms of how things have come in.

Better in some places and worse than others and also the same would be could be said for categories right youre delivering some things better than other things so.

That's really what's going on right now I think it's playing out.

Cross categories and across geographies.

Also at.

Across channels, So Dave do you want to.

Yes, Michael relative to SG&A.

You are correct in that the transition quarter was at a pretty high SG&A quarter and that was planned that way, we actually closed the quarter pretty much right on where we had planned it to be and that was mainly a higher marketing investment that we have strategically decided to make in the transition quarter.

But then also the increased salary and non salaried workforce wages that we had talked about previously in last year about the investments there.

When you think about Q1 of 'twenty three we're kind of continuing that forward for one quarter and so you do see a higher anticipated spend in the first quarter of the year.

And part of that is to continue those investments in brand marketing and give us a little bit of a tailwind from a brand perspective, as we push into the back half of the year, when we have more inventory availability and more ability to kind of run there. So.

We do.

Anticipate leveraging SG&A and keeping it under that revenue growth rate that we mentioned a 5% to 7%.

I would say that the leveraging is not as significant as I would normally like and that is because of the revenue headwinds that we're talking about that we believe are temporary.

So as we step into fiscal 'twenty, four we would anticipate leveraging SG&A more so than what we're planning to do here in fiscal 'twenty three.

But hopefully that gives you some some extra color.

And would you say.

It looks like back of the year, you've got revenue is growing like 7% to 9% and SG&A only one to four that's a considerable amount of leverage I mean as you look to 'twenty. Four is that I mean is that an appropriate framework do you think.

That might be a little bit aggressive assumption as we think about 'twenty four but.

Definitely leveraging better than what you would see full year 2003, okay.

Okay. Thanks, a lot guys.

Thank you.

Next question comes from the line of John Kernan of Cowen John Your line is now open.

Good morning, Thanks for taking our questions guys.

Dave maybe you can talk to how Youre planning the balance sheet as we go through the remainder of the year it looks like the stub quarter.

That did see a fair amount of working capital volatility I think the cash flow from operations earned.

<unk>.

Over $300 million box, how do we plan working capital, particularly inventory and the balance sheet as we go through the remainder of the year.

Sure John a couple of things to think about there.

As we go into the back half of the year and the supply chain challenges free up more and we're able to meet more demand we will be bringing in more inventory. So you will see the inventory growth.

So up a little bit in the back half of the year as we buy into that and get ready for that.

Demand that we can actually service better in the back half of the year and then also going into.

A bigger growth in fiscal 'twenty four so you will see that develop from an inventory perspective.

Relative to the rest of working capital, we're continuing to run it very tight.

And a very healthy position were in some of the best aging positions around the world that we've we've been in now probably for the last.

Six months to nine months versus versus years back so cash conversion cycle is still very tight.

The other aspect would probably be from a capex perspective.

We are going to be investing a little bit more on capex. This year than we have in the last few years, which hopefully should make sense, we tailored back during COVID-19 and some of those challenges and also during the restructuring period.

Whereas we've talked publicly about being in that kind of 3% to 5% range Capex to revenue, we were running more like 2% or less for a few years, whereas this year will probably run closer to the mid point of that of that 3% to 5% range.

And that is investing in retail store build outs, that's investing in fixtures and shop in shops within wholesale partners around the world.

That is investing in omni and digital.

But it also has to do with <unk>.

Starting to build.

Build out our new long term headquarters here in Baltimore, as well, which we're super excited about for our our teammates.

That's really helpful. Thank you just one final question for me just how do we think about China within Asia Pac Asia Pac had been a region that.

Our big growth region really during the pandemic and during your fiscal 'twenty, one how do we think about Asia and China in fiscal 'twenty, three and 'twenty four.

I think the.

If you think about APAC as a region.

The area outside of China.

Now I'm talking specifically about South East APAC, Australia, Singapore, Thailand, et cetera, and also I would say our market in South Korea is doing well.

China is with China is right now.

Were affected like everybody else in that market.

We will continue to monitor.

Manage.

According to.

How things develop Dave I don't know if you want to give some color on the magnitude of what we see that right now.

Yes.

Again APAC is the region is a very strong area for us to continue to grow China, specifically as we've talked about is experiencing some headwinds.

We don't see that as a under armour brand thing. It is more of a market challenge and then obviously right now with the Lockdowns in store restrictions that we're dealing with so I think the team is doing an excellent job and we are ready to continue growing the brand there, but there are temporary challenges that we are absolutely experiencing there and it's a combination.

The restrictions and the Lockdowns. It's also the impact that that has on transportation and therefore, our ability to be able to get product to the right place at the right time within China, and then just a little bit of overall softness continuing in the market for many of the international brands that aren't that aren't.

In China, So a lot of play there, but we're continuing to move through and we see that situation.

Proving a little bit as we get into Q2, and then even more so as we get into Q3 and Q4.

Okay.

Thanks, guys best of luck.

Thank you.

Next question comes from the line of Katy Fitzsimmons of Wells Fargo TD. Your line is now open.

Yes, hi, good morning, Thanks for squeezing me.

<unk>.

I was wondering if you could.

Sure.

Conversations with your wholesale partners, particularly here in North America.

93.

How would you can you just.

Ryan Halsted their releases.

<unk> probably be into.

Great.

When we're thinking about fall holiday.

How do your partners booked earlier.

And supply chain constraints that you're seeing even just how should we think about some of those conversations are evolving screen and then David real quick just a modeling question.

Any thoughts on the tax rate here in just 43. Thank you.

Yes sure.

Thank you Katie.

Wholesale perspective, with our wholesale partners in the U S. First of all we're now through the exit of all of the undifferentiated retail. So we're incredibly focused in the North American marketplace are our relationships are great I would say.

I would categorize it as the best I've felt about that since I since I got here.

And we continue to make great progress.

Across the board I would say so.

Excited about that.

Some disappointment of course in terms of our ability to.

Fulfill demand in the stub quarter to some extent, but also early in 'twenty three but.

To Dave's earlier point, we'll see inventory start to build back towards the back half of the year and into into our fourth quarter.

And I'm.

I am excited about the work that the teams are doing.

Dave.

Yeah and relative to the tax rate.

Its interesting Theres, obviously, a lot going on within our taxes right now but.

A couple of things to consider.

When you think about.

The benefit that we expect in Q4 that is a valuation allowance that were expecting to reverse based on.

Rebuilding profitability and kind of hitting that 36 month.

Trailing profitability factors, so that is definitely a benefit.

But we're looking at a tax rate, that's probably going to end up being in the.

High single to low double digit range.

All things are considered.

Still there.

Yes, yes.

We lost Katy later are you there.

Alright.

Yes, sorry.

One final just on that inventory question you guys are.

Great.

Supply and demand how should we think about that <unk>.

<unk> as we think about <unk> between alien.

Dalian DTC.

In the first half of the year.

Yeah.

Thanks, Anthony and I guess I simply don't meet the demand.

Right.

Dave do you want to take it.

To be honest, Katy I was having a little bit of a hard time hearing you. I think you were talking about is it inventory availability to service back half demand is that what youre getting at.

Where it's going is it how are we prioritizing is what I heard.

Thanks, Joe Yeah. So.

So I think yes go ahead.

I'm going to say again, we do see a lot more availability opening up in Q3, and Q4, especially Q4.

We are prioritizing our.

Our key wholesale partners. The most and then also in conjunction with that our brand house in E Comm channel, but I think as we get to Q4.

Pretty much all of our retailers should be able to feel kind of the full open.

Availability of getting product to them so it shouldn't have to be.

As much prioritization as we get into Q4.

Yes.

Okay. That's helpful. Thank you.

Hello.

Next question comes from the line of Bob <unk>.

Google time, Bob Your line is now open hi, good morning, just a couple of quick questions for me on the marketing can you address a little bit sort of how youre planning the marketing spend <unk> endorsements.

In fiscal 'twenty, three and into 'twenty four and I was just wondering if you can maybe just give us an update on your kids business sort of where the trends are there and what youre seeing with that segment. Thanks.

Sure.

Our general.

Span of marketing in a normalized environment would be somewhere between 10% to 11% we have been spending a little bit higher like Dave said.

And the transition quarter, we're going to spend a little higher here.

In the coming quarter, but should normalize towards.

The back half of the year.

And we kind of.

Aim to stay in that kind of spam in terms of marketing going forward between 10 and 11%.

Of course, when it comes to the endorsements we have been.

Announcing some some pretty exciting things here lately I talked about in my script around extending Georgia for example, the entire mix center back for <unk>.

And others here and just lately so we'll continue to.

Adjust our portfolio.

<unk> that it makes sense for us as a brand as we go forward. The main thing for us when it comes to the relationships that we have is really our ability to activate them.

And as we move into the future.

To get better and better in terms of understanding first of all what.

What assets matter to us and we do that through return on marketing investment modeling that we do.

Mixed media approach that we have where we now have these tools in place where we can understand what makes sense for the brand and also what makes sense for either.

The partner in this case.

And for US we now feel very good about the mix that we have.

And the rebalancing that we've done also through the restructuring over the last three or four years, and that's really exciting for us because we're now able to activate more of our.

Our partnerships than we've ever had been able to do before which is which is really exciting.

The kids business.

Alright, and the kids business, sorry, I thought David Scott Okay.

The youth business.

Is healthy our youth business is healthy and we saw an.

An increase in <unk>.

Our team sports business in our youth business as we came into back to school in 2021 and that started to normalize more and that trend for us in terms of the strength of our youth business has continued.

And we are very excited about how we think about that going forward as we as we see.

Normalized back to school season, this year too.

Especially here in the U S in the back half of the year.

Thank you.

Thank you Bob.

Alright, Thanks, guys that'll that'll close us out for today I appreciate you participating and attending our call today and look forward to catching up with you. Thank you. Thank you. Thank you everybody. Thank you.

Thank you so much to our presenters and to everyone who participated in this concludes today's conference call. You may now disconnect have a great day.