Under Armour, Inc. (UAA) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Under Armour First Quarter 2019 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 conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Lance Allega, Senior Vice President of Investor Relations and Corporate Development. Sir, you may begin.

Thank you, and good morning to everyone joining us on today’s call to discuss Under Armour’s first quarter 2019 results. Participants on the 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 at about.underarmour.com. 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 Chief Financial Officer, Dave Bergman. Following our prepared remarks, we’ll open up the call for questions. And with that, I’ll turn it over to Kevin.

Thanks Lance, and good morning, everyone. With the first quarter in the books, we are off to a solid start to the year for Under Armour’s business and brand. As laid out in our last call, we are focused on four objectives as we work to deliver 2019. First, the brand, amplifying our story and delivering innovative products and experiences that make our athletes better. Second, continuing to optimize our operations and investments, prioritize our premium athletic performance brand positioning. Third, building stronger relationships with our customers; and fourth, delivering on our financial plan to drive sustainable profitable growth over the long-term. With the first quarter as a backdrop, let’s quickly touch on some of the progress we are making. Starting with Under Armour brand performance. We are seeing strong momentum among athletes, products and experiences. Perhaps the biggest athlete highlight was the NCAA Basketball Tournament where we had teams competing in both National Championship Finals with Notre Dame on the Women’s side and Texas Tech on the Men’s side. When considering that only five years ago, we had just a handful of teams in the entire tournament having 29 this year, we are excited to see our product innovation well on the court and our overall presence in basketball continued to drive brand heat and consideration. In products, our big innovation story for the year Rush, Recover and Hover are in the markets delivering on our promise to make athletes better. Rush and Recover use mineral-infused fabrics to enhance performance by recycling the body’s natural heat to promote blood flow thereby improving endurance, strength and repair. Turning to UA Hover, with more than 12 styles across Run, Sport Style. Basketball, and golf now available, we are driving positive results and reception. In fact, the Hover Infinite running shoe is featured as a top pick of both Outside and Women’s Running magazines. And Runner’s World featured the shoe on the cover with Spring 2019 shoe guide with a coveted Recommended Award. We are also continuing to build momentum in our Digital business as we move to more aggressively integrate our Connect With Fitness Community at the intersection of strain, compete, and recover to connect even more deeply with our consumers. From an operational perspective, in order to deliver on our brand promise in this highly competitive landscape, and most importantly, to be able to do it again and again. Our investments must be optimized, targeted and return-driven. With a clear focus on athletic performance, supported by an improved go to market process, and the alignment of our category and regional structure now firmly in place, the integration into our long-term strategic planning process is considerably strengthening our ability to be consistent. By operating more effectively across innovation, design, supply chain, marketing and sales, we are making the best decisions collectively for our brand. This cohesive effort further empowers our ability to reinvest back into our largest long-term growth opportunities including footwear, women’s, direct-to-consumer and our international businesses. Two highlights supporting the strategic objective in the quarter included, opening our new EMEA headquarters in Amsterdam, which during this period of transformation and stabilization in this region, meaningfully amplifies our culture and brand energy gaining us great confidence in this team’s ability to tackle its next chapter of growth. We are also now opening of the first UA brand house in India, where Michael Phelps joined Patrick and myself along with others helped celebrate our entrance into a market that is immensely passionate for sport and represents a solid opportunity for Under Armour over the long-term. Next up is building stronger brand right relationships with key customers. Relationships that protect our premium positioning that allow us to mutually manage the marketplace with sustainable profitable growth. At the core of this effort has been a reset predicated on better segmented products, manage inventories and ultimately improved service levels, all of which we’ve made excellent progress with. With respect to differentiation, throughout much of 2019, we are still in a bit of a hybrid period in between our previous go to market, the short-term things we were able to impact like SKU rationalizations and channel optimization and our new go to market which commercializes more meaningfully toward the end of 2019, and in the spring summer of 2020. Of course, this is difficult if there is too much inventory in the marketplace and in this respect, our global supply chain and sales organizations continue to do an extraordinary job managing our sourcing and customer relationships, getting our products to retail and empowering our ability to manage our marketplace more effectively. With quarter end inventories down 24%, this is a significant accomplishment that allows us and our customers to ensure that our newest products are available at the right place at the right time. Whenever and wherever consumers choose to engage Under Armour. A key element of our success with our retail partners is how we service them and I am proud to say that we are seeing improved year-over-year service levels due to the ongoing process and structural improvements across our supply chain. We are just running a better play period. With that, lets finish out on our fourth area of focus, which is delivering on our financial plan. In the quarter, slightly higher than planned revenue and gross margin, along with more disciplined cost management delivered a better than expected bottom-line. With this slight overdelivery, we favorably adjusted our full year outlook. This is not to say however that this will be our typical approach moving forward. In fact, if we were to see additional top-line or gross margin expansion above our plan, we may choose to further invest in marketing and product initiatives to support building the long-term Under Armour brand. To sum it up, there is of course, still more work to do on this journey, yet it is one we are really pleased with the progress we have made to ensure that we put ourselves in a best position to win. There is little doubt that we are running more efficiently with clear, greater purpose than even just a year ago, great brands enduring Under Armour will emerge from 2019 as an even stronger brand and company for our consumers, customers and shareholders. We are exactly where we want to be. And with that, I’ll turn it over to Patrik.

Thanks, Kevin. Today’s results are a good indicator that the discipline stability and process improvement efforts are working. Our go to market framework continues to strengthen our business by driving greater efficiencies, quicker decision-making and repeatable executions across our product, category and regional portfolio. And it’s this repeatability just like training that is necessary and a vital foundation as we step up every day to compete in the global market. When competing the margin of victory can also in time be determined by one shot or by losing focus for even one moment. Throughout our multi-year transformation, we have obsessed every detailed process and decision to ensure that we build the appropriate muscle over time to be able to compete consistently at the highest levels by remaining disciplined and committed to optimizing our greatest strengths as a brand rooted firmly in premium athletic performance, we are indeed exactly where we want to be. Turning to our business, let’s take a look at our regional performance in the quarter beginning with North America. Revenue was down 3%, a little better than planned due to a slight benefit from operational enhancements and improved service levels. As expected, our results reflect fewer sales to the off-price channel and softer demand in our direct-to-consumer business as we were to reset toward a more premium price point. All said, we are right on track with our revenue expectation for the full year being relatively flat. In the near-term, with our foundation stabilize in this region, I am looking forward to digging in deeper with the North American team and continuing to execute against our long-term strategic plan by working to reestablish Under Armour as the performance authority in our largest market. Turning to our other regions and as a reminder, on our last call, we spoke about applying the lessons learned in North America in 2018 across our international business in 2019 including distribution optimization and a strategic inventory management actions to ensure that we protect our premium brand positioning. Starting with Asia Pacific, revenue was up 25% with growth in wholesale, driven by continued expansion with key partners and higher sales to the off-price channel, as well as sustained momentum in direct-to-consumer. In the EMEA, revenue was up 3%, driven primarily by growth on direct-to-consumer business and revenue from Latin America was up 6%, driven primarily by wholesale and keep in mind that this result was negatively impacted by a few points from the change in our business model in Brazil. Also we noticed that toward the end of quarter, in Mexico, we converted nine partner doors to own locations, a measured investment in this region’s largest market. Now turning to some of our category highlights, Hover Infinite is definitely creating opportunities for our Run business. With accelerating visibility and consideration seen across the price points throughout our running business, our disciplined approach to our channel allocation strategies means we are delivering the right volume of premium products for our consumers and customers at the right time. Having gone from just two Hover Run styles last year to five today, and more to come this year, our aperture is opening to include highly technical runners an accomplishment we are particularly proud of. With the expansion of our digitally-enabled footwear offering, along with our connected fitness ecosystem of apps, content and experiences from training, competing, recovery and nutrition, tracking has never been easier. Among our target consumer, the focus performers who use our apps especially advanced features like training and running plans and gate coaching, we are seeing higher rates of engagement and conversions to buying Under Armour product and those who don’t use our plans. All of which demonstrates that when we combine innovative products with premium experiences to make athletes better in the moment of sweats we win. In our Sports Style category, by leveraging our innovation technologies and remixing them with street inspired design language and products like Forge 96 and Hover FLK, we are providing unique opportunities for athletes to stay in brand and creatively express themselves as they travel to and fro in their active use wearing locations. And in our Core Sports category, the incredible roster of athletes and teams we support have had some amazing performances and moments in the first four months of the year. This category, as we discussed at our Investor Day is at the heart of our brand. It’s where we authenticate our position and performance, earn trust with consumers, and deliver products that make our athletes better for the moments they compete. Wrapping it up with our Train category, it’s all about Rush, Recover and Hover this year. All of these innovations platforms purposely consider the athletes holistic fitness journey by delivering products that recharge, return and recycle their energy giving them every edge to improve their performance. And with our first UA Hover training shoe coming this fall, we are excited to continue to build on the momentum we have seen thus far and drive even greater consideration and opportunities to grow our footwear over the long-term. So before wrapping it up, I would be remised to not mention that from an operational perspective, our Rush campaign which launched a couple of weeks ago, was our first apparel innovation that was commercialized and launched globally through our fully integrated go to market process. While still very early, we are encouraged by the initial reception and sell-through, this gives me great confidence that when we run disciplined repeatable plays, trusted process and deliver innovation that has style, performance and fit, we win. So in closing, we are making significant progress against multiple initiatives that prioritize our investments to high returns that support our largest global growth opportunities and strategic plans. Dave?

Thanks, Patrik. Given today’s results, we are on track to deliver on our full year expectations and as we progress through the final year of our operational transformation, we continue to run more efficiently and effectively toward driving long-term profitable growth. Before we dive into the first quarter, I’d like to briefly touch on the change in how we are now reporting our segments. As discussed on our last call, starting with the first quarter of 2019, we have realigned our segments to exclude certain corporate costs and are now reporting these costs as Corporate Other. This includes the portion of global corporate overhead costs which to-date have previously been recorded primarily within our North American operating segment. A few examples include, support functions like supply chain, digital, and IT, as well as the portion of sports marketing related to marquee athletes leverage globally to grow brand awareness and consideration. We feel this change provides improved visibility with respect to the performance and underlying business results of our operating segments. For easier comparability, we recast certain historical financial information to reflect this change, which was filed separately in our 8-K this morning. Now turning to the first quarter results. Revenue in the first quarter was up 2% to $1.2 billion or up 3% if you exclude the impacts of foreign currency. Clicking down, let’s start with revenue by channel. Our wholesale business was up 5% to $818 million driven by strength in our international business and slight growth in North America. Direct-to-consumer revenue was down 6% to $331 million due to softer demand and impacts from our shift toward more premium price points and lower levels of discounting. DTC was 27% of total global revenue in the quarter. Licensing was down 18% to $2 million driven by softer demand across our Japanese and North American businesses. By product category, apparel revenue was up 1% to $775 million, footwear revenue was up 8% to $293 million primarily driven by growth in our Run category. And within our accessories business, revenue was down 11% to $82 million primarily driven by continued softer demand and planned lower volume in North America related to a relaunch within our bags and backpack business. And finally, connected fitness was up 4% driven by subscription revenue. Turning to gross margins, we saw 100 basis point improvement to 45.2% in the first quarter. To walk you through the components of the improvement, gross margin was positively impacted by approximately 90 basis points of supply chain initiatives, including more favorable product costs. 60 basis points related to prior year impacts from restructuring efforts, and 30 basis points of regional mix, primarily due to the higher gross margin Asia Pacific business outpacing the growth of our other regions. These improvements were partially offset by approximately 70 basis points of channel mix due to higher margin businesses including licensing and DTC representing a smaller mix of the business in the quarter. This was coupled with a higher composition of off-price sales related to planned inventory management initiatives. As a reminder for 2019, we expect the mix of off-price sales to be down year-over-year, therefore providing a tailwind to our full year gross margin. SG&A expense decreased 1% to $510 million, which was slightly better than expected due to the timing of certain expenses shifting out of the first quarter along with overall cost management. First quarter operating income was $35 million. Interest and other expense was $5 million and our effective tax rate for the first quarter was approximately 27%. Taking this to the bottom-line, net income was $22 million or $0.05 in diluted earnings per share for the quarter. On our balance sheet, cash and cash equivalents were up 2% to $289 million. Total debt was down 36% to $590 million. Capital expenditures were down 23% to $27 million and inventory was down 24% to $875 million, demonstrating our continued commitment to operational excellence. Also in the first quarter, we implemented a new FASB Standard on lease accounting ASU 842 which requires all assets and liabilities related to our operating leases of 12 months or more to now be recognized on our balance sheet. Turning to our 2019 outlook. There is no change to our expectations that revenue should increase approximately 3% to 4% with relatively flat results for North America and a low double-digit percentage rate increase in our international business. Gross margin is now expected to increase approximately 70 to 90 basis points compared to 2018 adjusted gross margin due to ongoing supply chain initiatives including more favorable product costs and lower airfreight coupled with channel mix benefits from lower sales to the off-price channel and a higher overall percentage of DTC. Recall, that in 2018, we had approximately 40 basis points of negative gross margin impacts due to our restructuring efforts. Therefore, on a GAAP basis, gross margin should be up approximately 110 to 130 basis points in 2019. We now expect operating income to reach $220 million to $230 million taking up the bottom-end of the range by $10 million. Moving forward, we will continue to evaluate and prioritize investments in key strategic areas to support our long-term growth initiatives balanced with driving operating margin rate improvements. Interest and other expense net is now planned at approximately $35 million as we paid off our outstanding term debt in the quarter. And we now expect to be toward the higher end of our effective tax rate range of 19% to 22%. Diluted EPS is now expected to be in the range of $0.33 to $0.34 and capital expenditures are expected to be approximately $210 million. Before we turn it over to Q&A, I want to provide some color on the balance of the year. Based on our factors previously discussed, we expect second quarter revenue to be up 1% to 2% led by growth in our international and direct-to-consumer businesses, tampered by a slight decline in our North America business. As a reminder, the second quarter of 2018 was our highest growth quarter of last year with elevated inventory management actions as we work toward healthier inventory levels in North America. Second quarter gross margin should be up approximately 80 to 100 basis points versus last year’s adjusted gross margin or up 130 to 150 basis points on a GAAP basis due to improved product cost and regional and channel mix benefits. Within channel mix, the benefits are primarily being driven by lower planned sales to the off-price channel compared to the prior year along with improving expectations for our DTC and licensing businesses. We expect second quarter SG&A to be up about 4% to 5%, driven by additional planned marketing to support our innovation stories including Rush and Hover, along with increased facility, distribution and store expenses associated with the expansion of our international business, as well as some of the timing shifts I mentioned earlier. In total, when taken into context for the first half of 2019, SG&A to grow at a rate slightly higher than the rate of revenue growth. Second quarter operating loss is expected to be approximately $25 million and diluted loss per share is expected to be approximately $0.06. And finally, we are expecting inventories to decline at a mid-teen percentage rate at the end of the second quarter, which should then start to normalize during the second half of the year landing closer to flat as we enter 2020. That concludes our prepared remarks. So with that, I’ll turn it back to the operator for your questions. Operator?

[Operator Instructions] And our first question comes from the line of Jonathan Komp with Baird. Your line is now open.

Yes. Hi. Thank you. I want to follow-up on some of the comments really implying momentum that might be building on the premium footwear side with – at the Run category and then Patrik your comments on the initial response to the Rush apparel that’s in the marketplace. And I just want to understand, maybe what you are seeing in terms of how some of those factors are really showing up in the marketplace and just given that you are still projecting slightly lower North America revenue in total. At what point do you think some of these new initiatives that are announced to really drive an inflection in the overall business?

Hi, Jonathan. This is Patrik. Yes, we are really excited about what’s going on in – especially in our Run category right now with our second year into the Hover platform. If you remember, we launched Hover last year with two styles and that’s was the first time we really did it in a coordinated play in this new kind of go to market approach that we have had for the last little while in terms of doing it in a coordinated global launch. That was very successful. We are not expanding that with five styles this spring and adding more this fall. And what you are seeing is, our ability to really do it in a coordinated repeatable way and we are seeing the same kind of encouraging results in terms of sell-throughs this year than we did last year now with more products in the marketplace. So, we are really encouraged by this, because it shows that when we do it right, in terms of innovation, in terms of messaging, in terms of distribution, segmentation and allocation the consumer responds. And so, we are now thinking about how we can scale that of course going forward. And with Rush, it’s a similar story. It’s a limited allocated approach from our end applying the same kind of methodology and discipline that we have done in the Hover Run category. And then we are very encouraged by our ability to now execute also in apparel in the same way. So, this is a beginning of a play that you will see from Under Armour and we just feel really encouraged by what we see early on. Now remember, Rush has only been into market a few weeks. So, there will be more to come on that in the next call that we have for the next quarter.

Okay, great. And then, maybe a follow-up on just the gross margin progression that you are seeing especially with the inventory work down which has been impressive and given the comments that you could look to reinvest some upside if there were some. But when you look at gross margin started to recover in the state of inventory today and yet, you are only projecting a modest recovery in the gross margin relative to where it was several years ago. Can you just talk about, as you continue to focus on a more segmented and premium product approach, if there is kind of any upside potential that you see is really into 2019 and 2020 from a gross margin perspective?

Hey, Jonathan, this is Dave. We are definitely excited about the progress we are seeing in gross margin and bringing that back up to where we want to be longer term. When you think about the full year, a lot of it is driven by the supply chain initiatives that we talked about before and really starting to see more of a full year impact of those initiatives that we started to see some benefits in the back half of 2018. When you think about the vendor and cost optimization we’ve been doing, reducing the SKU to new count, reducing the number of key vendors that we work with and really driving those cost down through those negotiations, also just with better pricing strategies as we kind of use deeper analytics around the architecture there. But then also just improve GTM process and supply chain management are also allowing for less airfreight. So, a lot of good things coming out of the supply chain initiatives as the processes in the transformation really kind of take hold for more a full year impact this year. And you know, from a channel mix this year as well, we are stepping off the off-price channel and we want to continue to do that in the future. And we also have a higher DTC mix as we finish out the year as well. So, all of those things are going in our favor and we are excited about the continued improvement as we go forward as we talked about back in our investor call in December.

Okay, great. That’s encouraging to hear it. Thank you.

Thanks, Jonathan.

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

Great. Thanks. Good morning. And let me add my congratulations. I guess, just following up on Jonathan’s question on product momentum. I am curious what you are seeing from some of your key customers in terms of how they are thinking about future space allocation just given some of the momentum you’ve seen over the last kind of three to nine months in some of your footwear initiatives and apparel. Are they actually changing what they looking for in fall or spring of 2020? And then, just a follow-up on the direct-to-consumer business, what did you see in the Digital side of your business this quarter? Thank you.

Hi, Erinn. This is Patrik. I think what we are really excited about in – and you know, every region is a little bit different here. But in North America, we now feel that we have stabilized this region and as you see by our inventory numbers done a lot of work over the last year, year and a half actually to really clean up the marketplace. So it’s a much healthier marketplace and we clearly see that when we are providing newness into the channels, it really works really well for us. So, we are going to continue that, that work with our retail partners with a strategy to really win with the winners. And I think, earning it back takes a little time and that’s really what you are seeing from the brand now. But as I said before, what we are doing in terms of some of these more premium offerings, we are learning a lot from our ability to actually execute and drive sell-throughs when we do it in a coordinated play. So, we will continue to do that and we will earn our place back into the retailers. We feel really good about how the channels now are cleaning up in North America. In our other markets, it’s a little bit of a mix. In Europe, it’s a mix between partnerships, as it relates to doors and also in terms of wholesale, and we have done the same kind of work there that we’ve been doing in North America right now. I am very encouraged by some earlier results there too with these new initiatives around Hover and Rush and so forth in terms of being able to coordinate it. And in Asia of course, we continue to build out our direct-to-consumer business. We will be doing about 300 more doors a year. We are building a store every 36 hours or so. So, we are still on track to really drive that business. But it is a process and it’s going to, over time improve. I would say that, from a global perspective, we now feel that we are much more balanced and we have stabilized North America, which gives us great confidence for the future.

Great. And then, you found the Digital business. I was just curious what you saw there in the quarter?

Yes, I think in Digital, it’s also again is a little bit of mix. As we are stepping off the gap in terms of the promotional activity, and moving into more premium price points, we are doing that across the world. And so, it’s a measured play from our perspective. And we feel really good about our plan. The plan is still the plan. Same thing that we’ve talked about at Investor Day in December, that’s still holding true and we are really executing on that plan right now. So, we are encouraged by what we are seeing in terms of the response in terms of what we are doing from a full price perspective in that channel and we are going to continue to play our play.

Thank you, guys. All the best.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Alexandra Walvis with Goldman Sachs. Your line is now open.

Good morning. Thanks very much for taking the question. So, my question is on the marketing spend. You mentioned little bit of a ramp in marketing spend into the second quarter to support some of those new product stories with the Rush and Recover and Hover and so forth. You also mentioned some timing shifts going on there. I wonder if, taking a step back you could comment on how happy you are with the level of overall marketing spend in the business. So the rate came down a little bit in 2018 versus 2017. And I wonder if you could talk about the ongoing efficiencies that you have there and some of the discipline in that marketing spend which is new apps offsetting the ability to support some increased spend behind these new initiatives?

Alex, this is Patrik again. We are really encouraged by, the go to market ultimately, because that’s the one process that we have where we are able to now also use a lot of our learnings from an analytics perspective. So as we learn more, we are also understanding much better of how to get a good return on investment, good rollout from our spend. And as we see opportunities, like Dave said, if we have opportunities, we will certainly be looking to see what we can do about those opportunities going forward. But right now, we continuously see more effectiveness in our spend as we drive our business through the go to market and using more and deeper analytics to really drive the business.

This is Dave. When you think about just from a total dollar perspective, we are going to continue to kind of maintain in that 10% to 11% to 12% range of revenue. But we are picking that up a little bit as a percentage of this year versus last year. But I think the more important thing is the power of that spend is going to be a lot better because we did step out of multiple commitments through the restructurings in 2017 and 2018 that probably didn’t give us a return that we are hoping for. So, now, you still have that same percentage or even a little bit higher percentage of revenue that we can invest in a smarter way. So we should be able to get more bang for the buck, which we're excited about.

That’s good point. We got enough – we got plenty of money and we said in the past is that, we are big enough that we can do just about anything. We just can’t do everything. And so, I think being more thoughtful and strategic and targeted with how we are spending those dollars, but we’ve got plenty of money. We just need to make sure we are putting toward the right thing. I think you are seeing the brand doing that.

Splendid. That’s solid player. Thanks very much. I wonder if I could ask one more here on the direct-to-consumer business. You mentioned in your prepared remarks that some of the softness that was a result of softer demand and I wonder if you could elaborate on that comment specifically where that was being seen and perhaps drivers of that?

Yes, it needs to be taken it to the context of what we are doing in terms of protecting our premium, positioning as a brand and stepping of the gaps in terms of being discount it online and so forth. So, as you do that, it would be normal to see some softening in demand for sure. So, we are expecting that to continue a little bit. And again, I reiterate the fact that we are on plan. We plan to do this just like we said in December and on our last call and we feel really good about where we are at. We are right on plan right now. So, you kind of see us continue to move to that more premium position across digital across the world.

Thank you so much and all the best.

Thank you.

Thank you. And our next question comes from the line of Bob Drbul with Guggenheim Securities. Your line is now open.

Hi, good morning guys. I just wondered, you talked a lot about the NCAA Tournament, but can you just talk about how basketball is performing for you especially what’s happening in the NBA playoffs as well, today?

Yes, well, I think just large part of the story that we wanted paint in basketball is that if you look back at just the men’s side of the drum, NCAA Tournament in 2014, we had one team. We had one team in the NCAA Tournament. This year we have 17 teams or 25% of the bracket and that was done through a strategy that we put in place. So, we typically, we overestimate we can do in the short-term and underestimate we can do in the long term and that’s something I think we are really proud of. When you look at our basketball resume today, and again back in 2014 we had less than a 1000 high school teams, today we have more than 5,000 high school teams. We have just a few of the mid majors. We put a strategy in place to go sign mid major teams with for short calls money but actually, the kind of teams that we make money on, we were just getting started with Stephen Curry. And we since signed Joel Embiid. So two All Stars on our roster today, both in the playoffs. So, basketball from a brand sports marketing standpoint, I think we are demonstrating that our product works. I mean, two teams in the final four, one of the championship game on the men’s side, one of the championship game on the women’s side. So, we’ve demonstrated that the product that we build, we are capable and leaning into our performance back. So we believe that you will continue to see that play out at the grassroots authenticity level. Again, from 1,000 high schools in 2014 to more than 5,000 that we have today. So that’s just in the United States and obviously it’s a global game. But I think if you have to look positioning-wise, Under Armour is, we are one of the top two positioned basketball brands in the world right now. And you will see that begin to inflect with a signature series that we have with Stephen Curry and what he means and represents to us. But this is a long game. This is not something that’s going to happen overnight. But we t think that we are grinding them down and we will continue to build our presence in the sport like basketball. We like our resume. We like our positioning and we like the future.

Got it. And could I just question, in the U.S. business, North America specifically, can you just talk about like the outlook in sporting goods for you guys, athletics, specialty change doors, just what you expect the rest of the year to get you back to flat from what we are seeing right now?

Yes. Hi, Bob. It’s Patrik here. I think, coming back to what I said a little bit earlier, first of all, we feel really good about where we are at in North America right now. Moving our brand into that premium athletic positioning again. We’ve stabilized the region. We are working hard to really win with the winners. And we are doing that through servicing our accounts better, launching better products, making sure it’s on-time. It’s the right product, consumers responding, segmenting the product correctly, allocating it correctly. Behind all of that, though, there is a long game here, because what happens is, once you are out of favor, you got – you get back in favor. And that takes a little bit of time. And we are kind of caught in the calendar a little bit, right. So, we are working our way through that, earning our trust back with the retailers. Having said that, we feel that, going forward into 2019, like Dave said that we are on plan. So in other words, we are able to continue to run the play that we’ve orchestrated. We feel very good about that. We feel very good about the partnership that we have with our large retailers in every channel right now. We feel we have better segmented products, better innovative products and we are understanding better how to talk to the consumer and we are able to orchestrate to play through the go to market. And you will continue to see that from us, this efficiency play if you like in terms of ability to execute. So, we feel great about 2019 and we are also really, really looking forward to continue to fight in 2020.

Great. Thank you very much.

Thank you. And our next question comes from the line of Edward Yruma with KeyBanc. Your line is now open.

Hey guys. Thanks for taking the question and congrats on the continued momentum. It seems like one of the kind of callouts in the past couple of quarters has really been the strength of international. I was wondering if you could give us little bit more color on performance in Asia Pacific, specifically China. And then, as you think, kind of broadly, I know, it’s still early days in India, but kind of what gets you really excited about the market and from a dimensioning perspective, how big could that market be over time for you? Thanks.

Hi, this is Patrik. I would say that in general in international right now, we feel really well about the balance that we have stabilizing North America, continuing to have strong growth across all of our initiatives in Asia and taking a really good premium positioning approach in Europe and as well as Latin America. I would say that India specifically is something we are excited about. But again, India is a long-term play for us. We want to be present in that market. It’s a huge market for the future. We are very encouraged by what we are doing there. We are going to be opening a number of new stores this year. First signs are very positive. But again, India is much more of a longer-term play. But it’s an important play for us. We want to make sure that we are everywhere in the world where the focused performer wants to engage with us and India is certainly one of those places and we had a great time going there and engaging with the consumer face-to-face myself and Kevin. And that we are looking forward to continuing to drive the business there.

And maybe one quick follow-up. Kevin, as the brand is probably newer to the APAC consumer, I guess, how have you changed the way you go to market from a brand perspective and I guess what’s the perception of the brand today? Thanks.

I think a lot of lessons learned. We want to be careful is, we are proud I think the work the team has done. Just some of the metrics that we put up as a company, particularly the ability to drive inventory down, drive gross margin up, I think it demonstrates health in the brand and something that’s very, very positive for us. But we are a long way from declaring victory. I mean, it is a journey and that we sit here in our 14th year as a public company. I get the luxury of perspective of looking back and just see all that’s been accomplished. I look at the lessons that we’ve learned in North America, as a North American brand and we are in the middle of that journey again is because, in order to be a great brand, you have to be an enduring brand and that means you have to continue to reinvent yourself and I feel I was doing that. But our ability to take the lessons that we’ve learned here in North America and now apply them globally, specifically in markets like Asia Pacific where getting healthy making sure that while top-line is critical for us as we grow, we want a strong business. And it’s being able to implement the things that we’ve painstakingly done through our transformation over the last couple, two, three years here that looking at things like our go to market process having that in place the ability for us upgrade our systems across the world and so, we will have a lot of the pain that we’ve taken in the last few years is something that’s going to set us up. We are getting us to $5 billion with a lot of physical muscle lift. I feel a lot better about our ability to we will do it by being a lot smarter and our ability to get from five to ten is going to be a lot more thoughtful, of a lot more experience and not requiring so much to our physical labor. So I think we can be a much smarter brand. And you are seeing us apply that in APAC. The global operating model that we now have in place, it really empowers the regions. And so, little to be said about what’s happening in Europe and it kind of feels like it’s the same story that’s playing out in each region around the world. And so, we are obviously like many. We are incredibly excited about what Asia Pacific, China in particular to mean for us, but we’ve got great leadership. We are setting up our new headquarters. Our Asia Pacific headquarters in Hong Kong right now and it’s a lot of upside. But it is taking the lessons that we have learned here and getting smarter and becoming a true global brand. But we also know it’s exciting as Asia Pacific and other regions around the world. Winning here at home in the U.S. is something which is paramount to this brand and you will see us get smart about that too.

Great. Thanks so much.

Thank you.

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

Thanks for taking our questions here. So, could you just speak to the past? I think, can you just remind us, is mid-single-digit increase still the target for direct-to-consumer this year? And then of the number in first quarter that’s obviously a pretty meaningful swing in the rest of the year. Would you mind just kind of given us the path, maybe some of the components you see back from the first quarter to get to that mid-single-digit increase for the year?

Yes, Michael, this is Dave. We still are on plan and so the mid-single-digit increase for DTC full year is still the plan and that’s what we are driving through. And yes, you do see a lower number in Q1. But there is a lot of underlying reasons, some of those we have given before relative to some of the doors that we are working through. Also some of the changes in how we are continuing to optimize conversion. We also had the Easter shift that we talked about that affected us a little bit more in North America relative to Q1, Q2 flows, that was a challenge on Q1, as well. And Q1 was also of 2018 our largest growth DTC quarter. So the comp is tough as in Q1, as well. So, there is a lot of different factors in play there. We are also opening a fair amount of new doors around the world, especially in the Asia Pacific region as we go through Q2 through Q4. So, again, multiple things at play there, but we feel good about the mid-single-digit guidance for full year on DTC.

Okay. That’s helpful. And then on the – just maybe some housekeeping on the gross margin, I think you mentioned that the channel mix was 70 basis point headwind and licensing DTC smaller mix in the quarter. Would you mind breaking out how much is from licensing and DTC? And then, I think going forward, licensing should still be a headwind baked into your 2Q gross margin. But it sounds like DTC starts to improve pretty quickly here. So maybe that changes and finally, how much the pivot to lower off-price on a global basis year-over-year after being higher year-over-year in first quarter start to add to the gross margin as we get into 2Q and through the rest of the year? Any way to quantify that?

There is lot to that question. But when you look at the – when you look at Q1, the channel mix impacts, there was one of the two that was that much more overindexing there. Obviously, as we move further into Q2 and beyond, the higher off-price starts to flip the other way and becomes actually a nice tailwind for us and pretty substantial as we finish out the year as we are planning to run off-price or to the off-price channel as a lower mix of our business in total for the year. And then, when you look at the DTC side, that will flip to start to be accretive to gross margin as well as we get out of Q1 and as we go through the rest of the year. And the licensing impact is not very significant on the full year at all. And so we really haven’t called that out on the full year.

Okay. Kevin, if I could sneak one more and just bigger picture. At the Analyst Day you were guiding for several hundred basis points of SG&A leverage from 2018 to 2023. It sounds like you found some investments that you find pretty attractive today. But there is a lot of SG&A improvement over the long range. You didn’t change your outlook for revenues whatsoever obviously today. So there should be a lot of natural leverage in your model here. But is the target change or the timing of the ramp back to that SG&A level that you laid out at the Analyst Day change at all in your mind?

You didn’t really mean to ask me that question. Go ahead, Dave.

Michael, this is Dave. Obviously, we’ve got a full year play here and we did deliver a little bit better than we expected in Q1. Again, some of that is timing. So we are trying not to get overexcited about that. And obviously as Kevin mentioned in his script that, as we work through the rest of the year, if we overdrive in some areas, we may choose to reinvest to continue to fuel the brand for the rest of – later this year or mainly into next year and longer-term. So, again, we feel good about where we are. We are running the play and the SG&A leverage that we expect in 2020 and beyond is noted in the Investor Day back in December that’s what we are still holding to and we feel good about it.

Okay. Thanks a lot for all the help guys.

Thank you.

Thank you. And our next question comes from the line of Matt Boss with JPMorgan. Your line is now open.

Thanks and congrats on a nice quarter guys.

Thank you.

Thank you.

Thanks, Matt.

I guess, first on inventory management, where did you see the primary delta versus the down mid-teens forecast? And maybe, Kevin, what’s your view on the global athletic inventory position today? And then, on that same note, how best to think about the spread between inventory and sales in the back half of the year?

Okay, Matt. This is Dave. Relative to inventory, we did finish a little bit better than we expected. That was all driven by some timing of receipts for the international regions. But also coupled with slightly better than expected Q1 sales. We are definitely proud of our progress there. If you think about our inventory dollars, having been this low since 2016 and back then, we had $1 billion less in revenue. So, definitely going in the right direction. The other good thing to note is that, within that year-over-year inventory balance, the mix of excess within that versus current product has also gone down significantly. So not only is the inventory down 24%, but the health of the mix of that inventory and the underlying numbers is significantly better as well. So, the actions we are taking are really working and paying off for us. And if you, I kind of want to give a quick shot out, in the supply team our regional commercial teams supported by finance, they are all driving through the GTM revisions and inventory management initiatives and it’s really great to see that coming together and we are excited about what that’s going to mean as we go forward.

Great. And then just a – maybe just a follow-up on the expense front. How best to think about SG&A dollar growth versus revenues in the back half of the year? And then, just maybe any update on the progress of your restructuring cost efficiencies and when we would see a potential impact from that?

Yes, as I mentioned, in the first half of the year, we are spending the tiny bit ahead of revenue as I mentioned. And you can see if you kind of back into our guidance that, on a full year perspective, we are looking at maybe slight SG&A leverage. Again, we’ve got a lot of investments we want to continue to make even though we are driving savings and efficiencies in other areas. So, by default, that means that the back half of the year SG&A should grow slightly below revenue to be able to pull that off and that’s what we are planning through and driving that at this point in time. When you think about longer term, the SG&A leveraging will come through a lot stronger in 2020 and beyond. Some of the restructuring efforts that we drove through in 2017 and 2018 have a delayed impact as far as some of those actual excess. So some things we negotiated in 2017 or 2018. You actually are not exiting some of those agreements until at some point in 2019 or later in 2019. And so, you don’t see the real benefit of that full year until 2020 and beyond. So there is a lot of different initiatives at play there. But we are excited about the leverage we can drive in 2020 and beyond.

That’s great color. Congrats again.

Thank you.

Thanks, Matt.

Thank you. And our next question comes from the line of Matt McClintock with Barclays. Your line is now open.

Hi. Yes. Good morning everyone and congrats on the progress. I was wondering if – talk about that from a high level perspective, you’ve consistently outperformed the expectations that you’ve put out there, the plan that you put out there today is a great example of that. Where are you finding the most resistance today to your turnaround play and your turnaround efforts? That would be my first question.

Hi Matt. This is Patrik. Thanks for that question. I don’t really see a lot of resistance. I think it’s more of a continued planned rollout. Because the reality of course is that we are working inside of a calendar that we’ve shortened down. It used to be 22 months, it’s now 17 months. So it is a steady progressive march towards a better future. And what you are seeing now here as we turn the corner into 2019, is a lot of the work really starting to pay-off. We have stabilized in our largest region. We have started to really go into a healthier marketplace for the Under Armour brand where inventories, to Dave’s earlier point, are now actually much, much, much healthier and actually from a position of strength, if you compare it even back to as far as 2016. So, it is a long play. We are very confident, simply because we are doing it through this go to market process where we are now orchestrating the play further out and then driving it home and learning from every time we actually go to market with a new season or a new launch and then we are effecting future seasons from the learnings. So, we are not meeting a lot of resistance anywhere. It’s just that it takes a little bit of time to drive this through. And we are feeling more and more confident that a lot of the things that we are doing are really working. But it will be a continued work like we said at Investor Day in December, 2019 is still the last phase of our Protect This House chapter. And we feel really good about the plan that we currently have in place for 2019 and we will continue to drive into 2020.

Thanks for that. And then, as a follow-up, just on Europe. You talked about putting the global mark on the global operational plan in place or infrastructure in place, et cetera. You are empowering the local regions. But just, in Europe, there is a lot of brands that have had a hard time cracking Europe as a whole and I was wondering from a local – from more of a local level, what needs to be different about the approach there? Patrik, please chime into that, given your experience. But what do you see different about the local approach to Europe to make it successful? Thanks.

Yes, you know, Europe is a little bit of a harder market to crack overall. Right, you got to really win it country-by-country. In the U.S. of course, you can scale quickly and when it goes the other way, it goes the other way quickly. And Europe, it is really a country-by-country approach. So, for us, what we’ve done with this global operating model that we put in place is we have ensured that, with the new leadership in place in Europe and the structure that we have in Europe, we are now empowering the regional team to really prioritize how to win in Europe, right? And you are doing that through a geographic play, country-by-country, but also through a category play and that’s why we are so encouraged about some of the things that we talked about earlier around Hover and Rush for example, it’s because we are also seeing the effectiveness of this approach for our teams in Europe. Now we are structured in this new, let’s say more empowered way for the region. So it is a country-by-country, channel-by-channel, category-by-category approach you need to have in Europe. And you actually need to think about it that way, because you cannot try to win in Europe all at once, right. It’s really a longer term plan and a very strategic plan in terms of how you do that? So it’s feeding off-global, driving regional and we feel that we have a plan in place now with great leadership over there. And we are seeing some very exciting early response and results based on this new approach and we are very, very diligent and deliberate about making that a premium approach. So, we are not getting on top our skis and we are making sure that we are thinking through this strategy and playing the play in a very orchestrated fashion. And the go to market is enabling our teams to do that.

Thanks for the color. Best of luck.

Thanks, Matt.

Thank you. And our last question comes from the line of Omar Saad with Evercore ISI. Your line is now open.

Good morning. Thanks for taking my question.

Hi, Omar.

One kind of follow-up topic guys. Nice job in the quarter. And I really love to hear the premiumization strategy and really trying to reduce the reliance on discounting, especially in the DTC and online channels and maybe you could kind of elaborate on how – where we could expect to see that growth from a consumer standpoint? Are you going to take the outlet side off the website? How do you really kind of keep that website and the ecommerce piece that most premium products? And then, how do we think about that premiumization strategy in the physical channels, whether it’s your own stores or different wholesales channels, especially as it relates to the U.S. market which really know tend to be the more competitive market and more discount-driven market versus others obviously? Thanks.

Yes, thanks, Omar. This is Patrik. Yes, so we have a plan in place for all the channels, right and all the categories in terms of how we think about this. But it starts with understanding what goes where, right. So, it begins with a category, channel, segmentation strategy and then an ability to execute against that. So, the go to market is allowing us to do that. And that’s why we come back to this conversation around Hover and Rush. That’s pinnacle product being positioned in the marketplace and that’s also what the brand is talking about right now, which is important to us to really show up in a premium way. I mean, who would have thought that we were going to be on the cover of Runner’s Magazine two years ago. I wouldn’t have thought so, suddenly – certainly, but we are. And we are now starting to really connect with that more premium consumer and looking for the best possible product in that category for example. And we are taking and applying that same methodology across everything that we do. You’ve seen t he efficiency that we are getting through our SKU reductions. You’ve seen the benefit that we have gained from better allocation as we launch some of these more premium programs. We’ve taken discounting down on our – in our digital space. And also having less promotional days in our outlet channel over the last two years. All of those things are contributing to this march towards a better, more healthy brand. And it’s enabled by the fact that we have – we are doing it with less products. So, fewer SKUs, more focus, and more strategic and process that enables us to play the play. That’s really how we are thinking about it.

That’s really helpful. That’s really helpful, Patrik. Thanks a lots of information guys.

Yes.

Kevin, do you want to Wrap?

Yes, I’d love to actually just finish up on that comment, just what we are doing with driving premium brands. The interesting thing about looking at the journey that our brand has been on, 23 years in, 13 or 14 as a public company, and just seeing each one of these chapters they’ve unfolded. And when you talk about things like the premium positioning, I think it’s a perfect place of what and how we want to talk about our business. But understanding that what we need to do in order to become a great operationally excellent company in order to deliver on that premium position, particularly at the size and scale that we are now, there is a lot of things that you can physically lift from your smaller business. But we just out growing that. And so, I think we are going to really look back and appreciate the years of 2017, 2018, 2019, especially we can look at a year like 2018 where all the restructuring and growth that we had in getting healthy that we had while so growing the business over $200 million. So, the one thing we know is a great product is going to win and that’s one thing that continues to happen no matter what. And the proof positive of that is just the athletes continuing to win in our brand. Again, whether it’s Brady winning Super Bowls, the NCAA finals for men’s and women’s in basketball, whether it’s Steph and Joel Embiid in the finals of the NBA Championship, whether it’s Bryce Harper in baseball, the list just goes on and on. But one thing I want people to know is that we're also going to continue to get louder as a brand. We’ve been pretty quiet. We’ve been talking about product stories and telling people about Hover and Rush and that’s what you see in our marketing. But as we continue to get free and flexible we get to move things around, you'll continue to see us get louder about telling people what and why this brand is so special. And the fact is that, everything we build, everything we make does something. It makes our brand unique and it gives us an advantage and edge, especially to our consumer that allows them to give them super power. So we look forward to continuing to drive on that and really proud of the progress that this team has made. I think the operational excellence is being put in is something that will continue to come out and driving that premium brand position that we are all looking for. So, we have work to be done. We're going to continue to win for our consumers, for our customers, for our shareholders and we look forward to that challenge. So, we are in the fight. Thank you all very much. Operator?

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.