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Edited Transcript of UA earnings conference call or presentation 27-Apr-17 12:30pm GMT

BALTIMORE Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Under Armour Inc earnings conference call or presentation Thursday, April 27, 2017 at 12:30:00pm GMT

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Corporate Participants

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* David E. Bergman

Under Armour, Inc. - CFO

* Kevin A. Plank

Under Armour, Inc. - Founder, Chairman, CEO and President

Under Armour, Inc. - VP of IR

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D.A. Davidson & Co., Research Division - VP and Senior Research Analyst

Citigroup Inc, Research Division - MD, Head of the U.S. Discretionary and U.S. Apparel and Retail Analyst

* Randal J. Konik

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Under Armour, Inc. First Quarter Earnings Webcast and Conference Call. (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. Sir, you may begin.

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Lance Allega, Under Armour, Inc. - VP of IR [2]

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Thank you, operator. Good morning, everyone. Thank you for joining us on today's call to discuss Under Armour's first quarter 2017 results.

I'd like to remind everyone that 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. The company assumes no obligation to update forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Additionally, we may reference certain non-GAAP financial information. We provide a reconciliation of non-GAAP financial information in our earnings release and in the electronic version of portions of the script today from today's call, which will be available at uabiz.com.

Joining us on today's call will be Under Armour Chairman and CEO, Kevin Plank; and Dave Bergman, our CFO. Following our prepared remarks, we'll open the call for questions.

And with that, I'd like to turn it over to Kevin.

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Kevin A. Plank, Under Armour, Inc. - Founder, Chairman, CEO and President [3]

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Thanks, Lance. Good morning, everyone, and thank you for joining us today.

2017 is a year we're empowering Under Armour to become a single, more agile, stronger and smarter company. Our first quarter marks a good start to this journey. In January, we detailed some of the challenges we're facing in North America as well as what we feel our competitive advantage is to manage through this rapidly changing environment. We talked about the imbalance caused by extreme growth due to more than doubling our size over the past 3 years. We spoke of the unique strength of our brand, unparalleled ability to connect with global athletes and our tremendous portfolio of growth drivers. That said, our strategy is about more than this quarter or the next. And while parts of the broader environment remain uneven, we feel very good about the evolution of our brand strength, relations with consumers around the world and our ability to gain share in key markets and categories.

We've been analyzing the next 3, 5 or 10 years by product type, gender, category, channel or geography. We are underpenetrated comparatively by any measure: Market share, mind share and potential.

So now, as the third largest athletic brand in the world with more than $15 billion ahead of us to second place and another $15 billion ahead of that to first place, the fact remains that we have significant and scalable opportunities before us.

To build on commentary from our last call, the road to the first $5 billion was much different than we expect the road to the next $5 billion to be.

Yet we can't talk about results or opportunity without considering the need for balance. With a shifting terrain, we're hyperfocused on balancing external marketplace growth with internal operational excellence, working both in concert to embolden the strength of our brand. By balancing investments in innovation, consumer connectivity and experiences, with the appropriate operational discipline, we are on a long-term path to ensure more consistent returns to shareholders.

The core of our strategy, though, remains aspirational great products with a relentless pursuit of innovation and the creation of compelling experiences for our consumers. We have one of the most unique brand communities on the planet, a relationship we cherish and never take for granted, particularly our relationship with kids, the youth of this generation. We aspire to be a brand that is both trusted and desired. This consumer-led approach continues to take shape by the transformation toward category management. That said, I'd like to take a few minutes to highlight how we're progressing against that goal.

18 months ago, we made the decision to reset the company around key sport categories. This decision was driven by extreme growth, changing consumer behavior and the immense opportunity to address the unmet needs of our consumers. For men's and women's training, running, basketball and global football, to outdoor, team sports, youth and lifestyle sportswear, this evolution is well underway.

2016 and 2017 have a high focus on leveraging and empowering our team structurally. With our move in the category management, we're working to enhance our product creation, supply chain and speed-to-market processes and functionally, how we will bring products to market in the future via merchandising, demand creation and our overall distribution strategy. By emphasizing a clear go-to-market capability, we'll take a better approach of driving the core basics that our business was built on, while also emphasizing elevated product across all categories with innovation and experiences that inspires consumers. The purpose of this structure is to drive authenticity within each sport category, getting us as close as possible to the consumer as efficiently and effectively as possible.

So how is it working? So let's touch on a few highlights. I'm going to go ahead and start with our smallest category, yet potentially one of our largest, long-term growth opportunities, our sportswear business.

In only 24 months, we've gone from an idea to a fully dedicated team of product designers headquartered in New York City who have set up the backbone of this key growth driver.

Built on leadership. There's 2 ways we're approaching this. First, with the launch of our UAS collection last fall, and the second line this past quarter, we began to interpret and authenticate the Under Armour brand within fashion. This top of the pyramid approach, that is pinnacle, premium product, blends the intersection of our brand's core sport and performance elements with a unique personal style and creative expression. Understanding this is a longer-term strategic position, we are hitting the benchmark we set for ourselves to make lifestyle a core competency of our brand and the halo impression that we'll have access across all the categories that we do business in today.

Secondly, it's emphasizing a lifestyle throughout our product line in influencing style, silhouettes and distribution we already serve. One example is we've taken lessons from UAS' quick-to-market strategy to create the Unstoppable lifestyle collection, which is due out later this year. This will represent our first complete better level men's and women's sports fashion expression.

Turning to basketball. It's a global category that continues to post consistent growth as the brand gains more visibility, authenticity and performance around the world. Some of this hard work certainly paid off in the first quarter with 11 women's and 12 men's teams making the NCAA tournament for Under Armour, which is a record for the company. And most exciting, our brand's first-ever NCAA national championship in basketball as the University of South Carolina women's team took home the title and the men's team made South Carolina's and Under Armour's first Final Four.

Yet our success in basketball hasn't been without its learning. In spring 2015, we debuted our first signature basketball shoe with Stephen Curry, the Curry One, who since become a 2-time NBA MVP and global icon. The limited launch of the Curry One was a strong success and set us up well to realize even greater growth with Curry Two, which included a much broader spectrum of distribution, color and launches. Lock-step with other franchises, like Drive, Lightning and Jet, our performance offering has continued to evolve nicely, mixing speed, support, balance and style with the NBA's running gun positionless style of play.

As we launched the Curry 3 late last year, our expectations continue to run high. And while the 3 plays very well on court for Stephen Curry and our athletes, a sluggish signature market and a warm consumer reception has led to softer-than-expected results. This has created an inventory imbalance that we're working through, one that, yes, is baked into our full year outlook, which hasn't changed and, most importantly, yield the lessons we're applying ahead with the Curry 4 and beyond.

Not only for the 4, but moving forward, we've retooled our test-learn scale approach in this business to be sharper, sharper through a spectrum of number of color offerings, scarcity, exclusives and cadence of launches to drive more consistent engagement and results, and sharper with our basketball portfolio composition to target balanced growth across all assortments to address players at all levels.

One of the highlights for UA is the strong grassroot systems we've built across AU and our high school teams, where athletes are competing and winning championships. We're incredibly proud of our basketball business and see tremendous runway ahead as we continue to take market and mind share with this key consumer.

Another area we remain incredibly bullish on is our overall women's business. We reached $1 billion in revenue in 2016, a huge milestone for our brand, and our confidence continues to build. And of course, it starts with great product. Our women's team has been working relentlessly thinking differently to elevate style and performance as we continue to earn her trust and greater closet share behind key core items. A great example is the Misty Inspired collection that launched in the first quarter, designed purposely to elevate style, silhouettes and layering pieces that can be worn anywhere. We're seeing strong demand for the entire collection and have gained valuable insights into how we market these collections and engage her into our brand even more deeply.

Across our whole women's business, we're proud of the foundation we've laid, but really feel we're just getting started, identifying her unique UA voice. As we continue to learn, engage and drive insights, we see an incredible amount of runway for this business, but there's work to be done.

In addition to the success for moves toward category management, we made progress against operational goals as well. This quarter marked the completion and go-live of our work with SAP to build what we call the single view of the consumer. This system combines global point of sale, E-Commerce and transactional information with our Connected Fitness business. As we make the transition from data collection to data analytics and reporting, we're now equipped with realtime information on over 200 million users. This empowers our teams to leverage our speed to create, drive and accelerate value for our consumers through new personalized products, services and experiences. So what used to take weeks or even months for us to get information on new product performance, training workouts and demographics now takes seconds to speed and analytical horsepower provided by this incredible Consumer Insight Engine.

Two first quarter examples of utilizing single view of the consumer include our athlete recovery sleepwear launch with Tom Brady and the Project Rock collection, a collaboration with Dwayne Johnson. Two launches for us that drove incredible demand and now, we are currently working to replenish, except where we're building scarcity.

Using UA's SVoC, we're able to instantaneously analyze consumer purchase behavior, including gender, ages and workout frequency, among other attributes. These insights will now be integrated in the next-gen product development, helping drive discussions about product planning, assortments, future marketing and, ultimately, a better and more premium experience for our consumers.

Next up, and only a few months out, is an upgrade of our entire enterprise resource planning system that we've been investing heavily in since 2015, specifically SAP's FMS, or Fashion Management Solution. FMS will allow us to manage all of our processes across one data landscape with the ability to analyze large information volumes, also ensuring greater operational efficiency, better inventory planning and greater speed-to-market. This has been no easy effort and I take great pride in calling out and thanking the hundreds of global teammates that have been working tirelessly, living, breathing, testing and retesting again and again to ensure that we're optimally aligned for this game-changing evolutionary step for Under Armour.

Once combined, category management, Connected Fitness and our SAP capabilities will become a powerful instrument to further address the rapidly changing consumer environment. From insight-driven product creation to purchase, through end use, this data-fueled ecosystem creates one of the most powerful and unique consumer connections in our industry, a true 2-way consumer-led conversation that will directly integrate and strategically influence our go-to-market strategy. This highly sophisticated engine represents a critical asset and competitive advantage as we work toward becoming a $10 billion business.

So what does Q1 tell us about Under Armour? It tells us that we're stable and staying healthy even if segments of our wholesale business in North America fight through uneven terrain. It tells us that we're actively managing our growth, that our inventory levels are appropriate and that we have a strong innovation agenda. It demonstrates meaningful progress against our move toward category management, a structure strengthened by vital systems upgrades. And it confirms that we're in a good position to invest in growth opportunities, both short and long-term, while driving to become even more efficient and effective across our business.

With the start to the year, where we did what we said we would do, we're tracking well against our targets. As we look to the future, we will continue to make the best long-term decisions for our brand, teammates, communities, and, of course, our shareholders. And we're going to do it while adding more than $0.5 billion in revenue in 2017, implementing new SAP systems, standing up our category management structure and keeping an energized flow of exciting product and experiences coming for our consumers. We know we've got hard work ahead of us. And while we're certainly used to that, we respect the challenge and are pursuing it full force, and that's what I will leave you with. Our team is hungry and humble with our heads down, engaging, empowering, editing and executing.

And with that, I'll turn the call over to Dave to take a deeper look at our results.

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David E. Bergman, Under Armour, Inc. - CFO [4]

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Thanks, Kevin. We are pleased with our first quarter results, which came in a little better than we expected due to some cadence and timing shifts. And we remain on track with our full year outlook. So let's take a look at how we did.

Total revenue in the first quarter was up 7% to $1.1 billion. By product type, apparel revenue increased 7% to $715 million, driven by strength in golf, team sports and training. By continuing to focus on improved assortments, newness and innovation, including premium apparel platforms like Threadborne and athlete recovery sleepwear, we feel well positioned to deliver a solid year.

In line with our expectations, revenue for our footwear business was up 2% to $270 million. Recall that we're lapping 64% growth in last year's first quarter, which had significant strength in basketball sales. Some footwear standouts in the quarter included golf, women's training and running.

Additionally, we had less liquidation in the quarter as we're working to ensure appropriate-to-channel inventory and driving our premium position in the category.

Hitting $1 billion in revenue in 2016 was a great accomplishment, and we expect another year of growth that outpaces the overall company.

Revenue for accessories increased 12% to $89 million in the quarter with solid results for men's training, youth and global football.

Looking at revenue by channel. Our wholesale business was up 4% to $773 million, reflecting an uneven North American environment and a tough comp given the bankruptcies of several key partners in 2016.

Direct-to-consumer revenue grew 13% to $302 million, representing 27% of global revenue in the quarter. This growth was balanced across all 3 concepts: Factory and Brand Houses and E-Commerce.

Our licensing business grew 25% to $24 million in the first quarter, driven by strength in our socks business and our licensed partner in Japan.

In addition, our Connected Fitness business was up 2% to $19 million.

On a regional basis, in line with our expectations, our North American business was down 1% to $871 million as the promotional environment we saw in the fourth quarter of last year carried into 2017. Accordingly, we continue to proactively manage our inventory, while still protecting brand health with meaningfully less liquidation product in this year's mix as previously noted.

Also important to note is that growth from new wholesale distribution in the quarter was not enough to offset the bankruptcies of 2016.

Our international business, which we define as everything outside the U.S. and Canada, continues to deliver strong top line results, posting a 52% increase in revenue to reach $227 million, or 20% of total revenue in the quarter. Currency-neutral revenue was up 57%.

Looking down into geographies. EMEA revenues were up 55% to $103 million, driven by continued momentum in the U.K. and Germany with balanced strength across wholesale and DTC, and increases in nearly every sport category.

Asia Pacific revenues increased 60%, driven by strength in China and Australia as well as the first full quarter of contribution from South Korea, which is now direct versus previously being through a license.

And finally, our Latin American business was up 30% with broad-based growth across distribution channels and categories.

Turning to margins. First quarter gross margin was down 70 basis points to 45.2% due to continued inventory management efforts, a regional mix that skewed heavier toward international, and foreign currency impact. These headwinds were partially offset by channel mix, which included a lower mix of liquidations.

SG&A expenses increased 12% to $498 million, driven by investments in our direct-to-consumer, international and footwear businesses. This increase was slightly better than planned due, in part, to some timing shifts, including headcount additions and demand creation expenses, which had moved into future quarters based on execution needs.

First quarter operating income was $8 million. Interest expense in the quarter was up 73% to $8 million. And our tax rate in the first quarter approached 200% compared to 42% last year due to discrete items taken in certain foreign markets and the implementation of new accounting rules related to the tax treatment of equity compensation. Combined, these were about $3.5 million with the biggest portion driven by discrete international items, which are particularly impactful to our effective tax rate in periods, such as the first quarter, with lower consolidated pretax income levels.

Taking all of these to the bottom line, we had a net loss of $2 million in the first quarter, or a $0.01 loss of diluted earnings per share compared to a $0.04 gain in the prior year.

Now turning to our balance sheet. Cash and cash equivalents was up 10% to $172 million. Inventory was up 8% to $902 million, while we...


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