Q3 2023 Under Armour Inc Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Okay.
Good day and welcome to the under Armour Q3, 'twenty three earnings conference call at this time, all participants on a listen only mode.
After the Speakers' presentation there'll be a question and answer session and instructions will be given at that time as a reminder, this call maybe recorded.
I would now like to turn the call over to Lance Omega Senior Vice President Investor Relations and corporate development you may begin.
Good morning, and welcome to our third quarter fiscal 2020.
David.
For replay.
Joining us on today's call.
And Robert Executive Chair.
And our president and CEO , Paul Brown CFO .
Our remarks today include forward looking statements that reflect management's current view in certain forecasts elements of our business as of February eight 2023 statements.
Statements made are subject to risks and other uncertainties detailed in the documents regularly filed with the FCC.
I will report on Form 10-K, and our quarterly reports on Form 10-Q. Today's discussion also includes non-GAAP references.
We believe these measures provide investors with a helpful perspective on underlying business trends.
These measures are reconciled to the most comparable U S. GAAP measures, a reconciliation, which along with other pertinent information can be found in this morning's press release and under armour.
With that I'll turn the call over to Kevin.
Okay.
Thank you Lance and good morning, everyone.
Amid a continued dynamic environment. We're pleased to reported solid third quarter results and are on track to deliver on our full year operational and financial goals for fiscal 'twenty three.
By continuing to learn evolve and grow as an organization and our brand is strong and this is an exciting time for us, we're making progress on our strategic refinement and as I've said before we will not miss the opportunity to reposition and establish our sector leadership wherever we compete.
What I consider under armour is churning.
Never been more energized and excited about the road in front with the organization, we have in place as well as the future we are building.
We're certainly not standing still building on our transformative operational improvements and continuing to evolve our strategy from a position of strength.
We're working hard to amplify opportunities for our existing core business, while strengthening our long term ability to serve athletes beyond the gym field in courts and throughout the entirety of their day.
At the end of this month, our strategic evolution will gain more momentum as we welcome Stephanie Lennartz as our new President and CEO and as a member of our board of directors Stephen.
Definitely brings a wealth of experience to under armour. After 25 years at Marriott International the hospitality powerhouse overseeing a portfolio of 30 iconic brands spanning 138 countries.
He has a distinguished track record of executing best in class brand strategies and developing talent.
And let marriott's multibillion dollar digital transformation and award winning loyalty program.
Expertise that will give us a critical level up in one of our most vital areas of strategic focus.
I'm looking forward to the perspective that Stephanie will bring to the brand leveraging our deep bench of industry experts to work in concert and unlock our full potential.
And as brand Chief and Executive Chair I'm excited to support Stephanie across the business with an emphasis on our product innovation pipeline and brand storytelling.
We look forward to the complement of our diverse skill sets and strengths to prioritize top and bottom line growth for UA with Stephanie's leadership as CEO .
Further strengthening our brand, we recently announced two new board members, Carolyn Everson and Patrick Weitzel.
Each brings a wealth of experience and successful careers across media technology Sports and Entertainment management.
So a fantastic new competencies to support the chapter ahead for under armour.
And as we look to this next chapter we continue to build on our momentum as a brand.
<unk> industry, leading innovation and premium consumer experiences always obsessed with empowering those who strive for more than a uniquely underarm away.
To support this we're making progress on the strategic refinements that we introduced on our last call including <unk>.
Broadening our product aperture to address the non active moments of an athlete's day, maintaining UA performance and delivered with culturally relevant style.
Activating with greater precision to reach our target audience and inspirational Muse of the 16 to 20 year old varsity athlete.
And.
Advancing our segmentation strategy across the spectrum of good better and best with a heightened focus on better and best level product offerings.
<unk> will build amazing product that delivers on our promise of solutions you never knew you needed and once you've tried them could not imagine living without.
As we finish out fiscal 'twenty, three and round the corner into fiscal 'twenty four.
As much to do but let me be clear when I say that under armour is in a good place where strong and tested we've got the right people and processes working together and we're strengthening our leadership.
We know what great looks like and we expect to make significant strategic and operational progress. This year as we set up to reinvigorate growth.
And we're in this position.
Thanks, partly to the man sitting next to me.
Colin.
Got you. Thank you for your steadfast leadership of under armour. During this interim period as Stephanie joined I know you will continue to be a vital partner for her and all of US as we move forward we're fortunate.
So on behalf of our board and executive leadership team. Thank you cheers.
In closing.
We continue to push our evolution scale towards more significant global presence and realize our potential.
We must never lose sight of our identity and the heart of who we are as.
As I said our brand is strong.
And we will continue to protect this house.
2023 marks the 20th anniversary of this iconic phrase, which helped establish and underscore our unique identity as.
As a core component of our brand. This concept is as raw now as it was then.
And in today's dynamic world arguably even more relevant to sport to identity to community.
This year, we'll call this code back into action inviting a new generation of athletes to protect this house.
This constant has been there all along and.
And it's time to wake the giant.
Time to invoke a new future.
Alan.
Thank you Kevin and good morning, everyone. It's been a great privilege to lead under armour. During this transition and work more closely with our amazing teammates across the globe.
I look forward to partnering with Stephanie when she joined US on February 27th continuing to advance our strategy as I resumed my role as Chief operating officer.
Having had the opportunity to spend some time with her I know she has an incredible leader who will bring a breath of fresh air to our business with a keen focus on consumer Centricity and digitalization as we continue driving our strategy forward.
In the meantime, as Kevin mentioned, we are not standing still our purpose of empowering those infrastructures drive the more is a tunnel.
Our strategic evolution in creating the space necessary to broaden our product temperature.
Refining our target consumer to the $60 20 Euro advance the athlete and more effectively segmenting our product excuse me remains our immediate priorities.
To touch on these and start by underscoring that was one of only a handful of authentic performance brands. One by athletes at all levels of competition. We've earned a reputation as a trusted brand to sports the goto apparel footwear and equipment that athletes never knew they needed and once they have them.
You mentioned living events.
In this respect we do a great job fulfilling the train compete and recover moments of an athlete state that.
That leaves the non active or what we call lift moments of the journey.
Which is a significant long term growth opportunity that triples.
It'll addressable market for unknown. So how does this translate to a broader sports style offering where the train compete and recover stages of athletes Jenny outperformance with style product. The live stage will be style with performance products science rents are not all our trucks and science consumers will.
<unk> side.
Our job to give them more choices and therefore more versatility to suit whatever pump that day the outfit.
Soft launched in October this type of volatility is embodied in slip speed, our unique training footwear engineered with a convertible heel switch between active and recovery mode.
From early reads flip speed strong PMA also seated slotted into the space in between moments of style and self expression.
I've split speed launches globally on February the 14th we're excited to bring this innovation to a much broader audience and learn even more about the possibilities of this hybrid platform.
To support this we're opening a physical manifestation of our brand positioning with a pop up store in the Flatiron district in Manhattan, which will showcase that suite and our newest apparel offering and a new format with less product density and enhanced storytelling.
Of course, none of this happens overnight still you will see immediate progress and points on the board as we re imagining some of our spring summer 2003 floor sets with enhanced merchandising and storytelling to showcase how under armour can be one away from training and competition.
In apparel, we've got the new structured woven is coming and introducing more variation of unstoppable mens and womens bottoms to hit broader wearing occasions.
We're also leveraging our leadership in performance fees and then the latest sports bras.
And with programs like our new women's Meridian bottoms, which have significantly improved anti pilling component.
Legging youll ever need for style performance incumbents.
In footwear, the near term pipeline includes putting our youngest spend on Phantom, one Gemini and forge and this fall you'll see even more sports title launches, including dynamic outfitting, new silhouettes, new color ways.
Maybe even if footwear collaborations.
Transitioning to our second strategic refinement, we're also evolving our marketing and Omnichannel strategies to better connect with the 16% to 20 year old pump the athletes with an always on social media activation approach, including a greater focus on unique content to amplify Brian intensity and drive cultural.
Sure.
We're seeing early improvements in brand metrics with this demographic in the U S and key international markets like Mexico and China.
All this feeds into our ability to drive excellence into our Omnichannel Omnichannel presence, particularly in E Commerce, where we're also starting to see the early benefits of recent investments. So overall encouraging and we look forward to leaning in and applying even more in the coming season.
The third is the ongoing evolution of our segmentation strategy.
Better balancing of the top most parts of our product pyramid consumers tell us the phosphate athletes tend to buy more frequently.
Some higher price points than other groups throughout the year.
And this work we're doing category by category growing category by category addressing what premium looks like in every product price points determining opportunities to drive additional better and best level product Assortments and what the marriage of innovation and style should line looks like as if we're designing unencumbered as we.
We continue to shop in home. This strategy will also heightened our storytelling to drive a more pronounced premium element to young athletes.
And speaking of driving greater influence our incredible roster of athletes continue to inspire us all from Sharon locate the winning her debut at the New York City Marathon to Julio Rodriguez, winning the MLP American League rookie of the year Award to Justin Jefferson breaking the Minnesota Vikings franchise single season.
<unk> record and Jordan speed, winning the match alongside Justin Thomas.
Under armour continues to standout delivering performance and helping to empower athletes at the highest level that support them.
With 2023, and it's early days, there's more in store for UA as we look forward to the second half of the NBA season for Stephen Curry and Joel Embiid in in partnership with Danny Garcia and Dwayne The rock Johnson, we launch as the official uniform supply of the <unk> inaugural season on February the 18th So you as bright.
Momentum remains strong.
So back to our third quarter performance.
We delivered a solid quarter with revenue up 3% to $1 6 billion or up 7% on a currency neutral basis.
Clicking down into the results by region, North America declined by 2% coming in at just over $1 billion for the quarter with wholesale down, 6% and 1% growth in DTC driven by strength in our e-commerce business, partially offset by recovery tail stores.
So we continue to see solid demand in our largest region, we were more promotional during the quarter to manage inventory against challenging retail backdrop.
Despite the dynamic retail environment, we continue to focus on elevating the consumer experience across channels, while driving operational excellence.
EMEA was a standout again this quarter with revenue up 32% $265 million or 46% on a currency neutral basis.
This growth was driven by solid sell through across wholesale and DTC along with earlier than planned shipments. We are encouraged by our momentum in EMEA and intend to remain nimble given the continued marketplace uncertainty and building inventories.
APAC revenue was down 9% to $198 million or up 1% on a currency neutral basis. Despite ongoing COVID-19 challenges impacting retail traffic in store labor availability, particularly in China. We grew our wholesale business during the quarter. In addition outside of China, We saw a positive momentum in our <unk>.
Commerce.
And finally, our Latin American business was up 45% to $64 million in the quarter or up 41% on a currency neutral basis.
Turning to operations, we continue to see improvements across our supply chain with our factory partners, making progress in returning to pre pandemic production efficiency and ocean and delivery times continue to improve which contributed to significant tailwind from less air and ocean freight during the third quarter.
A trend we expect to continue in throughout the quarter.
From an inventory perspective levels continue to be elevated across our sector of.
At the end of the third quarter, our inventory was up 50% to $1 2 billion. As a reminder, though our inventory was quite lean and fiscal 'twenty. One two off due to a constrained strategy and supply chain disruptions. So a large part of this increase and increase over the next few quarters is simply normalizing to levels to us being at close to.
Our $6 billion Brian .
At the end of fiscal 'twenty, three we expect a similar growth rates, but about 50%, but again to protect your line space. This growth rate is off $800 million basis from the prior year, which was similar to 2015, when we were at $4 billion business.
We do expect our year end inventory growth.
We do expect our year end inventory growth rate to be the peak followed by elevated yet appropriate step downs in the following quarters.
That said, we continue to feel confident about where we are relative to our plans and managing this aspect of our business.
At this point, we expect inventory to stay around three tons as we work through this challenging environment.
In closing as I transition back to the Chief operating ROE I want to say, how proud I am to be.
Part of under armour.
Honor and a privilege to lead this iconic brand.
Over the last nine months I have worked with our amazing global team mates and now have a much broader understanding of our business, which will help me support Stephanie as she steps into her role.
Now I'll hand, it over to Dave.
Thanks, Colin and good morning, everyone with three quarters of our fiscal 2023 behind US we delivered a solid quarter and are on track to deliver our full year financial and operational goals.
As a reminder, due to our fiscal year change our third quarter of fiscal 2023 and in December 31.
Is comparable to the fourth quarter of fiscal 2021.
As mentioned earlier, our third quarter revenue was up 3% to $1 6 billion or up 7% on a currency neutral basis.
In addition to the regional comments Colin provided from a channel perspective wholesale revenue was up 7% to $820 million with increases in our full price and off price businesses.
Direct consumer revenue declined 1% to $715 million due to declines in our factory and brand house stores, partially offset by a 7% increase in our E Commerce business.
And licensing revenue decreased 19% in the quarter to $30 million driven primarily by the timing of minimum royalty guarantees associated with our Japanese licensee.
From a product perspective, and a challenging retail environment, our apparel business was down 2% with strength in golf and team sports offset by softness in training.
We also saw strength in mens and womens bottoms during the quarter, particularly the unstoppable franchise as well as a solid performance in outerwear.
In footwear revenue was up 25% with positive results in all categories benefiting from better product availability during the quarter.
But where growth was driven by strength and run with the hover market of three resonating well, especially in APAC and EMEA.
Team sports, particularly basketball with the current 10.
And American football with cleaner products also performed well during the quarter.
And our core run product continues to achieve solid results with rogue assert and pursuit demonstrating strength in the period.
And finally, our accessories business was down 2% in the quarter due to softer sales of cold weather accessories, which more than offset strength in our bags business.
Gross margin was down 650 basis points during the third quarter, driven by 400 basis points of negative impacts from higher promotions and discounting.
130 basis points of unfavorable channel impacts primarily related to higher distributor sales.
60 basis points of adverse effects from changes in foreign currency.
50 basis points of unfavorable region mix related to higher EMEA and Latin American sales.
And finally about 50 basis points of unfavorable product mix due to the strength of our footwear business.
These negative drivers were partially offset by 40 basis points of favorable supply chain impact driven by lower freight costs, which more than offset product cost headwinds during the quarter.
Our larger than expected Q3 gross margin decline was primarily due to higher than planned markdowns within our wholesale business and increased promotional activities within our DTC business as we manage through inventory.
Third quarter, SG&A expenses were down 11% to $604 million.
Several factors drove this decrease including lower marketing incentive compensation and consulting expenses.
Bringing it to the bottom line operating income was $95 million coming in above our outlook of $75 million to $85 million.
After tax we realized a net income of $122 million or 27 of diluted earnings per share.
Excluding a $45 million earn out benefit in connection with the sale of the my fitness Pal platform and a $2 million benefit from a tax valuation allowance release related to prior period restructuring.
Adjusted net income was $76 million.
In addition to the operating income overdrive more favorable FX hedging impacts within the other income and expense line and a better than anticipated tax rate helped us to realize 16 of adjusted diluted earnings per share.
Coming in above our outlook of 7% to <unk> for the quarter.
Moving to the balance sheet.
And as Colin already took us through inventory I'll highlight our cash and cash equivalents, which was $850 million at quarter end with no borrowings under our $1 1 billion revolving credit facility.
And finally, we've repurchased an additional $75 million of class C common stock, allowing us to retire $8 8 million previously outstanding shares.
In total under our two year $500 million program, we have repurchased $425 million of class C stock and retired 35 million shares to date.
Next let's turn to our fiscal 'twenty three outlook.
As a reminder, the comparable period is the trailing 12 month period from April one of 2021 through March 31 of 2022.
To start we continue to expect revenue to be up at a low single digit rate on a reported basis and a mid single digit rate on a currency neutral basis. So there is no change there.
Next due to the higher than anticipated Q3 promotional headwinds we now expect the full year fiscal 'twenty three gross margin decline to be at the high end of the previously provided 375 to 425 basis point range. This compares with our prior year's baseline rate of 49, 6%.
Within this decline we expect approximately one third of the total to be from the negative impacts of higher promotions and discounting.
One third from elevated product costs freight expenses and changes in foreign currency.
And the remaining third is from mix impacts, including channel product and region.
Moving down the P&L.
Full year SG&A should be down at a low single digit rate versus our previous expectation of down slightly in.
In this respect we remain committed to ensuring our investment dollars are optimized to the areas with the highest returns while proactively identifying areas to manage expenses appropriately.
Wrapping this through and in line with our previous outlook operating income is expected to reach $270 million to $290 million.
Excluding the company's litigation reserve adjusted operating income is expected to reach $290 million to $310 million.
Regarding items below operating income recall that we have been planning for a material benefit from a valuation allowance release that we expect to realize primarily in our fourth quarter.
That said, we anticipate a significantly negative adjusted tax rate or tax benefit in the fourth quarter, resulting in an adjusted full year tax rate in the mid single digits.
Putting it all together.
Diluted earnings per share is expected to be 71 to 75.
Which includes a <unk> 27 benefit related to the tax valuation allowance release.
Of this 27 cents benefit 15 is it related to prior restructuring.
Additionally, there is an <unk> <unk> benefit from our second year earn out on the sale of the my fitness Pal platform.
And a <unk> <unk> negative impact from our litigation reserve.
Excluding these net positive impacts of 19.
We now expect adjusted diluted earnings per share to be between 52 and 56.
This is higher than our previously provided range of 44 to 48.
Primarily due to favorable FX developments on the other income and expense line and a slightly lower tax rate.
Before I close out even though we aren't providing a fiscal 'twenty four outlook until our Q4 call in May we are anticipating the macroeconomic backdrop to stay uneven in calendar 'twenty three with elevated sector wide inventories that could result in ongoing promotions lasting longer than previously expected in there.
Respect, we are employing proactive measures to protect and ensure the health of our brand to mitigate these.
Potential pressures as best as possible as we lay the groundwork for next years operating plan.
So to close I'd underscore that we are pleased with our continued momentum and remain encouraged by our evolving long term strategy.
Including broadening our product aperture refined consumer focus and efforts to create a more premium consideration through improved better and best level product.
Moreover, from an operational perspective, we are confident that our refined playbook and financial discipline position us well to navigate near term uncertainty and drive under armour to our next chapter of pronounced growth as we continue to protect this house.
That we finished our prepared remarks, so I'll turn it back to the operator for Q&A operator.
Thank you if you'd like to ask a question. Please press star one one if your question has been answered and we would like to remove yourself from the queue. Please press star one again.
While we compile the Q&A roster.
Our first question comes from Matthew Boss with Jpmorgan. Your line is open.
Matthew.
Yes.
Got you there.
Matthew for your telephones immediate please on mute.
Okay.
Let's go to the next one gold credit all come back.
Yes.
Our next question comes from Jay sole with UBS. Your line is open.
Great. Thank you. So much my question is on the comments you just made about looking into the next fiscal year.
It sounds like Youre seeing a little bit of a change in the environment versus what you saw three months ago is that more of a consumer.
Change in the consumer and the consumers willingness to spend or is that more on the industry dynamic with.
Still inventory pretty heavy out there and maybe some of the supply chain costs, taking little bit longer to get better than you thought just a little bit of a little bit more color. There would be helpful. Thank you.
Sure Jay This is Dave I would say, it's actually a little bit of both.
We definitely have seen that the promotional environment.
When a little bit deeper and we believe is going to go a little bit longer and a lot of that has to do with some of the building inventories that are out there with all the brands.
And that is something that all of the retailers are going to need to work through in the coming quarters.
We are seeing that that's probably going to take a little bit longer than what we would've expected maybe 90 days back.
The consumers are.
Out there the traffic is reasonable but conversion is a little bit challenged.
And I think that folks are being a little bit more cautious here for a while and so we expect that pressure to continue as we move through this calendar year for a while.
Got it and maybe a question for Kevin just on hiring Stephanie can you just maybe elaborate a little bit more on what it was about her that major of the right person to come in the lead under armour from here and do you have a super Bowl predictions for us.
While this is colin jumping in here, Kevin and Kevin on the room at the moment, but.
Stephanie obviously as Kevin alluded to in the script. It's definitely obviously has is an amazing executive I've had the opportunity to spend some time with them.
She obviously has had an incredibly successful career and the level of kind of inside that she will bring with regards to how we're thinking about our consumer and building relationships.
Brand is something that we can undoubtedly we can already failed and some of the early conversations with us. So we're excited to welcome onboard and looking forward to working with them.
Okay. Thank you so much.
Thank you thank you Sir.
Okay.
Thank you.
Our next question comes from Simeon Siegel with BMO. Your line is open.
Thanks, Hey, guys good morning, nice job.
I was hoping you could talk just a little you bet.
Just maybe elaborate a little bit on your expectations for stores E com wholesale.
We've got to throw it all out you, sorry, but like channel product and region basically just given the improvements in the progress youre, making so as we think about DTC versus wholesale as you look at maybe diverging trends with footwear and apparel and then just would love any more color. If you could on what Youre thinking for China, and Asia, Yes, Thats possible I know there was a <unk>.
Sorry.
There is a lot.
Okay.
I think.
Trying to see if I can kind of picking up pace, a little bit and David can kind of jumping.
As you've seen in our results, we are showing up incredibly well in Europe , and that's something which.
<unk> been really pleased with the progress with thing there and part of that is the fact that the way the brand has been able to manifest itself in Europe allows us to really demonstrate the better the good better best kind of way in which we think about the Brandon and when we get that right. It's very clear that it resonates with them and so we're seeing that in Europe . In spite of what is a difficult time in Europe at a macroeconomic.
So under armour is resonating pretty well.
Thanks Han.
If you go over to China, obviously, we obviously did everyone else, but challenged in the third quarter because of the number of block times. We had we had 35, 40% of our stores closed for much of Q3, we're obviously now starting to see that open up a little bit more and we are optimistic that we may see we may see business continue to improve.
<unk> is kind of consumers come back obviously, that's changing the dynamic of how people are shopping a little bit people going into stores as opposed to more online. So we're seeing that kind of play out and in North America, we talked about that we talked about this a little bit already but we are seeing a softer retail environment, but we continue to invest in building out our own DTC.
That's really a key focus for us thinking through how do we actually took directly to consumers.
Turning the store in New York is a great example of us really starting stepping into that and really think through how we can build on that and the investments. We continue to make in unlocking the power of our Omnichannel are all things that.
We feel we are.
Well positioned to lean into over the next 12 months and Dave I'm not sure. If you wanted to maybe I'll, just add a little bit from our Lincoln apparel footwear accessories perspective.
Apparel I think is down 2% in Q3, but if you think about it our first three quarters of fiscal 'twenty three we had year over year comparisons on a very favorable 21.
A lot of folks that were in our industry in terms of demand and I think across the industry apparel was impacted with higher inventories. So as a product category. It's been more promotional activity, there, which definitely challenges the revenue growth a little bit how's.
However, as we worked through that we expect that to normalize more and get back into the right growth place as we go into next year.
Footwear has been an excellent opportunity for us as you can see growing 25% in Q3 definitely a strong area for us and one that we've always talked about as being a big opportunity now some of that is due to better product availability.
If you recall with the impacts.
Last year from production a lot of that impacted footwear, even more than apparel.
So comping that is a little bit helpful. This quarter, but again super exciting area for us to keep driving on as we go into next year.
Great. Thanks, guys and then just one quick one recognizing it's relatively new for you guys seen the ASR any guardrails or how we should think about your approach to buybacks going forward.
Yes, it's something obviously that we continually look at.
There's a lot of different ways that we want to be able to utilize our cash and a lot of it is going to be navigating the current environment and staying nimble.
We still have the full revolver availability, so we're very liquid as well but.
But we want to make sure that we can reinvest at the right level in long term growth, whether it would be within our systems processes DTC a lot of what.
Colin had mentioned as well so.
We will continue to assess that no.
No decisions are made at this point in time.
But we're going to continue to look at it as we go forward.
Great. Thanks, a lot nice job and best of luck for the rest of the year.
Thank you.
Thank you. Our next question comes from Kate Fitzsimons with Wells Fargo. Your line is open.
Yes, hi.
I guess looking ahead to fiscal 'twenty four I certainly understanding that you are unwilling to guide here.
But I'm curious just as Youre looking at the gross margin opportunities and puts and takes.
As we look to the first half in the back half just given the depressed levels that we're seeing certainly on the markdown front here.
Well.
As David already alluded to it it's a little early its only February so we're not really giving too much.
Calling out anything providing any color with regards to full year 'twenty for at this moment in time, but we.
We are obviously, continuing we talked already about the continued promotional environment, but at the same time, we are starting to see some of these kind of supply chain issues that currently previously, but driving up costs, that's talking to kind of.
Two.
Back out again, so things like shipping and containment costs in this type of stuff. So we think there is an opportunity there but.
It's going to be a challenging year, just because of the amount of <unk>.
That's out in the market from a promotional activity point of view, so it's going to take us some time to kind of work through that Dave do you want to add any more color. Yeah. I mean, obviously, there's a lot of different areas that we're we're pushing on and we want to keep moving the ball forward, but Collins' point it is early.
And so at this point, we're going to kind of take advantage of the next 90 days to really dig in and continue to drive forward and be ready to speak more about it at our next call Kate I would say to you. It's not that we're not willing if you use the word unwillingness I wanted to kind of correct that we didn't do this last year as well as one of the reasons, we changed our fiscal year, primarily due to visibility because in February we're still barely.
The order book for the fall winter.
Season, so a lot of moving parts.
We will definitely obviously get to it in our may call, but certainly.
A lot of a lot of considerations as we move forward.
Can I just ask.
Fairpoint can I just ask one follow up on that inventory level, certainly understand that you guys are kind of shifting towards the prioritization of growth growth year, but with that in the yearend inventory is about 50% you are noting greater caution just o'brien environment, maybe the consumer I guess I'm just trying to.
<unk> balance opportunities on growth as well as maybe a potential return to positive gross margin next year again understand kind of unwilling to talk about trajectory on gross margins next year, but I'm just trying to understand the balance there between growth and profitability as we're looking ahead, especially with some of these.
Inventory investment.
Well.
As we already spoke a little bit, but I think we are in somewhat of a difficult different place than much of the industry. We're actually reasonably happy with what we know today from an inventory perspective.
Because as we called out in the script.
We're running the constrained volatile last year, we also walked away from some demand because we just couldnt see we'd be up to services to our inventory levels were incredibly slim last year, we're now getting our inventory back to what I would call kind of a steady state kind of number which is okay that 50% increase is a big number but when you actually look at the amount of inventory. We're now holding we're holding the right level of <unk>.
Inventory for a $6 billion business now.
Comparable with <unk> from an inventory perspective, and our inventory is right sized for the way in which we expect our business to kind of evolve next year.
This is Dave I think maybe what I would add a little bit there too as we have done a deep dive to kind of see what product. We have that is more seasonal list that we can pack and hold over to next year as opposed to liquidating. It at very low prices now and that's part of what's assumed in our in our outlook as well and so.
That is something that is in our our inventory growth numbers now that will be able to draft off of a little bit next year at least from a cash perspective.
And then I think.
Just thinking about where we are right now is a kind of around the three turn to Collins point is a pretty healthy spot for us and as we move through next year and deal with any of the excess we still will be managing our third party liquidation in a reasonable spot.
Expect to stay kind of in that 3% to 5% range hopefully at the lower end of that which is what we've been doing and continue to do so.
To make sure that we're keeping the brand healthy out there leveraging our outlet stores as best as we can so we feel really good about that.
To <unk> point, the growth rate looks high but if you look at the actual health of the inventory and you look at our actual turns were actually in a reasonable spot we're ready to drive into next year.
Great Best of luck. This spring season, thanks, so much.
Okay. Thank you.
Thank you. Our next question comes from Bob durable with Guggenheim. Your line is open.
Alright good.
Just.
On the marketing and the focus on the 16% to 20 year old varsity athletes you talk about.
Just some of the early improvements in the metrics for this demographic I was wondering if you could share a few of those with US and then the other question is just where on this year, where you're going to end up the marketing like levels or the rate of marketing spend this year I'm just trying to understand that as it relates to more of a longer term perspective.
On how much youre going to invest thanks.
And thanks for the question Bob.
Yes, as you mentioned.
<unk> shifted our target audience to the 16th 20 year old varsity athlete and I want to stress that that's the target audience that is not the target market. This is the inspirational news that we are looking to kind of work with them and build relationships with which would allow us to amplify the brand.
Part of our broader strategic evolution.
Early days, yet, we really only made that shift.
And the back end of last year so.
We're starting to look at the.
Our marketing metrics around that and it looks as if the work we're doing and we're starting to see the results certainly from the point of view of how we have been selling in things like our creative or landing incredibly well something about team sports work as lending incredibly well. So a lot of the work. We are now starting to do and the way we start to think about focusing our marketing to ensure that we're meeting that athlete is really starting to <unk>.
And we're seeing that kind of show through in some of our results as well.
The point of view of our marketing it still.
It's focused on middle to top of funnel Activations and again continue to be focused on increasing awareness engagement and consideration as we would do.
<unk> is a great example of how we're looking to lean into that when it comes to the other part of our strategic evolution, what we call a live sports style stuff. So overall, we feel as if we were moving we've got a great story to tell in the 16 to 20 year old athlete individually, we want to tell it to but Dave do you want to give some.
But just from a dollar perspective, we finished Q3, a little below 11% of marketing dollars to revenue.
And we're still.
Managing through that operating objective of keeping marketing kind of in that 10%, 11% of our revenue and that's how we're going to keep driving forward.
And then we'll talk more about next year as we get to the May call great. Thank you very much.
Thanks, Bob Thanks Bill.
Thank you. Our next question comes from Brian Nagel with Oppenheimer <unk> Company. Your line is open.
Hi, good morning, Thanks for taking my questions.
So the first question.
I guess, just a bit of a philosophical.
Just to understand better.
What youre seeing out there as far as the overall backdrop. So it sounds the comments you made today it sounds like it sounds suggest to me that maybe your view the backdrop has gotten a bit worse demand perspective. So the question I have there is you think about how the consumers' behavior in how the consumers reacting to the under armour brand, but at the same time you are you in.
Others.
There's clear inside this clearance activity to sort of say rationalize.
Excess inventories.
Are those still two distinct events.
As the consumer potentially weakening here at the same time, you're strategically clearance clearance inventory or is that that that clearance activity now either.
Leading to consumer weakness, we're fueling consumer weakness.
Yes, I think that from our perspective.
We're not necessarily seeing it as a developing consumer weakness I think it's more a little bit of a math situation a lot of the brands had produced a lot more inventory for 2022 thinking it was going to be as strong as 'twenty, one not realizing how big of a bounce back banner year 2021 was for most of the brands.
So with all that heavy inventory out there, it's really a math equation of being able to move through it and so you see a lot of the brands are have been heavily discounting and we've had to play in that a little bit more than we wanted to in Q3 and now we're starting to protect a little bit more in Q4 here as we drive through.
But I don't I don't necessarily see it as a demand issue I see it more as a situation with the numbers that are out there and as we go further through this calendar year that will we believe that that will start to subside, but it is going to take longer than what we expected probably 90 days back.
And then the other pressure that we saw more in Q3 was relative to China as well with Covid.
Now very resilient consumer in China. So we're starting to see that bounce back a little bit which is great and we hopefully will continue to see that.
But that's kind of what we're seeing out there and we're going to keep driving forward, but I think the first half of our coming fiscal year will be a little bit more pressure than we expected 90 days back yes, let me just jump in there the way I have been kind of explaining it.
The inventories are bloated and it's in it's pretty stagnant out there at this moment in time. So it's just going to take time for it to kind of work through I think the consumer is still there.
And we are confident that suddenly the categories. We're in and our business can certainly continue to win within this environment, but we do think in some respects actually this this actually gives us the right time to actually lean into the strategic work that we've already got in flight, we've already talked about the 16 to 20 or out of Boston.
Please how do we build that product how do we stop building that relationship. So this actually gives us a great time to do that how do we start to bring live and sports style to the market again, great time for us to do that at the inventory as the as the industry works through the inventories and first thing our strategic segmentation thinking about how we.
Continuing to build best.
Good better and best product and how do we actually really start to bring that better and best product to the consumer so yes, I understand it's bloated and stacking them at their but actually from the point of view of how we can that start to play in this market, we can position ourselves incredibly well. So as this starts to play out we can power out of it.
That's very helpful and the second question.
A follow up recognizing you haven't given guidance beyond the current fiscal year, but lots of moving parts right now with respect to topline or across geographies across product categories distribution channels et cetera.
Water.
We're watching this business and watching the business continued to recover how should we think about which should be kind of a healthy topline growth rates for under armour.
Brian This is Dave.
Great question and.
We're excited as excited if not more to talk about the future.
I think when you step back we.
We probably would go back to what continue to be some of the biggest opportunities for us.
When you think about the footwear growth and the continued potential there and how smaller footwear businesses in total to our mix.
When you step back and look at where we are from an international perspective in.
And being able to return to healthier growth in Asia Pacific as we get past Covid more.
EMEA is a very healthy market for us and we're driving forward there as well so.
So still a lot of great opportunities for us.
As we think about internationally.
And then from a DTC perspective, it is an area that we've been over indexing on relative to investment there whether it be within the platform itself, whether it be within our loyalty CRM et cetera, So and you see that coming through in the E comm growth.
So there's a lot of things to be excited about also we continue to make progress relative to how we wanted to attack full priced brand house stores.
And then on top of all of that we have a new opportunity as far as expanding the aperture and going into that fourth quadrant for us are the Lib quadrant sports style project, which we're super excited about and that has a little bit of a longer lead time, youll see some of that product coming into the market, but as far as bigger dollars and bigger volume.
That's going to be a little bit more of a fiscal 'twenty five and beyond so when you think long term to your question.
There's a lot of great opportunities out there but.
But as far as giving color on growth rates and things like that we're going to hold back for now until we can get more get more further down the road.
Got it very helpful. Thank you.
Thank you. Our next question comes from Jim Duffy with Stifel. Your line is open.
Thanks. Good morning, Thank you for taking my questions.
So I'm interested in learning more about go to market strategies behind efforts to expand the wearable occasion for the brand first can you speak about the allocation of marketing dollars that effort.
Versus the more order activity or the dimensions of the brand and.
Secondly, can you speak about how you leverage partner athletes to raise awareness for the new product dimension and then finally.
I'm, particularly curious here can you speak to the volume of wholesale channel partners are there examples of commitment to a point of sale representation for that product.
Hey, Jim Let me, let me kind of lean on let me kind of kick that off obviously just thinking through how we how we think about this new segment. The lift which is again just to remind you that this is kind of the fourth quartile of train compete recover live.
And.
Building a little bit off the previous question. This changes our total addressable market enormous states. So it's a huge opportunity for us telling them into that we are building currently building. This thing so our go to market model at this moment in time and understanding how we can optimize what we currently have.
And how do we then think about bringing it to market differently and all of that work in flight at this moment in time, but the store that we're opening in New York is perhaps a great manifestation of how the Brian wants to show up differently and intends to show up differently and the teams are working through that and Youll see more of that come to come to life over the next few quarters with regards to.
How we're thinking about how we're thinking about the utilization of athletes.
Obviously, we've got such an incredible roster of athletes.
And many of them are really keen to have access to this kind of product one of the one of the expressions, we use around here with tunnel work.
Because we do an amazing job of providing athletes with.
With product they can wear on and off the field when the training, but how do we allow them to have that swagger, how do we give them. The tunnel work kind of swagger that they deserve if you're operating at that level within within the sports World. So again many of the athletes are really up for this they really came to this they are really engaged and want to be part of this John .
And again, we've been talking with many of our key athletes with regards to how that comes to life.
Continue to see that in the way in which we're showing up from a from a marketing perspective as well.
And again, we are just starting to build these relationships with our wholesale partners. We've had these conversations with them to build on your third question.
They're excited about it as well and the opportunity for us to again the opportunity for us to increase our time of total addressable market is something they can clearly see and they can see that we have an opportunity to play there Dave do you want to supplement that.
<unk>.
Not surprisingly one of the bigger opportunities as being able to more aggressively.
Aggressively expand into the mall channel and some of the great partners that are in the mall business.
So that's going to be a big opportunity for us, but there could be other distribution opportunities as well. It is early days at this point.
But definitely a lot of potential and within the walls and outside the walls of under armour, we're really excited about what that can mean.
And then just following up on that David is filled in some of your earlier comments should we think about fiscal 'twenty four is kind of a foundational year for us and you build on it in fiscal 'twenty five or we will we begin to see meaning.
Meaningful revenue contribution from these product categories in fiscal 'twenty four.
Yes, I think Thats, a fair assumption fiscal 'twenty four is going to be a little bit more foundational. If you think about our product lifecycle and developing into more of the sports style and building out that aperture a little bit more so you.
You might see a little bit of that coming in back half of fiscal 'twenty four but from a material perspective, it's really going to be fiscal 'twenty, five and beyond where that big opportunities.
Understood. Thank you.
Thank you thanks, Tim.
Thank you. Our next question comes from Laurence <unk> with BNP Paribas. Your line is open.
Good morning. Thank you very much for taking my question I wanted to ask about EMEA last December it was up 23% at this time. It was up 46% is the growth driven by a balance of footwear and apparel.
If you could give a little bit of a color on what youre seeing by regional performance within EMEA and Dave How do we think about four key performance for EMEA.
Yes, I mean, a couple of things.
<unk> has been a very healthy region for us.
We've made a lot of progress there, which has been great. The team is doing an incredible job there.
And.
We saw increases in Q3 in wholesale but also on the DTC front.
I will say that a little bit of that with some earlier than planned shipments.
Were originally planned for early Q4 that ended up coming in and making it out in late Q3, so that did help a little bit.
And we remain agile in the region, despite uncertainty, including the inflationary pressures and rising energy costs and things that that that region is dealing with but.
But we're in a very good spot relative to our key account relationships. We're starting to open more full priced brand house stores, which we're excited about so definitely a DTC emphasis there.
And we continue to see it as a very high growth region for us and we would continue to expect that in Q4 as well I wouldn't expect the Q4 growth to be as high as the Q3 growth because there is some timing in there that I mentioned.
But we still believe it's going to be a healthy growth area for us as we continue forward and building up that.
You asked about the countries I mean, the U K has been.
Huge focus for us in some way, we decided a couple of years ago, we nearly needed.
Really needed to win and that's working incredibly well we have again to Dave's point, we have great relationships with our wholesale partners and we are in the process of opening a number of stores in the first half of calendar 'twenty, three which will be opened up between London and end up in Liverpool and Manchester Birmingham. So.
Opening up across the UK as we really start to lean into it again.
It is important to understand.
Europe is really where the brand manifest itself in the way that we want to show up and when it when we show up the right way, we clearly resonate with that poor consumer. So the UK is incredibly important we also have a major focus on Germany as well as thinking about how we kind of continuing to grow in that market, we're a little bit further behind in Germany, but we've got other.
And in Europe , and are starting to lean into more aggressively from from Spain, and Portugal, France. So we're working our way through the region, but we really wanted to make sure. We win in a couple of those core markets before we kind of rollout too aggressively in the region, but it's working and it's a model that we're looking to kind of replicate back here in the U S. As we build those relationships further.
Very helpful and then David I'd Love to ask about.
Kate question around gross margin just following up.
Around those three buckets it sounded like the third one mix is more structural in nature.
The right way to think about it.
Relative to the other two buckets and then you alluded to inventory turnover.
A three times over the foreseeable few quarters, how do we think about inventory growth yeah.
Year over year over the coming quarters when does it match revenues.
Yes, I would say a couple of things relative to gross margin.
As we think about that I mentioned, a third is the higher promotions and discounting. That's that's probably the biggest kind of individual piece for this year the second bucket around.
Elevated product cost freight expenses changes in FX, the two bigger pieces and there would be the product cost headwinds and then also the FX headwinds.
Freight was a big headwind in the front half of the year, but it's now kind of flip the other way a little bit.
And then the last one which was more to your question. It is a little bit more structural so the mix impact which is the other third remaining.
Probably the biggest piece of that is just having a higher mix of distributor revenue, which is a little bit lower gross margin business for us, but still very profitable on the bottom line.
And then there is a little bit of product mix in there with the higher percentage of footwear revenue, which is a little bit of a gross little bit lower gross margin for us.
And then a little bit or even a smaller amount impact with the region mix, but the biggest one in there as the channel mix with the higher distributor sales.
And we will provide fiscal 'twenty four inventory color when we get to our fiscal 'twenty four outlook in may.
Very helpful. Thank you very much.
Thank you.
Thank you. Our next question comes from Matthew Boss with Jpmorgan. Your line is open.
Great. Thanks, So Colin maybe as we enter 2003, you mentioned an uneven macro backdrop.
How are you seeing the progression of trends in the North America Athletic Channel, maybe post holiday and then Dave maybe just as a follow up could you speak to the composition, maybe below the surface within inventory, what's durables versus what's at risk from markdown and then to your point on the continued promotions.
Is there any parameters for us best to think about gross margin next year.
Well Matthew Thanks for the question.
I think.
But what I used earlier is bloated I think I think the industry suddenly dispose industry is pretty bloated at this moment in time, just because of the amount of inventory that has hit the hit.
Hit the stores over the past six months.
The overhang and I kind of call. It the hangover from Covid, a little bit where we had so much product that was late that was all kind of coming in at the same time as we saw.
Perhaps a slowdown in demand somewhat but we saw.
Correction in demand so you've got all of those things happening at the same time. So you've just got a lot of inventory out there and I think as we've talked about already.
Labor the point, but I think it's going to take some while for that to kind of work its way through.
I think again I think we're in a better position than most to kind of manage through it but you know when the inventory when the industry sneezes, we catch a cold somewhat as does everyone else. So we're having to play within that environment, but I think we're in a better position because of the way we've managed inventories to power out of it quicker and hopefully kind of protect our bottom line as we go forward.
Okay.
Yes, I think Matt when you think about our inventory.
We are in a fairly healthy place, we do not have a lot of aged inventory. So if you look at what's in that 50% growth its not like Theres a whole bunch of stuff that is 234 seasons old. It is all much more current and.
And therefore, we feel more comfortable with being able to move through that in a reasonable way.
And we did as I mentioned before it takes a lot of the seasonal product and we're going to pack and hold that and sell that next year as opposed to kind of moving that through liquidation or something that are at a lower margin or less brand accretive way. So we're in a position to be able to do that we're comfortable doing that.
And when you think about gross margin next year, we are going to wait until the may call to give color on that because theres just a lot of puts and takes.
You would think that back half of next fiscal year, you would probably have some less promotions you would think that next year, we would have lower freight cost and what we dealt with at least the front half of this year.
But then on the flipside footwear is probably still going to grow faster than apparel and thats, a little bit of a headwind, which we are comfortable with and relative to foreign currency, who knows right. I mean, it's difficult. So theres a lot of puts and takes out there. Obviously, we're going to continue to drive forward and we've got a lot of initiatives to do so.
But we're going to we're going to wait until the may call to be able to give more color there.
Thank you. Our next question comes from Tom Nick <unk> with Wedbush. Your line is open.
Hey, good morning, guys. Thanks for taking my question.
The last couple of years.
Done a lot of work around.
Retraining the consumer to come.
To look for you at full price and pulling back on discounts and pulling back on the off price channel.
I think unfortunately because of the inventory.
Bloat that you've talked about you know I think obviously you've been more promotional than you want it to be how do you a void.
I guess, having the customer be trained.
Look for your brand at a discount how do you eventually.
The rain in the discounts and promos that are.
That are occurring right now without facing pushback from the consumer who has been able to buy your brand and your competitors.
At a discount.
This is colin jumping in here and thanks for that question, Tom I think Theres a couple of areas that I think are relevant to this number. One is you talked about already we've walked away from quite a bit of undifferentiated retail at this moment in time and we have no intention of going back. So from the point of view of kind of ensuring that we protect that that core product that we have.
Yes.
We don't see that kind of sliding again, we've also managed to Dave's earlier point, we're also making sure we control our liquidation at an appropriate level as well so from the point of view of not allowing us to slide further into that kind of that trap. We are working aggressively to make sure that that doesn't happen at the same time, we <unk>.
Much of the work that we've been done recently as working through how do we bring more bedroom best product. So at the top of the house, we've got a really good.
Good level brand here in the U S, but the opportunity for us to build into that bedroom best is kind of what we're working on and what Kevin spending a lot of your time, because his history and its context for the brand really helps us understand that at the same time. We're also working through building out our wholesale distribution strategy to kind of try and increase the opportunity of landing this stuff at a wholesale.
Level and working through how that segmentation works and how we show up now moving through to lift clearly gives us an opportunity to think about that a little bit from the point of view of where we show up and Dave talked about a little bit about how do we make sure we're showing up in the right places at the mall because that gives us again, a huge opportunity utility into that as well and finally, we have been continue.
Going to make.
Oversized investments in Omnichannel, and DTC kind of parts of our business and certainly thinking about how we show up at retail the Flatiron store in Manhattan is a great example, and a first step on that journey, but at the same time continuing to invest in loyalty programs, which again, we've we've rolled that out last year, we're looking to roll out our mobile.
Here in the U S. Later this year and we're seeing great results from that so it's a question of offense and defense.
<unk> by making sure we don't slide back into that that lower channel kind of network.
Retail, but at the same time, putting in place really strong plans.
The strategy is to ensure that we're driving continuing to drive the brand up to that next level.
That's helpful. Thanks, Colin that's a lot this year. Thank you Phil.
Thanks, Tom.
And we will take our last question from Michael Binetti with Credit Suisse. Your line is open.
Hey, Thanks for all the detail here and for taking our question. So if I could just follow up that last one very quickly as you look at the distribution map in North America were 24.
There are also parts of the U S distribution map that you need to mix away from to get to that targeted better best mix on product as you kind of rethink distribution more broadly.
And then I guess, one on SG&A, you talked a little bit about gross margin and how you're thinking about.
Some of the themes for next year, but same same way marketing you commented on the near term to Bob's question earlier. It sounds like 2011 is where where you plan to live next long term I guess as we think about the other buckets I am guessing incentive comp everybody would hope you'll come back next year, but are there any other buckets to just be mindful of maybe some frontloaded investment as you build the teams for live.
Any other buckets that we should be thinking about as we look out to next year into the may call.
Well. Thank you Michael I'll take the first part of that and then I'll pass it over to my partner in crime, Dave to have to take the SG&A part but.
If I had my applying Tim Michael is two two to not shrink the bottom of the market, but grow the top of the market, we want to get bigger as an overall, Brian we believe when we look at the way we resonate with consumers when we look at the data we see three.
See from consideration point of view.
We have a huge opportunity out there and part of that is not necessarily about shrinking the bottom end of the market I think we've already done that to a large degree by walking away from much of those.
That was kind of different undifferentiated doors, which just didn't make sense, but it's really about how do we grow at the top end of the market. So I'll focus is more about trying to elevate the brand.
Again protect the Corp, and elevate from all points of a better way of putting it is kind of how we're spending our time and thinking through the product developing stories for telling the consumer we are engaging with.
The entire strategic evolution that we've got in place and we're working through but hopefully help us deliver against that and Dave do you want to jump into the SG&A, Yes, I mean, I think from an SG&A perspective.
Through a lot of difficult work over the years, we are now more nimble and so we're able to proactively managed much better than we were years back and so we think about this year.
With some of the pressures that are developed in the market, we've slowed down our prioritized hiring we prioritize marketing investments differently and better.
Continuing to manage things like consulting and <unk> and things like that.
Doing that has been.
Not as difficult as it used to be in the past and I think some of that also goes to the enterprise mindset within the company.
Whether it be the alignment of our leadership team and being able to make tough calls in drive thru and prioritize further to be able to protect the bottom line or even if we just think about all the teammates that we have across the world and how much they're looking out for the brand and trying to spend as if it's their own money and kind of make $1 spent like three and.
That enterprise mindset goes a long way for us and it's just been I don't want to say the word easier because these are tough decisions, but we've been able to act more quickly and more proactively on the cost structure and we're going to continue to do that as we drive into next year and beyond So I think we're set up well for that.
And it's time to drive forward the time to go yes, and I'll just close out.
We've done I think over the past few years, we built an operating model that clearly works, we had a solid quarter, but I think that demonstrates the fact that we got it we have a strategic refinement that we're putting in place at this moment in time.
And that's starting to build out and starting to flow through the market and starting to flow through work with our teammates to kind of bring it to its full manifestation.
I'm excited about how thats all going to come together I think we're well teed up for future success totally agree.
And then follow that with just one more I think you used the word stagnant twice in regards to the inventory clearing youre seeing in the marketplace today obviously.
We have your revenue outlook for the fourth quarter, but would you mind elaborating a little bit on where you see pockets of stagnation and pass out there perhaps.
Were you surprised to see that inventories are turning slower than you expected coming out of holiday.
I think there's just a lot out there I think.
I'll use bloated again, I think I've used that couple of times as well so that might be the keyword with regards to inventory I think I think it's just bloated and I think its different channels. Obviously, you have different different issues that they're dealing with.
Different brands or obviously handling it in different ways, but.
You only have to go and look on websites to see how many people are running discounts out there are challenging it is.
So again I think it is just that.
I'm going to take some time for it to work.
Alright, Thanks, guys great detail I appreciate the help.
Thanks, Mike. Thank you Michael Thank you.
Thank you. This concludes the question and answer session. Thank you for your participation you may now disconnect everyone have a great day.