Ladies and gentlemen, thank you for standing by, and welcome to the Under Armour, Incorporated Fourth Quarter 2019 Earnings Webcast and Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Lance Allega, Senior Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead, sir.

Thank you and good morning to everyone joining us for Under Armour's fourth quarter and fiscal year 2019 earnings call. On today's call, participants will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in this morning's press release and documents filed regularly with the SEC, all of which can be found on our website at about.underarmour.com. We may also reference certain non-GAAP financial information including adjusted and currency-neutral terms, which are defined in this morning's release. We do use non-GAAP amount as the lead in some of our discussions because we feel that more accurately represent the true operational nature and performance of underlying results of our business. You may also hear us refer to amounts in accordance with U.S. GAAP. Reconciliations of GAAP to non-GAAP measures can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items to provide management's view of why this information is useful to investors. Joining us on today's call will be Under Armour President and CEO, Patrik Frisk; and CFO, Dave Bergman. Following our prepared remarks, we'll open up the call for questions. With that, I'll turn it over to Patrik.

Good morning everyone. I want to say something out front. Last night we learned of a terrible tragedy involving the loss of a member of the Under Armour family at one of our stores in Orlando. Our heart goes out to her teammate -- to this teammate and her family and to all the teammates affected by this awful incident. Our concern right now is with the safety and security of everyone involved. We have closed our stores in Orlando area and are making grief counseling available to our teammates. We will offer updates as soon as possible in coordination with local authorities and the teammate's family. Now let's get into the prepared remarks. On my first call as CEO, I will start by underscoring several things. First and foremost, I'm not satisfied with where we're today. As a company, we've made significant operational progress in the form of better systems, structure and processes, as well as a considerably stronger balance sheet and the ability to generate cash. As a brand, however, we see a paradox of two challenges in front of us. Continued softer demand in North America as we work through our elevated inventory and multiple years of discounting, and a highly committed cost structure which is taking longer to unpack and is limiting us from being able to spend as aggressively as we would like to, to increase brand consideration. Next, we are firm in our commitment to staying centered in athletic performance and bringing authenticity to the brand through innovative products, solutions, and experiences that athletes didn't know they needed, once they have them can't imagine living without. And finally, to thoroughly execute a strategic operational and cultural transformation of this magnitude takes time and quite simply, the realization of milestones and progress within certain areas…

Thank you, Patrik. Before moving into greater detail on our initial outlook for 2020, let's take a quick run-through our fourth quarter highlights, starting with revenue, which was up 4% to $1.4 billion. Clicking down by channel, sales to our wholesale customers were up 2% primarily driven by our improving service levels around the world relative to spring floorsets. Direct-to-consumer revenue was up 2% with growth across our international regions, offset by continued declines in North America. Licensing increased 36% primarily driven by contractual royalty minimums and one-time settlements with two of our North American partners. By product type apparel revenue was relatively flat compared to the prior-year. Footwear revenue was up 10% driven primarily by our team sports and running categories and improved service levels as previously noted. And accessories revenue was up 2%. From a regional perspective, revenue in North America was up 2% in the fourth quarter driven by our licensing and wholesale channels. Within wholesale, service level improvements enabled us to meet demand earlier providing an incremental benefit to the fourth quarter. This growth was tempered by lower sales to the off-price channel. In EMEA, revenue was up 2% driven by growth in our DTC business. Relative to wholesale, as a reminder, some shipments originally planned in the fourth quarter of 2019 were shipped in the third quarter in anticipation of Brexit. Revenue in Asia-Pacific was up 10% with growth in wholesale and DTC. Like North America we experienced improved service levels that benefited the quarter. DTC growth was slightly below our expectations due to softer than expected sales through key e-commerce moments, including 1111 and 1212. Latin America revenue was up 12% driven by growth in wholesale and DTC. As reminder, this was the first quarter after a full-year lapping of our Brazilian business model…

Thanks, Dave. I want to underscore a few points. Under Armour is an operationally better company today following our purposeful three-year transformation. We've reengineered our go-to-market, optimized our product and innovation engines, and focused ourselves on a well understood and well defined target consumer. We've improved our balance sheet by reducing our debt and inventory and realize significant improvements in our ability to generate cash. That said we absolutely have more work to do work, a work that will require us to make tough decisions, further evaluate our cost structure, and sharpen our prioritization to ensure that we continue to put ourselves in the best position possible to achieve sustainable, profitable growth over the long-term. And now, I'll turn it back to the operator for your questions.

[Operator Instructions]. Our first question comes from Matt McClintock with Raymond James. Your line is now open.

Hi, yes. Good morning, everyone. Patrik, you worked pretty hard the last few years getting the organization to a place where we can start to see growth again in North America. And it seems like things are actually getting tougher, albeit maybe in a more profitable manner. As you look back, what would you have done differently? And could you perhaps talk to the product itself that you expect to sell this year as it seems like the shorter go-to-market calendar should have helped somewhat? Thank you.

Thanks, Matt. Yes, I think we've had a pretty long call here this morning. And part of that, reason for that, of course is try to unpack some of the noise that's going on there right now. Yes, it is true that it's taking longer than we anticipated to get back to growth in North America. And there are several different factors there. Part of them -- part of it is earning our way back on the shelf at retail is taking a little longer than we thought it would. And some of that actually has to do with the latter part of your question, which is around calendar and our performance in spring of 2019. We feel though as we go forward because of the shortened calendar and because of the efforts that we put into not just the front end of the machine, the commercial part, but also the innovation pipeline, that we have great, great product lineup in a coordinated manner in our go-to-market this year like we never had before. But again, you've got to earn it back and it's taking longer than we thought. When it comes to our own control channels, our e-commerce platform is an ailing and old one. And we had planned to move on to a new platform in 2020. And we've worked hard to make sure that that is the most state-of-the-art platform. But not only that, we're also supporting that with loyalty, with CRM, with personalization. So you have both a new site and platform and all of the other things that you need to actually drive that coming online for us in the second half of the year. We believe that is incredibly important because ultimately, we would want to tell the right stories around our beautiful product and our marketing in a coordinated matter better than we're able to do it today. So the way we think about this is it's about timing. It's more about timing than anything else. And as we said, we do see softer demand in the first half in terms of our wholesale accounts, but we see a stabilization in Q3, but again too early to call the ball of what's going to happen in Q4 because we don't have orders at hand. So I think for us, it's about a timing issue. I think when it comes to what would I have done differently; you'd always like to go quicker. You always would like to go quicker. But the reality is also, you have to take into consideration the cultural aspect of change management when you go through these things. And it's sometimes hard to call the ball on exact timing of a transformation because there's so much work that needs to happen across the entire organization and what we see playing out here now for Under Armour is a little bit of a delayed effect in North America unfortunately.

Thank you. Our next question comes from Edward Yruma with KeyBanc Capital Markets. Your line is now open.

Hey good morning. Thanks for taking the questions. I guess first on off-price. This has been kind of a constant narrative for the past couple of quarters. I guess at what point do you think you'll get comfortable with the mix of full-price to off-price and one [indiscernible] without being a drag? And secondly, maybe this is just a chicken and egg, but are you comfortable at this stage with existing product line up to amplify marketing, given some of the challenges you've outlined in your script? Thank you.

This is Dave. We have talked a lot relative to kind of discounting promotion in the off-price channel and quite frankly, it is a journey for us. And we've taken a lot of good steps in that journey in 2018, and 2019, we're kind of walking down the third-party liquidation channel and some of that's been enabled just by a much improved supply chain process and not actually creating as much access and therefore not having enough to even move through that channel, which is also a good thing. But we're also starting to take steps this year to take that further into our own DTC channels. We did some of that in 2018 and 2019. But in 2020 especially the back half of the year in North America, we want to start walking-off more of the promotional and discount activity that we're doing in our Factory House stores and also on our e-com site. So we're pretty excited about the combination of being able to launch a new site, being able to build in the personalization, the CRM, and stepping off kind of the promotional and discount cadence there on the e-com platform. But we do have to be careful; any site transition is risk around that. And we got to be prudent around our planning for that. So we feel good about where we are in that journey, we're kind of about where we expected to be in that step-off process. Is there more that we can do next year and beyond probably a little bit more, and we'll continue that journey, but we want to make sure we're doing it prudently. And that is backed up by the right brand campaign and brand voice at the same time to make sure we're really compelling those consumers to stay with the brand and want to stay with us as a premium brand and a full-price brand. And so that's another reason why we're so excited about the marketing campaign that we recently have launched, and kind of doubling down on the investment there as we go through this year.

And one of the -- I'll take the second part of that question as it relates to product and the go-to-market, Spring 2020 we're now and Fall 2020, the entire year of 2020 we're now truly running a coordinated play across product marketing. And we're doing that with we believe a better product line-up then we've had ever and I'm thinking now specifically around Rush and Recover, that metabolic fabric that we have that helps you recover, Iso-Chill which we're driving now hard into Golf which is a new innovation that we've had before but we now actually expanding it to make sure that we're covering more styles with that, our Infinity Bra for women which is a new bra that we're launching which we believe is absolutely the number one bra for any women that wants to be active and stay active. Our continued driving into Project Rock and some of the new products that's coming out from his line and in footwear continuing to build on something that we've worked hard to do over the last few years as a brand, which is starting to build franchises around our footwear. Our HOVR running, we just launched a new Machina on Friday. We're very happy with how that launch has gone across the world. This was the first time we were able to actually launch a product simultaneously across all of our countries globally. And the big news there is that's real live coaching, right you can wear watch and you can be coached as you run has had great reception. But that's just one of the things that we now have on the HOVR platform. We also have the Phantom/SE, the Sonic, the Infinite, the Mega, the Velocity 2, the Guardian. And that platform itself has been a…

Great. Thanks so much guys.

Hope that helps.

Thank you. And our next question comes from Erinn Murphy with Piper Sandler. Your line is now open.

Great, thanks. Good morning. I guess my first question is just around the DTC channel. If you guys talked about it being up low-single-digit in 2020 could you just talk a little bit more about what's contemplated in terms of store development in this number and maybe in that talk about how some of your smaller format stores have performed?

Sure, Erinn, this is Dave, I'll start out Patrik can add a little bit as well. But we are excited about global retail for us going into 2020. I think from a DTC perspective, we mentioned on our prepared remarks, we're a little bit tempered on our e-com outlook, mainly with the site redesign in North America. And also just being a little bit prudent there with a lot of the promotional environment we saw in Q4 of 2019. But relative to retail stores, we're excited about the new Brand House commercial concept we've been launching this year, we're excited about the format for Factory House. And so we're really getting behind that. When you think about globally we're still planning about 275 doors globally about 200 of those are going to be more partners, and then 75 are going to be more kind of owned and operated. The partner doors are going to be mainly Brand House doors and the owned and operated are going to be more Factory House doors. I do want to just caveat that with the fact that that plan does not currently anticipate any extended impact from the coronavirus situation in APAC, we have to keep an eye on that and make sure that we continue to update as we go forward. But we're excited about the continued progress there.

Yes, we've done a lot of work around the Brand House and we're truly moving into an era now for Under Armour where we're starting to drive through omni channel through both personalization, BOPUS, and loyalty as well as CRM. And as part of that we've been working to coordinate the efforts that we have of course in e-commerce but also through this new Brand House concept in terms of both experience and activation. We did a lot of work on the three stores that we opened in the back half of the year in 2019 to learn from. Those were hybrid stores, we tried a lot of new things in there and we put all of that work also into the stores that we're now starting to launch and roll-out in 2020. And it's important to us; we still are on track to open somewhere between 1,500 and 1,700 stores across the world over the next three to four years. So it’s absolutely a critical initiative for us and we're very encouraged by what we see in terms of how those stores are performing right now. Dave, do you want to add anymore.

[Indiscernible].

Thank you. Can I just clarify just one thing, Dave, for you on the guidance for international growing low double, does that include the $50 million to $60 million hit that you're taking in Q1 for coronavirus? Or is that excluding that?

It does include the hit that we're expecting in Q1 the $50 million to $60 million. It does not include anything after Q1.

Thank you. Our next question comes from Alex Walvis with Goldman Sachs. Your line is now open.

Good morning, and thanks so much for taking the questions here. My question is on North America guidance and specifically on North America wholesale. I wonder if you could share with us what level of decline you're embedding within the wholesale segment of North America specifically as you contemplate the down mid to high-single revenues in total, is there any color that you can share with us on the moving pieces within wholesale beyond the declines that you're expecting in off-price. And here I'm thinking of whether you're planning to reduce the number of doors that you sell through and any thoughts that you might have within doors of where share losses are going to is it other international brand? Is it private label players or any other thoughts around that? And then my second question is just a quick-one on the decision making process around the New York store, and how you'll come to a conclusion on that?

Sure, Alex, this is Dave. Relative to North America and kind of what we're expecting for 2020 there are a couple different puts and takes that are going on there. Most of the decline is attributable to wholesale and then a little bit from DTC but that's mainly on the e-com side. When you think about on the wholesale side, as Patrik mentioned in his prepared remarks, we did see some softer demand relative to first half wholesale bookings. Some of that's coming off of some of the performance of our Spring summer 2019 product. But then as we look at the Q3 orders that came in, they're actually more flattish. So we're seeing signs of stabilization there, which is good. We don't have Q4 bookings in hand yet, so we want to be careful there. But hopefully that momentum that we're seeing in the stabilization and beyond continues as we get those Q4 bookings in. And then as we've mentioned on the wholesale side also, we're definitely planning decreased third-party liquidation in 2020 as well. When you look at the DTC side, we are pretty encouraged relative to the Brand House commercial model that I mentioned and also on the Factory House models, but we are stepping off the promotions a little bit on the e-com side and also on the Factory House side. Little bit more detail on North America DTC from a doors perspective. We only have about 19 full-price stores as we ended last year. So we're going to look to open three more of the new format doors this year. But we are being prudent about that expansion, we want to make sure that the profitability of those new models is working the way that we expect before we really amplify that a lot more, but we're excited about the early reads on that. Relative to the question on the Fifth Avenue store, obviously this is a big, a big conversation for us and a big decision that we have not officially made yet, but that we're anticipating. Flagship Retail is certainly important to us. But in this instance, we would prefer to continue focusing on our smaller, more profitable Brand House commercial concepts that I mentioned, which we're rolling out this year. In addition, we need to reprioritize and allocate more investment to the digital side of our strategy including our new e-com platform that I mentioned; CRM and Loyalty that Patrik mentioned as well, the Fifth Avenue location is obviously a premier retail location. But we're considering whether it may be better suited for someone else at this time. Regardless of whatever decision we make there, our lease obligation will remain in place and we begin paying rent on that later this year. But we're continuing to evaluate that.

And that doesn't, and this is -- hi, this is Patrik. I just wanted to add a little bit of color around Flagship stores in general. We have other Flagship stores around the world and we will continue to look at flagships opportunities in the future for sure. But at this point in time, we feel that it's prudent to take this action and I think for us, we need to make sure that we're also now looking not just in North America, but beyond in terms of how we support our retail business.

Thank you. Our next question comes from Omar Saad with Evercore. Your line is now open.

Good morning. Thanks for taking my question. Two quick questions, guys. So number one, I thought I heard you mentioned at some point in the prepared remarks embracing the performance element of the Under Armour brand really sticking to that kind of knitting and its original D&A, I'd love to hear you elaborate on that, especially given kind of the demand for fashion products in the marketplace and how you see Under Armour's unique performance element fitting into the broader marketplace. And then my second question is, if you can give us a sense of the rise and fall and rise again of marketing spend and ad spend for the brand, how much and how large and far reaching was the UA voice at its peak versus 2019. So we can think about what ramping back up the brand voice will be through increased marketing going forward? Thanks.

Okay. Well, I'll start Omar, thanks for your question. Yes, it's an ongoing conversation, I guess that we have with investors and I think also with the media around our decision to play in athletic performance. And we don't necessarily think about it in terms of bifurcation between performance and style, right? We don't believe that just because we're focused around what our product does for people means that we're not going to be stylish or on trend. We're expecting our products to be bought because people want to get better, but ultimately, the way that they choose to wear them might be another wearing occasions. So our design team and as I said on my prepared remarks truly believes that there is no performance without beauty and that's how we think about it. So we believe we can be absolutely relevant in today's trend that's going on right now with the products that we make going forward. The major difference and why we speak about it so pointedly is because we want to make sure that we're focused as it relates to our innovation engine and ultimately, our go-to-market engine around things that is going to improve people right to make them better. And we got to start from that short point. And that's really important to us. If you think about footwear, for example, there's no real footwear platform or success story out there in footwear that isn't based on a performance base at some point or another in terms of history. So for us in footwear, it's important to build these franchises so that we can then start to expand more. In our parallel offering it's similar, right, for us, it's about making sure that we have products that is actually making you better, they need to be innovative. That's what people are expecting from us, but then ultimately, making them so beautiful that you also want to wear them in different wearing locations. That's our job. And I think one thing that's important here is this is not the management team at Under Armour sitting in a closet somewhere trying to figure this one out. We've done more extensive consumer insights work around understanding the consumer, the marketplace, and the consumers preferences for this brand than I think many other brands have done. We have done close to 50,000 interviews at this point with consumers around the world. And they continue to tell us the same thing. And that's why we believe in our strategy ultimately, it's not just grounded in internal speak, it's grounded solidly also in the external world in terms of making sure that we're turning this company into a more consumer centric company going forward. So we believe in our strategy and we believe we're headed in the right down the right path and we're going to stick to it for now.

And Omar, this is Dave relative to the marketing investment, over the last probably five years or so, we kind of fluctuated in that 10% to 11% of revenue range as far as the marketing investment. We kind of hit probably the trough in 2018 as we're really trying to manage costs; we were all the way down towards 10.5%. As we approach 2020 and the amount of confidence we have in our new brand campaign, we're going to be pushing that closer towards 12% of revenue. So just over a two-year period, that's about 150 basis point increase in marketing as a percentage of revenue. So we're pretty excited about that. And also, the mix of that spend has gotten much more powerful as through the past restructuring, we're able to step out of some of the committed sports marketing contracts and pour a lot more of that fuel into the brand kind of top of funnel. So we're excited about kind of power of that not just the increase in the dollars.

Yes, it's really important point that Dave is making, it's not just the amount of money that you have, it's how you're able to activate that spend ultimately. We had a lot of committed spend in our marketing from 2016, 2017, 2018 and as we stepped out of 2018 and started coming to 2019 and now into 2020, we're starting to be able to activate more of the money top of funnel and that's incredibly important and mid-funnel, that's incredibly important North America because our issue here in North America isn't brand awareness, people know about this brand. Then that's why I keep saying that there isn't anything wrong with the brand, the problem is consideration in other words, why should I consider Under Armour and to be able to drive consideration you need to spend against the brand. Of course you need to have great product, innovative product, beautiful product, but you got to do it in combination with spending money the right way and as we move into 2020, one of the big differences for us is we're now able to activate the dollars using the assets we have, spend against the assets but also spend against the brand. And I think that is what's so exciting for us and to be able to do that in a coordinated way across everything that we do is something that we never been able to done before -- do before and to do it over a 12-month period consistently. That is new news. I think that is one of the big unlocks for us as a brand as an organization and that's also why we firmly believe in our strategy going forward.

Thank you. And our next question comes from Randy Konik with Jefferies. Your line is now open.

Yes, thanks a lot. I guess Patrik I got two questions. I guess the first one is, when you think about the beauty quotient you're speaking to, you've made some clear progress on the footwear side and talk to improved kind of demand resulting from the stuff looking better. How do you kind of think about that that beauty journey across the apparel and broader footwear platforms for the company? Where are we today? Where will we be in six months and a couple of years out from now just kind of getting your perspective of where we come from, where we are today, and where we're going?

Yes, it's great. Yes, first of all I think in footwear we're now really turning the corner in terms of what the composition is of our footwear proposition to the consumer. As we went through 2019, we still were putting, taking some products out that we felt were not necessarily going to be with us going forward. And as we're putting new products in, we're taking old products out, so that that rejuvenation, if you like of the line started to really happen in 2019 and is starting to play out in a major way in 2020. In terms of apparel, a lot of the effort that we're doing now going into 2020 is really around a reinvention of where we began our journey around the base layer and how we think about marketing ourselves as kind of part of the equipment as it comes to base layer. We think we have a lot to say there and we think that the consumer still looks to Under Armour for that first layer bubble. We're also doing a much better job of now is actually continuing to build out our fleece program for both men and women and adding on top of that much better outerwear as we go into 2020. We're taking a little bit of a different slant on the outerwear, it's not just outerwear, for outerwear sake, so to speak, it's actually functional outerwear that is done together with the performance base that we have. And the idea is really around active outerwear that is merchandise to get it back into our categories of train and run and so forth. In combination, of course, with some colder weather gear coming in the back half of the year, all of those different things, we believe, are incredibly exciting. We…

Yes, and then kind of just follow-up, if we all can agree on the call that the performance has always been there with the products and the beauty side of the product, our story is getting better seemed first most in footwear, over time in apparel as well. On the consumer work you've done and then talking to your wholesale channel partners, what’s the kind of response or perception you're getting on the pricing side from a -- how the products are priced in the market and that perception of the consumer as they as it relates to them thinking about do I purchase an Under Armour product or not, given this price points, I'm just curious on how you’re thinking about price architecture?

Yes, that's a great question. I think that is what gives us a lot of encouragement too and Dave kind of alluded to it here a little bit earlier. That's one of the reasons why we're feeling a little bit more bullish in terms of turning off how we think about promotional activity in the back half of 2020. We've been doing some tests in Europe on this as well and we've seen great results from some of the turning off the discounting button if you like on and the willingness from the consumer to pay full price. And when they are willing to pay full price is when we get the formula of SPF, style, performance and fit right, then the consumer does not have a problem to pay full price for Under Armour. But the reality is, we're well-positioned from a price perspective compared to some of our competitors, right that are out there right now in terms of some of the categories that we play in whether it's tights or base layer and so forth. Of course, we're not as well priced as a private label when we come to our competition; we feel that we're competitive there. And the great news is we're competitive there. And we've done great work in the back-end of the machine to make sure that our margins are better, right. So as we scale the business, there should be a great benefit there.

Thank you. Our next question comes from Matthew Boss with JPMorgan. Your line is now open.

Great, thank maybe, Patrik, just to put this all together. What's the timeline you see at this point where the product innovation in the assortment marries the louder marketing message to drive a return to growth in North America?

Well, thank you for that question, Matt. I think for us, it will be a gradual improvement from here going out. I think that's how we think about it. What we try to depict here today is a -- it's a timing issue for us more than anything and part of this taking a little longer than we thought and some of that is just simply earning it back. And earning it back, you don’t forget to do that in a vacuum right everybody else is also out there trying to make sure they maintain their position. So we believe now that we've put the play together, so to speak with the product and the marketing and our ability to service the business. I mean, our service levels are the best they've ever been as a company. All of those things playing in unison is giving us the optimism to say that growth will return to North America. It is a little bit of a delay, but ultimately it will and we're going to earn our way back. Dave mentioned it in North America specifically that we see stabilization in Q3. I think that's -- that's good. I think we're choosing to stay prudent here as we look out into the Q4. But we believe we have the product, we believe we have the marketing assets; we believe we have the plan in place to return this brand to growth and the right strategy. It's about consistency. It's about being persistent. It's about spending against the brand at this point in time and executing the playbook. So we see it as a gradual improvement as we go into the future in the second half of the 2020 going forward.

Great. And then maybe just on the gross margin, so inventory exits the year down double-digits. And you've outlined an effort to be less promotional in the back half of the year. Maybe what drivers of this past year's gross margin expansion moderate, if you could just help unpack your gross margin guidance for this year?

Yes, Matthew, this is Dave. When we step back and look at 2020 there's a lot of great progress we've made on gross margin in the last few years and a lot of that's come from the supply chain side with all the consolidation of vendors and skew rationalization costing transparency and everything else. And so we've been seeing a lot of those benefits starting to come in 2018 and then full-year of 2019. And so we’re starting to comp some of those benefits. But we see them continuing. But when you're comping a lot of that in 2019, it's not as much of an incremental benefit year-over-year. You couple that with the fact that we are continuing to step-off the off-price channel, so that helps a little bit as well. But then there's a couple of things that temper us a little bit this year on gross margin. And that's when you think about the APAC region, we've tempered our royalty revenue a little bit with some of the challenges in Japan. And we've also talked about the impact of the coronavirus that we're expecting in Q1. So that takes the APAC growth down a little bit for us, which is our highest gross profit region. So we don't have as much of the tailwind this year that we normally would have with the APAC growth there that we would be expecting them to continue more so in 2021 and beyond so a couple of different things going on there. And when you think about channel mix which would normally be a little bit of a tailwind more for us as we go into 2020, it's actually going to look a little bit neutral this year because we do have the benefits of the reduction in the third-party off-price channel. But we also have a decrease in our licensing revenue that we talked about. Some of that is related to Japan, some of that is related to one-time settlements in 2019. And some of that is also stepping away from a couple partners that we don't think or is in line with the focus performer. So that license revenue is obviously an extremely high gross margin business as well. So that kind of offsets the off-price channel benefit. So there's some puts and takes going on, it's wider progression in 2020 might not be as much as what you've seen in 2019 and prior, but we feel good about the direction and the continued supply chain improvements.

Thank you. Our next question comes from Jim Duffy with Stifel. Your line is now open.

Thank you. Guys just thinking big picture, you've made great progress operationally quality of sales have improved, you remain confident in the consumer positioning. Can you talk more about how you're thinking about distribution strategies in North America? Give us an update on the segmentation efforts. Specifically, I'm curious versus the plan outlined in December 2018 are there notable changes in go-to-market thought process or channel strategy? Or is North America decline simply share loss and just less volumes through channels that remains strategic?

Yes, thanks. Thanks very much, Jim. It's interesting. We don't talk about it. But there are certainly dynamics in terms of distribution that's going on in North America too, I just think about some of the news that came out this week around Macy's and other things, right. We're in some of those channels where contraction is also happening right now, which is another way to think about it as well right in terms of what's going on. But essentially at the core of it, our strategy remains the same as it relates to how we think about segmentation. And we've been able to as we work through 2019, and into 2020 also validate a lot of that, right. In other words, especially as we think about footwear, where we have been driving a lot of the run initiative in HOVR for example into the endemic chameau run specialty channel, the channel that we were not in before, as a positioning vehicle for example for the brand. So we see our distribution footprint currently and going forward being fairly stable in North America, I would think but there's going to certainly in pockets be some contraction where we're estimating that that there's going to be some stores disappearing as we go into the future and that's kind of calculated into our model as well. But we think that despite of that, we're going to be able to grow the business because we're going to have earning our way back into the winners. So part of our strategy going forward is definitely win with the winners, right? So and we believe there are going to be winners in this market too. And we're going to make sure that we're on in that shelf. So I think from a distribution perspective, it's no change in terms of how we think about our world going forward, it might be a little bit of a pocket here or there will be find some opportunities to find a new partner or so. And there might be some areas where we see contraction with some of our current partners. But in terms of segmentation into our distribution, there is no change. We're going to continue to make sure that we do a better job and we've continuously made sure that as we've rolled through 2018 and 2019, we've gotten better and better segmentation, not just in terms of price segmentation but also category segmentation. And that's a global. That's a global view.

And Patrik, you mentioned the 3Q bookings flattish to what do you attribute the improvement in third quarter versus what you're seeing in bookings in the first half?

Yes, I think it's year-over-year. Our business with the wholesale channel in North America and I would say also in Europe where we have the most wholesale, those two regions improved and therefore we're seeing flattish earn back if you like. So and I think part of that is also definitely in terms of our product, and our marketing efforts, right we're able to put together a holistic play for our partners and the product is getting better. So I think that's part of it. And both of those things are playing into it.

Thank you. And our last question comes from Michael Binetti with Credit Suisse. Your line is now open.

Hey guys, thanks for getting me in here. Thanks for all the detail today. I guess, Patrik, as you look past 2020, I have to ask about the comments that you're stepping up the costs on some of the long spending from the long-term drivers like digital and marketing this year and also the CapEx looks like it's rising a little bit. So I guess a few questions is 10% to 12% marketing still the right longer-term zone? I know you talked about butting up against the high-end of that today. And I think you offered some comments, Patrik that I'd say we're appropriately cautious reflecting the longer-term algorithm given today's update, as we think about that plan that you gave in 2018, how realistic do you think it is to still have the business margins surpass 10% by 2023 at this point, knowing what we know now?

Two things there and thanks very much, Michael. I think two things. First of all in terms of the marketing spend, we believe that as we have implemented roll mill return on marketing investment practices diligently over the last 14 to 18 months, we are that much more well informed now as we think about how to spend the money and we believe that you will see an acceleration because we're actually right now believe that we should continue to spend and the way that we're spending right now in 2021, as well. So and what I mean by that is prioritizing North America and then APAC secondly, and spending with the same kind of percentage spend going into next year as well to continue to drive what we now believe is a much smarter engine and more and better well defined engine if you like in terms of understanding how to spend. So we are all in as it relates to spending as the brand as we turn the corner into 2021, that's the first question. I think Dave, do you want to give a little bit more color around the longer-term outlook?

Yes, I mean I think this year obviously, we're taking a little bit of pause on operating margin rate expansion, but through all the different things that we've been laying out and driving, we still see the long-term objective of being able to get into that low double-digit operating margin rate. The exact year we're still going to be working through as we continue to update our long-term plans and assess that. But there's still absolutely the plan that we want to drive towards that.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.