Under Armour, Inc. (UAA) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Under Armour Fourth Quarter Earnings Webcast and Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference Lance Allega, Vice President of Investor Relations and Corporate Development. Sir, you may begin.

Thank you, and good morning everyone, thanks for joining us on today’s call to discuss Under Armour’s fourth quarter 2018 and full year results. Participants on this call will make forward-looking statements. These statements are based on current expectations and are subject to certain 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. During our call, we may reference certain non-GAAP financial information, including adjusted and currency-neutral terms, which are defined in this morning’s release. We use non-GAAP amounts as the lead in some of our discussions because we feel they more accurately represent the true operational performance and 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 and provide management’s view on why this information is useful to investors. Joining us on today’s call will be Under Armour, Chairman and CEO, Kevin Plank; President and COO, Patrik Frisk; and CFO, Dave Bergman. Following our prepared remarks, we’ll open the call for questions. With that, I’ll turn it over to Kevin.

Thanks Lance, good morning, everyone and we really appreciate you joining us today. Before we get into our prepared remarks and 2018, I’d like to take a moment to reflect on what an amazing 2019 it’s already been for Under Armour’s ranks of world champions, MVPs and partnerships. From Tom Brady winning his sixth Super Bowl Championship to Stephen Curry and Joel Embiid for starting in this weekend’s NBA All-Star game to joining forces with Zhu Ting, the number one ranked volleyball player in the world and our recent partnership with Virgin Galactic to create a new generation of space apparel and footwear for astronauts as well as an astronaut specific performance training program. Our brand is off to a great start. And with a well deserved notch, one of Under Armour’s longest tenured athletes, one that redefined alpine skiing as we know it with 82 World Cup wins, 20 World Cup titles, 3 Olympic medals and 8 World Championship medals, Lindsey Vonn has accomplished something that no other woman in history has ever done. We’re incredibly proud to have been a part of her journey and legacy. Thank you Lindsey for the amazing year, supporting our brand and making our job so much fun, looking forward to what we do together next. With respect to our internal team roster, we’re also pleased to welcome Tchernavia Rocker to the Under Armour family as our Chief People and Culture Officer. As a 22 year veteran she brings deep expertise and a proven track record at best-in-class HR practices to our team. So, very happy that she is here, excited for what the future holds. And with that let’s get back to 2018. On our call a year ago, we spoke about working to create a more stable business for Under Armour by transforming our operating model and long term strategy to significantly strengthen our foundation. Ultimately, in operational, strategic and cultural transformation with a goal of empowering greater capabilities, more discipline, efficient processes and a structure designed to protect and fuel our brand for sustainable possible growth over the long term. While the past year has certainly presented a number of challenges, our fourth quarter and year end 2018 results demonstrate both stability in our business and the emerging strength of our operating model to deliver more consistently for our consumers, customers and shareholders. As we closed out 2018, we held an investor meeting where we provided an in-depth overview of our five year strategy and the key initiative designed to drive growth and profitability to 2023. At the core of this strategy is a clearly defined consumer supported by discipline, go-to-market process, data science and analytics in an accelerated innovation agenda to give perspective on our past and present and how we’re thinking about the future, we use a chapter [contract] [ph] to detail our strategic and operational assumptions and the things that could impact our business moving forward. In this respect 2018 marked a second year of a 2017 to 2019 chapter which we referred to as protect this house where we’re focused on running a smarter, faster and stronger business and committed to protecting the $5 billion global brand that we built. With two years in the books of what we believe will prove to be the most transformative phase in Under Armour’s history. The offensive and defensive strategies we’ve employed are empowering us to make better decisions and deliver consistent results. Results that we’re proud off and results that have delivered against last year’s objectives of strengthening our foundation and transforming our operating model. With that let’s review some full year 2018 highlights which are a bit better than the outlook we gave on just December 12. Total revenue grew 4% and reached $5.2 billion with balanced growth from our wholesale and DTC businesses which were up 3% and 4% respectively. As a percent of total revenue DTC was 35% for the full year. In-line with expectations North American revenue was down 2% and our international business was up 23% driven by continued growth in EMEA and Asia-Pacific. Also in-line with expectations apparel and footwear were up 5% and 2% respectively and accessories was down 5% for the full year. Reported gross margin was unchanged from the prior year at 45.1% which includes approximately $21 million in restructuring charges. Excluding these charges in both periods, adjusted gross margin was 45.5%, an increase of approximately 30 basis points driven primarily by product cost improvements, lower promotional activity and foreign currency changes which were offset by channel mix. And with respect to channel mix, this gross margin improvement has made even more remarkable by the fact that we made a strategic decision to significantly reduce our inventory position throughout 2018, resulting in elevated sales to the off-price channel which carries a lower margin. In fact, when you consider, we ended 2017 with a 26% increase in inventory and we ended 2018 with a 12% decrease in inventory while considering we held GAAP, gross margin flat or posting a 30 basis point improvement on an adjusted basis executing a 38 point drop in comparable yearend inventory position truly demonstrates a commitment and incredible resilience of this team in our brand and what we’re capable of as our operational, structural and cultural transformation continues to take hold across the business. Moving to SG&A, we’re continuing to work through our highly committed cost structure and asset build over the past few years and are making good progress from SG&A dollar growth of 22% in 2016 to 14% growth in 2017 and 4% growth last year we’re prioritizing this line item as a key unlock to driving higher optionality for investing in our brand while increasing returns for our shareholders, which takes us to the bottom-line where we reported an operating loss of $25 million for the year with $0.10 of diluted loss per share, which on an adjusted basis is $179 million of operating income which is $0.27 of diluted earnings per share. In total 2018 was a productive, evolutionary year for Under Armour, one that we delivered against our plan made great stride forward in our transformation. With an improved go-to-market process empowered by significant SKU reductions, a shorter calendar and an enhanced regional structure we’re back on offence. As we work through 2019, we will seize the opportunity to stay on offence to protect this house by remaining focused on the things that will continue to keep us healthy this year and beyond including, first and foremost, it starts and it ends with the brand, the brand, the brand, and delivering innovative products and experiences that make our athletes better. Secondly, further optimizing operations and investments to maintain our premium athletic performance brand positioning. Third, building even stronger relationships with our customers, and finally, delivering appropriate financial performance while ensuring our ability to deliver sustainable, profitable growth over the long term. In closing our operating model is working, we’re confident and committed to our long term strategic plan. We’re in control and command of our business and actively applying the lessons we’ve learned. We’re also acutely aware of just how special the Under Armour brand is and most importantly the hard work, choices and effort it has taken and will take from this team to keep it in reverence for the years to come. I’m proud of the entire global team and I’m excited about what lies ahead for Under Armour. And with that let me hand it over to Patrik.

Thanks, Kevin. As I reflect on 2018, I’m particularly proud of the fact that simultaneous to the achievements that we’ve accomplished throughout our transformation we have continued to grow including $5.2 billion worth of Under Armour performance product that was sold around the world last year. This is a testament to our brand and the trust that athletes put into our ability to make them better. We’re thankful for this. We do not take it for granted and with only a handful of mono branded footwear and apparel companies north of $5 billion, we know that we’ve to earn it every day, everywhere and every time we show up and consumers engage our brand. That includes about a third of our business which is direct consumer and a two-thirds from our wholesale partners who are vital to our success as we grow the Under Armour brand globally. At our Investor Day, we spoke at length of protecting our brands through selective optimal and premium wholesale distribution. Having stabilized our business in 2018 and dramatically rightsizing our inventory, we look forward to the numerous opportunities we’ve with our retailer partners to ensure positioning and growth as mutually beneficial around the world. So, where are we at the end of 2018, exactly at the point I’d hope we would be at this point in time. From a product operational and regional perspective we made great progress against multiple initiatives to keep our team with the structure, process and tools necessary to support our long term growth strategy. Starting with products, in 2018, we delivered newness, innovation and in some cases scarcely more realistically and methodically than ever before all within the improvements of our go-to-market framework allowing us to tell sharper stories and engage with our consumers. In our run category, we launched our third cushioning platform Under Armour HOVR, which has helped their amplifier consideration with technical runners as well as our overall brand exposure. Employing a tighter distribution strategy, new drops and expansions into other categories throughout the year coupled with a more holistic go-to-market framework and consistent always on storytelling has continued to drive strong results for us. As we look ahead into 2019, we expect HOVR to continue to fuel this important category growth driver with new performance styles including Infinite, Mega and Guardian as well as generation 2 versions of Sonic and Phantom establishing franchisees from which to deliver on. In our largest category train, we saw continued success in key innovation stores like Reactor and Threadworm as well as strong wins in more exclusively offerings like Project Rock unstoppable and our women’s collections driving newness, innovation and style to our consumers through sharper segmentation and differentiation. And this is a really important point as we continue into 2019, we believe that our assortments, product flow and cleaner inventory positions will create greater opportunities for clear differentiation and therefore improved segmentation amongst our retail partners. From an innovation perspective in Train, you'll hear a lot about rush, recover and HOVR this year Under Armour's advanced performance solutions across apparel and footwear that bring energy reflection, transmission, and restorative benefits to help make you better. Within sports style footwear, a small but powerful cultural connection for our brand throughout the year we continue to cultivate style with performance through limited releases of product like Forge 96 and that's our low along with leveraging our heritage and technologies from our place of performance into spots like HOVR SOK and Breathe Lace place for women. And finally, within core sports, our Curry franchise continues to drive elevated brand relevance and authenticity in basketball and our team sports businesses continue to deliver the best product for athletes on the field, in training, and on the sidelines. Across each of our core sport categories and the teams we outfit, our focus remains centered on delivering innovative performance solutions that you never knew you needed, but once you have them you can't imagine living without. In 2019, we will be even more deliberate and precise and giving our athletes every edge to push their limits. So great progress and solid momentum and product in our categories all of which of course depends on execution, discipline, and operational excellence, which brings me to our strategic operational priorities in 2019 where we're focused on four areas of cross-functional excellence across our global business. Global structure alignment, category evolution, marketing transformation, and process redesign. First, as we continue to expand globally we will be heavily focused on empowering our regional businesses with a stronger, more consistent structure and operating model including dedicated and localized support functions. This will help to drive greater uniformity and enter global alignment from a strategic, operational, and financial perspective to ensure that we properly leverage our scale while driving optimal business results that focus on protecting the brand. Second, we are working to further unlock the strategic benefits of our category structure while ensuring which they appropriately leverage at the crossroads of our accelerated innovation pipeline, consumer insights, speed to market and rates of return. As we laid out at our Investor Day, with each subsequent season, you will see better holistic synergy particularly as we enter into 2020, where the first full season will come to market that has been designed, architected and executed under a shorter 17 month calendar. Third, is our marketing transformation. With a clearly defined understanding of our target consumer and where and how we plan to compete, we are moving toward better strategic and tactical executions using insights and data analytics to inform clear, return based and brand right decisions. Continued investment in social, personalization and agile testing along with shifting to an always-on mentality is the top priority in this effort which overtime will yield more prescriptive and high return opportunities to drive greater engagement, preference and considerations. And finally, our fourth area of focus is process redesign and the primary backbone that it serves for a transformation. With the synchronization of the consistent go-to-market along with our sales and operations planning processes that final steps are locking into place to ensure that our goal of improved consistency, predictability, and repeatable processes are driving results. This effort has already produced a meaningful reduction in tactical steps, approvals and previous case that were counterproductive to our efficiency. In this final year of our protect this house chapter, it will be about operating and optimizing the process to an even deeper level letting the structure, method and tools needed to support our strong global performance brand settle in and breathe throughout the organization. With these four enterprise-wide priorities progressing forward, our ability to generate greater agility and balance will help us ensure we continue to protect the investments in our largest long-term growth opportunities including direct consumer, footwear, women's and international. Turning to a regional perspective, protecting our brand remains our key focus as we manage the marketplace appropriately with the right level of discipline to drive balanced growth. For North America that means we are at a point of stabilization. Inventory is cleaner and tighter to demand. Our pricing and promotional activities are normalized at lower levels than just two years ago, and our product segmentation strategy continues to get sharper. In our international business, which is now more than a quarter of our total revenue we will continue to make prudent investments to protect and drive brand right profitable growth. In this respect many of the lessons we learned and the discipline we instituted in our North American business in 2018 will be applied internationally in 2019 including distribution optimization and strategic inventory management actions to ensure that we protect our premium brand positioning. Accordingly, we are making decisions to optimize, grow and invest at the right pace for each region to ensure that we leverage the knowledge and scale we have built as we continue to grow our presence outside of North America. There is work to do to get our international regions into better stability and consistency from an operation and strategic perspective and we believe the actions we will take in 2019 will allow us to exit our protect this house chapter with all of our regions operating more efficiently, consistently and profitably. And with that I'll hand it over to Dave.

Thanks Patrik. Before I round out today's call with details on the fourth quarter of 2018 and review our expected outlook for 2019, I'd like to provide some more context around the 2018 restructuring plan and the one-time items that impact us during the quarter and full year. As detailed last September, we expected to incur approximately $200 million to $220 million in restructuring charges in 2018. For the year, we came in on the lower end of that range at $204 million including $50 million that was realized in the fourth quarter. We do not anticipate a new restructuring plan or any further charges in 2019. Turning back to our results let's start with the fourth quarter. Revenue was up 2% to $1.4 billion or up 3% if you exclude the impacts of foreign currency. Clicking down by channel, sales to our wholesale customers were up 1% to $737 million driven by growth in our international regions. The direct-to-consumer revenue was flat compared to the prior year at $577 million and represented 41% of total revenue in the quarter. For context, it's important to keep in mind that promotional activity in North America was down by about one-third compared to 2017, which created a more difficult comp in the second half of the year. However, we believe this is the right strategy to drive our premium positioning. In-line with our expectations, licensing increased 39% to $46 million primarily driven by royalties received from our stocks and Japanese businesses. By product type apparel revenue in the fourth quarter increased 2% to $970 million including growth primarily in our train category. Revenue for our footwear business was down 4% to $235 million driven by lower sales to the off-price channel. And accessories revenue was down 2% to $108 million due to softer demand and continued actions to optimize our inventory and distribution. By region, in-line with our expectations revenue in North America was down 6% in the fourth quarter primarily driven by contraction in our wholesale business coupled with lower sales to our off-price channel. In EMEA revenue was up 32% driven primarily by growth in our wholesale business and continued strength in DTC. Revenue in Asia-Pacific was up 35% with growth in wholesale and DTC. Between our owned and partner doors we now have over 660 locations in the region with the majority in mainland China. As we continue to expand in this key region, our focus on performance and our commitment to maintaining our premium positioning will remain center to our execution. And finally, revenue for Latin America was down 15% driven primarily by the business model change in Brazil, which transitioned from an owned subsidiary to a licensing and distributor model which carries lower yet more profitable revenue. We will continue to see this business model change negatively impact the year-over-year revenue comparison through the majority of 2019. And finally, our connected fitness business was up 9% to $30 million driven by continued strength in subscription revenue. Turning to gross margin, we saw 160 basis point improvements to 45% inclusive of a $2 million impact related to restructuring efforts. Excluding restructuring charges in both periods, adjusted gross margin was 45.1% an increase of 160 basis points. To break this down more, benefits in the quarter included approximately 80 basis points of channel and regional mix, 60 basis points of improvements in product costs and lower promotions and 50 basis points of benefits due to lower air freight. These benefits were partially offset by about 30 basis points of foreign currency headwinds. SG&A expense decreased 1% to $587 million in the fourth quarter which was slightly better than we expected. Fourth quarter operating loss was $10 million and our adjusted operating income was $40 million. Our effective tax rate in the fourth quarter was 122% or negative 30% on an adjusted basis. As a reminder in the fourth quarter we had a one-time tax benefit related to an intercompany asset sale. This contributed approximately $0.04 to EPS. On a full-year basis are adjusted effective tax rate was 11%, without the one-time fourth-quarter benefit our full-year adjusted effective tax rate would have been approximately 14 percentage points higher. Taking this to the bottom line net income was $4 million or one penny of diluted earnings per share. Adjusted net income was approximately $42 million or $0.09 of adjusted diluted earnings per share. Turning to our balance sheet and cash flow statements where we are also seeing productivity gains and improvements. A few highlights would include a 78% increase in cash and cash equivalents to $557 million, a 21% decrease in total debt to $729 million. And to add a little more color to this throughout 2018 and into the first quarter of this year, we have successfully paid down $326 million in debt including early payoff of all remaining term debt. Capital expenditures were down 25% to $56 million and for the full year capital expenditures were down 43% to $154 million or 3% of revenue which is at the lower end of the long term operating principle we discussed at our Investor Day. And finally, our cash flow from operations improved by $391 million year-over-year. The progress, discipline and stability that we are instilling and driving across the organization is taking hold. So with that let's move on to our 2019 outlook, which we are reiterating from our Investor Day in December. To quickly recap and provide some more color, we expect revenue to increase approximately 3% to 4% reflecting relatively flat results for North America and a low double-digit percentage rate increase in our international business. Diving deeper into the regions with international, we expect EMEA and Latin America revenue growth to be up at a high single-digit percentage rate and Asia-Pacific to be up at a high teen rate for the year. From a channel perspective, we expect wholesale revenue to be up at a low single-digit rate and DTC to be up at a mid single digit rate. Within our product segments, we expect apparel and footwear to both grow at a low to mid single-digit rate and a flat to a low single-digit decline in the accessories business. Gross margin is expected to increase approximately 60 to 80 basis points compared to 2018 adjusted gross margin due to channel mix benefits from lower planned sales to the off-price channel and a higher percentage of DTC sales along with continued product cost benefits from ongoing supply chain initiatives. We expect operating income to reach $210 million to $230 million. Interest and other expense net is planned at approximately $40 million and the effective tax rate is expected to be in the 19% to 22% range. Diluted EPS is expected to be in the range of $0.31 to $0.33 and capital expenditures should be approx $210 million. To give a little more color with respect to the first quarter, we currently anticipate revenue to be flat to slightly down. In addition, first quarter gross margin should be up about 20 to 30 basis points versus last year's adjusted gross margin with benefits from regional mix and product cost improvements being primarily offset by channel mix due to an expected lower percent of DTC as well as higher sales through the off-price channel as our more aggressive inventory efforts begin to normalize. We expect both of these first quarter head winds will shift to become benefits for the full-year. Operating income for the quarter is expected to be about $5 million, which after interest expense and other puts us at about a penny of diluted loss per share. Also of note, given the continued focus on inventory management during the quarter, we expect inventory levels at the end of Q1 to be down at a mid teen percentage rate. And before we close out, I want to mention one reporting change we plan to implement in 2019. Given the size, scale and expected long-term growth rate of our international business and a growing portion of global corporate overhead costs, which to-date have primarily been recorded within our North American operating segment. Beginning in the first quarter of this year, we will begin to break out a new fixed reportable segment known as corporate other. We feel this change will provide improved visibility with respect to the operational performance in underlying results of these businesses as individual segments coupled with more consistent comparability across our peer set and sector. So, with that as we close out today's prepared remarks, we are confident that the progress we have made over the past two years will ensure a stronger Under Armour brand that is more consistent, disciplined and bound, yielding operational efficiencies and improvements necessary to support our long-term strategic objectives and deliver for our consumers, customers and shareholders. Now, I'll turn it back to the operator for your questions. Operator?

Thank you. [Operator Instructions] Your first question comes from Jonathan Komp with Baird. Your line is open.

Yes hi, thank you. Maybe first just following-up on some of the guidance you just gave. Dave, I'm wondering if you could give any more context as you look to the first quarter and maybe even first-half, second-half, any thoughts on the regional performance when you look at North America, since I think that's part of what you mentioned around the DTC and headwinds you're seeing in the first quarter where some of that falls. So, anymore color kind of North America versus broadly, what you expect the growth rates maybe first-half, second-half, or first quarter?

Yes, Jonathan. When we think about Q1 of '19, it's been planned as the decrease that we mentioned. So, it's not really any change there from what we've been thinking. Relatively flat to slightly down driven by mid single-digit decline in North America and a more of a low double-digit increase in international growth. And when we think about within North America pre Q1, remember we are lapping higher sales to off-price channel in Q1 of '18. Also, we had some service level challenges in late '17 and early '18. That can negatively influence how wholesale partners buy in relative to Q1 in '19. So, we've been improving a lot there as we move forward beyond that. We do have a little bit of continued contraction in the wholesale accounts that we're keeping in mind for Q1 as well, lesser degree than '18. And then when we think about DTC, relative to our expectations there, we're tracking conversion. We do have more normalized promotional levels. We've got less brand houses in Q1 in North America than we did a year ago due to some of the restructuring exits. We also have a little bit of an Easter shift impact between Q1 and Q2. And then lastly, also from a product perspective, we have a bag or an accessories reinvent that we're doing in Q2. So, the Q1 sales in are a little bit tempered as we lead into that reinvent. Secondly, to give you a little bit of color on North America. When you think about around the world again, more of a low double-digit across total international for Q1. But when you think about within Latin America for example, we are comping a previous full subsidiary model in Brazil versus the new license in distributor model. So, hopefully that gives you a little bit color on the quarter. For the full year, we're probably not going to get into the rest of the quarterly flow at this point but hopefully that helps you with Q1.

Okay, certainly helpful. Maybe then my broader question really relates to a lot of the other initiatives and I know Patrik, you mentioned early 2020 is maybe the first time when it all starts to come together. But my question is when you look at 2019 some of the new product you're starting to put into the market, can you maybe talk a little bit more about what you hope to see in terms of signs that your initiatives are working and starting to gain traction. And maybe even tying with that, near-term your willingness to make that so to speak on some of the new product that you're putting out and how that might change over time as you gain more confidence?

Yes, sure absolutely. No. actually it's already started to happen. We launched our second year of HOVR with new styles about two weeks ago now with the Infinite which is actually our first real performance running shoe and we're super excited about the performance that we're currently seeing there. We feel the same kind of tailwinds that we actually got last year if you remember when we launched the Phantom & Sonic last year; we talked a lot about that in first half of the year. What we're doing now is we're actually building on those two franchisees. They're actually coming out with the second iterations and we also see great performance with both Phantom 2 and Sonic 2. But we're building on that whole new platform of HOVR with three specific styles; the Infinite which is kind of the lead style, our high performance running shoe has received incredible reception. We also have the Guardian which is more of a stability shoe and we have the Mega which is more of a cushioning shoe. And all of those three things are launching now this spring and we're very excited about them, we're very excited to see the tailwind. And again, here is repeatable outcomes. We're really taking everything that we learned last year and we were excited when we broke through with the HOVR platform last year and we're doing it even better this year. In other words, taking all the learnings. Because we now have this new go-to-market, we can do this in a better way in a more repeatable way. So, we're driving that from a footwork perspective especially in the first half of the year. We then got rush and recover which is really a reinvent of our compression platform is you like. And we're combining that with the recover product which is now starting to really work with the athletes to cover them from a 24/7 perspective, not just when they're in the activity but also after; we're very excited about that. That's launching in early April. And we're following that up with cold weather gear in those categories also as we turn the corner into the back half of the year. So, a very deliberate go-to-market this year with really strong product launches. And we're supporting it with a louder brand. Being more deliberate with our marketing, we talked a lot on our Investor Day around all the work that we're doing to really return, understand the return on marketing investment. We're now able to start to deploy that, to spend each dollar smarter; make each dollar work like three. And we're able to do that across all of the touchpoints of the consumer, not just in digital but also in our direct consumer business in terms of retail and our wholesale partners. So, a lot of info there but I just wanted to give you a little bit of sense of the comprehensive and thorough way we're now going to market for 2019. And we're very excited about the products that we're launching. Thanks, Jonathan.

Thank you.

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

Hi, good morning guys. Thanks for taking my question. I guess first a housekeeping question. The restructuring charge in '18 came in a little lighter than you would expect towards the low-end. Where there any changes in the scope of the restructuring, and are there any implications for the restructuring benefits longer term. And then second, Kevin, you're really redoubling I think on the performance, heritage and story of the business. I guess, how do we think about how you articulate that to consumers and reemphasize that Under Armour is about performance. Thank you.

Yes, this is Dave. I'll take the front of that with the restructuring. We did come in at the low – a little bit of lower end of our range but really it wasn’t a change in the activities that we identified or the opportunities that we identified as far as less opportunities, it's more than we're able to negotiate some of those exits at a little bit more favorable terms than we really originally anticipated. So, no real impact relative to the future benefits but a little bit of a win just in negotiation process for us.

Yes. I think what you've heard us say incredibly clearly is that we're going to double down on performance. And you've heard Patrik and all of us give this we believe what may be perceived as our weakness for us today is actually going to be our greatest strength. We understand what the trends are, we understand what people are saying. We get athleisure in some of that movement but we believe that Under Armour was born on field as a performance brand, technical in its nature, what we do and how we do it. And the ability for us to go after and really be able to utilize a lot of the things that we've implemented over the last couple of years. But having a sharp point, you know the world doesn't need another version of a brand that may be working today. And so, we've seen that especially the cyclical nature in our industry in general and so we want to make sure that we can own that position in real-estate of the consumer when they're thinking about being in a performance mindset, we're going to have them. We articulated that as the focus performer on our Investor Day and it's something that were going to be continue to come back to. But all of this doesn't happen because we've always had that positioning. We've always made cool product. But at the end of the day you watch the consumer begin to move in a different direction for us. So, I'm really excited about our ability to actually get that story out. The go-to-market process that Patrik mentioned has been critical. But when you look at the transformation of the business over the last four years to get us to where we can make as we say a repeatable process to do this over and over again, I think it's something it sets itself for what that next leg of the journey's going to be. But let me just expand that into our ability to talk about the conversation of how we're going to really attack this consumer. So, it doesn't mean we're not going to make great products. It means at any time that Under Armour makes a product, it will have a performance attribute to it that's actually founded and built on field, for instance, when we did the Virgin Galactic launch, we're talking about products we're putting into sending people into space and every product that we're going to use to build those space suits for the astronauts is products that's actually going to be commercially available this year. And so, I think that type of innovation is what really gives us our basis and of course the table stakes are to just look great and to be stylistic and so we'll be there as well.

Yes.

Okay, thanks very much.

Thank you, Ed.

Thank you. Your next question comes from Alexandra Walvis with Goldman Sachs. Your line is open.

Good morning and thanks for taking the questions. First question: you mentioned some process redesign which would continue to benefit the cost structure in 2019. Can you give us some examples of that and how that's expected to benefit the SG&A as we move into next year?

Yes, there is a lot of different areas that obviously we're attacking through the restructuring. A lot of it has to do with our facility; some of our stores; a lot of it has to do with contracts; and commitments that we have that we didn’t feel like we are getting the same amount of benefit. Some of it was dealing with strict inventory. So, there's a lot of different areas, we tried to make sure over this two years that we didn’t really leave any stone unturned. And some of those negotiations are for longer term situations and so some of those benefits we won't start to realize until later in '19 or maybe into '20. So, for example if you negotiate the exit of our facility but you still need to be in that facility through say September, you know you're not going to get that full benefit in '19 but you get a full-year benefit in '20 and beyond. So, when we think about a lot of those things, it certainly are our intent to continue to leverage our SG&A line. We've made a lot of progress as Kevin noted with the 22% growth in '16 down to 14% in '17 and down to 4% in '18. But again, as we mentioned at Investor Day, it's really about executing again that strategy of balancing savings, identify through all those efforts with the right investments in line to support our long-term strategy. So, there's still lot of areas where SG&A is increasing for the right investments around international regions especially APAC, also around DTC globally, innovation, and also continued geographic and capability expansion of our global ERP system. So, we're not really stepping off the gas and investments in the right areas for long-term profitable growth and some of those benefits on the restructuring efforts will take a little bit longer to come through. So, you'll see more meaningful SG&A leverage capabilities in '20 and beyond.

Yes, and I would add to that that we've put some of the foundational processes and place like go-to-market SNL be and so forth. We're now going into tuning our planning processes and marketing transformation processes and also turning the corner into that 17 month go-to-market calendar in 2020 is work that's actually happening into 2019. So, there is still a lot of work to do to make sure that we're making these processes work for us and to become robust. So, there's a lot of tuning that still will happen in 2019 as it relates to the process redesign.

Great, that's very clear, thank you. And then, just to follow-up on the marketing point, Patrik, you mentioned becoming a louder brand in 2019 but and being more deliberate and efficient with marketing. Where did marketing end up 2018 as a percentage of sales and should we expect that to ramp in the coming year or for that louder brand piece to be offset by the efficiency?

I'll take the first point, Dave, and then you can do the numbers. I think when we think about marketing today, the way we think about it and now that we've become a little bit smarter with all of the return on marketing investment and data analytics that we're doing as we built up that capability is really truly understanding the journey of the consumer. Understanding how that consumer moves through their purchase journey when they're in the area of looking to invest into something foreign activity and then making sure that we're there whether it's in a digital or real world so to speak. And making sure that we're delivering the right content, the right tone of voice at that moment in time and doing it in an Under Armour appropriate way. It's about getting really a lot smarter in that way. That's really what we talk about when we talk about marketing today. So, it's really making sure we're understanding the consumer journey and that being there when we have an opportunity to interact with them. Dave, maybe you want to take some of the perspective?

Yes. Just as far as where we landed 2018, we're around that 10.5% of sales as far as marketing and we've historically planned marketing in that 10% to 11% range and that's kind of where we feel good. What we're excited about the Patrik's point though is the power of that 10.5% or 10% or 11% should be a lot stronger going forward with all the roaming work we've been doing and also with the restructuring and freeing up some marketing dollars where we don't think the returns have been as strong and being able to reinvest into the right spot. So it's probably similar planning principle to the amount of marketing dollars, but hopefully a lot more return for that same amount of dollars.

Thank you.

Thank you.

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

Thanks a lot. I just want to talk on the geographic side of the regions. I guess first for Kevin, I wanted, since Asia-Pacific is the most profitable region for the company and it looks like profits actually accelerated nicely in the fourth quarter compared to the other parts of the year. You talked about maintaining that premium price position, but it kind of flush out other ways that APAC region has really been set up for this current success and then long-term success. And then, kicking it over to Dave, I want to know kind of what happened in EMEA in the fourth quarter to impact the profit rate in that quarter and just kind of more broadly as it relates to EMEA and Latin America. How do you think about the long term profit margin kind of model or how do we start to get scale particularly in Latin America you talked about the change in the business model there. But just curious on how we kind of, we got a good color from you at the Analyst Day on the sales side just trying to get some perspective on the margin and scaling out the business side particularly in Latin America and then to a lesser degree in EMEA? Thanks.

Randy, I'm going to hijack your question a little bit and then I am going to toss to Patrik. But I just want to make sure that we drive the point down is that, in this protect this house chapter of what's been accomplished in the few years or several years has been replacing the go-to-market process as Patrik mentions and that's a clearly-defined organization from strategy, supply chain, product, marketing, sales, the systems upgrade with the SAP implementation the middle of 2017, the leadership that we have, the cultural transformation. But Patrik being in the chair and really I'd say the global operating model creating the four regions. So when we talk about this we're just a few years ago, we would have said the North American company that's selling product in other places today we have a fully built out structure that's in Asia-Pacific and Patrik looks over that with a really terrific leader in team that we have over, based out of Shanghai and soon to be Hong Kong.

Yes and we're really thinking through the global picture exactly like Kevin said, in terms of holistic view on the brand and really nothing has changed in the last 60 days since Investor Day. We're looking to ensure that we're stabilizing North America. We're making sure that we're protecting our premium positioning and driving profitability around the world with the lessons learned also in North America. And when it comes specifically to APAC, it's really about controlling the pace of growth to really make sure that we are staying strategic brand as we grow in that region. If you remember, we talked a lot about how we're going to grow our mono branded doors there for example, and we laid out a plan at Investor Day to get from about 1,100 doors to about 2,600 or so in that time frame, a lot of that's going to happen in Asia. What we want to make sure is that we will be in the right places with the right size so that we can actually continue to scale the business in the right way. We believe actually that we have an advantage in that region right now because we're smaller. We should be smart enough to use that smaller footprint currently to really build into a larger footprint in the smartest possible way. And we think, we're doing that and we're also cheering the model in APAC and China as we've now moving into this global operating model to ensure we can actually do that and we can scale with profitability.

Yes, I think Randy, just thinking about profitability in general for the regions and a little bit about APAC and about Latin America, etcetera. APAC again we expected a little bit of contraction in 2018 as we continue to invest in future scale there in a brand protective way. 2019 we do expect a little bit of continued contraction as we work to kind of manage through the marketplace and make sure we're really investing for the future there from a marketing perspective and also building out the new regional headquarters in Hong Kong that we spoke about recently. So there's a talent and infrastructure perspective there that's going in for APAC to really set us up for 2020 and beyond for really scalable, more profitable growth. In Latin America we did mention the business model change which will definitely help the profitability rate, the contribution margin rate of Latin America going forward. And also we've been working through, make sure the cost structures are at the right level for Latin America as well. So all of that works coming into play and we're looking forward to what that means for 2020 and beyond.

And just any color on Europe profits? What happened in the quarter? And just lastly on connected fitness to turn profitable for the year, is that something they can start to scale more? I'm just curious; I'm not sure how those margins kind of ramp there or not in that business? Thanks.

I mean, as far as EMEA we're continuing to see steady improvements in the EMEA. We definitely continue to improve our relationships with the customers there. We're starting to open some brand house doors. So there's a little bit of timing in the profitability through the quarters. But relative to full year and as we move forward into 2019 as well, we're continuing to see steady improvement there which is great as we continue to build out those relationships, invest a little bit more in DTC, but have a pretty solid cost structure going forward.

And let me just touch on connected fitness. I'm glad that you asked about it. Going back to the first acquisition we had, the goal that we've always had with this was to improve the experience for our consumer meaning and ultimately to help us sell more shirts and shoes. That is our core business and what we do. But we think with the world's largest digital health and fitness community it obviously puts us in a terrific position to truly understand and get deep with knowing who our consumer is. But the results are something from where we were and saw a bit of a drag for the last couple years is to actually turning that into profitability, hats off to Paul, who's leading that with Michael and Ann Jim and really a full team that makes connected fitness from being a place or a thing that's in the organization to really being a part of the business. So, really bringing that into the way that we're using and touching our direct consumer business and digitally understanding our consumer. But also articulating it with product, I mean that's what we do and we say the purpose of this business is to help us sell shirts and shoes. We're going to have a lot of HOVR in the marketplace. Millions of pairs of HOVR in the marketplace that'll be a connected experience, we will actually be providing gate coaching and machine learning algorithms to really improve and help the consumer get better which is our mission overall. So I think what you're finding and what you're seeing is we're still figuring out how to unlock the true power of what this size and scale this network means for us, but it's going to be incredibly important for our future. So I think we're looking forward to what this will bring.

Thanks guys.

Thank you.

Thank you. Your next question comes from Erinn Murphy with Piper Jaffray. Your line is open.

Great, thanks. Good morning. My question is around the direct-to-consumer channel I know it was flat in the quarter and the plan for 2019 is that mid single. I'm curious if you can talk about some of the major drivers to build that up in 2019. And then relatively, you've been testing some kind of retail merchandising test within footwear and also accessories and some of your test market stores. Can you talk about how those have been performing thus far?

Yes. This is Dave. Relative to DTC, for the first quarter we do expect DTC to decline a little primarily in North America as we comp the exits of some of those brand houses last year and continue to normalize promotional levels to focus on the prudent profitable growth we've been talking to. But then, for the year from an e-com perspective we're definitely focusing more and improved newness and more frequent drops, mobile site optimization, customization, personalization, so a lot of good investments in moving forward there. And then, when you think about just international DTC in total, we start to gain some more momentum relative to expanding with more additional retail locations and also servicing some of those additional country websites. So definitely a lot of progress in international DTC in total as we move beyond Q1. And then also within North America, again we are anticipating what's the right traffic and conversion level with higher full price sales that we continue to optimize the promotional canes as we move forward. So as we said in the Investor Day, over the next five years DTC is going to become a larger mix of our business, we continue to invest there and believe in that from a retail and e-com perspective.

And then any update on some of those merchandising testing. I know when we’re together in Baltimore you guys talked about some of the footwear wall optimization. I think accessories you tried a few things. Curious on how those are doing and what the role out plans are?

Hi Erinn. This is Patrik. Yes, we are very excited about some of the trials that are currently going on not just offline, but also online. And we clearly see the consumer responding again it's kind of the same old thing with the right product and the right message and the right style and fit. And when we have done that in few stores where we’re trialing this across the world, we have been really successful and that's why are still kind of very bullish about how we think about this going forward. We told you guys at the Investor Day that our retail cagier is going to be about 6% to 8% over the five years, our e-com cagier is going to be 12% to 14%. We are going to build, we are going to go from 1,100 doors to 2,600 doors around the world in that timeframe. And that's how we see it and we are doing that with definitely an elevated merchandise and consumer experience in our stores and 2019 again will be a year where we continue to test a lot of this stuff out. We are doing a lot more consumer insights in our stores around the world and we are doing that globally now that will accelerate in 2019 and we believe we are going to learn a lot from that and we are going to be implementing that in our new store formats that we start to rollout towards the end of the year.

Great, thank you. And then just on the women’s business, how did it perform in the fourth quarter and how are you planning the women’s business in 2019? Thank you so much.

Erinn this is Dave. We are proud of where we are going with women’s business, but we don't normally discuss or breakout the women's versus men but it is performing to plans. No real surprises there.

Great, thank you guys.

Thank you.

Thank you. Your next question comes from Michael Binetti with Credit Suisse. Your line is open.

Hi guys, good morning, thanks for taking our questions here. Two questions. First, Dave did I hear you say that you think sales into the off-price channel will be higher in the first quarter again? I know you are starting to lap bigger amounts disposition in the year ago period. So I want to hear a little bit more. I am actually trying to reconcile that with the conversation from the Analyst Day where you expected inventory down mid singles but here we are down much more in that down 12 in the quarter and then I had a follow-up?

Yes. I mean we are continuing to kind of close out the more aggressive inventory management efforts in Q1, so we will have higher consolidated off-price channel sales in Q1. And then we'll see it normalize a lot more as we go further through the year and become more of a gross margin tailwind for us on the full year. But it is a little bit of a headwind in Q1 as we saw some more opportunities to deal with a little bit of the remaining inventory and really run as clean as possible beyond 331. It's a little bit more on the international front. We did a lot more North America cleanup in 2018 and there's a little bit of trailing cleanup in the international markets that we're taking care of in Q1.

That's helpful and separately I guess Kevin or Patrik I'm trying to think a little bit about what gives you guys a confidence on revenues accelerating from flat in the first quarter through the balance of the year? And I guess, in the bigger picture you're one more quarter into the transformation plan that you've got a better product pipeline that you showed us this year versus last year, inventory is a lot cleaner. Are you seeing the wholesale partners respond? I think Kevin, when we talked about this on the third quarter call you noted that these things take some time. There's a bit of a lag when these transformations happen as you need to rebuild some trust from the wholesale channel those kinds of things?

Yes. Hi Michael, I think, this is Patrik. The reality of the business here in North America especially, predominantly a wholesale business, so when you've lost space on the shelf you got to earn it back and it takes a little bit of time and that's really what you're seeing. And we talked about this at Investor Day. Two things, one is, trust is kind of earned, so you got to earn it back. You got to fight your way back onto the shelf. And secondly, you're comping pretty high off-price sales that you want to replace with full price sales. What makes us confident is the fact that we're now into our second year of HOVR and as I said, we just launched that two weeks ago, we had an incredibly elaborate way to do that and it's working for us. It gives us confidence and it's working for us in our own channel and also in our key customer channels. And that's again an allocated kind of scarcity model. We want to continue to drive that. So we're making the prudent decisions around product and when we do and it has the right SPF formula. It works for us. Secondly, we're really excited about the apparel launches we have this year, which we didn't necessarily have last year to the same extent with rush and recover where we're now starting to expand into that more of that comprehensive 24/7 approach to our target consumer, inside of the performance base. And we know that we're going to do that with much more effective marketing. So it is a slow build and we're aware of that but nothing has really changed since Investor Day, 60 days ago and it will continue to build and really we believe that once we get into this 17 month calendar next year, we're going to have more of an acceleration but it's really exactly what we laid out on Investor Day. We still feel about, we feel as confident as we were then that the play that we're playing is the right play for the brand and Kevin maybe you want to add a little bit to that?

Yes Michael. I think, I gave a little discolor before just about what's been happening, but great brands endure and as we're sitting through this protect this house chapter. I'm looking at the team of the transformation that's happening across structural process, strategic and cultural and I am incredibly proud of the things and the steps that the teams have been doing and getting the go-to-market in place and really just having a structure we can build to make something repeatable. But all the while, we're leaning forward and growing. We'll grow a couple hundred million dollars this year and that's no small feat and the one thing that we know that in order for us to think about how growth is something that is a part of us because we've always defined ourselves as a growth company is that every product does something. It's the thing that makes Under Armour as DNA. It's not just the fact there's a logo on it that we can sell some units. But it causes a question to say wow is that Under Armour, it doesn't have to be a big blazing logo to define it. But when they realize that it is, the next question has to naturally be will what to do. That's what makes us and gives us our DNA and gives us our reason for being that differentiates us from any other brand. So we think about that position, that premium performance positioning. It's something that we of course are going to deliver in a stylistic way to just make the consumer say I'm inspired. I'm delighted and this is a brand that is going to help make me better. So I don't want to give you too much sort of marketing flim-flam with that because I want you to know that it's very real that our product has real technology, real innovation that's built in everything we do is. So as long as we stay true to that DNA the consumer knows that product proposition, that product, the value proposition is something which is really second to none and exclusive pretty much to this brand.

Thanks a lot for your thoughts guys.

Thanks Michael.

Thank you. And our final question will come from Bob Drbul with Guggenheim Securities. Your line is open.

Hi. Just a couple of quick ones for me. First, can you talk a little bit about the basketball category and sort of how that's trending for you? The second one is, with some of the off-price selling that you're still doing, can you just discuss how you decide to move it through the factory houses versus the off-price channel? And then I have one final question at the end.

Sure Bob. I will start, Patrik here. We're very excited about our engagement in the basketball category overall. We're very excited about the Curry 6 that we just launched. It's doing great in the market and we're excited about some of the launches that are coming up this year, not just with the Curry franchise but also the Havoc, SPON and some of the other products that we have and I'm sure Kevin you want to add some color onto that. But we're also excited about Joel Embiid. We're excited about the All-Star game and since I know this is a really favorite topic of Kevin, I'm going to hand it over to him to talk a little bit about that. We are both excited.

Let me expand on it then. Obviously, we built an incredible franchise with and through Curry which has been explosive for us. But also building and making sure that happens beyond it. We don't want to put all that way just on step and shoulders although someone who can certainly handle it. But I'd rather have this go from what we're doing in basketball and what you see with the ability to have it for the first time two starters in the NBA All-Star game this weekend is a big deal, but we see the ability to continue to expand this. I mean, with what's happened in footwear for us as a whole even moving beyond any one sport is the focus that we have with our team and our headquarters out in Portland and I think the product that you're seeing come through. Franchise is what we built with Curry but I think it goes much further beyond that. Within Havoc, within SPON and also as you go to other categories and let me move this to a couple other topics. But our cleats which is highlight, spotlight Harper and running its HOVR, Phantom, Sonic Infinite. In women's its Fortis and Breathe in sports style it's Forge SR low, it's Project Rock. What I'm getting to is that you're not going to find us trying to reinvent the wheel every year. We've done that for a long time. We are in our 12th year making footwear and I think we've been too quick to move from one idea to the next idea. Building franchise is going to be critical for us and really I think the Curry business is what has taught us that as a business of how we can get into a product line, we can get into a category and we can just keep enhancing it season after season, year after year and I think that's what you're beginning is to see from us. Narrow and deep and so that's what we want to be. We want to be performance on-court authentic basketball. We want to win there. We believe that what's going to lead to the kids to want to take a pair of shoes from the court and put them all when they're walking on their way home too.

And Bob this is Dave. Just on your question relative to off-price and factory house versus the off price channel. Generally speaking, we feel better about controlling movement of our excess through our outlet doors, but we also know that we need to have a certain mix of MFO product there to really make the shopping experience for the consumers a strong one. So we do leverage a third party off-price channel to take care of that excess outside of what we can do in the mix and our outlet stores. And we'll continue to work on trying to decrease that as a percentage of our revenue going forward and that's what we talk a lot about at Investor Day.

Got it and if I could just one more quick question is Lan still sporting the beard or is he taking it off?

Got it, maybe shave it tonight.

Thanks very much.

Bob thanks very much. We appreciate everybody. Operator?

This concludes today's question-and-answer session as well as today's call. Thank you for your participation and you may now disconnect. Everyone have a great day.