Q2 2024 Under Armour Inc Earnings Call
Good morning, and welcome to the under armour Q2, 'twenty 'twenty four earnings conference call all participants will be English only mode.
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Good morning, and welcome to under Armour second quarter fiscal 2024 earnings Conference call. Today's event is being recorded for replay.
Joining us on today's call are under armour, President and CEO, Stephanie when arts and CFO David Bergman.
Our remarks today will include certain forward looking statements that reflect a neuroma is management's current view of our business as of November eight 2023. These statements may include projections for our business in the present and future quarters and fiscal years forward looking statements are not guarantees of future business performance and our actual results may differ materially from those expressed or implied in that he has provided.
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Statements made are subject to risks and other uncertainties detailed in this morning's press release and documents filed regularly with the SEC, including our annual report on Form 10-K, and our quarterly reports on Form 10-Q.
Today's discussion May also include the use of non-GAAP references under armour believes these measures provide investors with a helpful perspective on underlying business trends.
When applicable these measures are reconciled to the most comparable U S. GAAP measures reconciliations of which along with other pertinent information can be found in this mornings press release and at about Dot under armour Dot com with that I'll turn the call over to Stephanie.
Thank you Lance and good morning to everyone. Joining today's call I'm pleased that our second quarter results, particularly our profitability were better than expected I'm also encouraged by the progress we're making in strengthening the parts of our business that will set us up for greater success over the long term.
That said, we did update our full year outlook to reflect additional topline pressures for the balance of fiscal 'twenty four mainly due to our north American business, which will address later in this call.
First though I'd like to discuss the strategic levers, we are exploring to put us back onto a path of greater returns in the years ahead.
Over the past three months our team has focused on assessing the opportunities and the challenges we face as a brand and as a company.
Through multiple work streams across strategic operational and financial lenses, we continue to dig into our product pipeline distribution strategy operating model and the financial discipline necessary to drive a more consistent trajectory for our future.
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Our team and the leadership responsible for making this happen are central to these efforts.
In this respect our new Chief Consumer Officer, Jim Dallas, She's hit the ground running including in depth market visits around North America, and EMEA to assess directly what is working and where opportunities exist for us to show up even better for athletes and wholesale partners.
With work underway to improve our consumer facing functions by prioritizing efforts to advance our digital business I'm excited by the possibilities. He has identified to optimize our marketing spend to ensure the highest possible returns.
Elsewhere in the organization, we're putting the right people in place to pursue best in class operational practices.
Last month, we announced John Curran, as our new Chief supply chain Officer.
After a 30 plus year career at the gap Shawn has responsibility for end to end planning product sourcing and manufacturing vendor management distribution and logistics, we are thrilled to add John's experience and perspective to UA as we strive to gain greater edge in our supply chain.
Turning to our strategic protect this house three or P. P. H three construct as we mentioned on our last call fiscal 'twenty four it is a year of building for under armour.
It's a year of assessment resetting and simplifying our approach to balance the short term optimization and profitability of our business with long term brand building and the ability to deliver more consistent topline growth.
Within this construct we are confident that driving global brand heat and delivering elevated products and design will combine holistically over the long run to drive sales growth in the U S. While maintaining momentum in our key international markets.
To touch on some progress some progress and highlights during the quarter I'll start with driving brand heat.
As a brand rooted in athletic performance with the Northstar team sports a well deserved congratulations go to the Las Vegas Aces and UA athletes Kelcey Plumb, who wore the curry one retro N V. P shoes as this amendment their place and WNBA history by winning their second consecutive championship.
This year's MLB season also gave US highlights included including Bryce Harper with one of his best ever postseason powered by his signature Harper eight cleats.
And congratulations to our hometown Baltimore Orioles for their best season in decades, including the alleys.
L East with UA athletes, Gunnar Henderson, and Ryan Mountcastle, helping lead the charge.
And in running following her when at last year's New York City Marathon, Sharon Lu Dechy placed third in this year's race only 10 seconds out of that first wearing our UA flow velocity elite to running shoes.
Demonstrating the consistent footwear innovation, we're bringing to the elite levels of road racing.
Another highlight during the quarter was a marketing activation featuring one of the most talented wide receivers and American football just in Jefferson.
The campaign blends athletic excellence music and culture targeting 16 to 24 year old varsity team sports athletes in.
In the spots Justin is featured wearing the unstoppable fleece pulls up and joggers and the recently launched jet fuel slip speed trainer.
The best part with Justin's involvement with the development process, demonstrating how we're marrying technical innovation and style to translate performance in individual expression into culturally relevant products and.
And the response has been great with the significant improvement in web in store traffic and revenue metrics exceeding past activations.
Our relationship with Notre Dame also exemplifies a deeper collaboration with our athletes and teams to develop new products and create brand heat moments.
Last month, we launched eliminate addition, UA coaches collection for coach Marcus Freeman.
From her to crew Knacks fans can now access coach Freemen's Lux he wears on game day.
And quarterback Sam Hartman, who has hundreds of thousands of social media followers posted a day of his life showing the versatility of our slip speed training shoe.
We also drove brand heat and email with the started the European global football season, including Activations across TV digital and social media as well as our first outdoor placements in London Madrid and Barcelona.
With protect this house as a backdrop more than 1600 retail and wholesale doors in the region showed how under armour products can make you better and.
Integrating our famous basically our products our magnetic co elite football boots, and hub are marking a running shoe to help athletes and their journey to compete.
Each of these brand heat moments during the quarter signals a significant evolution in our approach to marketing, which is much more focused on capitalizing on our assay assets to generate returns via product marketing rather than simply leaning into large scale anthemic campaigns.
By activating more consistently across the products and franchises that matter I am confident we will continue to drive improved brand affinity.
Finally, we are driving a new approach to our digital and social media strategy, yielding improved performance metrics across our channels with strong double digit growth in followers shares likes and reach across our Instagram accounts, all leading indicators that are strategic that our strategies are working.
And on Tictoc, which continues to be our fastest growing platform, we've seen significant increases in followers engagements and views on the under armour channel.
Next is our second priority of delivering of delivering elevated design in products, emphasizing our footwear sports style and women's businesses.
Strengthening leadership in this area, we recently announced John Barbados, as our Chief Design Officer.
He has quickly added leadership maturity direction and strength to our design organization, bringing a fresh perspective, and helping us elevate our approach to our athletes lives outside the gym.
With the search for a new head of product underway, a new head of design and using sneaker and branding experts to add horsepower to the team it's about getting the right talent in the right place to maximize our innovation and marketing engines to breakthrough at the intersection of where style and design meet performance.
Above all else our single most significant growth opportunity is footwear.
And while we have a solid foundation and performance footwear and aim to grow and sports style at about $1 $5 billion in a hyper competitive space, we have yet to capitalize on our full potential.
We have started the work to evolve our footwear strategy and I am confident that we are putting together the right or components to scale. This area of our business more aggressively but this is a multiyear journey that will take time.
It's also evident that we will need to invest more in footwear to support our long term growth expectations.
Therein lies the challenge balancing P&L productivity and profitability, which as we've demonstrated remains a priority for us to deliver to shareholders in the near term.
In this respect we are continuing to dig into our product and marketing cost structures to determine how to best prioritize investments to the areas of highest return and deep prioritize areas that may not be as productive for the brand.
In this respect we are assessing the productivity of Skus styles categories sports marketing assets and distribution channels to determine the most optimal path forward.
Back to the quarter, we have a lot of newness to be excited about this fall holiday season and into next year.
Starting with the most innovative shoe thus far in the current portfolio. The Korea 11, future Curry dropped on October 13th.
The first iteration of the Korea 11 speaks to Stephens desire to inspire the next generation of players.
It features UA warp up our technology and dual density UA flow cushioning for premium comfort and control to support his demanding dynamic style of play.
As we continue to grow the Curry brand, we are excited to bring more talent under the Korea umbrella, including our recent signing of rising Star Darren Fox.
Marking the first time and active NDA athlete brand has added an active NBA player to the portfolio. We're working on a crease brands signature D. Aaron shoe that will embody what he brings to the game.
Turning to our UA slip speed platform, we launched slip speed youth footwear, a few weeks ago scale.
Scaled down so all ages can enjoy the versatility of this industry, leading innovation slip speed youth is only available in our direct channels and Dick's sporting goods.
Next up for the platform will be occurring Bruce Lee co lab due out later this month and then our slips the running shoe in February just in time for the start of the 'twenty 'twenty four funding season somewhere drops more energy and of course more versatility to com.
Rounding out our product highlights in our sports style and women's businesses, we launched several better and best offerings for her including premium products from head to toe that will keep her warm and comfortable from the locker room and field to out on the town after the big game here.
Here, it's all about premium executions of that fabric and finish infused with the swagger and style our athletes desire.
Starting on top our unstoppable Fleece collection has all day comfort and four way stretch material with just enough warm to keep her ready for anything on.
On the bottom our meridian cold weather leggings take our Super soften stretchy performance knit fabric to the next level by adding extra thickness for warm.
Her outfit is complete with a retro sportswear inspired forged ninety-six shoes, the ultimate expression of comfort and style.
Wrapping up our product update although we know it will take time for our focus on elevated designed to deliver expanded better and best level collections. We are not standing still while re merchandising existing products. We are selectively infusing limited run releases and capsules with an expectation that greater critical mass will arrive.
Towards the end of next year.
This brings me to our third strategic priority, which is to drive U S sales.
During the second quarter, our North American business was down 2%, which was in line with our expectations.
However, when we look towards the balance of the year, we expect a further contraction in North America, mainly due to ongoing pressures in our wholesale business, which have gotten tougher since our last call.
Several forces are at play here, including inflation and consumer confidence normalizing inventory levels that mid still broad promotions and overall softness in our future wholesale order book as a result, we lowered our fiscal 'twenty four revenue outlook to reflect these challenges.
Amid these conditions, we are however, making progress on our premium wholesale distribution strategy in North America.
Leveraging the strength of key footwear franchises, including Curry, our mall penetration is expected to be up more than 40% by the end of fiscal 'twenty four.
This is an early win and I'm confident that as we drive brand heat and deliver better products, we will continue to gain premium shelf space.
Shifting to our direct to consumer business, our U S loyalty program UA rewards, which went live in late July has exceeded our initial expectations.
In October we made the program available in our retail stores, adding to our momentum.
Having surpassed 1 million members in our first few months, we see more robust engagement amongst our members.
So far you a rewards members are almost twice as likely to make a repeat purchase and returned to the brand within 90 days. So early points on the board and building greater brand love and loyalty.
As a cornerstone of our consumer engagement strategy, we are confident that UA rewards will inspire better sales conversion as we continued to scale the program.
In concert with our loyalty program, we are distorting resources to our digital platforms, including our website and our mobile app.
Most of our consumers start their shopping journey on social media, our web site and our App. So it's critical that we improve this experience.
Within this context, our teams are working hard to accelerate our e-commerce business by enhancing our search and browse capabilities upgrading our size and tick guides, adding athlete shop, the look sections and increasing mobile speed all enhancements that we know will deliver a more premium experience.
I understand what a world class digital offering looks like and this team is strengthening the foundation for our long term success.
Turning to our international business, we continue to maintain momentum in EMEA and APAC EMEA.
India was our highest growth region during the quarter, reflecting solid growth in our DTC and wholesale channels in.
In July we opened our fourth London brand House on Oxford Street, marking an exciting milestone as we expand our presence in the U K and drive greater brand affinity across this important market.
Our APAC business also grew in the second quarter, driven by solid performances in our wholesale and DTC channels.
Over a broad array of different countries and cultures are focuses on customizing, our product and marketing strategies with the local athlete in line and leveraging the success of our loyalty program.
With seven 5 million members in our APAC loyalty program. We're now piloting franchise partner implementation and our members are spending almost 30% more than non members.
Encouragingly there are many learnings that we can leverage from APAC to make our U S loyalty program even better.
In summary at the halfway Mark of fiscal 'twenty four we are progressing against our P. T H three priorities at.
Acknowledging that this is a multiyear journey with much work ahead of US. Most immediately we are focused on operational efficiencies and controlling costs to ensure we remain responsible stewards of the business.
With our continued strategic evolution and a renewed mindset I'm confident that we are building a stronger under armour with brand he more premium product offerings to inspire athletes worldwide and ultimately a more robust profitable growth story and the long term.
With that I will hand, it over to Dave.
Thanks, Stephanie.
Moving right in our second quarter revenue was flat versus the prior year at $1 6 billion, which was in line with our outlook, excluding the impact of foreign currency revenue was down 1%.
On a regional basis, North American revenue decline by 2% coming in at $991 million, which was in line with our expectations.
Wholesale was down at about the same rate due to challenges in our full price business, partially offset by growth related to inventory management strategies, which include a normalization of our off price channel mix from low levels last year.
Our North American DTC business was down slightly during the quarter.
EMEA revenue was up 9% to $287 million.
We're up 4% on a currency neutral basis.
This was driven by solid growth in our DTC business related to new store openings and a strong underlying pump business.
Our EMEA wholesale business was also up during the quarter.
APAC revenue was up 3% to $232 million were up 7% on a currency neutral basis. Despite the dynamic environment, we saw growth in our wholesale and DTC channels.
China was a leading contributor to second quarter growth.
And finally, our Latin American business was down 8% to $54 million in the quarter were down 19% on a currency neutral basis due to the timing of distributor orders.
From a channel perspective wholesale revenue was down 1% to $940 million with decreases in our distributor business, partially offset by higher sales to the off price channel.
Our full price business was flat compared to the prior year.
Direct to consumer revenue increased by 3% to $596 million due to a 4% increase in our owned and operated store revenue and a 2% increase in our E Commerce business.
Licensing revenue decreased 14% in the quarter to $29 million driven by declines in our North American and Japanese licensee partners.
By product type.
Apparel revenue was up 3% driven primarily by growth in our training and golf businesses.
Following several quarters of solid growth footwear was down 7% driven primarily by softness in our team sports and run categories.
Within team sports, we did see strong growth in basketball.
As a reminder, during the second quarter of fiscal 'twenty three a significant amount of footwear products that were previously delayed due to COVID-19 related factory constraints made their way into the wholesale channel.
For the second half of fiscal 'twenty, four we expect footwear to be relatively flat as we comp against last year's 26% growth in the second half.
And finally, our accessories business was up 3%.
Moving down the P&L.
Gross margin was up 260 basis points to 48% during the second quarter, driven by approximately 410 basis points of supply chain benefits, mainly due to lower freight costs.
These <unk> were better than our previous expectation and were responsible for most of the overdrive on gross margin.
These benefits were partially offset by 120 basis points of unfavorable pricing due to deeper discounts in our sales to the off price channel and a proactive strategy to reduce inventory through our factory houses.
And about 20 basis points of unfavorable channel mix related to a higher percentage of off price sales.
In the second quarter, SG&A expenses were up 2% to $606 million driven by higher marketing costs.
Next operating income was $146 million, which was above our outlook of $115 million to $135 million.
After tax we realized net income of $110 million or 24 of diluted earnings per share coming in above our outlook of 18 to 21 for the second quarter.
Now moving onto the balance sheet.
At the end of the second quarter, our inventory was up 6% to $1 1 billion. This was in line with our outlook and as a reminder, we anticipate consecutive declines in Q3 and Q4 to end the year down at a mid to high teen percentage rate or about $1 billion.
As our levels normalize we feel very good about the quality and composition of the inventory we have on hand.
Rounding out the quarter, our cash and cash equivalents were $656 million and we had no borrowings under our $1 1 billion revolving credit facility.
And finally, we repurchased $50 million of class a common stock during the second quarter.
Retiring $7 6 million previously outstanding shares.
Under our two year $500 million program.
We have repurchased $475 million or.
We're about $42 5 million shares of class C stock.
Next let's turn to our fiscal 'twenty four outlook.
As Stephanie mentioned several pressures impacting our north American business have persisted longer and are tougher since our last call. The macroeconomic environment remains uncertain with continued inflation mixed consumer confidence and the effects of wholesale channel Destocking, having led to softness in our future order books.
And while we're not seeing significant cancellations, we don't anticipate as many at once or automatic replenishment orders as initially planned so we've revised our full year outlook expectations.
Accordingly, we now expect revenue to be down 2% to 4% versus our prior outlook of flat to up slightly.
Looking down into our full year revenue outlook, we're now expecting North America revenue to be down 5% to 7% versus the previous expectation of down 3% to 4%.
And there is no change to the expectation that our international business should be up at a low double digit rate.
Next given lower freight and product cost. We now expect gross margin to be up 100 to 125 basis points versus our previous expectation of up 25 to 75 basis points.
Moving to SG&A, we now expect our expenses to be flat to down slightly versus our prior outlook of flat to up slightly.
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.
That said, our operating income outlook of $310 million to $330 million and diluted earnings per share of <unk> 47 to 51 cents.
Remained unchanged.
Turning to color on the second half of fiscal 'twenty four.
We anticipate revenue to decline at a mid single digit rate in the third quarter due to softer wholesale orders in North America, partially offset by continued growth in our DTC business.
This implies that our fourth quarter revenue will be down about 3% to 5% versus the prior year.
Next we expect gross margin to be flat to up slightly in the third quarter.
And as a reminder, this is the smallest quarterly gross margin improvement this year due to anticipated actions to manage our inventory down further.
As we finished the year, we expect an expansion of around 200 basis points in the fourth quarter due to supply chain benefits from product costs and an easy comparison related to elevated promotions in last year's fourth quarter.
Bringing this to the bottom line, we expect third quarter operating income to reach approximately 65 to 75 million and nine to 11 of diluted earnings per share.
This implies a fourth quarter operating income of about $75 million to $85 million.
12 to.
The 14th.
Diluted earnings per share.
To wrap it up thanks to the outstanding efforts of our team we are progressing on our PTH III priorities and at the same time, taking a balanced approach to mitigate near term pressures. We are relentlessly focused on driving brand heat and delivering elevated design and products, while driving operational efficiencies.
And controlling costs.
We are confident this will foster sustainable profitable growth over the long term.
With that I'll return it to the operator, so we can take your questions. Thank you.
We will now begin the question and answer session.
That's a question you May press Star then one your telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the keys.
To withdraw from the question queue. Please press star two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question will come from Jay sole with UBS you May now go ahead.
Great. Thank you so much two part question Stephanie for you just as you continue to get deeper into the business I mean, what have you learned over the last 90 days in terms of where you see some biggest opportunities.
What gets you most excited about being able to drive sales growth going forward and then secondly for Dave can you just talk about the gross margin in Q2, and then also your guidance for Q3, what were some of the puts and takes into Q2 and some of those are in Q3 to explain why youre seeing the gross margin that youre seeing in Q3. Thank you.
Good morning, Jay and thanks for your question on Yeah, I'm excited about a lot of things over this past quarter I mean, we're having some real early wins coming out of our PTH three strategy I'll hit on a couple of them on the on the driving global brand heat front.
We're doing a lot to think about marketing differently for the company and I mentioned this in my prepared remarks, but less anthemic top of funnel marketing campaigns, and really making sure we leverage our terrific assets, whether it's Steph Curry Justin Jefferson Sam Hartman.
Kelsey plant you name it and doing a lot more product marketing and we're also seeing a lot of green shoots as it relates to our efforts in social media marketing. So we want to be where that 16 to 24 year old team sport varsity athlete.
Is located so we're seeing great progress on likes and shares and engagement, so and again on the product marketing front, you're seeing us really be very clear to market slip speed the magnetic.
Football boot in EMEA base layer.
When you think about meridian et cetera, So we're doing a lot more product marketing.
Speaking of product and other thing I'm very excited about is just couldnt be more thrilled that John Barbados has joined US. He just joined US in September. So it's just getting started but he is really driving a design led culture within the company, which is terrific.
And it.
It takes the lead time for our product engine is anywhere from 15 to 18 months. So his fingerprints will really be seen more as we head into the latter part of next year, but he is not standing still he is he is having his influence on even the most current collections, but we've got a lot of cool things on the product front, our new Curry Bruce Lu.
Co lab, I mentioned that I talked a little bit about slip speed.
We have some amazing product I mean, I will put our unstoppable collection and our Meridian collection up against any competitors product any day of the week really are fantastic.
Better and best level products for Us I'm excited about that and then as it relates to driving sales in the U S. None of US are happy with the fact, we're not moving.
Faster here, but I will say I'm thrilled with the loyalty launch we already have we launched in late July we have over 1 million members already and it's not just about signing people up it's about engaging them. So we're seeing engagement. It's also a terrific part about our loyalty platform, it's more data and information on.
Your consumers and with their permission doing more targeted marketing and personalization. So that's off to a great start.
And we're we're starting to see green shoots on more expansion into more premium retail so a 40% higher mall penetration by the end of fiscal year 'twenty for again more to come next year, but early wins on the three pillars protect us out three driving global brand heat big part of that is marketing better.
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And Jay relative to the gross margin comment for Q2. It was really two main things the big the big positive was really supply chain impacts mainly around the lower ocean freight rates and costs, there, but also less utilization of airfreight.
As we're getting more caught up there from versus last year from a supply chain perspective. So freight costs was a really really big favorability there year over year, and then that was partially offset by some unfavorable pricing relative to selling into the third party off price channel.
The pricing into that channel started to get a little bit tougher in Q4 of last year and we've seen that kind of continue this year.
And then also we've been a little bit more promotional relative to our direct to consumer business.
As we move through Q2 as well so those partially offset the big favorability on the on the freight costs in Q2, when you flip to Q3, it's a little bit of a different story.
Still expect.
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But we also continue to see lower pricing on our sales into the off price channel and also we're going to be doing a little bit higher volume in Q3 were really using Q3 to move through a fair amount of inventory the.
The other piece of that is that relative to our outlet stores, we've reduced the mix of our MMO or made for outlet to be able to also help us move more excess and so that's also a year over year gross margin headwind. So there's a couple more kind of offsets going on.
In Q3 versus Q2, but a lot of it has to do with really just getting ahead and moving forward relative to our inventory position. So we feel good about what we're looking at there and I think the last thing for Q3 is as we come into this holiday period.
We are being careful relative to a promotional environment and what that's going to look like in the holidays, we want to make sure that we're gonna be prepared for that as well. So we feel like we're in a good spot.
Got it thank you so much.
Of course.
Our next question will come from Simeon Siegel with BMO capital markets. You May now go ahead.
Thanks, Hi, everyone. Good morning uniformly is doing okay in these challenging times.
So how are you guys are telling me how are you guys thinking about go forward footwear performance just given the kind of excitement you talked about with the innovations in the drops or how we should think about the progression there and timing.
Maybe similar question around domestic store expansion as well so we should be thinking about what you were thinking about store opportunities there. Thank you.
Absolutely and good morning, Simeon Thanks for your question.
I believe the first part was on footwear.
Footwear is without a doubt the single most significant long term growth opportunity for us and I. Just spent some time with our footwear team Mountain Portland, Oregon and was very encouraged with the innovation that I was saying the lean into sports style. There's some great stuff going on with our team out there John Varvatos to spend quite a bit of time out there as well.
And we're seeing we're seeing green shoots and positive positive results with Curry with our forge, which is a kind of a retro shoe that's more sports style aberration I spoke about slip seemed quite a bet slip.
Let's say it really is is a wonderful example of us driving brand tea and getting some innovation momentum, we're selling a non signature shoe at $150 and it's our most reviewed sneaker on the site with a 93% recommendation right.
As I mentioned, we launched youth a few weeks ago, a running expression coming out in February of next year. So excited with the traction we're getting in terms of footwear and as it relates to the second quarter, Dave touched on this but demand was softer than we expected due to general weakness in the North American wholesale environment and he talked about.
Some of the tougher comps that we saw in the second quarter and for the year footwear will be flat, but the broader opportunity is significant I think it goes back to some of my comments on the product pipeline. You know take 15 to 18 months of lead time to get things out. The other end. So we are working very very hard.
On our footwear and it's just going to take some time to get even more traction in the space. So.
So on a big big area of focus for US on your question related to domestic store opportunities there is a real opportunity there.
We are working on a new brand house concept that is our full priced.
Our store and there's a real opportunity, particularly here in the United States to open more full price.
Physical retail we have 17 brand houses today and we.
Our aiming to open more of them in the years ahead. So we can get that outlet to full price store mix right.
We're a little off kilter right now with about a 90%, 10% mix and we want to get that.
And that are in better shape I think physical retail is also so important because we know it's not just about driving sales and profitability from that box. It's about the ecosystem around the store when you have a fabulous brand house at a great location to drive E Commerce sales and it also drives sales in our wholesale partners.
So we think about it from an ecosystem perspective, too so lots of great work underway I mean, we needed to give people a reason to walk over that lease line into our store because theyre going to experience something just really fabulous when they go to an under armour store and we're hard at work at that so I'm excited with the progress we're making on building.
[noise] out our physical retail, particularly a big focus here in the United States, So more to come on that front too.
Great. Thanks, a lot best of luck for the rest of the year.
Thank you thanks.
The next question will come from Jim Duffy with Stifel you.
You May now go ahead.
Hello, Thank you and good morning, I'm, hoping for some additional perspective on the U S wholesale environment looking out to 2024.
You speak to shelf space expectations in the 'twenty four I know you mentioned some gains in the mall based channels is that with both footwear and apparel and are you seeing any notable changes in north American shelf space elsewhere that might be an offset to those gains.
Yes, Jim This is Dave North America, we have talked obviously a lot about some of the macro impacts there and some conservatism we're seeing from accounts relative to the order books and obviously the impacts that we're speaking to with a revision to Q3 Q4 back half outlook.
We are making some progress relative to mall business to your point.
We're excited about that that is relative to new spaces with new partners, but it's going to take time to really develop that into a more robust and meaningful volume of revenue and a lot of that has to do with footwear and a lot of that has to do with sports style, both of which as Stephanie mentioned, we are hard at work.
We continue to edit relative to our wholesale segment.
Segmentation, we want to continue to improve there and continue to get cleaner and push the envelope further there.
We've done a lot of work there, but we still got a fair amount to go.
Then also just from a.
Hi, Lo perspective, and just overall premium distribution.
We want to continue to be able to expand more kind of at the.
The higher end and get into a little bit more specialty et cetera. So a lot of different things that are in play we're excited about some of those initial.
Our relationships, but again from a volume perspective, it will take a little bit of time relative to the product pipeline that Stephanie mentioned.
Understood. Thanks, and then you maintain the guide for the International business as you look to your spring order book is there any evidence that economic challenges are catching up in markets that have been resilient for you like Western Europe.
Yes, I mean, I think you know.
We're really bullish on our international markets, both APAC and EMEA had been doing well for us they continue with some really solid momentum there.
I think that.
We also need to think about that even though there is some macro pressures out there we do have a little bit more non comp business as we opened more doors internationally in the back half of the year, which which helps a little bit.
And then within APAC.
We've been talking more recently about moving to more local product design in China, and also relative to marketing development localized in China, and we're starting to see the benefits of that and we see that starting to come into.
Kind of a Q4 orders and business for for APAC and so we're excited about how that can help continue to fuel their momentum within the APAC region.
Thank you Dave.
Thanks, Jim.
Our next question will come from Lorem vascular SKU with <unk>.
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You May now go ahead.
Well good morning, Thank you very much for taking my question.
Dave I wanted to follow up on your point about international growth for the year growing double digits.
Maybe potentially unpack that a little bit.
Cros.
The key markets EMEA and APAC.
Should we expect both regions to grow double digits. This year, just the reason why I'm asking that question because we did see a slowdown in APAC I know I recognize you mentioned that China did well, but maybe you can just give us some guardrails around that those two regions.
Yes.
Both regions are again doing very well for us and we expect solid growth within each of them.
I wouldn't necessarily say that one is necessarily going to be outgrowing. The other in any big way because you also have some offsetting currency impacts.
But they are both driving very well.
I think that the opportunities that are there are still great for each of them were still fairly small in each of those two regions.
Especially if you think about our China business compared to some of our competitors. So.
Continued opportunity down the road for Us and we're excited about what those teams have been able to drive for us.
Very helpful. And then I think Dave last quarter, you mentioned that we should expect inventories for the end of the year to be down mid teens to around $1 billion is that still the case and then maybe just kind of following up on <unk> question about the gross margin that 410 basis points of our supply chain benefit can you, maybe just kind of help us.
Frame.
That benefit.
Evolves over the next two quarters and best firms.
Yeah, I mean, we've been really excited about our progress on the inventory management strategies in what we have planned for the rest of the year.
Some of that relates to if we if you remember we talked last year about doing a fair amount of pack and hold.
Last year, so we packed away kind of seasonal product with future demand instead of discounting those products last year. When we would just need to buy them again this year and so we're now kind of selling that pack and hold product in the back half of this year, which is one of the factors in our year over year inventory improvement, but then also we were pretty proactive with factory by.
<unk> when we saw some softness in demand.
So that has helped us this year with managing inventory as well.
And then we've also been leveraging our outlet stores more than in the past so doing more more movement of our excess product through our outlets and a brand controlled way.
Les <unk> through our outlets. So all those things are kind of coming together to be able to drive our inventory into a really good spot. So we're expecting inventory to be down year over year. As we hit 12, 31, and then mid to high high teens down as we get through the end of Q4, when we look at.
Most margin a couple of different things that are coming into play. So yes in Q2 huge benefit there on the supply chain side, mainly with the freight costs. When we think about Q3 still seeing a pretty big benefit relative to the freight cost.
But then you know obviously I mentioned, we're going to be pushing through a lot more inventory and so there's some offsets there relative to pricing and mix of third party liquidation.
And then as you step into Q4.
The supply chain benefits will start to change a little bit in that the benefit of the year over year freight costs will start to become a little bit less of a factor as we start comping some of that improvement in Q4 of last year, but the other piece that starts coming into play that benefits Q4, as we've actually been working through a lot.
Better negotiations with our factory partners on product costs. So our sourcing team has done a phenomenal job working through that and we're going to start to see those product costing benefits come through starting in Q4 of this year so that.
Kind of helps to be a tailwind as well in Q4 and gives us a little bit of an extra.
Gross margin benefit there and then the the pricing impact actually starts to be slightly favorable for us in Q4, and what I mean by that is the.
The third party liquidation channel the pricing got pretty tough in Q4 of last year. So now we're comping that in Q4 of this year. So it's not the headwind that it is in Q3 and prior.
So that's really helping us out and then also in Q4 of last year, we went pretty aggressive and deep from a discounting perspective within DTC.
And we don't foresee having to go that deep in Q4 of this year as we believe that the.
The market in the inventory levels out there I'll start to normalize as we step into the next calendar year a little bit.
So couple of different things going on there, but that's why gross margin in Q3.
Slight improvement versus Q4, a larger improvement for us.
Our next question will come from.
Durable with Guggenheim.
You May now go ahead.
Hi, good morning.
Two questions can you give us.
Sort of where you are focused on the women's business.
What you see happening there.
Second question is just a little bit more on pricing.
Sort of progress that youre, making on ASP, but also some of the new products that you're bringing to market.
Right on sort of where you think.
Speeds are going with some of the new launches and maybe a little focus on Swift suite.
Sure of course, good morning, Bob Thanks for your question.
I'll start with on your question on womens.
As we've shared on past calls this is a big area of opportunity for us with less than 25% of our sales theres a theres a lot of upside here.
Women's was actually up in the quarter and as we continue to prioritize on winning with women and again focusing on delivering that elevated both footwear and sports style products.
So it was and it was up in Q2, despite the wholesale challenges we mentioned.
And where we're really winning in the short term with women is on raws in bottoms, but we've got it.
I mentioned some of our higher end collections unstoppable and meridian are doing well with women, but we've got a lot more work to do there and the focus for our product team and the focus for with John Varvatos and again because of there is this 15 to 18 month lead time and our product engine, it's just going to take some more time.
To get product designed sourced manufactured shipped and on the shelf. So we are very very focused on that and I think equally important to having the right elevated product for women, we need to market to women differently. So it's not just about the product it's about the marketing and we need to have a different feel to the creative.
And how we market to women and there is also the distribution element and this gets back to more premium distribution as we deliver more elevated products not just for women, but across the board that will open more doors of distribution for us getting into more department stores or specialty boutique. So when I think about women driving our biz.
They are it's really kind of the full <unk> approach product placed price promotion and we're hard at work at it and seeing some green shoots.
On the pricing point, we are absolutely on working on driving higher Asps and that does get to ties back to the point about more better and best product.
We need to get our mix of high low and better equilibrium and so we will be driving on better and best products that of course will have pricing on implications you mentioned flip speed. It's a great example of a non signature shoe, we're selling in $150 and it's getting <unk>.
<unk> Fabulous reviews.
We're also as it relates to pricing we're focused on our digital assets in particular, our website and our App, we're spending a lot of time, not only making it more functionally easier for consumers less friction, but figuring out a way to on.
We now have some of the discounting on our website and our app that must be a premium expression for the brand so that as we get that mix and better shape over time that will drive up asp's as well. So I mean, there's many pieces moving parts here as we drive higher asps, but it is absolutely.
An area of focus for us.
Across the board.
Our next question. Thanks, a lot Matthew from Matthew boss with Jpmorgan.
Alright, great.
Great. Thanks.
Stephanie you mentioned striking a balance between returning the brand to growth multi year relative to the investments that may be needed. So maybe how best to think higher level about this interplay maybe as we think about next year or 2025.
Just the timeline that you see is reasonable to return North America to revenue growth.
Okay.
Yes. Thank you for thank you for the question that and that is the on this is that this balancing act is exactly what we're managing through and it's about figuring out how we're going to grow the company and again, we've got some I'm excited about some of our early wins and at the same exact time looking for.
Entities to expand margin so not just cost efficiencies, but also operational efficiencies how can we drive a stronger P&L.
We do recognize that this year is it's the perfect example, where were strained on top line growth. So we are identifying additional areas of cost of goods sold improvement Dave talked about some of that work that's going to hit more in the fourth quarter as it relates to the work we're doing with our vendors.
We're diving deep into SKU rationalization improved segmentation opportunities back to the point of driving ASP expansion.
But we are at the very same time trying to figure out how to prioritize our investment we got to figure out how we can invest and.
Around demand creation effort to get back to that growth and at the same time look at areas, where we will prioritize where we're not seeing the return and manage our costs. So it is this balancing act.
Between finding cost and operational efficiencies to drive the bottom line, but also to find opportunities to reinvest in the business for the future I talked about footwear, that's an opportunity of growth, but also it's going to take investment we're not going to be able to grow footwear. If we don't also invest in that.
And Theres just I'll give you. Another example of future growth for us the core business that is I have never been more excited about that business.
Personally had several one on one meetings with Steph Curry and he has never been more excited and engaged about what we can do with this business not only on footwear of course, that's going to be basketball at the center of the <unk> brand, but also with apparel and we've got some really fantastic new.
Sports style apparel coming out under the <unk> brand golf, I mentioned, Dara and Fox and his signature show under the <unk> brand. So but again this is going to take investments. So we're getting we're getting that balancing act I think we're getting it right and we're working on it every single day.
Not we're not ready to call fiscal year, 'twenty, five and beyond yet, but I think we're putting all the puzzle pieces in place and all the building blocks in place to return to growth in the long term.
That's great color and then Dave just how would you characterize the health of the broader sportswear channel today, maybe what are you seeing from promotional activity in this space relative to your expectation and maybe just high level could you just elaborate on the change in the wholesale backdrop relative to three months ago.
Sure I mean, I think from what we're seeing I think the industry seems pretty poised to kind of enter the holidays with a with a leaner inventory than last year, which is good.
Yet this doesn't really guarantee that promotions will be lower because demand has also become a little softer relative to the macro so from a timing perspective.
Our outlook assumes normalization by kind of that spring timeframe of 24, but it's mixed it's a little bumpy out there still and we're still seeing some wholesale partner conservatism in there in their buying pattern. So it's something that we're monitoring every day.
And we're continuing to work on our relationships work on our product and work on our marketing to be able to capitalize.
When things are a little less software.
And then relative to what was the second question that you had.
Just the overall promotional activity in this space, what youre seeing out there.
Yes, as I said it is.
<unk>.
Fairly promotional still.
It was it was turning pretty promotional in Q3 and Q4 of last year and we're seeing that continue this year and we're planning for that.
And that is fairly broad I mean, obviously North America I think we're seeing the most.
But some of the other regions as well and again.
I don't or we don't foresee that to be changing a lot until we get kind of further into our Q4 and further towards kind of spring of next calendar year.
That's great color best of luck.
Thanks, Matt Thanks, Matt.
Our next question will come from Paul <unk> with Citi. You May now go ahead.
Hey, Thanks, guys.
A weaker wholesale channel.
That was equally disappointing there has been equally disappointing in both the apparel and footwear side, maybe if you could talk to the sports style reception. Specifically then also stopped.
<unk> mentioned deep prioritize Im curious, where you might have in mind to help pay for some of what you want to prioritize.
And good morning, Paul why don't I start and then I know, Dave will jump in with some additional color and information on on wholesale yes. It has been I think the softness in wholesale has been on both the apparel and footwear side and when we think about just assuming lay out for the whole company.
We're going to be flat in both for the year, but the softness has been has been in both areas.
And then on sports style, specifically on the way we're thinking about sports style is I mean first of all let me define it quickly it has that kind of intersection of performance and style. When we talk to 16 to 24 year old teams Ford athletes and any of you who have teenagers can relate to this they don't use this language right. They just want to have cool stuff that looks great. When they are on the field.
Playing their sports and then they can wear out with their friends. So that's really what we're talking about and it's really for US. We believe in evolution of our product offerings not a revolution, we have some fabulous sports style offerings right now, we're going to have more and more better and best So phase one for us is really around re merchandising and <unk>.
Marketing products to demonstrate the non active use occasion and again, we've made a lot of progress here over the past nine months and Youre seeing it in some of those social media stats I mentioned during my prepared remarks, those are tied to this effort to remerchandise and marine market a lot of our sports style product that we have today, but we do.
Do need new product and we do need new better and best product and again, we see that coming out on the latter part of next year, just given the lead time for for our products.
As it relates to where we're going to find savings or de invest for the future. I mean, we're looking at everything right. We are looking at on our on our.
It's sports marketing whether its cost.
Across the P&L, Dave can jump in there more but we are that's the need that some work we're knee deep in now is assessing where we're driving profitability, where we're driving growth and where we're not being as successful and where we could pull back and pour more gas on things that are growing and pour more gas on things that are growing I would say so.
<unk> style footwear Curry women would be great examples.
Dave do you want to add a little bit yes, I would just say that over the past few years, we've worked really hard to become more agile from a cost structure perspective, we certainly have more work to do there and we understand.
And continuing to dig into the areas of highest returns and kind of validate where our best investments are but.
But we've been pressuring down our costs appropriately whether it be in our hiring are tightening up our marketing prioritization and spending reducing <unk> other areas of our cost but to Stephanie's point, while doing that we are trying to make sure and we are investing in design talent investing in E comm relative to loyalty and site speed.
Investing from a planning perspective retail Pos perspective, Pls system et cetera. So a lot of those enablers to growth and to also help fuel the brand or what we're freeing up dollars and putting money into so.
Is kind of a continued balancing act there.
Thanks, guys. Good luck.
Thank you. Thank you. Thank you.
Our next question will come from Alex <unk> with Morgan Stanley You May now go ahead.
Great. So maybe just two from me. Thanks for taking the question maybe for Dave feel task to get to your revised full year top line guidance and by that I mean, it feels pretty conservative as a starting point.
Maybe can you talk about the range of outcomes, you've embedded in that guide and perhaps the key areas of upside and downside and then just a second question for Stephanie How're.
How do you balance the heightened kind of occur in off price presence with your goals of expanding your premium distribution over time, thanks a lot.
Yes, I mean, I think when we look at our back half we revised our guidance full year, obviously, it was down 2% to 4%.
In general we didn't really give specific channel or product outlook, but we continue to expect our U S wholesale business to be challenged this year, especially the wholesale piece.
And given the demanding selling environment, yes, we are being a little bit cautious there, but it is what we're seeing.
So we want to make sure that we're reflecting that we do on the other hand expect DTC to continue to outperform wholesale as we drive through and that's in kind of each of our regions.
And when you break it down and kind of look at it by quarter.
The quarters aren't drastically different we're seeing.
The fact that the order softness in wholesale some of that did come out of Q3 and Q4. Some of that is our at once business assumptions, because we did see some of the bookings come down and normally the at once is going to kind of follow that as well.
And then even with some of our auto replenishment. So we think that we're being prudent in reacting and driving through relative to what we see.
As far as <unk>.
And takes of what we could see it's hard to say I mean, we've taken in a lot.
There's a little bit bumpy, but we feel like we've called the ball here with our updated outlook.
Could there be some areas that that overdrive, possibly.
But there could be some continued pressures as well so we're trying to kind of call. It in the middle here.
Good morning, Alex Thanks, Thanks for your question.
As it relates to balancing kind of off price.
Shelf space and more premium distribution, just a couple of things I think important to note that we've held our off price to 3% to 4% of global revenue since fiscal year 'twenty. So we have been consistent there and being very very diligent, but when it comes to getting the mix right. It does get back to product it starts with product more better and best.
That is what we are laser focused on because that is how we're going to get more premium shelf space.
With our wholesale partners, that's how we're going to get into more department stores more specialty retail, it's how we're going to get more shelf space.
And I should put this at the top of the list with the likes of a Dick's sporting goods, but we want to get more shelf space with our existing partners to and our wholesale partners are very very important and critical part of our distribution strategy, but it starts with really that better and best product focus for the company and it also ties to our DTC channels we.
And ties back to my point earlier about opening more full priced brand houses in the United States over time, as we really perfect that model and give people a reason to walk over that lease line, which is all about more better and best product in our stores and having it be an absolutely.
Fabulous experience for them. So again I mentioned, we have not in the past, particularly here in the United States, we haven't been as disciplined as we could've been amount segmentation too about being very very disciplined about which product go into which channels. So that is another that disciplined approach to segmentation is also something we're laser focused on.
But we need to get that equal an equilibrium in a better place between off price and premium and I think everything that we're doing around the protect this house III strategy is driving us towards that outcome.
Thanks, a lot good luck.
Thank you. Thank you.
Our final question will come from Jonathan Komp with Baird.
You May now go ahead.
Yes, hi, Thank you just two questions from me first.
Any sort of anecdotal.
Insight you can share from your wholesale partners when you try to shift some of the attention towards more mom active.
More premium product are you getting any response today I don't know if its too early or is that something you need to prove first in DTC.
And then just broader a broader question.
Our focus both returning to growth and driving higher profitability.
Is that does that.
Thinking shifted at all as you know.
Our optimizing some cost to react to a slower revenue growth in the short term.
Or do you still think that.
Dual focus is appropriate going forward.
Good morning, Jonathan Let me start with your first question around our reaction from our wholesale partners I think it's been it's been great I mean, they see that's where the consumer is going and they want to see more from under armour. In this regard I mentioned just as a early green shoots that we've seen a 40% <unk>.
Kris and Dale.
The mall is.
As a result of our product and particularly on that's a big part of that footwear inquiry. As an example, so we are seeing run a lot of receptivity from our wholesale partners and I think the more we continue to deliver great products that resonate with consumers and we're going to continue to see more and more.
The receptivity, there and Thats and Thats what were hard at work at to your question about the balance between returning to growth and profitability.
My earlier remarks, absolutely. We're still we're still laser focused on getting that balance right. We must grow at the same time, we must expand margins through cost efficiencies and operational efficiencies. We are very aware, though that in the short term there is pressure on the top line. So that's back to my point around really digging in.
On SKU rationalization cost of goods sold improvement et cetera, just really really doubling down on making sure that we've got are on.
Our P&L in a good shape, our cost and a good and a good place, but we will like all great companies, we will always be focused on driving both topline.
And on <unk>.
Margin expansion and profitability and we believe that's the right long term strategy for the company.
Thank you very much.
Thank you Jonathan and thank you Jonathan.
Okay.
With that we'll conclude under Armours second quarter fiscal 2004 earnings conference call. Thank you for Tim attending and have a good day you may now disconnect.
Thank you. Thank you.
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