Under Armour, Inc. (UA) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Under Armour, Inc. First Quarter Earnings Webcast and Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Shaw. Sir, you may begin.

Thanks, Melissa, and good morning to everyone joining us on today's conference call. During the course of this conference call, we'll be making projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. These risks and uncertainties are described in our press release and in the Risk Factors section of our filings with the SEC. The company assumes no obligation to update forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Joining us on today's call will be Kevin Plank, President, CEO and Chairman; followed by Brad Dickerson, our Chief Financial Officer, who will discuss the company's financial performance for the first quarter and provide an update to our 2011 outlook. After the prepared remarks, Kevin and Brad will be available for a Q&A session that will end at approximately 9:30 a.m. I will then close with the tentative date of our second quarter 2011 earnings call. Finally, a replay of the teleconference will be available at our website at approximately 11 a.m. Eastern Time today. And with that, I'll turn it over to Kevin Plank.

Thank you, Tom, and good morning, everyone. After surpassing the $1 billion revenue mark in 2010, we are truly at the beginning of a new era at our company. And the great news is that as we enter this next phase of our growth, our business is as robust and our revenues as broad-based as at any time in our history. And most importantly, it's our core business in U.S. apparel that is driving our growth. We are proud of the growth culture that we have instilled at Under Armour, and that was evident with revenue growth in Q1 of 36%. Some of the highlights included: our wholesale Apparel business with strong growth across Women's, Youth and, of course, Men's; our strong launch for Charged Cotton with great consumer acceptance and awareness of the technological benefits of the Under Armour approach to cotton; Direct-to-Consumer, which continued strong growth of 53% over 2010 and represented 20% of revenues in the quarter; 20% footwear growth in the quarter highlighted by a solid sell-through for a certain running shoe among starters; taking our hats and bags business in-house, which helped drive 213% growth in our Accessory business; and increasing our brand strength and visibility with athletes like Tom Brady and Cam Newton, as well as the global signing of the Tottenham Hotspur of the English Premier League. We are a growth company. The continued strength of our U.S. Apparel business provides a great platform for our investments and growth drivers like footwear, where our team is in place and starting to develop great products. In International, where we are still building a team and foundation for Under Armour in key markets including China. While we are investment mode in those areas, we are funding that spending by being in strong execution mode in apparel, growing our business across categories, gender and distribution. Under Armour remains a growth company, so let me take a minute to give you some examples of where that growth is coming from. On the category front, our overall training, golf and running apparel businesses were all extremely strong in the quarter with training accounting for almost 1/2 of the incremental revenue. We saw a great consumer acceptance of our Charged Cotton product that hit retail shelves last month. For Under Armour, Charged Cotton represents the type of innovation we expect to deliver, it's innovation that starts on the field and in the lab for the elite athlete for innovation that will also find its way into every athlete's closet. Our mission is to make all athletes better, and Charged Cotton is off to a great start on helping us deliver on that promise. It's important to point out that Charged Cotton is not a one-item introduction, as much as a platform for Under Armour that increases our addressable market from the $2 billion to $3 billion synthetic market we have played into date to the more than $11 billion active use apparel market that cotton now gives us. Charged Cotton will, of course, live on into the fall season and will be bolstered by the introduction of Storm Cotton, a heavyweight water resistant sweatshirt that includes all the Under Armour performance benefits that consumers come to expect from us and unlike any similarly positioned product in the market. At the same time, we had strong growth in our core baselayer. Great evidence of the core Under Armour athlete continues to invest in and prefer our brand as we step into this new category like Charged Cotton. On the gender side, we consistently talked about opportunity in Women's since we've been a public company, and it's very satisfying to see that piece of our business really coming together from a product perspective. And while we're very excited about the opportunity around Women's with Charged Cotton, we are equally excited about how our young women's consumer is adopting the technical fabric that is the heart of our brand. This gives us great confidence that we can build a long leadership position in Women's athletic apparel over the long term. Our success in Women's is just one part of the growth we are driving in our U.S. Apparel business. Our strong performance in Men's this quarter came primarily from our big categories, including training and golf, great evidence that there is still plenty of runway to grow with our core consumer here in the U.S. within our core distribution. On the wholesale distribution front, we continue to outpace the industry growth rate across our full spectrum of retail distribution. Under Armour revenue growth within our key accounts was broad-based and speaks to the critical position we now occupy both on the floor and the future plans of our key retail partners. And beyond the strong growth, our key retail partners our Direct-to-Consumer business continues to grow with revenues up 53%. And there is runway there as well as we continue to add factory help stores to our existing base and invest in the next generation of our e-commerce platform. Given the current focus on material cost and our experience with surgical price increases late in 2010, we are very encouraged by our ability to communicate the value we build into our products and maintain our premium brand position as a result. Brad will provide additional detail later. But we are gaining confidence in our ability to better navigate these types of challenges as we grow. So after the solid quarter, it's fair to ask what are we doing for the next 9 months, and I think our plans for Charged Cotton are a good example of how we're evolving as a company, entering this next phase of our growth. In the past, we looked at all opportunities in front of us as a rapidly growing brand, and we're anxious to get after all of them. We focus a lot of energy into our launches to create awareness and drive revenues, but then we were quick to move on to the next opportunity. With Charged Cotton, we understand how it provides us with a great opportunity to dimensionalize the brand and bring Under Armour D&A to what has traditionally been a commodity business. As a result, we are being patient with our growth strategy in reaching this new consumer and are staying focused on building that relationship for the long-term with great product and consistent communications. We are focused on building this long-term asset for our brand, and we'll gradually roll new products out within the Charged Cotton platform over the next few months. So while we were pleased with the selling of cotton product for the first time in Q1, I want to spend a moment on a product that we didn't sell any of yet. At this year's NFL Combine, we introduced the E39, which stands for Electric 39, the style member of our first product. The world's most innovative, athletic evaluation and improvement tool, all contained in our compression baselayer, the electronic t-shirt measure data points of the athlete including horsepower and g-force, body temperature, as well as breathing and heart rates. One of the benefits of our sports marketing strategy is being able to showcase this level of innovation on a stage as authentic as the NFL Combine. With the next generation of great football players wore the E39 at the Combine in February, it was a great example of us demonstrating our thought leadership in the absolute rate environment. And if you weren't hard core enough to watch the Combine for the full week, You'll see a lot of footage of the players wearing the E39 during the NFL draft coverage that starts this Thursday in prime time on ESPN. So as I said at the outset, we are in strong execution mode. But as we enter this next stage of our growth, the definition of strong execution is evolving as well. When we are $100 million brand executing was about developing great products, getting it made and shipped and ensuring it's sold through. That process remains the core of what defines our success in 2011. But the UA lens has widened, and we are now equally focused on the financial and human capital needed to fund our long-term growth drivers. Pushing hard on both of those funds to ensure we strike the right balance that will enable us to fully capitalize on the promise of what we have built to date. So much like the E39, the investment we announced in March about our partnership with the Tottenham Hotspur Football Club and the English Premier league generated no revenues for us in the quarter. But it does put us squarely in the middle of the pitch in the world's best soccer league, starting next year. We feel strongly that our relationship with this championship league will level north 1 and base club will accelerate our business in not only the U.K. but everywhere that soccer is played. Tottenham is an Under Armour kind of team, like the Auburn Tigers and the FCC, they come with a great tradition in the top league, and we hope that our partnership will help bring the same level of success that Auburn saw this past year. And finally, one last investment we are making that really speaks to the possibilities on the Under Armour brand. Later this week, we are scheduled to open the first UA retail presence in China. As we always do, we will initially be in test mode with a shop-in-shop store and the Grand Gateway Mall in Shanghai. We'll be telling the UA gearline store in this initial retail location, that our primary goal will be to learn about the Chinese consumer in how we can bring our performance story to them in the years to come. As I said earlier, it was a great quarter. And innovations like Charged Cotton and E39, our new partnership with Tottenham and taking our first step in China later this week are great examples of the investments we are making now to ensure more great results in the years to come. So with that, let me turn it over to Brad. Brad?

Thanks, Kevin. Now Kevin has been taking you through some highlights and strategies for our business, I would now like to spend some time discussing our first quarter financial results and updated 2011 guidance. Our net revenues for the first quarter of 2011 increased 36% to $313 million, reflecting momentum in both our Apparel and Direct-to-Consumer businesses. Apparel grew 34% to $230 million during the quarter. Category strength was once again broad-based across each of our Men's, Women's and Youth categories. Our training category continues to lead the way accounting for nearly half of our net revenues growth. Including our training category was the launch of our Charged Cotton product in March. Overall, in 2011, we expect a mid-single-digit total growth contribution from Charged Cotton off of our 2010 net revenues base. Our Direct-to-Consumer net revenues increased 53% for the quarter, representing 20% of net revenues compared to 18% in the prior year's period. We opened 9 new Factory House stores during the first quarter, increasing our Factory House store base to 63, up from 39 locations at the end of last year's first quarter. We expect approximately 16 additional Factory House stores to open in 2011, bringing our total door count by year end to 79. Our e-commerce business also remains robust as we continue to capture higher traffic and take deliberate steps to drive conversion. Footwear net revenues during the first quarter increased 20% to $51 million from $43 million last year. Growth was predominately driven by new basketball offerings and strong performance in slide. Our expectations for footwear growth in 2011 are unchanged. We now see the majority of growth balanced between the second and third quarters, compared with the second quarter concentration indicated on our last call. Accessories net revenues during the first quarter increased 213% to $24 million from $8 million last year, reflecting the addition of our hats and bags business, which we brought in-house in January. International net revenues increased 22% to $17 million in the first quarter and represented approximately 5% of total net revenues. First quarter gross margins were 46.4%, compared with 46.9% in the prior year's quarter. We had several factors contributing to the 50 basis point gross margin contraction. First, higher footwear stores and cost negatively impacted margins by approximately 100 basis points. And offset to this, we experienced lower footwear sales returns and markdown reserves positively impacting margins by approximately 40 basis points. Second, less favorable apparel product mix negatively impacted margins by approximately 50 basis points. Third, we continue to generate a higher percentage of net revenues from our higher margin, Direct-to-Consumer business positively impacted margins by approximately 60 basis points. Selling, general and administrative expenses as a percentage of net revenues decreased to 39.6% in the first quarter of 2011 compared to 41% in the prior year's period. Details around our 4 SG&A buckets are as follows: First, marketing cost declined to 13.3% of net revenues for the quarter from 13.6% in the prior year period. During the quarter, we incurred incremental marketing expenses related to the Auburn Tigers national championship game. However, overall costs were lower than planned, giving a shift in timing, approximately $2 million related to retail market spent for Charged Cotton from the first quarter to the second quarter. Second, selling costs increased to 8.9% of net revenues for the quarter from 8.6% in the prior year period, primarily driven from the contained expansion of our Factory House stores, which as we have said carry better gross margins but also incur higher SG&A expense as a percentage of revenue. Third, product innovation and supply chain cost decreased to 9.3% of net revenues from 9.6% last year. We continue to invest in these areas to support our long-term growth, but we're able to show modest leverage given our top line strength. Finally, corporate services decreased to 8.1% of net revenues, compared to 9.2% in the prior year period to leverage corporate personnel and facility expenses. Operating income during the first quarter grew nearly 56% to $21 million, compared with $14 million in the prior year. Operating margin expanded 90 basis points to 6.8% from 5.9% in the prior year quarter. Our first quarter tax rate of 39.5% compared favorably to the 42% in the prior year period. We continue to expect our full year effective tax rate to approximate 40%. Our resulting net income in the first quarter increased 69% to $12 million, compared with $7 million in the prior year period. First quarter diluted earnings per share increased 64% to $0.23, compared with $0.14 in the prior year. Now shifting over to the balance sheet. Total cash and cash equivalents at quarter-end decreased 33% to $111 million, compared with $166 million at March 31, 2010. We have no borrowings outstanding on our new $300 million revolving credit facility, which we recently expanded from $200 million. Inventory at quarter-end increased 68% year-over-year to $249 million, compared to $148 million at March 31, 2010. As we indicated on our last earnings call, we expect that inventory growth during the first and second quarters of 2011 to exceed the 45% growth experienced at year-end. Two notable factors contributed to our inventory growth during the quarter: the transition of our hats and bags business in-house, and as discussed in our last earnings call, an earlier planned build of our ColdGear apparel for our 2011 fall winter season. Excluding these 2 factors, inventory would have increased approximately 45% versus the prior year period, a position that reflects our efforts to better service anticipated demand. We will provide more detail on our inventory positioning shortly. Accounts receivable at quarter-end increased 48% year-over-year to $163 million, compared to $110 million at March 31, 2010. This increase was largely based on the timing of our wholesale apparel shipments, which were concentrated more toward the end of our first quarter. Our investment in capital expenditures was approximately $12 million for the first quarter. We are now planning capital expenditures for 2011 in the range of $45 million to $50 million, up from our prior guidance of $40 million to $45 million, partially reflecting incremental in-store market initiatives with key retail partners. In addition to our normal operating capital expenditure plan and as previously disclosed, we have an agreement to purchase the Tide Point office complex, home of our corporate headquarters here in Baltimore. We now expect this deal to close in May subject to certain closing conditions at a purchase price of $60.5 million. Now moving on to our updated outlook for 2011. Previously, we anticipated 2011 net revenues of $1.33 billion to $1.35 billion, an increase of 25% to 27% over 2010, and 2011 operating income of $143 million to $147 million, an increase of 27% to 31% over 2010. Given our current visibility, we are raising this full year 2011 outlook. We now anticipate 2011 net revenues in the range of $1.37 billion to $1.39 billion, an increase of 29% to 31% over 2010, and 2011 operating income in the range of $149 million to $153 million, an increase of 33% to 36% over 2010. Our current guidance implies full year operating margins between 10.9% and 11%, leveraging 30 to 40 basis points in the 10.6% level achieved in 2010. Below the operating line, contingencies and effective tax rate were approximately 40%. In 2011, although as discussed in our last call that maybe opportunities to capture certain tax credits throughout the year enabling us to improve on this rate. Finally, we anticipate fully diluted weighted average shares outstanding to approximately $52.5 million to $52.7 million for 2011, a slight increase over our prior guidance of $52.3 million to $52.5 million. We would also like to provide additional color around our outlook for 2011. First, with respect to gross margins. Our visibility around 2011 gross margins and the puts and takes remain relatively the same from our last earnings call. The transition of our hats and bags business from a licensing model to in-house although accretive to operating income dollars in 2011, will negatively impact gross margins as will near-term challenges around apparel and footwear sourcing cost. These gross margin pressures would be partially offset by the continued strong growth in our higher margin Direct-to-Consumer business. From a seasonality view, we continue to expect the largest year-over-year decline in gross margins to occur in Q2 and Q3, with a modest improvement to gross margins year-over-year in Q4. We anticipate full year 2011 gross margins to be down approximately 100 basis points from 2010. We also want to provide some early insight into 2012 gross margins where we continue to evaluate product costing and pricing. We are facing the same challenges as the rest of the industry where near-term input cost pressures have intensified for both cotton and oil-based synthetics. As a result, in addition to select retail price increases in fall winter 2011, we are looking at more broad-based pricing increases commencing in spring 2012 to help mitigate some of these pressures. We believe our premium position in apparel gives us unique opportunity to mitigate much of these pressures. In addition, similar to 2011, we anticipate our continued growth in our higher margin Direct-to-Consumer business will also play a part in offsetting product cost pressures. . We will give updates to our progress as we get more visibility into 2012. Now some additional color on SG&A. As we previously mentioned, we shifted approximately $2 million in retail marketing expense for Charged Cotton from the first quarter to the second quarter. We continue to expect a higher weighting of marketing cost in the first half of 2011 as compared to 2010. Given the cadence of new Factory House openings, we would also expect more pressure in selling cost in the first half of 2011, compared to the second half of the year. As experienced in the first quarter, corporate services expense leverage is expected to be the primary driver of improved operating margins in 2011. Regarding inventory. The same factors that impacted the first quarter carrying total gear apparel into the fall winter 2011 season and the transition of our hats and bags business will continue to impact inventory levels in the next 2 quarters. In addition to these 2 items, our ongoing efforts to manage inventory effectively must be balanced with our desire to meet consumer demand. Over the last few years, we have discussed many investments and systems and technology to design to achieve this balance. Although we expect these investments to be a significant part of improving inventory turn efficiency over the longer term, we must be careful on our expectations of how quickly this will occur, especially in balancing this with immediate consumer demand. We believe in the near term, a forward inventory turn of 3x and a 90% to 95% fill rate are realistic goals for our team. If we look back to the first half of 2010, our forward inventory turns were well above a 3x turn rate. In Q2 of 2010, they jumped as high as 3.6x. And as we discussed last year, our fill rate became challenged. To put it more simply, in the front half of 2010, we believe we were under-inventoried to meet demand. This led to our decision to start making incremental inventory investments in the second half of 2010, which have continued into the first half of 2011. Included in these investments are greater positions and core auto replenishment inventory or safety stock and also higher levels of seasonal product. Regarding seasonal product, we feel this gives us greater ability to meet anticipated demand with the backdrop of an efficient and highly profitable Factory House closeout vehicle, which will approach 80 doors by year-end. With all of these factors taken into consideration for inventory, we expect the year-over-year inventory growth rate will peak in the second quarter before moving more in line with our net revenues growth in both the third and fourth quarters. We also want to provide a few comments on our business in Japan with our licensing partner, Dome. As a reminder, we received a royalty payment from this $100 million plus business, which equated to less than 1% of our net revenues in 2010. While revenues and thus our royalty improved significantly in the first quarter of 2011, the environment has clearly changed since the March earthquake and tsunami. Our thoughts are with the people of Japan and with our friends and partners at Dome. We will continue to work closely with them to monitor the impact to their business and our royalty revenue. In summary, demand from our brand remains robust, and we are off to a great start in 2011. While unprecedented sourcing challenges present a greater challenge to the industry through 2012, we believe that we can deliver strong top line performance while improving our operating margin rate, which we see as a compelling combination in this environment. Now I would like to open the call for your questions. We ask that you limit your questions to 2 per person, so we can get to as many of you as possible. Operator?

[Operator Instructions] Our first question is from Robbie Ohmes of Bank of America Merrill Lynch.

My 2 questions would be, first, on the Charged Cotton distribution, as you gradually roll it out, can you give us a little more detail on whether it's a sort of a gradual rollout of expansion into existing customers, like a Dick's Sporting Goods? Or do you see it going further into the Footlockers and Finish Lines of the world? And any more color on -- is it more SKUs and different styles beyond t-shirts and shorts that we should be looking at? And then the second question, maybe for you, Brad, I just want to clarify, the guidance I think implied by what you're saying on footwear is we should expect footwear revenues to be down in the second quarter, any help on that would be great also.

Robbie, so let me jump on the cotton question. First of all, I think that we view cotton is opening us up to a whole new consumer that this has given us a totally new dimension to the company. And while we are not trying to be as explicit in saying this is giving us new distribution, we think that this will access our existing distribution but takes us into the hearts and minds of an existing consumer, as well as opens us up to a new consumer. So we're pretty clear about how -- going from the $2 billion to $3 billion synthetic market that we play in today to more than shifting to that going into active use or something that we'll really expanding our addressable market. But more importantly, we see this being broad-based in everywhere where we sell Under Armour, we see acceptance of having Under Armour Charged Cotton. Some of these we're dealing with, though, is that getting into a program like this. This is millions of units. And so it's a new manufacturing base for us. It's a new supply chain. It's a lot of new pieces. And so I wouldn't say we are cautious but we are definitely -- we tempered ourselves as getting going, making sure that we could keep the fixtures that we've invested in to put in stores, keep the fixtures full and making sure that the supply chain is in place to service that. So we've been very pleased with the sell-through. It's actually exceeded expectations where we sold it, exceeded expectations for our retailers as well. And you look at where we're starting to see this product really come into play. Our entry price point in the past has been what we call our tech tee at $20. And we're seeing the consumer who look at that again without cannibalizing that category for us, but it's the consumer's who's going a tech tee at $20 is there still seeing we're seeing them buying the tech tee. But more importantly, we're also seeing them trade up and spend money on a $25 cotton t-shirt as well. So I think in 1 we've got a new product category, a new market and also take an ASP for our retailers.

Robbie, on the footwear question, sorry for the confusion there. But our highest dollar volumes quarter for footwear are going to be Q1 and Q2. However, our highest growth rate for footwear this year will be Q2 and Q3. So you will see footwear revenues up in Q2 and Q3. Obviously, Q1 footwear is driven by baseball, and Q2 is driven by football. Also year-over-year, last year, we shipped our running footwear a little bit late in Q3 for back-to-school. We'll get more of that out in Q2 this year, so you would see some good growth in footwear in Q2.

Got it. Thanks very much guys.

Thanks, Robbie.

Our next question is from Sharon Zackfia from William Blair & Company. Sharon Zackfia - William Blair & Company L.L.C.: I had a bigger picture question on the International business. I guess as you're investing in some of the other kind of sponsorships overseas, should we think about the International business becoming less profitable before becoming more profitable? And I guess, how do you expect to be the sales ramp there to really occur over the next 5 years, Kevin, I think you've made comments about wanting to make a splash at the next World Cup.

Yes, I think we're tempering that as well as we recognize that 90 plus percent of our revenues is coming from home-based. And so the theory that we use from we deploy period that we use when we deploy the resources and that means time, money and people, our #1 protect that we have and that is the 90 plus percent of our business is coming from here at home. But the second criteria we use is making sure that every decision we make has global implications. And so the decisions to go after something like Tottenham, you look at places where it affected the deals that we didn't do and whether it's traditional colleges, whether broader or standard deals that we potentially do with some of the bigger leagues here the U.S., are dollars that we said decided to deploy outside of the United States. So I think that we are -- we believe in being a global business, which our definition of that means that half of our revenues will come from the outside of the United States. And the way that we are thinking about doing that I think is pretty measured. We're very fortunate to have the success that we do right now in a growing Direct-to-Consumer business, up over 53% for the year. Our largest business 70% of what we do is in apparel, up over 30% for the quarter as well. And I think those two successes allowed us to really fund the longer term investments. So the more near-term longer term of that, that we see is footwear. And we've seen success in footwear that's coming on in the back half this year as we said we have seen success we the running shoe that is coming out. And we've got some styles in '11 but I think feel very good about it, the running category is going to look like for us. But really as we get into '12 and we get into the '13, we see that business coming on. The longer term investments that we're making right now is happening within international. And so we plan more than 10 years in Japan, $100 plus million business in 2010. And again as things normalize there, we see continued growth in trajectory. The recent opening that we're having in China, find the ability to deploy dollars there that will get us started. And we see that those things, not unlike the comparison is to a good dollar line but something that will begin to come on for us in 3 or 4 years. And so we feel very good about -- I think Europe as we're sitting here 5 or 6 in Europe. The timing for making the investment in cotton is something that's prudent. And I think it's a worthy investment. In fact we think it's even bigger and more global than just the U.K. Sharon Zackfia - William Blair & Company L.L.C.: And can you talk about how much of your SG&A is dedicated for non-U.S. at this point?

Yes, Sharon, we only break that out on -- but again, I think that to Kevin's point, I think that 90% of our business is here in the United States, and then you would expect that the majority of our investment is really focused on protecting what's here in the U.S. and also protecting what our near-term growth drivers are around apparel and Direct-to-Consumer.

Our next question is from Eric Tracy of FBR Capital Markets. Eric Tracy - FBR Capital Markets & Co.: If I can focus on the gross margin, first, just from the quarter perspective, Brad, I think you mentioned the less favorable apparel mix. Just want to get sort of what exactly was going in there and then sort of bigger picture as you go to the balance of the year, the 100 basis points down year-over-year, is it possible to quantify those buckets as you talk about via the input cost how the Direct-to-Consumer helps to offset and then the level of surprise, and I know it's been surgical to date. But the level of pricing you put through and then maybe quantify how we should think about that building in FY '12?

Sure. On gross margin for Q1 in apparel, really the mix there is again this is just some lower margin product mix. Cotton obviously we've talked about having some cotton in Q1 some growth there in cotton is coming a little bit less margin as we saw the product pressure, costing pressure around cotton came in a little earlier than the oil-based synthetics. So just a little bit of a mix issue there on apparel, which created 50 basis points down for the year in the quarter. For the full year, not ready to break out and categorize the individual things I called out. But obviously, as you look at the 100 basis points in total, 1 of the things the hats and bags business in-house which is the business model change from a licensing model to in-house model, so more dollars to the bottom line but does negatively impact gross margins this year on a comp basis. You'll see the biggest pressure there on Q2 and Q3 where we're comping the highest royalty revenue last year in hats and bags. So you'll see the biggest impact there in Q2 and Q3. Footwear in general, again, returning to growth and some of obvious sourcing pressures in footwear also that's facing the industry too. So you'll see some pressures there again. But just to answer the question before, specifically, around Q2, as we saw in Q1 with footwear towards the back half of the year, footwear becomes a smaller number in total. So it's not as impactful on the back half of the year. On the apparel side, although we did see some pricing pressures in Q1, most of the pricing pressures we talked about in our last call really were focus more towards the back of the year as we start getting to fall winter and that big key programs up in fall and winter, and it was really just a few select key programs it was not broad-based at all. Because it is that we probably had some room in any events kind of raise prices based on our premium position. So they'll come into play in the back half of 2011. And it really kind of wrapped up with Direct-to-Consumer on top of it. Obviously Direct-to-Consumer growing faster than the overall business will help mitigate a lot of that, especially around Q4. Where we have a high volume and direct consumer year-over-year obviously, just growth to. Eric Tracy - FBR Capital Markets & Co.: Okay. And then, Kevin, if you think about the Direct-to-Consumer business, obviously, the outlook format has been highly successful. I know you tested some of the full line stores in the past. Any kind of thought to bringing that back into the mix, or how should we just think about that longer term in terms of sort of an opportunity to carve out your own distribution?

Well, we have 63 outlets today. We are anticipating roughly 80 by the end of the year. I think that gives us a lot of versatility as a brand with the opportunity for liquidation to move inventory when we need to. So we've obviously seen the benefits of what having controlling your own distribution can mean. I want to reiterate, we have great partners, and we still see great growth within maybe the existing doors that we are in today and that we've been for many years. So same time, long-term, we see from a factory base standpoint, about 110 to 120 stores is the opportunity we have. But we often see the ability to test in different concepts because the goal and the reason that we have are in distribution is to supplement where our current partners are not in. And so we mentioned places like Sevierville, Tennessee that we talked about a few times. But I think, there's 1 or 2 sporting goods stores within an 80- or 90-mile radius of that store. And of course, outperforming from an outlook standpoint because that proves to be the only place the consumer within that range can find our brand. So we still believe we are underdistributed as a company. And I think that we will continue to test different options that will give us the ability to satisfy those needs for our consumers. So there's nothing that we're looking to do to cannibalize existing distributions. Our goal remains if we can find the right opportunities with the right presentation. And frankly, I think there's an opportunity to have a comprehensive presentation of the Under Armour brand that we're still pushing that a, within retail partners. And I think we also have the ability and someday to do that ourselves. Eric Tracy - FBR Capital Markets & Co.: Okay. Thanks guys. Best of luck.

Yes. Thanks very much.

Thank you. Our next question is from Pamela Quintiliano with Oppenheimer. Pamela Quintiliano - Oppenheimer & Co. Inc.: Just had a quick question on your approach to the escalating sourcing costs and between the apparel and the cotton and the oil component which you talked about and also footwear, if you can just give us more clarity on where you're seeing the most pressure and kind of what you're forecasting going forward. And along those lines, are you coming more aggressive or thinking about becoming even more aggressive taking ownership to safety stock?

Yes, Pamela, this is Brad. If you break out the sourcing from apparel and footwear and look at that separately. First, from the footwear side, the majority of our footwear manufacturing is being done in China right now, and there's been a lot more pressure in not only commodity price but also labor price in China. So like a lot of other brands, I think heavily are more weighted towards China in manufacturing. You see some pricing pressures there. So how we're approaching that is trying to mitigate this going forward by maybe moving some of that manufacturing out of the coastal areas of China where we see the most pressure on labor, either to in-land China or to other parts of Southeast Asia where labor is less of a price pressure. So that will take a little bit of time. So we'll continue to see some of these rising pressures in footwear in the near-term for this year. And as we look to get into the back half of 2012, maybe start to have some more impacts around moving some of those manufacturings to different parts of the world. On the apparel side now, the same issue that we've been talk about commodity price pressures but also labor in China is an issue to people rate also but the good news for us in apparel is that less than 10% of our apparel is manufactured in China, so that's not as much of an issue for us. On the commodities pricing side, I think everybody kind of saw the impact to cotton come in play a little earlier than the impact to oil-based synthetics. So for us, a little less pricing pressure in the front half of 2011 because we're more obviously heavy weighted to oil based synthetics, but if we got into the back half of '11, we're starting those a little less pricing pressure in the front half of 2011 because we're more obviously heavily weighted to oil based synthetics. But as we got to the back of 2011, come into play to. And obviously, as we talked about taking some key styles up in fall winter '11 will help to offset and mitigate some of those pricing pressures. As we look forward in 2012 with apparel, much more broad-based increase in prices. We have talked on our last call about a mid-single digit increase in the back half of '11 in product cost. And we're seeing a similar type of increase as we get into Spring/Summer '12 on top of that fall winter increase. But as we stated, we're looking and analyzing more of a broad-based view of our products in Spring/Summer '12 and how we can increase prices to help mitigate that. Pamela Quintiliano - Oppenheimer & Co. Inc.: And just as a follow-up on that given you're so early in your Charged Cotton launch, do you see it as an opportunity potentially from the pricing perspective how do you view that? Do you want to try to attract new customers so you're going to not take the opportunity to take pricing there despite demand? Or is that something where because it's an open field there's more of an opportunity to take pricing?

Yes, I think and again, I don't want to speak for fall winter '11 but for Spring/Summer '12 and forward, I think again more broader based deals around our products in total. And to see where we think that we have that premium position to increase prices and that will include cotton products. So I think we see enough value in our products. Oil-based synthetics and cotton where we have that ability we think to increase prices again based on our premium positions.

Just to add to that. I think there's a little bit of latency from our manufacturing base as well how can this program be. So I think we're coming in with a pretty good check book around the size of those cotton products. So we don't believe that we've maximized the supply chain yet it with being in the best shops, and we have some great partners, so we think there's more opportunities within that back. So I think from the increased demand and increased production that we'll be driving the opportunities there as well as I think the consumer really likes the product. And so we won't be restricted to being tapped out on the price of the top side either. So we have a lot of flexibility both top and bottom. Pamela Quintiliano - Oppenheimer & Co. Inc.: Great. Best of luck.

Thank you.

Our next question is from Michael Binetti with UBS.

Just a follow-up on the last line of questioning, I think you did comment on some new components in the supply chain around Charged Cotton, sounds like demand has been good initially. Do you feel like you've been able to ship enough products at this point to meet demand? Or has there been a governor on your ability to your sales because of some of new supply chain components specifically?

I think the same thing we talked about in the back half of this year has come into the front half of '11. So the conversation that we have around inventory and increasing safety stock levels and also taking some more positions in seasonal products is really starting to come to kind of fruition here in the front half of this year in Q1 and Q2. From a cotton perspective, for the most part, for 2011, we've kind of kept our position as far as how much cotton we're going to put in the marketplace based on our current forecast. But again, from a core auto replenishment safety stock level for again our oil-based synthetics products, we're increasing that perspective here in the front half of the year to better to be able to meet demand were to back of the year. As far as fill rates and service levels have gone, we've seen those improve with that investment as we got to the back half of 2010, and the front half of 2011, so it appears obviously investment is paying off for us.

Okay. And is there any way you can get some incremental color on what the increase in CapEx is for -- can we expect to refresh and some of the Under Armour pad and some of your big sporting goods retailer later this year or maybe how that will flow quarter-to-quarter?

Yes, I think there's not much of a timing, I think, issue relative to seasonal Spring/Summer versus fall winter. But I think on the CapEx side, the retail marketing side, there is some refresh going on. But there's also some ability for us to take some extra floor space at some of our key retail partners, and we did have some fixturing to do that and obviously that makes sense for taking the floor space.

Okay. And then if I could just ask 1 last question on the gross margin from footwear there. I think the negative 100 basis points is probably going to be summer of a surprise for people today. I mean do you feel like that's a bigger impact, and you're maybe expecting last time we talked to you guys, and do you think that, that's still fluid and something we need to keep an eye on for the rest of the year at this point?

Yes, again, although we didn't really quantify the full year impact, the gross margins in the last call our view of gross margin for the year remains relatively the same as with our last call. So there really wasn't too many surprises there year-over-year. I think the interesting thing in footwear too though is at the offset of some of that 100 basis points on the costing side is the benefit we're seeing from really being clean at retail with inventory levels for footwear, and that's helped reduce our kind of markdown in return reserves, which had a 40 basis point improvement to offset the 100 basis points. So I think we got some sourcing costing pressures there. But you have overall cleaner and more healthy position of footwear going forward. So I think you're going to see a similar type of thing in Q2 as you've seen in Q1 relative to footwear because Q1 and Q2 are the highest volume quarters for footwear. As you get to the back half of the year, footwear becomes a smaller component of our overall business.

Okay. Thanks, Brad.

Our next question is from Jim Duffy of Stifel, Nicolaus. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Brad, a couple of follow-ups on the pricing line of question, first, will you be taking price in footwear as well? And then as a look to the Spring/Summer '12 price increase in apparel, many in the apparel industry are talking double-digit price increases. As you think about your pricing strategy, are you pricing to the increase in cost of goods to protect margin? Or are you following the pricing trends of the industry?

Yes, first on footwear, again, I think we're going to have a broad-based approach across all of our product categories, and we're kind of in the middle of that right now in analyzing where we think they have the ability to do that. So footwear will be open to that analysis, just like hats and bags and apparel would be. So that will be included in our analysis, and again we'll give more color on that later in the year as we have more detail around that. On the apparel side, I think along the lines of what Kevin was saying too, it's not just about raising prices. So our ability to look in where we can save in costing is important to us. Our ability to maybe move from lower margin products to higher margin products is also important to us. And also, I think reaching out and maybe making a little bit longer term commitments to some of our key factory bases, especially around some of our core auto replenishment type products, I think, also can help mitigate some of those costing pressures, too. So raising prices is kind of one tool we have as our premium position. But we're looking at all different types of things we can do relative to mitigating some of those cost pricing pressures.

Jim, I'll jump on there too is that innovation is the greatest validator to price. And so I think from -- we were the first company to sell a $25 t-shirt volume of volume more than 15 or 16 years ago. And I think as we continue to come back and lead the industry from a thought leadership standpoint, with the products that we have and the shirts that we had that combined, I think, will just illustrate above our commitment to innovation. But probably more importantly, we're going to sell a lot of $25 cotton t-shirts because of it. And frankly, it's not just another basic cotton t-shirt. It's a cotton t-shirt that drives 5 times faster than anything else in the market. And so that is something I think the consumer has demonstrated the ability and their willingness to pay for in the past. And I think as we maintain that premium positioning, we'll have a lot more flexibility the most. So we don't see ourselves driving in. This is not how we're going to keep up with our $12 or $13 Cotton T-shirt business but how are we taking $25 in fact in expanding those price points as well. Jim Duffy - Stifel, Nicolaus & Co., Inc.: I understand. And you guys have done a great job with the innovation. I guess, I'm thinking from a standpoint -- the consumer is seeing the backdrop of double-digit -- even with those cost savings that you're putting in place, could you potentially use pricing as a source of margin as you look to 2012? Or is that not a lever you would pull?

We don't like it. We have a very consistent model when it comes to gross margin. And it comes to our approach the margin for the consumers basically. As we build it, I said this before but we find what's the problem in the market. And then we find what's the best solution to solve that problem. We source the ends of the world to find the most efficient way to make that on behalf of our consumer. Whatever that causes to build to effectively double the cost of that, sell to our wholesale partner and allow them to double it again. And so whether it's a $20 t-shirt or $200 jacket, that model stays pretty consistent. And I think that's something that keeps us in favor with the consumer and frankly builds the trust that will keep Under Armour here and relevant for the next 5, 10 years and beyond. So that approach is something that we want to make sure we keep doing. But we source, we frankly we see ourselves sourcing on behalf of our consumer deliver as much value back to them as possible. But of course there's opportunities where we can take advantage because we like our gross margins in those high 40s and that 50 range. And so that is a long-term target for us as a brand. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Okay, great. That's helpful. Thanks.

Our next question is from Michelle Tan of Goldman Sachs.

Sorry if you addressed part of this earlier. But I had a couple of questions on the full year guidance. First, I was wondering if you're expecting the contribution from the new cotton platform to accelerate in the second half versus the first half as you introduce the things like Storm Cotton? And then as you look at the guidance raised from 3 months ago, can you give us a sense of exactly what drivers are shaping up better than you expected at the start of the year?

Yes, Michelle, on the cotton seasonality, I really don't see any significant fluctuations in cotton seasonality compared to our overall Apparel business. It should flow through relatively the same as our overall Apparel business. So obviously, again the back half of the year, the cotton product will have higher ASPs in the back of the as well as our other products, too. So there's not really any seasonality impact of cotton as opposed through our business. As far as the call up in our outlook, not surprisingly is the 2 things we keep calling out to strengthen our business right now in the near term, that's apparel across all channels and then Direct-to-Consumer, via the growth in our factory help store base and also some good strength in our e-commerce business. So those are the real drivers there that are giving us the ability to call our numbers up.

And then just on the cotton question, when you look at that, I understand the seasonality is similar, are you expanding the level of sell in or distribution more significantly with the expanded product line? So the seasonality on like-for-like product is similar but there's actually more product out there in the second half relative to your total?

Yes, I think we're taking a more proactive approach on price as well. The good news is that we're just entering this market, so we have a lot of styles that will be coming onto market. And that we haven't set price or established a precedent with the consumer of something that they are expecting. So there's obviously that supply and demand curve, one affects the other. So we want to be a commercial product in the market. We want to be available, we want to be premium product available to most. And as we approach that, strong cotton is a great example of that. We're entering what is seemingly a pretty dry and a pretty boring category of business and we're going to go at a premium price. But frankly with the innovation standpoint, our product unlike anyone has ever seen before. And so we think there's going to be a lot of hype and excitement, and I think as the summer demonstrated any market that if you get a great product out there and you communicate a great story about a product, and frankly just works the consumer that always be there for you. So we feel pretty good about that.

Okay. Great. Thanks guys.

Thanks, Michelle.

Our next question is from Kate McShane of Citigroup.

Just to go back again to the sourcing side of the discussion, I wondered if you had any issues or have encountered any issues with availability of capacity at the factories and based on the demand for your product, have you had to air freight any of these products?

Yes, Kate, obviously, last year as we started talking about demand, servicing demand issues, air freight became a bigger component of our story. But in total from a margin perspective, it wasn't really a huge impact last year. And we're seeing similar levels this year in the front half of '11. I think obviously with our ability to complete our investment and getting safety stock levels up as we get to the back half of the year, that should help mitigate some air freight numbers but those again out of that significant our overall gross margins. On the capacity side, we've got pretty good bench strength right now, and some new factories for is coming online, and I think capacity is always a challenge when you're trying to meet demand. But we feel pretty good about where we're at right now with the capacity especially from our larger suppliers, and we've had some pretty good bench strength coming forward.

And then my second question is a little bit longer term about your strategy, about pushing more into Europe. And I know you've mentioned in the past that the London Olympics are going to be a leveraging point for you. What can we expect to see, is there any update with that strategy, and when will we start to see the sell-in for that event?

I think where you'll see us continue to leverage the big assets that we have. And we did a pretty good job at the last Winter Olympics with the U.S. bobsled and ski and of course we have our ongoing relationship with Michael Phelps as well. I think there's a lot of big stories but 1 of the things were looking to do in line particularly is to leverage the new deal that we have with Cotton. And I think we're clear to say that our strategy globally, it's more of a 10 and a 20 year plan and we don't want to bite off more than we can handle today because again, as I said earlier on the call, our first priority is protecting what we have, which is a 90% plus of our business here at home. But of course our long-term goal is driving that relationship to being more than 50% of our revenues from coming outside of the U.S. And so Olympics is 1 of the keys to that. But in fact that the investment that we're making in cotton, the hype that we'll be in London in the summer of 2012 when this deal commences is going to be a great platform for us, as well to utilize and to be able to leverage. And so you're not going to see official range from Under Armour today, and I don't think that's a prudent spend of our dollars. What you'll see is being thoughtful and strategic about places where we can be impactful in utilizing the assets that we do have like the Michael Phelps and some of the other places. But we'll have relationships with the Olympics and we'll be a little more forthcoming as soon as come in the future. But I think you're not going to see Under Armour blank at the Olympics. But you'll absolutely know that we're there. I think that will be very telling and sort of where we are at the moment in time in Europe and particularly in international. And so we've demonstrated a pretty good ability I think to probably come across bigger than we are. And I think that we'll anticipate doing that with overspending and making $1 spend like $3, a favored analogy that we use around here.

Thank you.

Operator, we'll take one more question.

Our final question is from Sam Poser with Sterne Agee. Sam Poser - Sterne Agee & Leach Inc.: Thank you for taking my question. I guess I wanted to just clarify what you said about the footwear plans for the balance of the year. So Q2 is going to be the largest quarter, then Q2 and Q3 are the largest quarters as a percent increase over the prior year?

Yes, if you look at the full year for footwear and seasonality of footwear, Q1 and Q2 are the largest volume quarters in 2011. The largest growth quarters year-over-year are Q2 and Q3. Sam Poser - Sterne Agee & Leach Inc.: And you've talked about running and so, where do we stand with basketball? Where does that fit in, and I would think that could be some opportunities for the back half of the year?

Yes, we've got a big push I think that a lot of the growth that we saw in the first quarter, a lot of that was coming from basketball because obviously that was new business for us. But we're staying pretty consistent with the theme that we have. We're very tight with the distribution. We're very tight with the number of doors we have out there. We're still learning a lot about the product. But we have some products that we like very much, and we've seen some really good success with some buying. The 1 thing we are looking for is the kid going to accept as a footwear brand if they can't accept us a basketball footwear brand. And we're not getting any of that reluctance, and so as we continue to become more important in sort of the social conscience of this consumer, who would not only on court, I think we've demonstrated our ability to be a great on court supplier within basketball. And I think we needed to just keep moving that exposure. So 1 thing I will tell you that you will see from us in the back half of the year, you will see great storytelling from us around basketball in the back half of the year. People will know that we are in the basketball business. And frankly today, Sam, I'm not sure that we've gotten that message out yet. But I'll tell you that there will be an emphasis around the messaging that we're making there. Sam Poser - Sterne Agee & Leach Inc.: And then, thank you. And then to that messaging question, marketing spend as a percent of sales, I mean, how we should think of that on a full year basis this year, given the numerous new initiatives that you really have this year?

Yes, consistent with our previous outlook around marketing, it should be relatively flat as a percentage of revenues year-over-year right now based on our view. A little more front end of the year weighted as a percentage of total marketing spend compared to last year. But again, similar percentage in total for the year. Sam Poser - Sterne Agee & Leach Inc.: So around 12%?

Yes, last year, we were 12%, correct. Sam Poser - Sterne Agee & Leach Inc.: All right. You already answered the question about the Olympics. So thank you very much.

Thanks very much, Sam. I appreciate it. Thank you, everyone, for your time today.

Thanks for joining us on our call today. We look forward to reporting to you our second quarter 2011 results, which tentatively have been scheduled for Tuesday, July 26 at 8:30 a.m. Eastern Time. Thanks, and goodbye.

Ladies and gentlemen, thank you for your participation. This concludes the conference. You may disconnect, and have a wonderful day.