Under Armour, Inc. (UA) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Under Armour Inc. Fourth Quarter Earnings Webcast and Conference Call. [Operator Instructions] As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Tom Shaw, Director of Investor Relation. Please go ahead, Sir.

Thanks, and good morning to everyone joining us on today's fourth quarter conference call. During the course of this 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 an unanticipated event. Joining us on today's call will be Kevin Plank, Chairman and CEO; followed by Brad Dickerson, our Chief Financial Officer, who will discuss the company's financial performance for the fourth quarter and full year 2012, followed by an update to our 2013 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. Finally, a replay of the teleconference will be available at our website at approximately 11:00 a.m. Eastern time today. And with that, I'll turn it over to Kevin Plank.

Thank you, Tom, and good morning, everyone. 2012 was another outstanding year for Under Armour. And as we enter the new year, 2013 holds great promise. Because Under Armour has always been about a promise. What is it that we can do with the team to empower athletes to reach their full potential? How do we help make athletes perform better? Stay warmer, stay cooler, stay drier and stay lighter. This morning I want to talk about the promise of Under Armour, both the one we share with our consumers, and the one we have with our shareholders. Those promises have been connected since our inception and we believe that both our revenue and EPS CAGRs of 30-plus-percent since our IPO in 2005 is a great measure of our success. 19 months ago, we hosted Investor Day here in our campus in Baltimore and promised that we would double our revenues to $2.13 billion by 2013. Given some of the noise that was going on around about the appetite of the U.S. consumer, we understood that was an aggressive number. But we had enough vision and an executional plan to get there. In our release this morning, we issued revenue guidance for 2013 in excess of the doubling of the business that we forecasted in 2011. Our ability to provide that guidance tells me 2 things: first, we're becoming much better company operationally. While our business has become more complex and multilevels we've grown, our operational financial planning teams have met the challenge; secondly, not only have we kept our promise to the athlete, who helped us reach our first billion in revenue, but our growth as a measure of how we've been able to reach out to a new consumer, one who understands that the promise of what Under…

Thanks, Kevin. I would now like to spend some time discussing our fourth quarter and full-year 2012 financial results and our updated 2013 outlook. Our net revenues for the fourth quarter of 2012 increased 25% to $506 million. For the full year, net revenues also increased 25% to $1.835 billion, which compares to our most recent full-year guidance of $1.82 billion. Apparel grew 25% to $405 million during the quarter, representing the 13th straight quarter of at least 20% growth for our largest product category. Our big story is driving growth across genders for Fleece and Storm. We were able to significantly expand the Storm platform beyond just the Charged cotton line last year to now encompass the broader Armour Fleece line. That advice to this product to the consumer was key as consumers look for more versatility from our store base. In Women's, we continue to raise our consumers' expectations with new product categories like Studio and Armour Bra. Youth products led the way from a growth rate perspective in Q4 as we gain shelf space at both existing and new distribution and continue to broaden into areas like graphics, which more than tripled during the quarter. Our direct-to-consumer net revenues increased 29% for the quarter, representing approximately 39% of net revenues compared to approximately 38% in the prior-year period. For the full year, direct-to-consumer net revenues increased 34%, representing 29% of net revenues compared to 27% in 2011. In our retail business, we opened 5 new Factory House stores during the fourth quarter, increasing our domestic Factory House store base to 101, up 26% from 80 locations at the end of 2011. In e-commerce, we achieved a growth rate in line with our overall net revenues growth during the fourth quarter. Fourth quarter footwear net revenues increased 43%…

[Operator Instructions] Our first question comes from the line of Robby Ohmes from Bank of America Merrill Lynch.

Two questions. The first question would be, Kevin, can you give us a little more detail on exactly what a louder brand voice means, maybe paint more picture for us what the big change could be in the approach to marketing for 2013? And then just the second question would just be on international that you're talking a lot more about, Latin America and maybe Asia, and I'm just curious where Europe fits into the international growth strategy going forward?

So let me take a second and tell you about what we want to do from a marketing standpoint. What we did -- I guess, starting so, so 17 years in the business now, it gives us a tremendous amount of perspective. And looking over the areas in the years where we've been really effective and the years that we still moved forward, but maybe we haven't been just quite as loud. So we what we want to do is we want to go back to this concept around cluster marketing, and the idea there is to create holidays. So holidays are places where basically the entire brand meets at once. What we want to do is consolidate our spend to tighter, but louder messaging, and so we're planning on several brand holidays this year. So to give you probably the best descriptive idea of what we're doing, it's about to happen in a few weeks here, and within the span of about 4 or 5 days, you'll see several things coming from the brand. First of all, we're going to kick it off at the PR event in New York in the second week of February. That will be announcing some of the innovations we're bringing to market. Things like our new Spine Venom running shoe that's coming out, we're very excited about on the footwear side, as well as probably the marquee product that we have which is our Armour 39, our biometric measurement device that I went into a bit of detail in my script on. So this is something we think is going to finally apply some data and take away the subjective into the type of workout I had by -- that was typically judged by the size of sweat stain in my gray T-shirt,…

Our next question comes from the line of Omar Saad from ISI Group.

Wanted to follow up on the specialty store you're opening up in Baltimore. Can you talk about how -- and I think Brad alluded there might be 2 openings this year. Can you talk about how that's different from your last efforts in the specialty retail department? Obviously in the more of an urban location as opposed to a mall, but can you talk about the product mix and merchandising strategy for the store and what you hope to accomplish with it?

Yes, Omar. Well, I think we want to learn. We went at -- when we looked at specialty retail, 3 or 4 years ago, I don't think -- I think we still have a long way to go in terms of putting our infrastructure in place. And more importantly, we had so much work to do in our wholesale distribution. Now, I'd tell you, there's still a tremendous amount of work with our wholesale partners because first and foremost, we love our wholesale distribution and hopefully, I think you see from some of the presence we have there, that they feel pretty good about us as well. We're going to start casting -- February 16, we open our new Harbor East store, and most importantly, we're going to learn a lot, and we're going to learn a lot about the consumer, and I think as we grow as the brand, it's important that we have this closer relationship with the consumer, the same way that we learned in our e-commerce channel. There's a way that we can learn watching a consumer walk in and seeing what products are compelling. The primary goal here is for us get closer to that consumer and again, a place that we can tell the full Under Armour story in this environment. I mentioned those 2 product categories of, a, our Women's and having a larger and a more important presence because I don't believe that our Women's gets enough credit for the size of the company that we built there. We're nearly a $400 million Women's business in 2012, and it's still on an amazing trajectory of growth right now, and that's $400 million at wholesale mind you, and it's close to $800 million at retail. And we think that the idea of how…

Okay. It sounds like it's a brand messaging store. But it's also aimed to be -- with the hopes of being profitable and replicable on a larger scale, is that correct?

Yes, first and foremost, we specifically did not use the word flagship, and I don't believe in the idea of leading with marketing or flagship where, oh, it's a loss leader for us. We should make money in everything that we do. And so our approach to this store is no different than that, and that's why we say 8,000 square feet is maybe bigger than you'd say a 5,000 or 6,000 may feel right. So we want enough room to tell a brand presence, but 100% we believe that our intent is to make money in the store.

And then real quick on the Armour 39, is that an offshoot of the Es, Under Armour's E39 product innovation that you guys had on some of your athlete least last year? Is it embedded in the apparel? Is it some sort of arm band, a wrist band or is it related to the Footwear? Any insights you can give there?

Yes, it's the evolution of the same products and this is the -- there's attorneys in the room, but I'm going to tell you the attorneys got the better of me. We had to come down to the naming of this thing. But it's a perfect product. It's the same product, and again, we've had this product in the market for 2.5 years. And so we've been testing it, refining it, now we're finally ready to go to retail with this product. And so it's something that what you saw, again, Cam Newton and Julio Jones, 2 of the stars of the NFL that you'll see today, when they went through the NFL combine more than 2 years ago, the same product they were wearing. And so we've evolved that into something that has commercial application. And as I said, it'll give the consumer at home the ability to finally measure themselves beyond being on a lift core or a treadmill, but what happens from the full-time that you're in the gym, the full-time that you're exercising and taking the subjective away, as I said earlier, the size of the sweat stain on your T-shirt into actually what is my willpower score? And that's something given on one-to-ten basis and allows an athlete to measure and say, well today, I was a little better than yesterday, and tomorrow I'm going to be a little better than today.

Our next question comes from the line of Michael Binetti from UBS.

So thanks for all the help today on the components that are going to be contributing to the revenue growth in 2013, and as I think about that, it was kind of the detail you gave to us, seems like might be a good time to ask about how you think about the long-term gross margin potential of the business. Back in 2011, I think you were targeting 50% gross margins, Kevin as you look at the places you're going to be taking the brand over the next few years, how are you thinking about gross margins today?

Michael, I can jump on that one to start with here -- I mean, our vision of long term gross margin hasn't changed. We do believe that, over the long run, that our gross margin should start with a 5. That being driven by continued innovations in the marketplace, which would justify the price points and justify the margins for the product to get there, first of all. Second of all, obviously, direct-to-consumer is a help in the mix equation for gross margins also. So nothing has changed relative to our vision of, over the long run, getting up to that kind of 50% plus gross margin goal.

Okay. And then this one might be for Kevin, with -- Kevin, with footwear, there's obviously been some changes on the team there. So do you think as new leadership moves in, we'll see the footwear program take change of direction over the next year or 2 or your approach to that market? Or do you look at the platforms you have now like Spine and the new basketball shoes and will be more of an evolution of those platforms that you've already launched?

I think we -- look, we've very pleased, I think, with the direction in how we've been moving as a footwear organization, and we're especially pleased with the team that we have a place in footwear. The thing is that, since we've added $1 billion in revenues in the last 3 years, we've added new skill sets and the evolution of the team of what makes the most sense with us. At the end of the day, we've had to make a lot of these decisions over the last 7 years, since being public, but it's also come out to netting us 31% CAGR top and bottom line in that same period of time. So as our business evolves, so does the need to consistently build and recalibrate our leadership, and so what we're doing is we're taking my original partner, Kip Fulks, who is a guy who, first and foremost, he's a product guy. And I want to make sure of the assumption that people understand and know about Kip as -- he runs supply chain because he's a great leader. He's running footwear because he's a great leader. But he also understands product at the same time. And we'll -- again, his primary focus is to get in -- to help us continue to build out our footwear team, because even where we are crossing the quarter billion dollar mark, we feel there's a tremendous opportunity in front of -- and a long way to go. When I say a product guy, it means Footwear's reported to Kip for the past 2 years, in addition to innovation. So he understands the things that are in the pipeline and really the way that we're going to pull the trigger there. And the reason we're able to do that is…

Our next question comes from the line of Eric Tracy from Janney capital.

I guess if I could, Brad for you focus a little bit more on the supply chain, perhaps the learnings, you said Jim McCarthy and the team have come on. I understand the cadence still sort of a bit of a constraint in the first quarter, but maybe just talk about sort of the upside opportunities in the back half, and as we enter into '14, sort of what these opportunities to drive further gross margin expansion from the supply chain?

Yes, Eric, we've talked a lot about the supply chain challenges over the last few quarters and the impact to our results in the back half of 2012 relative to having to airfreight some product in, to get product in on time to meet demand. Some of that -- some of those challenges are going to be consistent as we get into the front half of this year, especially in Q1. Some more heightened airfreight than usual again, just to kind of make sure we're meeting demand on time. And it's the same type of issues we had from last year. It's relative to a few factories that we onboarded during the course of last year. And some challenges around the onboarding of a few factories. So that will be consistent to the front half of this year. As we start moving through the year, the thought there, in the supply chain side, and the short run here is to move some of the supplies, especially on the fleece categories where we had some of -- most of our challenges last year, to move that to more consistent historically reliable suppliers of ours. That will help with obviously delivering on time, but in the short run, that will come at a little bit of a cost especially in the back half of the year when some of that moving of products starts to hit the market. Lessons learned really to get to 2014 and forward and Jim has done a really good job looking at this and his team is -- capacity in general, planning longer term capacity and where we need to be, not just in the next year or 2, but further out years 3 and 4, and making sure that we can onboard factories in the right -- at the right pace and at the right time. And that will be the important part of our long-term strategy in the supply chain. So we do kind of see this, kind of air freight issue at the back half of last year, first part of this year. And then kind of the switching of the factory base the back half of this year to be more of a short term need to meet demand, longer term doing a much better job of planning out capacity and onboarding new factories at the right pace.

Okay. And then, maybe Kevin for you. Again apparel is holding up really, really well. I think there's probably misinterpretation of being saturated domestically, that goes without saying. In terms of the distribution expansion beyond the core, particularly on the Men's side of the business, how do you balance continuing that expansion in support of the apparel growth without potentially sort of diluting or getting maybe cannibalization within that cold channel?

I think it begins by having and continue to drive great growth within our existing base. So if you did your check, I think the expectation that we believe our existing distribution has from us is that, we're the company that continues to deliver double-digit comp growth in their stores. And so finding ways to do that is, it isn't putting the same things in there, but finding newness, frankly showcasing innovation, and it's not always -- and they can be simple innovation too. It's -- the charge from the Storm platforms, they'll each be $200 million businesses for us this year that frankly it didn't exist in 2010. When you look at, again, some of that simpler innovation, it's things like fleece, our Fleece businesses this year was on fire, not literally, but up 50% for us. So you imagine taking a simple category like Fleece and driving that kind of growth, that is a wheelhouse product: Our Charged Cotton business, plus 90%; our Storm platform, plus 300%. So when you look at apparel, we're still not servicing the appetite of our consumer, within and through our core base. So when I mention we like our distribution, they like us very much, we understand where our bread and butter, and we'll continue to make sure we take care and that we build out things in taking time as you heard me hopefully very thoughtfully talked about the retail presentation expansion will have in our wholesale distribution. And at the same time, we do see opportunities, so you'll continue to see more and we could spend a lot of time talking about Dick and I think some of the headway that we have there as they continue to be a headline for our brand as we are presented in the…

Our final question comes from the line of Kate McShane from Citigroup.

With regards to the warm weather, which has been on everyone's mind the last 2 winters. I wondered if there was any insight into any possible strategy change with regards to the change in flow of product or the change in mix for next winter or subsequent winters.

Yes, Kate, let me jump on that first. First of all, our inventories is in really good shape right now. We've had some great cold weather, obviously as you felt last several weeks, and that's really had things moving at retail. It doesn't have a big effect to us. It's been helping our partners out in getting things cleaned out as they start looking forward to 2013. We've been doing several things from repositioning. I mentioned that growth that we had in baselayer. We made a decision, I think we were in this position in the fourth quarter particularly, and we all had our fingers crossed sitting, around waiting for it to get cold. And we realized that, that probably wasn't the best model or way for us to be thinking about our business. And so we made a conscious decision to stop being so weather reliant. And for a company whose 2 basic categories of business were something called HeatGear and something called ColdGear, that was a pretty big shift. So keeping that DNA and that explanation to our consumer of how they shop our brand, intact, we started adding things like a lighter fleece product. Something that isn't just as much about keeping warm as much as it has more style, it has more relevance to it. So I think you've seen us take that. Our apparel business in the fourth quarter was up 25%. But moving away from weather reliant is something that allowed us to keep that in what was probably the most challenging fourth quarter that anyone has seen in a very long time. We are more, and I think that's, hopefully, what comes across, we are more than just figure on apparel side, a cold-weather compression brand. Compression is, I mentioned that stat in…

And Kate, just relative to -- on the dollar side of how we're planning the flow through the year, and it kind of ties in what Kevin is talking about here. You should be -- if you look at kind of the quarterly revenue growth, relatively consistent across the quarter as far as revenue growth, but a little bit more heightened growth in Q2 and Q3 versus Q1 and Q4, again, not a significant difference, but just how we're planning the business right now. A little bit of a timing difference. Q1, Q2 it's just more timing in general. Q4, is kind of going to your point of coming out of 2 warm winters still trying to get our arms around what that means. As Kevin mentioned, obviously, our product has expanded and it's much more versatile right now, even with warm winters, but still trying to get our arms around what these two warm winters mean, also, have not -- had bookings for Q4 come in yet. So that's kind of the timing difference there in Q3 and Q4 relative to revenue growth.

Okay, that's great. And if I could just sneak in one more question. I think you mentioned, Brad the incremental cost of footwear during the quarter. I just wondered, what that was from and how many more quarters we can expect to see that pressure?

Well, as we've talked historically, Kate, footwear gross margins are well below our apparel margins right now. And as footwear grows quarter by quarter, that could have an impact to our gross margins. In Q4, technically Q4 really isn't a big footwear quarter for us in general. But we do see in the fourth quarter sometimes is, the sell-in of some of the spring product for the next year. Specifically this fourth quarter was around our baseball cleats. If you remember last year, we had a very, very strong baseball season. Had very strong sell-in and sell-through of baseball cleats. A lot of our customers on the wholesale side wanted to make sure we got product on the floor in times set coming off that success last year, so we had some shipments of baseball cleats in December.

Thanks everyone for joining us on the call today. We look forward to reporting to you our first quarter 2013 results, which tentatively have been scheduled for Friday, April 19, at 8:30 a.m. Eastern time.

Wait, Ravens, 35-33, final prediction, go Ravens.

There we go, thanks.

Bye-bye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day