Under Armour, Inc. (UAA) Q1 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Under Armour Inc. First Quarter Earnings Webcast Conference Call. [Operator Instructions] I’d now like to turn the conference over to your host, Ms. Alex Pettit, Senior Director of Investor Relations. Please go ahead.

Thank you, and good morning to everyone participating in this morning'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. The words estimates, intends, expects, plans, outlook or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, 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. Before we continue, I'd like to direct you to our website, investor.underarmour.com. There, you will find this morning's press release and, on our webcast page, images of a number of products and initiatives we will address on the call. Joining us on today's call will be Kevin Plank, Chairman and CEO; followed by David McCreight, our President; and finally Brad Dickerson, our Chief Financial Officer, who will discuss the company's financial performance for the first quarter and provide an updated outlook for 2010. After the prepared remarks, Kevin, David, Brad and Wayne Marino, our Chief Operating Officer, will be available for a Q&A session that will end by 9:30. And with that, I'll turn it over to Kevin Plank.

Thank you, Alex, and good morning, everyone. The Under Armour brand is about leadership. That means leading on the field by working with the world's best athletes to improve performance. It means leading our industry in sell-through, which is evident in our results, not just in this past quarter but over the past year. And it means leading in communicating with our consumer, whether it's a familiar one who plays football or a new one who's getting her exercise on a ski run. So we look at our results this past quarter and we see continued steady progress. We have broad-based strength in Apparel. And I want to talk about what was behind that strong growth. But I also want to talk about the opportunities that exist for the Under Armour brand to continue to lead, because I believe those are areas where we are focused in investing and are making progress. These opportunities in Footwear, in new geographies and in distribution are critical to our growth over the next several years. These are the opportunities that will enable Under Armour to continue to lead. It will be up to us to execute against those opportunities, whether they are new categories, new sports, new geographies or new ways of reaching our consumer. And it is the criteria by which we will judge our progress. But first, I want to discuss our main engine, the growth story that is powering the brand for us in 2010, U.S. Apparel. More important than the fact that we grew our Apparel business 31% this past quarter is the fact the strength was so broad-based. There was strong growth in all of our categories; Men's, Women's and Youth. There was strong growth with our wholesale partners, with each of those three categories, showing 20-plus percent growth. And there is strong growth across all categories in our Direct-to-Consumer business, with Men's, Women's and Youth all growing more than 50% in our own channels. The growth story for Under Armour Apparel is more than just intact; in fact, it's dynamic. In Q1, we continue to drive business at retail, with our core products such as compression, base layer and underwear. Our equity with our core consumer continues to grow, and we are benefiting as new, young athletes, the younger brothers and sisters of our core consumer, enter the world of organized sports. They are growing up in homes where Under Armour has been the brand of choice for the athletes in the family, and we are building loyalty because our product performs on the field. And we remain laser-focused on accelerating the Under Armour innovation agenda. It's what we’ve built our brand on and what drives our product teams. That innovation is recently evident in the course short. Our new $45 compression short that was featured at the NFL Combine and will help us extend our leadership position in compression. Our core consumers continue to show their loyalty to Under Armour, and our core apparel is vibrant. We benefit from the fact that with each new season there is a new sport to be played. When the baseball and lacrosse fields open up in spring, our consumer reaches for our brand. And when it's time for football, soccer or field hockey, our consumer is reaching for our brand. Those team sports will always be at the center of where our brand lives. So with abundant growth opportunities still in front of us, our decision criteria on investments are simple. We will invest to protect what we have and we will invest with a view toward succeeding on a global platform. We will protect our core strength on the American sports field with innovation, great athletes and great stories. On a global platform, I think we will look back on 2010 as the year where we made significant strides in bringing our innovation story to new sports and new athletes. The best evidence we saw of that was in this past quarter as Under Armour was introduced to new consumers around the globe with our strong sports marketing presence at the Winter Olympics in Vancouver. Without question, our work with Lindsey Vonn, U.S. bobsled and freestyle Ski Teams provided a great platform to tell the Under Armour innovation story to a wide range of new consumers on a global basis. Our presence in Vancouver, as well as the Winter X games in Aspen, helped establish our authenticity on the Mountain, and we will continue to build on that equity this year and beyond. Creating that foothold for Under Armour as an authentic brand on the Mountain is a great example of how we can focus our resources to effectively grow outside our core. And while our Mountain business is still in its early stages, we are equally excited about the opportunities we see in larger, more diverse categories and geographies. Our Footwear business continues to gain traction among our core consumers. We've had great success establishing ourselves as an authentic and innovative footwear brand on both the football and baseball fields. With new baseball athletes in the Under Armour footwear camp, such as Jonathan Papelbon, Mark Reynolds and Kendry Morales; collegiate assets like Boston College; and new football assets, like first-rounder Dez Bryant, who will be suiting up for the Dallas Cowboys this fall, we continue to invest in both the assets and innovation that the market has come to expect from Under Armour. Equally important, we understand the challenges in bringing that same level of leadership and innovation outside of the Cleated business. We continue to invest in our Footwear team to ensure that our strength in on-field footwear will translate into an equal degree of success in categories such as running, training and basketball. Our point of view on footwear for the football and baseball field is solid, and we are 100% focused on bringing that same level of attention to the broader commercial opportunities I just mentioned as well as Women's, Youth and Youth Footwear. Lastly, I want to talk about the Under Armour opportunity in new geographies because I firmly believe that remains our biggest single untapped growth driver. As we saw from our Apparel results this past quarter, we are still in the early stage of growth in the U.S. market. David will provide more color on that in a minute. But as we continue to lay pavement and reach new consumers here in the States, we are investing in a meaningful way to clear that first unpaved path for growth outside of our primary market. The way forward for Under Armour to grow outside the U.S. will mirror the growth strategy we have used to make us a near billion-dollar brand here domestically. We will build equity through outstanding performance on-field and do so in the sports that are most relevant for that local consumer. In Europe, we are establishing ourselves as the young athlete’s brand under his or her uniform, with our biggest commercial success in ColdGear. In Japan, where we've been on the ground for more than 10 years now and have wholesale sales approaching USD $100 million, our product strength is more broad-based. The success we have found in Japan is what drives our confidence that the Under Armour brand will translate and that we can win globally when we find the right balance of product, story and, most importantly, team, like we have with our partners at Dome Corp. in Tokyo. We're also taking initial steps into China, currently working to understand the consumer and how we need to organize to ensure success. These types of investments, global investments about geography as we develop into a global brand or our product investments, like footwear technology and new categories here in the States, are the ones we are making now so that we will continue to lead. We are also especially investing in human capital, in our team, and last week announced that our new Head of Apparel, Henry Stafford, will be joining Under Armour from American Eagle in June. Henry is a strong merchant with broad experience, and he’s also a great example of our ability to attract great young talent that wants to be a part of what is being built here at Under Armour. We are about leadership, leadership with athletes, leadership in sell-through, leadership in communications. We believe our success in a drawing talent to Under Armour is another key metric where we will lead our industry. With our U.S. Apparel business in strong growth mode, we are building the team that will take Under Armour to its place as a multibillion-dollar global brand. And with that, I'd like to turn it over to David.

Thank you, Kevin. I'd like to provide some additional detail on our Q1 performance that focuses well on the evidence that we are still in the early stage of our brand's growth here in the U.S. The first piece of evidence is in our results. In addition to the 31% growth we saw on Apparel this past quarter, we believe it’s even more illustrative to note that on a trailing 12-month basis, our Apparel business was up 19%. And we think the reason for much of that growth can really be summed up in one word: accessibility. From a product perspective, we continue to expand accessibility of our brand as our non-compression apparel grows as a percentage of revenues. While compression remains the focus for our brand, and it's still responsible for a large piece of our profitability, we understand that not every athlete needs or wants compression product. What they do want is the level of performance and protection that is built into every Under Armour product. Our significant growth in both loose and fitted apparel is helping to make the Under Armour brand accessible to an even wider audience of athletes. We have successfully shifted our business away from being focused primarily on compression to one that is now doing 2/3 of our business in loose and fitted products. In fact, in Q1 the percentage of business we did in non-compression apparel was the highest in company history. And that was true this quarter for the Men's and Women's categories individually as well. So when we look at the runway provided by expanding beyond compression, we believe our ability to grow Apparel business in the U.S. becomes increasingly evident. Loose and fitted product clearly puts us in reach of a much broader base of athletes, and we believe that we have enormous opportunity for long-term market share gain as we enter these new categories of business. The second piece of accessibility story lies in the growing power of the Under Armour brand and our ability to enter new sports categories. As Kevin mentioned earlier, there's probably no better example of this working for us than at the Winter Olympics. Given the strong perception of our brand as a great cold-weather product, from the Mountain was a logical place for Under Armour to go. So we went to Vancouver with a complete story; product, communication and athletes. And we were able to break through and further dimensionalize our brand for more athletes. Beyond Mountain, there a number of sport categories where we are still in a nascent stage with big opportunities to gain market share. As we fill out our apparel product offerings in categories such as soccer, basketball and others, we believe we can gain space at retail and drive business for our wholesale partners. Again, we are not figuring out which categories we could be in, but more about how we use our brand equity to help put together that total Under Armour story of product, communication and athlete. One area where we feel that complete story has been coming together is our Women's business. Our primary focus for Women's is our teen girl consumer, age 13 to 22, who's playing in organized team sport. We will take our protect-this-house-I-will campaign to this consumer with the lead female athletes, such as Lauren Cheney of the U.S. Women's National Soccer Team, 200- and 400-meter runner Monica Hargrove and Under Armour's gold medalist and training fanatic, Lindsey Vonn. We will push our Women's messaging towards the web, where we know our core consumer is spending a great deal of time. As Kevin discussed earlier, we are balancing our priorities, driving revenue growth through new products in categories, while remaining intently focused on our core performance business. While we continue to grow in new businesses, we've been also able to devote resources to maintaining our leadership and innovation agenda in performance apparel. The core short in the U.S. bobsled and freestyle skiing uniforms are great examples of us staying true to our mission of making all athletes better. And we continue to bring innovation to our core athletes with our catalyst green performance tops. While they are made from recycled plastic bottles, as you would expect from our brand, there is no sacrifice in performance. So the Under Armour athlete doesn't have to settle if they want to be an ecologically-sensitive consumer. This isn't about top-of-the-pyramid product that appeals to a niche customer. It's more about bringing performance to a growing consumer segment that we've not been focused on previously. With our evolving product innovation story, we are able to focus on gaining market share within our existing channels of wholesale distribution. Our core HeatGear, ColdGear and Base Layer products are relevant in almost every account channel where we do business. Beyond that, we are being more sport- and category-specific based on the account in target consumer, with some accounts having a greater mix of soccer and lacrosse and others focused more in golf and running. Also, we're fine-tuning our Women's assortments, where we are growing rapidly with our key and important wholesale partners. And our new fit story gives us opportunity to further tell specific stories around compression, fitted and loose within distinct channels to broaden our appeal to more athletes. Our ability to gain market share within our existing distribution is one strong and important element of our growth story for U.S. apparel. The most immediate opportunity and third piece of the accessibility story is efficiently broadening distribution through web, Factory House and selected geographic expansion here in the U.S. When we look at our 19% growth in Apparel over the past 12 months, we can see how broadening our access to athletes with our discrete Factory House and enhanced web efforts helped us meet consumer demand while continuing to grow with our valuable wholesale business partners. Reaching new Under Armour consumers where they shop is the driving force behind our strategy, and we're very encouraged by our efforts over the past 12 months. We know there is much more opportunity out there to meet growing consumer demand. While our primary focus is on growing share within our existing accounts, we are pleased with the activity we've seen in our new limited distribution points. We're also seeing continued strength in our Factory House stores and our Web, and our Factory House plan is to open 16 to 18 doors in 2010, bringing us to a total of approximately 51 to 53 doors at year-end. The last piece of the equation for continued growth in our business is leadership, and we are bringing aboard new leadership for our team. Next week, we will be announcing a new Head of Under Armour's e-commerce business to drive our efforts in that critical area. And as Kevin mentioned, Henry Stafford is joining us to lead our Apparel team. He comes to us from American Eagle, with prior experience at Old Navy and Abercrombie & Fitch. His strong merchandising background and years of experience with our target consumer will help direct our Apparel growth as we move our brand beyond our core strength on the football and baseball fields. He has a great understanding of how performance and innovation has built the Under Armour brand. This segment edited by Jenn Henry's addition will help to accelerate our strong trajectory of growth as we increase our accessibility to our consumer for further expansion of our offerings. With that, I'd like to now introduce our Chief Financial Officer, Brad Dickerson.

Thanks, David. With Kevin and David having taken you through some highlights and strategies for our business, I would now like to spend some time on our first quarter financial results. Our net revenues for the first quarter of 2010 increased 15% to $229 million. This strong growth is largely driven by Apparel, which was up 31% to $173 million with growth across the Men's, Women's and Youth Apparel businesses. Direct-to-Consumer, representing approximately 18% of net revenues for the quarter, was up 73%, driven by our Factory House stores and Web business. International net revenues increased approximately $6 million to $14 million in the first quarter and represented approximately 6% of revenues. Accessories and Licensing revenues also experienced strong growth in the first quarter and increased 30% and 25%, respectively. Footwear net revenues were down approximately $14 million to $43 million in the first quarter. We've previously indicated Running and Training Footwear revenues were expected to decline in 2010 compared with 2009. First quarter gross margins were 46.9% compared with 44.6% in the prior year's quarter. There were several puts and takes impacting gross margin. First, Apparel gross margins were up during the quarter due to a favorable product mix as well as improved costing, accounting for an approximate 130 basis point increase. Second, gross margins benefited from the strong rate of growth in our higher-margin Direct-to-Consumer business, accounting for an approximate 90 basis point increase. Third, decreased returns and reserves accounted for an approximate 85 basis points increase. These items were partially offset by lower gross margins in our Footwear business year-over-year, which accounted for an approximate 75 basis point decrease. Selling, general and administrative expenses as a percentage of net revenues increased to 41% in the first quarter of 2010 compared with 40.6% in the prior year's period. Let me take you through the components of SG&A. As a percentage of net revenues, marketing declined to approximately 13.6% of net revenues in the first quarter compared with 16.8% in the prior year as we anniversaried the brand campaign that supported the introduction of our running footwear in the first quarter of 2009. Second, selling costs increased to 8.6% of net revenues from 7.4% in the prior year, primarily associated with the continued expansion of our Factory House stores. Third, product innovation and supply chain costs represented 9.6% of net revenues in the first quarter compared with 8% in the prior year as we made increased investments in personnel associated with the design and sourcing of our expanding Apparel, Accessory and Footwear lines. Finally, Corporate Services increased to 9.2% of net revenues compared to 8.4% in the same period of the prior year as we invested in additional corporate personnel and facility expenses to support our growth. Operating income during the first quarter increased 72% to $14 million compared with $8 million in the prior year. Operating margin was 6% compared with 4% in the prior-year quarter. Our effective income tax rate in the first quarter was 42% compared with 43.8% in the first quarter of 2009, primarily due to decreased losses in our foreign subsidiaries. Based on continued tax-planning strategies, we continue to expect our effective tax rate in 2010 to improve approximately 50 basis points from the 2009 rate of 43.2%. Our results in net income in the first quarter rose 81% to $7 million compared with $4 million in the prior-year period. First quarter diluted earnings per share increased 75% to $0.14 compared with $0.08 in the prior year. It's important to note that certain costs have been reclassified within our income statement. We believe these reclassifications more closely align with the way we manage our business and will allow us to gain better visibility as we move forward. Please refer to the tables in our first quarter 2010 earnings release for further details. Now let's spend a few minutes on the balance sheet. Total cash and cash equivalents at quarter end increased 153% to $166 million compared with $66 million at March 31, 2009. Cash, net of debt, increased $101 million at quarter end to $148 million compared with $47 million at March 31, 2009. We currently have no borrowings outstanding on our $200 million credit facility. Inventory at quarter end decreased 10% year-over-year to $148 million compared to $164 million at March 31, 2009. This improvement in inventory efficiency year-over-year was driven by increased demand for our product and an improved focus on the management of excess inventory through liquidation sales to third parties. We are pleased with our inventory improvements to date. However, as we look ahead we will concentrate on improving our service levels within the wholesale channel in order to better meet consumer demand while also increasing our safety stock in key core programs. We expect this will result in a year-over-year increase in our inventory balance beginning with the second quarter. Our investment in capital expenditures in the first quarter was approximately $9 million. We continue to anticipate capital expenditures in 2010 to be in the range of $35 million to $40 million. Now moving on to our outlook for the remainder of 2010. Previously, we provided an outlook of 2010 net revenue growth in the range of $945 million to $960 million, an increase of 10% at 12% over 2009, and 2010 diluted earnings per share to grow in line with net revenue growth. Kevin and Dave have highlighted our first quarter Apparel strength in both the wholesale and Direct-to-Consumer channels, which we believe will continue to drive our business throughout 2010. Based on these results and our improved visibility of the full year, we are raising our outlook. We now expect 2010 annual net revenues in the range of $965 million to $985 million, an increase of 13% to 15% over 2009. We also expect 2010 diluted earnings per share for the full year in the range of $1.05 to $1.07, an increase of 14% to 16% over 2009. Driven by a product mix shift towards Apparel, combined with continued anticipated growth in our higher-margin Direct-to-Consumer sales, we continue to believe that gross margins will improve year-over-year in each of the remaining three quarters of 2010. We are building a growth platform with large scalable businesses to drive accelerated profitable growth in future years. This requires a balance between investments that will benefit us in the near term and investments that will generate a payoff in a longer-term horizon. The investments we have made and continue to make in our Direct-to-Consumer and Apparel businesses are driving the strong results you see today. In addition, we continue to invest in strategic longer-term initiatives to help drive significant incremental revenues in new geographies and categories, such as Footwear and Accessories. As a result, we continue to believe our SG&A growth rate will exceed our top line growth in 2010, with the largest impact on a percentage basis occurring in the second and third quarters. More specifically, in the selling cost area, we will continue to invest in Direct-to-Consumer, specifically around the continued expansion of our Factory House stores and Web business, as we aim to reach more consumers. As David stated earlier, we now anticipate opening a total of 16 to 18 new Factory House stores in 2010. It is important to note the retail business model is different from our traditional wholesale model. Retail delivers higher gross margins but also requires higher SG&A investments. The second area of our investment focus will be on five innovation and supply chain. We will continue to invest in the talent that will bring to market our growing Apparel, Footwear and Accessory lines in 2010, 2011 and beyond. Increasing the depth of our design and development talent is critical as we expand our offering of non-compression apparel to drive market share gains in the active Apparel category. Footwear remains an enormous opportunity, and we have achieved early success in football and baseball cleats. We will continue to invest in building the team that can achieve that same success in non-cleated categories, such as running, training and basketball. Beginning in 2011, we will be developing, designing and selling headwear and bags in house. Currently, this is a licensed business. We've been building the Accessories team in anticipation of this transition. This strategy will allow us to integrate stories [ph] across Apparel, Footwear and Accessories, continue to drive innovation in the Accessories line and leverage our operational capabilities and infrastructure to service this business. Beyond these strategic investments in the selling and product innovation and supply chain areas, investment in Corporate Services will increase as we support the needs of a growing business. This includes personnel, IT, infrastructure and facilities to support our growth. Finally in 2010, marketing investment is expected to remain in the range of 12% to 13% of net revenues. Based on the timing of certain key initiatives, we expect marketing as a percentage of net revenues to be the highest in the second and third quarters. Moving on to the potential impact of foreign currency on our results. During the first quarter of 2010, we recognized a foreign currency loss of $690,000. Our hedging strategy allows us to limit our exposure to foreign currency exchange fluctuations. With that said, there is no perfect hedge and risk remains that with future foreign currency fluctuations we could have positive or negative foreign currency impact during the remainder of the year. We are pleased with our results during the first quarter of 2010. However, we have many opportunities to improve operating efficiency, and this will be the focal point for our business as we strive to achieve our long-term targets in 2010 and beyond. At this time, we'd now like to open the call for your questions. We ask that you limit your questions to one per person so we can get to as many of you as much as possible. Operator?

[Operator Instructions] Our first question comes from Michelle Tan of Goldman Sachs.

I was wondering if you could actually give us a little more color on the tailoring that you're doing to your apparel assortments across the different retailers. What level of differentiation are you up to now? How much further do you want to go? And how much of a benefit are you seeing or do you expect to see to sell through in the Apparel product and margins?

This is David. As we discussed earlier, we believe that's one of our opportunities to broaden our accessibility, and we think this year we’ve just started to do that. You're starting to see us do this pretty successfully across fit offerings within accounts. And we work very closely with our key wholesale accounts and partners and believe we've made some nice progress on that. You're going to see it across Youth, Men's and Women's. But we still think we’re at the very early stage of the tailoring and see lots of upside.

So just to clarify, you're doing for fit now. Are you also doing it for sizing and compression versus non-compression? Things like that?

Absolutely. The brand was built and continues to be leading compression brand in our space. And we're focused around the athletes and the equity we've captured, and thinking about how we can service more of their athletic occasions, game day, practice and then other events throughout the week.

Okay. And is there any specific technology that you’ve added to do this? Or is it just more focusing on it for the first time?

We look at our technologies in ways that we can improve performance for every product and every under product within the Under Armour brand. This has being primarily through size and through styling, and also fine-tuning the assortments for each account based on the athletes that they serve.

If you look at the acceleration that you're seeing in Apparel, do you think -- how much of it, if it's possible to think about it this way, could be attributable to the idea of these more appropriate assortments versus restocking or whatever on the part of retailers?

It's Kevin. What we're seeing the need for Under Armour to take our business to make it more specific to consumers that are shopping in particular accounts. I think you're seeing a much more sophisticated distribution model that we’re bringing in. But in every way, that means continue to highlight our center, which is our key big big-box sporting goods’ guys. And so making sure that we have differentiated product that exist and lives in the stores and highlighting some of our best partners and then differentiating us from some of the channels that we're starting to enter, and where frankly Footwear and some of our new categories is taking us to. But the addition of Harry Stafford is a real reason as to, I think, Under Armour the need for a more sophisticated merchandising plan. Because when you look at between big box and differentiation there, let alone the mall channels and some of our additional distribution, our own stores, our own outlet stores, there's a model that we ! need people that are thinking and competing on a level, which is much more different than basics versus other basics. And so of course innovation plays a large there, and then just great merchandising. So we're extremely excited to bring Henry on board, and what he’s going to be able to bring from somebody who’s been living that world in the mall for a long time in very competitive set, we're looking to up the game in ways sporting goods has. So we think this is a net-net big win for our retail partners, especially so. We're looking to bring some really exciting product to all them.

Our next question comes from Sharon Zackfia of William Blair. Sharon Zackfia - William Blair & Company L.L.C.: Just expanding upon Michelle's question, what inning are you in as you think about becoming more sophisticated in the distribution on how you're stratifying the assortment? And maybe if you could more specifically talk about the tests you're doing in Bloomingdale's and any further opportunities with Foot Locker?

It's Kevin. And I believe that we’d probably tell you we're rounding the first inning right now. And there's the opportunity, I think that's what’s evident in our results this quarter from not only 31% in just Apparel growth in the quarter, but really, and David highlighted the 19% over the trailing 12 months. Our business is very strong. There's a consumer demand for our product, and we have -- I think a really obligation is to find the right point at where we can get our product distributed to our consumers. We're not currently hitting all the access our consumer wants our products. So we're still finding an enormous amount of consumer demand. And even in some of the places where we've opened and tested some of these categories, for instance, you mentioned the tests we're doing with Bloomingdale's. Number one, that makes us is a lot better in all of our remaining distribution. Now that's a pretty limited test. It's only in five stores today, and it's Women's only. But it's! something again that's pushing us to places where you haven't seen our brand before. And I think some of the experience we've had, particularly on the Women’s side, which we've identified as one of our largest opportunities for Women's Apparel to some day be larger than our Men's Apparel business, which is our goal and frankly what we're tracking to. And I challenge all of you, if you get a chance, go into sporting goods and take a look at the way that our Women’s product looks. And if you’re remembering the Under Armour brands from Women's perspective in terms of what you saw 12 or 18 months ago, I think you’ll see a much different, much more fresher look. And what we've always found, and what insights continues to tell us today is that she likes us, she wants to shop us, she's just been waiting for Under Armour to give her reason. And so from a fit, from a style, from a color standpoint I think we're really meeting a lot of those expectations. And that's where Henry, whi! ch something comes right from his wheelhouse from American Eag! le, I th ink is going to pick up and hit the ground running, and frankly give a little bit of a different perspective for us on the Apparel side too. And of course that will translate across channels beyond just what potentially Bloomingdale's could be, but of course into Foot Locker and some of their statements about being more commitment to apparel. That's something which is a statement that plays right to the Under Armour brand and our strength as well as the commitment we have to becoming great in Footwear. I think we're meeting one another right at the right time where they can help us and of course we can very much help them.

Our next question comes from Robby Ohmes of Bank of America.

Kevin, you probably won't comment on it, but there's a lot of speculation about the timing of basketball shoe being seeded into the market, and I was hoping you could maybe just speak broadly to when you could be entering that category. And then maybe related to Footwear, Brad, can you maybe just remind us how much clearance in Footwear was going on in the first quarter and why there was so much pressure on Footwear margins in the first quarter? And then maybe remind us how we should think about the quarterly revenue pattern impact from Footwear being down this year for the rest of the year. And then if there's any other things we should consider on a quarterly basis, pressures related to Footwear gross margins.

So, Robby, as it relates to basketball, number one, we are very committed to getting into this category. And for us it's not a question of if as much as it's a question of when. And I think one of the things we're probably most proud of is what we've learned of being in the Footwear business heading into our fifth year. And I think we relaying some of those learnings into our approach to the basketball category a whole. From an authenticity standpoint and from, frankly, just getting our product out there, and more importantly to the demand and demand creation that we’ve been able to build as a company, we're very proud on what the internal team here has been able to do. With more than 10 Division 1 teams that are playing in our shoes this year for this entire season, all of the athletes and players; more than 20 high schools, five of which are from the USA Today top 25; with Brandon Jennings and Rookie of the Year-type performance that he’s put on, and a win for the Milwauke! e Bucks last night, again led by Brandon Jennings and 26 points, I think we are very, very pleased, I think, with the progress we've made to date. And I think we're frankly sitting in the cat bird [ph] as to the timing and when we choose to enter this category. And I think we'll be opportunistic with that approach, but it doesn't have to be something we can force, and frankly, as you can see, with a strong Apparel business we can use timing to our advantage, are not forced from a revenue standpoint. So the answer to that is we're not making any declarations as to when we're going to enter the market, but when we do we’ll walk in with a point of view and we’ll enter with strength.

And, Robby, on the Footwear question on margins, couple of things there. The mix of Footwear year-over-year, as you can imagine, in Q1 we had more of a mix towards cleated footwear, which we’ve talked about being lower margins than non-cleated footwear. So we had that mix kind of working against us from a gross margin perspective in Q1. Also, we talked about a lot last year the price value relationship of our non-cleated footwear and the fact that we brought some of that price-side relationship more in line in the back half of 2009. And obviously we're carrying forward similar product here into 2010, and that price-value relationship strategy that we had at the end of '09 is carrying into 2010 also. So year-over-year you do have that difference in Q1. You'll start to be able to comp some of those price value '09 relationships more towards the back half of 2010. And from a clearance perspective, we did have some clearance in both Apparel and Footwear in Q1. It's kind of embed! ded in my comment around decreased returns and reserves, but we did have some clearance, incremental clearance, Q1 this year versus last year. And I think total Apparel and Footwear was probably around a 60- to 65-basis point impact in liquidation. As far as your question, Robby, on the quarterly revenue impact, we talked about at the end of the last earnings call, and it’s consistent right now, that the biggest impact year-over-year relative comparing Footwear, with the Running and Training Footwear numbers, is in the first quarter and the third quarter of this year compared to last year. So going forward, the third quarter will be impacted with Running and Training being down.

Our next question comes from Chi Lee of Morgan Stanley.

Just a follow-up question on margins. When we look at the 130-basis point gross margin contribution from Apparel, can you talk about how much of that is really sustainable for the balance of the year versus maybe what might have been just a beneficial mix impact for the quarter? And then just in terms of the costing environment, what are you guys seeing in terms of both Footwear and Apparel price inflation, if any, as you go into the back half of the year?

Chi, this is Brad Dickerson. As far as the Apparel mix margin, the biggest impact to our Apparel mix is from sourcing benefits. As far as sustainability of that, we’re obviously always looking for ways to improve costs, and there’s a lot of different ways we can do that relative to obviously the factory costs but also logistics, freight and so forth. So in general that was the biggest benefit. We'll always look for benefits there. And also remember that we lock our pricing in well in advance too. So a lot of the benefits we saw in the first quarter were locked in obviously last year. We’ll continue to see some improvements year-over-year in margins, maybe not to the magnitude that we saw in Q1 but we'll always continue to look for those.

And then just in terms of just the inflationary outlook, are you guys seeing any pricing pressure for factories at this point in time?

Chi, hi. This is Wayne. Right now our visibility is probably out about eight to nine months, and we're not seeing anything there that would concern us other than just normal business conditions.

Our next question comes from Kate Mcshane of Citi Investment Research.

Can you just -- I just wanted to be clear on a comment that you made during the call that marketing as a percentage of your sales will be a little bit higher in Q2 and Q3. Is that because of a specific investment you're going to be making? Or it's just the timing as a percentage of sales?

Kate, this is Brad. Right now it's really just the timing. Obviously every year we have some key initiatives around marketing, especially Q3 and Q4, but for the most part it's just the timing of our initiatives this year compared to last year. Remember, last year we did spend a little bit more in Q1 to support the run launch last year. So there's a little bit more of a shift this year towards the back half of the year because of that.

Our next question comes from Omar Saad of Credit Suisse. Omar Saad - Crédit Suisse First Boston, Inc.: You talked about China, you talked about Europe and Japan, opening 16 to 18 new outlets, investing in the Internet business, investing in supply chain, the new Footwear team, Q&A on basketball. Kevin and David, if you could comment, how do you get comfortable? Like what makes you more comfortable that you're able to juggle all these balls at once. I mean it's a lot in the air compared to maybe two or three years ago. What's different now where you confident you can execute on so many different initiatives simultaneously?

So I mean so much of what we have to do, and I think a large part of how we get judged is not what to do as much as what not to do. And believe me, we are a company that typically live with 15 items in our top 10 list. And probably one of the things I think we've demonstrated our ability to become better and better at, particularly over the last couple of years, has been our ability to focus. And I think we've been able to focus from an operating standpoint, I think we’ve been able to focus from an initiative standpoint. And a lot of the ways that you handle and that you treat growth is finding the right categories in the right places to invest. And for us that's what leadership, it means defining how we deploy our resources. And that of course is people, it's time and it's money. And the commitments that we’ve made, I think, are into what Brad referred to as large scalable businesses. And I think we've done a pretty good job in our investments, but we are clearly making inv! estments. And that's why we continue to come back with our commitment to being a global brand and telling you that we're investing in Europe and we're letting you know that we are investing in Asia. We've already been doing so in Japan for a while, and the result of that is a $100 million business that we have with a great partner. We’ve begun that process in China, and we've been doing it for the last couple of years as well. Again, expending [ph] ahead of where the revenues flow. Footwear is another great example where we've done this. And probably at the same time, our Direct-to-Consumer channel is another place where we've done this, and we've obviously seen a much more immediate payoff. I got to tell you, Omar, that we feel good about the investments we're making. We feel good about, frankly, a top 10 list that's more like probably a top seven list, which for us is pretty miraculous. We are a better company. We're a better operating company, and we feel good about, I t! hink, the juggling as you refer to it. It’s much more measured! and it' s much more in line. So there are things that we do, and we used to call them putting water bottles along the trail and then you’re going for 100-mile run and you go out the night before and you plan it, mile 10 to mile 20, mile 30. So a lot of these are potential growth engines that can be in place for us in the future as well as I think balancing that with things like a Direct-to-Consumer channel and Apparel wholesale business that continues to grow for us and frankly can fund some of that ability. Our belief is that we're going to be a multibillion-dollar global brand, that we are the next great athletic brand. And as we think about that, it's much more of a 2020 approach than it is a 2010 approach. And so us putting some of these pieces in place are as much about this year or, frankly, as much about the future as they are about immediate return this year.

Our next question comes from Mitch Kummetz of Robert Baird. Mitchel Kummetz - Robert W. Baird & Co. Incorporated: On the Apparel business that was up so nicely in the quarter, up 31%, when I look at the sales guidance for the year, it looks like you're not assuming that level of run rate for the balance of the year, and I’m just wondering why that might be? I mean, are you guys just being conservative on your outlook? I know you have tougher compares in the second and fourth quarters when you look at what you did last year, or I don't know if there were any shifts in the quarter that may be pulled some sales out of Q2 into Q1. But could you just maybe talk a little bit about your sales expectations on Apparel for the balance of the year?

Yes, let Brad and I tag team that question for you. As you mentioned, we were up 31% in the quarter. So when you look and say sales and potentially slowing, 30% would effectively be slowing, which of course would be a pretty strong number and I think we'd take that. As you look back at just sort of historically, our distribution took a pretty conservative approach to inventory in 2009. So we’re obviously feeling a little bit of the benefit with a little more offense this year from a merchandising perspective, the way that they’re approaching it and I think the product assortment that we have as well. Our Women's line really coming together. Our Youth line really coming together. And I think, of course, Men's business, that continues to be sort of the backbone of our business as well. We're not ready to declare victory on 2010. It's very early. I know there’s a lot of positive sentiment out there, but we're still watching 2010 and really taking, I think, a balanced approach t! o the rest of the year right now.

Mitch, yes, as far as the timing goes we did see some benefit in Q1 to timing. The Easter holiday obviously came earlier this year than last year so we did see some benefit from that. Obviously we had some good cold weather in February, also that benefited the first quarter. As far as the rest of the year goes, based on our visibility right now we’re providing our outlook; we did talk about my prepared remarks, and some of our cash right now in some key core items and inventories. So if we do see some demand upside in the back of the year we hope to position ourselves to be able to meet that. Mitchel Kummetz - Robert W. Baird & Co. Incorporated: On then on your Direct business, which was up huge in the quarter, could you say what that was as a percentage of sales? I know last year for the year Direct was about 18%. I mean, I'm kind of backing into a number that was probably around 20% for the first quarter. Is that pretty fair?

This is Brad. As stated, 18%. Broad-based growth in Q1. We saw a growth with our wholesale accounts and very strong growth clearly on the Direct side. But it was 18%. Mitchel Kummetz - Robert W. Baird & Co. Incorporated: On your Direct business, huge in the quarter, what that was as a percentage of sales. I know Last year, for the year, Direct was about 18%. I mean, I'm kind of backing into a number, partly around 20% for the first quarter. Is that pretty fair?

Mitch, Brad had stated it was 18%. We saw broad-based growth in Q1. We saw a growth with our wholesale accounts and very strong growth clearly on the Direct side. But it was 18%. Mitchel Kummetz - Robert W. Baird & Co. Incorporated: I think, Brad, you said international, if I heard it right, $14 million I think you said in the quarter?

Yes, correct. Mitchel Kummetz - Robert W. Baird & Co. Incorporated: What was that between Canada and Other?

International does not include Canada. Mitchel Kummetz - Robert W. Baird & Co. Incorporated: What was Canada, then? Do you guys have that?

Yes, we don't split Canada out separately. Mitchel Kummetz - Robert W. Baird & Co. Incorporated: I thought you did in the Ks.

No, we don't.

Our next question comes from Jim Duffy of Thomas Weisel.

So when we look at the first quarter numbers, do they reflect a restocking effect? Or is that a benefit that would likely be delayed to future quarters?

No. Actually, in terms of the comparables we saw a restocking occur somewhat last year in Q1 of 2009. But broadly throughout, we're seeing, as Kevin had mentioned earlier, some of our wholesale accounts regaining confidence and seeing Under Armour's positioning and the strengthened opportunity we have ahead.

So those wholesale accounts aren't taking up weeks’ inventory on hand? That's what we're hearing from other vendors?

No, we have no indication of that.

And then, David, can you comment on your current mix of pre-booked revenue versus replenishment and maybe how much special makeup you're currently doing?

There has not been a significant move or shift in that. Clearly, our partners are watching their balance sheets as well and work very closely with our team, our sales team and supply chain team, to make sure that we can fulfill demand. And as Brad said, we're also investing in some additional core inventories, some perennial style, in the event that demand comes towards the back half of the year. But the mix remains relatively consistent. Sam Poser - Sterne Agee & Leach Inc.: Okay. We’ve seen some strong forward orders from companies with cold-weather merchandise. Can you guys comment on any benefit you’ve seen to your pre-booked orders for fall?

No. We've included those in our guidance already.

Our next question comes from Taposh Bari of Jefferies. Taposh Bari - Jefferies & Company, Inc.: I was hoping you could tell us how many outlet stores you guys opened in the quarter. And also I’m hoping you can address your long-term view of the channel mix of wholesale versus direct. I noticed that you slightly increased your guidance for outlet stores for the year?

Taposh, this is David. We opened four during the quarter, have opened two additional since then and we're going to plan to open 16 to 18 total for the full year. And as we discussed earlier, our primary growth engine will continue to be our wholesale partners. It is the focus. We continue to focus the vast majority of our resources around growing our business with our key partners. And we think we’ve got a lot of runway there as we continue to innovate and tell the Under Armour story, and with their strong support. We do believe our Direct-to-Consumer business plays a natural sort of logical, strategic extension to where we can add facets to the brand that aren’t being served through locations or product offerings, whether it's online or in our stores. So we’re going to see it continue to grow, but we still see for the near future the wholesale business is vital to our growth and we're very optimistic about our potential there.

Our next question comes from Tom Shaw of Stifel, Nicolaus. Thomas Shaw - Stifel, Nicolaus & Co., Inc.: Let me ask kind of three questions on the Footwear side. First, I didn't hear a whole lot about soccer and how you might position that product around World Cup. Second, there's a lot of interesting trends going on at Footwear, whether it's lightweight, running or toning. Just curious of how maybe how Gene or Gavin is looking at that and thinking about that when addressing the running, training re-launch for next year. And last, but not least, Kevin, you talked about being opportunistic on the basketball side. I guess I was just assuming with the guidance that there are no expectations for a major push on the basketball side late this year.

So soccer, first of all. We've been in the soccer business and we're really exceeding product as much as anything. Our price points were $150 and up and really trying to get and maintain that high-end player and athlete. And we've done that with the way we launched in Europe. And it was really more of a player or product launch than it was at the highest levels than it was at the retail level. You'll see us begin to commercialize that in the near future. We expect to be an important player. In soccer, we've really led the way there from an apparel standpoint. And that consumer, especially here domestically, has a great relationship with our brand and is waiting for us to outfit them. At the same time, you've seen a lot of people adopt our shoes and frankly you've seen, from not even soccer, but if you ever went over to some of the football fields, including the kicker for the New Orleans Saints is wearing our boots in the Super Bowl as well. We feel great momentum with what ! we're doing and especially the authenticity that we've been building in Europe. On Premiership fields wearing our boots and building great momentum there. So I think soccer again, it is the ticket to the global stage and of course the place where you'll see us playing on a much bigger level and product will lead the way there, of course. From a training and running standpoint and as it relates to toning, I think hats off to our industry for creating something that's created as much buzz as it has. I don't anticipate Under Armour doing specifically there, but I think, of course, we continue to listen to the consumer. And the fact that you could just walk around in a pair of shoes and hopefully get in shape has inspired a lot of people. We're not looking to create a product with a battery in it that'll help you lose weight right away. But we do think the opportunity is listening to the consumer is that if you can be relevant to them and you can find ways where the consumer ca! res about fitness and cares about athletics, I think that they! 'll be a n impression of that, that you'll see related into our product. And frankly, that's a message that speaks to this whole positioning that we take around training and combine training, in particular also. So I think there's a lot of synergy there. And I think what you'll see is an Under Armour take on it not where maybe the market is exactly today, but what we see taking the market to in the future. Lastly, around basketball. We have a great opportunity there. I think we have a great opportunity to differentiate. The fact of the matter is that we are going to enter the category. And we are going to enter the market. And with one player or two brands taking more than, or earning more than 90% of the market share in that business, we anticipate when we enter to take significant market share. And you can define significant in any way, but the fact is, is that we are gaining mind share with the consumer today. There is a demand. There's a pent-up demand. People are talking about o! ur basketball footwear. There anxious for it. And when we enter that market officially, our product is not for sale today, but when we do, we expect it to be meaningful. And that's the approach we'll take. So we're very fortunate to be in the position with five terrific growth levers for our business that we can lean on when we need. Again, there's no pressure for us to enter this market as much as being able to have the luxury of saying when market timing is appropriate. That really means when the consumer and the athlete and the product, especially is in the right position, we have everything ready to go. That, and only then is when we’ll enter that market.

Our final question comes from Sam Poser of Sterne Agee. Sam Poser - Sterne Agee & Leach Inc.: I just want to follow up on the basketball launch, if I can. By saying that you're going to do a significant -- a launch that’s going to create significant market share, does that -- I mean by definition, does that mean that you’re not going to do -- you're not going to seed the product into select markets this year?

Sam, I think one thing that we've learned is that we launched training shoes. And we did a big Super Bowl commercial and we had a lot of “feedback”. We launched running shoes. And again, I think the way that smart people do it is that you're going to see us show up in the market at a point in time. And I think that, I don't know how loud that story will be. We expect that frankly the majority of the noise to be made from the consumers that are wearing it and when it’s on their feet, and I think that’s some of what you're hearing now is that the consumers who are wearing it, Brandon Jennings, our Division 1 teams that are out there: Auburn, Maryland, Texas Tech, South Florida, who are all in the shoes this year, competing at a NCAA level. And then of course, the high school kids. And things, highlighting like the Elite 24, which is a top 24 high school players regardless of class, that'll be playing in Los Angeles this summer in our footwear. I think there's a great pent-up d! emand. I think that the message that we're hearing is there's not only room, but frankly there's a want and desire for a new brand. But it's not just us showing up and putting a logo on a shoe. It's us showing up with new technology on a differentiated way and that's why we’re entering the market because we can deliver that Under Armour edge and that Under Armour advantage. So again, the word launch isn't something that I don't think you'll hear from us in the short term. But, yes, we expect to, again, enter the market in a meaningful way, but when we say we meaningful we’re going to use product to define that. Sam Poser - Sterne Agee & Leach Inc.: And then can you tell us what the comp store sales were with your retail outlets?

Sam, we won’t get into -- there were strong results. And we believe that's a primary indicator of the success and growth and the change in the strategy. We had strong comps but we're not going to get into any specifics. Sam Poser - Sterne Agee & Leach Inc.: Can you give us an idea of the margin contribution difference between the Direct business and the Wholesale business?

Yes, Sam. I think we've talked in the past about -- obviously, Direct-to-Consumer has different margins within them itself between the Web business, our specialty stores and factory outlet stores. So all we can tell you is -- guide you is that the mix of that Direct-to-Consumer margin base is higher than our wholesale apparel margins are. That's all we can tell you, really.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.

Okay, thanks a lot.