Carrie Gillard - Under Armour, Inc. Kevin A. Plank - Under Armour, Inc. Chip Molloy - Under Armour, Inc..

Michael Binetti - UBS Securities LLC John Kernan - Cowen & Co. LLC Erinn E. Murphy - Piper Jaffray & Co..

Good day, ladies and gentlemen, and welcome to the Under Armour Third 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. As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Ms. Carrie Gillard, Director of Investor Relations. Ma'am please go ahead..

Thanks, and good morning to everyone joining us on today's third quarter conference call. During the course of this call, we'll be making projections or other forward-looking statements regarding future events for the future financial performance of the company.

We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. These risks and uncertainties are described in our press release and in the risk factor section of our filings with the SEC.

The company assumes no obligation to update forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, as required by Regulation G, we need to make you aware that during the call we will 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 from today's call, both of which are available our website at uabiz.com.

Joining us on today's call will be Kevin Plank, Chairman and CEO; followed by Chip Molloy, our CFO, who will discuss the company's financial performance for the third quarter and provide an update for our 2016 and longer-term outlook.

After the prepared remarks, Kevin and Chip, along with our Senior Vice President of Corporate Finance, Dave Bergman, will be available for a Q&A session that will end at approximately 9:30 a.m. Finally, a replay of this teleconference will be available at our website at approximately 11:00 a.m. Eastern Time today.

And with that, I'll turn it over to Kevin Plank..

innovative product, brand strength and relevance and the best team in the industry to drive market-leading results. A large part of that growth in North America will come from footwear as we firmly believe that we are at a tipping point in terms of opportunities to gain market share.

In the back-to-school window of July through September, our overall footwear market share nearly doubled according to industry data. So, while we've always understood that the size of the prize in footwear was massive, we knew coming into this year that there were a lot of consumers in the U.S. who didn't know us as a footwear brand.

So this summer, we launched our, It Came From Below, Footwear campaign which focused on the importance of footwork as athletes trained.

We started with Bryce Harper in baseball and for running we hosted a UA run camp, where we took experienced men and women from urban run crews and put them and their Under Armour footwear to the ultimate test in the world's toughest conditions.

With the start of the NFL season in early September, we incorporated NFL MVP, Cam Newton with the prince of a thousand enemies spot and the launch of a game on Snapchat with Cam that drove incredible engagement.

The final piece of our footwear campaign debuts today with the launch of the Curry 3 the TV spot debuts tonight on TNT during opening night of the NBA season combined with our second tour of Asia where we took Stephen to four cities in early September we are continuing to build our relationship with the basketball consumer and driving awareness and UA as a footwear brand by partnering with the two-time NBA MVP.

So, while Stephen has been a big part of building our footwear story, we're also having success in other areas that are contributing to the growth. The highlight is the number one Football cleat in the market four years running now and continues to showcase our ability to elevate and drive premium footwear in every category we choose to be in.

We made our first football cleat in 2006 and since then have changed the look of the entire category while elevating the price. This type of market evolution and positioning in cleated underscores our opportunity in other footwear categories as we gain awareness, credibility, capabilities and scale.

We are focused on the exploding running market in China and we saw greater success there with the Bandit 2 running shoe. An example of how we are building key footwear platforms that will continue to scale and extend. We are improving our ability to leverage our global assets and help drive business in local markets.

And we continue to focus on being a premium brand in footwear with a goal of having more than 50% of our volume in running footwear over $100 by just spring of next year. We saw incredible demand for our Slingride product offering during the third quarter.

Slingride is our second running shoe utilizing a full knit upper to deliver comfort and fit where you need it. Priced at $100, it did extremely well in the market and we believe there is great opportunity in what knit can mean for Under Armour running.

So, we'll continue to invest meaningfully in our footwear business with a focus on talent as well as infrastructure that will help improve the profitability in our business as we scale. We believe we are at a moment in time where we can gain share in footwear and we are prepared to make investments that will drive long-term profitable growth.

That same focus on the long-term opportunity holds true for our investments as we build out our international business. We continue to post strong growth across all our geographies. While our business in EMEA continues to be strong, it's our Greater China market that remains the biggest growth story for our international business.

Posting revenue in the third quarter equal to the entire first half of the year and firmly on a path to more than double their business from $80 million just a year ago. We are making incredible inroads in China that we believe will drive our position in this critical market.

With sports and fitness being promoted strongly by the government, we continue to be viewed by the Chinese consumer as the Performance Brand or referred to often as the Professional Brand.

Some of the things we're doing in China include focusing on building premium Brand Houses with a controlled retail environment and a sustainable full-priced business model where we have already opened over 100 doors this year.

Driving a strong e-commerce channel presence and utilizing an Asia for China and local-for-local model to reduce costs and improve fill-rate and on-time delivery. But we are just getting started in China. Much like we are in new markets around the world.

We've rolled out e-commerce platforms in four new markets this year including Mexico, Australia, New Zealand and Chile. And that's after doing the same in 14 new markets in 2015. Bringing our total global e-commerce sites to 30.

We're building a global organization for the long-haul, as I said earlier funding these growing international markets may require additional investment in the short-term. However, we believe they are essential to our long-term goal of market leadership.

In addition to footwear and international, we're making investments in other key growth areas that will contribute and drive our ability to become a bigger and better company. Including; retail, where we're ensuring that we deliver a great presentation of brand wherever our consumer decides to transact.

With SAP, we're creating efficiencies in our systems as we continue to grow in scale. In category management, where we are organizing around nine sport categories and executive leadership to create focus and alignment across our business.

And finally, merchandising, which enables us to differentiate our product to create unique experiences for our consumers across our points of distribution and now gives us the ability to reach more athletes than ever before. The third key where we will continue to overinvest in the near-term is Connected Fitness.

We're doing so because we believe strongly that it will prove an important differentiator in our relationship with the consumer. With nearly 190 million registered users in our community, we continue to gather critical information to help us change the way athletes live.

We firmly believe that going forward, brands without substantive communities will be at a deficit when it comes to building a relationship with our consumer.

We are investing in our single view of the consumer through our partnership with SAP as we look to continuously drive a better business as we scale, knowing that much of the benefit will not be seen immediately.

That said, we expect to see return on these investments starting in the near-term with tools like self-service consumer comparison reporting where we can quickly compare the demographic profiles, workout habits and purchase behavior of any group of consumers.

We are growing our analytics capabilities and moving from backward-looking reporting to predictive and prescriptive analytics which allow us to establish and drive growth in a more meaningful way.

We will be able to personalize our e-commerce homepage driving off your geographic profiles, which sport categories are important to you, your exercise, how frequently you exercise, sleep, weight, diet, and the make-up of your household.

Going forward, we will continue to dive into the data and leverage the insights to deepen and expand our relationship with athletes as their needs change. Our brand continues to evolve and shift with the changing demands and needs of the consumer.

And as I said earlier, we are an incredible industry where sports and health and fitness are driving forces in our success. Our investments, the ones we have made in the past and we'll continue to make in the years to come, are critical for us to realize the true potential of the UA brand.

We are confident we are making the right investments and our track record of investing for growth is exceptional. Our investments are all about expansion of brand, about opening the aperture of what we are capable of and never being satisfied with our past successes.

So recently I pulled together the top leaders in the company and discussed the strategic growth and direction of Under Armour. We came away with three key areas of focus that I want to share with you today. First, getting big fast. Second, making retail a core competency. And third, getting more shoes on feet.

To be clear; get big fast does not mean at all costs, it means prioritizing our growth and making the right decisions for the brand. It means growing the right way. As I said earlier, we have succeeded over the past 20 years by consistently punching above our weight and that will not change.

But our growth now gives us opportunities to move up in weight class and we find ourselves well-positioned at this moment in time to compete for long-term relationships with athletes, teams and league affiliations that we previously could not justify.

Now with the flexibility to lock in 10-year to 15-year deals, we can make investments on a global scale that will help drive authenticity, awareness and revenues for our brand. It is not going to be easy. The mix of our business is evolving and so must we, which is why making retail a core competency is critical to our future success.

We'll do that by answering the call to consumer who is asking us to give them more in the place that they expect to find our product. We are no longer just a North American apparel company.

We are a retail company across multiple consumer touch points and we'll look to be best-in-class and when we know how to be a great retailer, we can leverage that expertise to help us be a better wholesale partner and therefore continue to elevate and meet our consumer where and how they want to engage with us.

So to summarize where this nets out, both international and footwear are growing faster in the near-term than we had originally planned; and as a result, we remain confident in reaching our 2018 revenue target of $7.5 billion.

While this mix shift will create margin pressure, we have a significant opportunity to offset the sales mix impact by continuing to improve our footwear product margins over time and we will. But the market share opportunity cannot wait.

We will remain focused on getting more shoes on feet, because we see footwear being as big, if not bigger than apparel one day. And as we drive footwear revenue, the dynamics of the business do change, but that's a good thing because we are truly just getting started in footwear.

So before I pass to Chip, I just want to reiterate my confidence in the future of our industry and more specifically how Under Armour with the right investment and incredible brand momentum will continue to lead and outpace the competition.

As I said during my opening, I believe we operate in a resilient industry with strong competitors who have built global businesses over the course of many years.

And while their sheer size poses consistent challenges for us, and challenges we have consistently met and beaten, we believe that the monumental shift that is taking place in both the manufacturing of shoes and apparel and the way consumers buy our products is leveling the playing field and will enable us to build a bigger and better global brand.

We've delivered great results on the path that has led us to this moment in time. 26 consecutive quarters of 20-plus percent revenue growth. During that stretch, we've established a culture of growth that equips us for this next chapter in our story. And today, we are reiterating our target of $7.5 billion in revenue for 2018.

Our challenge is that we need to continue investing on multiple fronts, in categories, geographies, and the talent and infrastructure required to capture those growth opportunities and that's why the dollars we are committing reflect a broader investment strategy.

In the short-term, these investments will impact our operating income growth, which Chip will walk you through in a moment. We understand that the path to industry leadership grows more complex as we expand in categories, channels and geographies.

And I am confident we will remain the market leader in growth by delivering innovation at every touchpoint a consumer has with our brand. Thank you. And now, I'll pass it over to Chip..

first, liquidations negatively impacted the quarter by approximately 80 basis points versus the prior year; second, product margins negatively impacted gross margin by approximately 30 basis points versus the prior year, driven by product mix, higher discounts and promotions, partially offset by continued improvement in product input cost; and finally, foreign currency exchange rates negatively impacted gross margin by approximately 30 basis points.

In the quarter, gross margin declined more than planned, driven predominantly by higher-than-expected promotions both the volume and rate of liquidations and foreign exchange rates.

Despite liquidations having been a headwind on margin rates for most of this year, we now believe that our inventory position is healthier and that liquidation should not have the same negative impact moving forward. Selling, general and administrative expenses grew 20% to $499 million, compared to $416 million during the third quarter of last year.

Growth was predominantly driven by investments in our direct-to-consumer businesses both retail and e-commerce along with the infrastructure and people necessary to support our growth and strategic initiatives such as product creation, innovation and sport-category management.

Selling, general and administrative expenses were less than planned in the quarter due to lower incentive compensation and the timing of marketing activations.

A portion of the expected marketing spend shifted from the third quarter to the fourth quarter to better align with key initiatives including the launch of Curry 3 that Kevin mentioned earlier. Operating income for the third quarter increased 16% to $199 million compared with $171 million in the prior year period.

Interest expense for the third quarter increased to approximately $8 million compared to $4 million in the prior year's period. Within other income and expense, we recorded a loss of $1 million in the current year versus a loss of $3 million in the prior year.

In addition, the tax rate in the third quarter was 32.6% compared to 38.8% in the prior year, largely due to improved international profitability in the current-year period and a tax benefit related to our prior-year acquisitions. Our third quarter net income increased 28% to $128 million compared to $100 million in the prior year period.

On the balance sheet, total cash and cash equivalents for the quarter was $180 million compared with $159 million at September 30, 2015. Inventory for the quarter increased 12% to $971 million compared to $867 million, while total debt increased to $1.07 billion as compared to $902 million.

Looking at our cash flows, our investment in capital expenditures was $73 million for the third quarter compared to $71 million in the prior year's period.

We now expect to spend approximately $450 million for the full-year, including investments in our global offices around the world including our headquarters in Baltimore, our distribution centers, our SAP platform and global direct-to-consumer. Now, moving on to our guidance for the remainder of the year.

Based on our current visibility, we continue to expect full-year 2016 net revenues of approximately $4.925 billion, representing growth of 24%. And operating income in the range of approximately $440 million to $445 million, representing growth of 8% to 9%.

Gross margins for the full-year are expected to decline approximately 80 basis points compared to last year driven by the same factors that we have experienced through the year.

Based on our outlook of $4.925 billion in revenues, SG&A is now expected to grow approximately 26%, as we remain focused on making the right investments today to drive our long-term global success. Below the operating line, we expect interest expense to increase to approximately $30 million in 2016.

In addition, we now expect a full-year tax rate of approximately 35.5% and fully-diluted weighted average shares outstanding of approximately 446 million. I would also like to provide additional color on the fourth quarter. For the fourth quarter, we expect revenues to grow approximately 20%.

We believe the strength of our brand and increased breadth of head-to-toe product offerings position us for another quarter of strong growth in what has been a challenging North American retail environment. With strong momentum in footwear and international, we remain focused on delivering key products and assortments for the holiday season.

Gross margin is expected to be relatively flat versus prior year. Within SG&A, as I mentioned earlier, the timing of certain marketing activations along with continued investment in long-term growth opportunities like Connected Fitness, international and direct-to-consumer will drive the growth in the quarter.

For the fourth quarter, we expect operating income in the range of $186 million to $191 million, representing growth of 5% to 8% over the prior year. Before we turn it over to Q&A, we'd like to briefly discuss our long-term outlook and associated guidance for next year.

At our 2015 Investor Day, we announced our goals of achieving $7.5 billion of revenues and $800 million of operating income by 2018. We are on track to achieve our 2018 revenue goal of $7.5 billion and expect to grow full-year revenues consistently in the low 20%s in both 2017 and 2018.

At the same time, we expect annual operating income growth in the mid-teens each of the next two years as we focus on investing to get big fast. As Kevin highlighted earlier, the landscape for our business and our industry continues to evolve and in a fast-paced world we must be willing to adapt make game-time decisions and drive our brand forward.

North America apparel growth is slowing across the industry. While we expect to continue to significantly outpace the apparel industry, the growth rate going forward will be less than expected from our Investor Day in 2015. This is a moment in time.

We could choose to optimize for more near-term profits, but we believe it is more prudent to invest to maintain superior growth rates, while gaining both share and scale. Growth, share and scale are the priorities for our brand.

That said, we will invest more heavily in areas that we can grow faster such as footwear, direct-to-consumer and international as well as more aggressively enter sport fashion like UAS and the much-broader sports lifestyle category.

In footwear, that means doubling down on creating great product through innovation and design, scaling and extending our pinnacle footwear franchises and investing in the complete market strategy from merchandising to in-store marketing.

In direct-to-consumer, we are driving investment in mobile, the optimization of the Factory House store footprint and building our premium Brand House expressions to help us drive market share. International growth includes being more aggressive in key markets where we are gaining significant awareness such as Asia.

In the sports lifestyle category, we are accelerating investment in the people necessary to design relevant and brand-right product. And finally, we will continue to make key investments in assets that promote the brand.

Beyond 2018, we believe we have opportunities across categories, channels and geographies to consistently deliver superior revenue growth relative to our industry.

We also believe that as we approach $10 billion in revenues, the scale it provides along with the investments we have made in people, infrastructure and systems will begin to pay off in the form of increasing operating margin rates. As Kevin stated earlier, we've delivered great results on the path that has led us to this moment in time.

The dollars we are committing reflect a broader investment strategy that will enable us to build a company as big as our brand. We would now like to open the call for your questions. Similar to our last earnings call, Dave Bergman, our SVP of Corporate Finance will be joining us this morning to provide additional assistance with your questions.

We ask that you limit your questions to two per person, so we can get to as many of you as possible..

Our first question comes from the line of Michael Binetti with UBS. You line is now open..

Hey, guys. Good morning..

Hey, Michael..

Kevin, let me – I'm going to start with a question for you Kevin.

Can you just help us better understand within the context of the longer-term guidance, why you don't think you'll be able to hit the $800 million in operating profit income, and maybe what has changed that gives you confidence in hitting the $7.5 billion in revenues, wow, but not the $800 million in operating income?.

Yeah. Thank you, Michael, and this is obviously an area that I want to spend a little time on and go deep, so give me a few minutes to craft this for you..

Sure..

So, as Chip just said in his commentary, we talked about building a business as big as our brand. We've had our eye on $10 billion, that's the way that we see our company, I think it's the way that people view and judge us with $7.5 billion being our next milestone to be hit by 2018.

And again, we want to reiterate that we're on track to hitting that goal. But there are a few factors that led to the decision to modify the operating income for us, since Investor Day September 2015.

So what's happening and what's different? First of all, in North America, it's a place that provided incredible air cover for our brand for a very long time and I think like we're seeing in a lot of places that, that is modifying, it's changing.

In the investments that we've made over the past 11 years as a public company, we've seen that our business, thankfully, has evolved from being strictly a North American wholesale apparel brand into a global sports brand that also has the ability to claim international and footwear as probably two of our largest and greatest opportunities for growth.

And all the while, I want to be clear, with apparel remaining incredibly profitable and still growing at the tune of 18% in just the third quarter for us. So, there's not an end to the North American apparel story. That continues to march on for us as well. We just have other opportunities that are outpacing some of that growth.

So some of those opportunities, like footwear and international, they are exceeding what we're putting up, in 24-plus percent topline growth as a company and that change in mix is modifying our gross margin story in the short-term.

That means while we're doing better in footwear and international than we thought we were capable of doing, that we're fortunate to have these levers to pull and, frankly, attack as we maintain our industry-leading growth on the top line as well as continue to drive what we can in making the right investments in the right parts of our business.

So it also changes our distribution.

The fact that we've had three bankruptcies that have occurred in just the last 12 months in sporting goods that account for more than $4 billion in lost revenue for the sporting goods industry in North America, and compare that relatively speaking that going all the way back to 2008/2009 there was just $170 million of bankruptcies, of lost revenue in our industry.

So we saw something pretty big happen that we'd thought about, but it definitely has been eye-opening for us, especially recently. We want to be clear, like our demand is still there, like this doesn't mean that the demand for the Under Armour brand has disappeared, but it certainly hasn't reappeared dollar-for-dollar in our immediate distribution.

We believe that the opportunity is also still there. We just have to be more thoughtful about how to capture the consumers and their dollars including replacing with our own direct-to-consumer controlled retail as well as expanded distribution by doing things like Kohl's, which will carry the Under Armour product beginning in 2017.

We also plan to make additional investments in the places where we know that we can win. So right now, that moment in time is a very important message I think for, obviously, our shareholders but, frankly, for our team and our consumer.

Footwear and international are going to continue to be staples of our investment strategy, because we think the opportunity for us now is to strike and strike hard.

And we take the momentum of things like Curry, with what is launching tonight, and I think you'll be pretty excited by what you see and, most importantly, the consumer is going to be pretty excited about what they see.

We also have opportunities like lifestyle that, as we've talked about before on these calls, represents roughly a third of the revenues of our two largest competitors and today less than 5% of the business for Under Armour.

Thirdly, Connected Fitness is continue going to be an area that we'll invest in, where we believe that redefining the expectation the consumer has of a sports brand with our data will give us perspective on our consumer that will be truly unmatched in our industry.

Another factor that we've seen recently has been the escalation in the price and, frankly, the duration of sports marketing assets. The length of these deals has gone from standard 5-year deals arrangements to now 10 to 15-year deals.

UCLA, one that we just wrapped up recently this past spring, was the largest collegiate deal in history, but it's a 15-year partnership. And at the same time, we also locked up Cal Berkeley and giving us a true position in California which, frankly, prior to that, we really didn't have.

If we deem them strategic, the ability that what's happening in the sports marketing as these assets are being wrapped up, it's either act now, or lose them for frankly the mid to long-term.

This, of course, does not mean every deal and I want to be clear, is that the shift in operating income for us is not about creating a bigger marketing budget so we can go buy more stuff. It is about truly investing in our brand, our systems, our infrastructure and especially our team. I'll give you another example of that in just a minute.

So all those things are just some of the tactical but not to be ignored long-term strategic issues, new issues that we're facing since September of 2015.

And when you grow a business 20-plus percent a quarter for 6.5 years, it builds a unique profile that we find ourselves today, which means adding $1 billion and growing a year in revenue and it requires significant resources and investment.

But I want to be clear, is that the growth remains intact, it just costs more short-term investment dollars to achieve and the belief is that greater efficiency can come later and that the growth that we have over the short-term EPS is a priority for our long-term goal of becoming the number one sports brand in the world.

And I want to reiterate that, like we are in this for the long haul and the opportunity that we see is to be the best in the world.

And that does require investment and we know that people aren't going to like the way it sounds, but this is – I don't know if there's ever been another model like ours at 6.5 years with the growth that we've seen, particularly in consumer. And so the book isn't written anywhere and if it were, we'd have read it.

But this is what we're telling you is that from our purview of 11 years public and what I've seen in our business, that now is the time for us to strike because I think the upside is so much greater on the other side.

So on a relative basis, we believe the short-term dollars are better spent building our infrastructure, ensuring that we capture that 2018 goal of $7.5 billion, especially once we achieve the scale of a $10 billion growth company, which will be when we can truly begin to leverage our model to optimize expanding gross margins, our SG&A investment and ultimately shareholder value.

So one of the issues that I just – I know people notice but I think it's worthy of us to say, that you face as a superior growth company, which Under Armour has always demonstrated its ability to be, is that operating growth of 15% for virtually any S&P or Fortune 500 business would be outstanding.

But because our business is growing in the 20%s, a profile that only a very few rare companies in either the S&P or Fortune 500 and frankly not from our industry from either pharma or tech share and where we still expect to deliver more than $0.5 billion of operating income profit in 2017 alone. So we're not saying we're losing money.

We are moving and marching forward or in growth terms that more than $0.5 billion is more than nearly two times the total revenue we delivered in our IPO year of 2005 proving that our investments in things like footwear, women's, and international have all paid off.

But at the end of day, look, we believe that by making these investments, the ability for us is to mature into a business as big as our brand. And we want to drive best-in-class profitability as our business hits scale, our growth rates become more measured and we've got the people, distribution, systems and infrastructure to optimize.

Today, we have pieces of it, but frankly it's just incomplete and that's why we must continue to invest. I want to give some perspective here for a second just on where we are. I mean, Under Armour's – we got dropped into the sporting brand pond about 20 years ago.

And we jumped in and there were a lot of players, 20 players, 30 players or brands as many as you want. Today, we're the third-largest brand in the world. We're the second largest brand in North America.

And our two largest competitors have more than 20,000 points of distribution each in North America alone compared to just our 11,000, which speaks to just some of the runway that we still have in front of us right here in our own backyard. They are also six times and four times our size respectively.

So, let me give you a real-time example of what that means.

It means in an area like women's footwear where we currently have just six teammates on our women's footwear team based in Portland, who are doing an amazing job for us and is building best-in-class product, our competitors who we get compared to on a one-to-one basis have dozens or even hundreds of people covering the same category.

It's our responsibility for our long-term growth objective of being number one in youth, in men's, and of course, women's across all categories to continue to invest to meet that long-term goal. So, I want to be clear is that, you know, we have a saying around here, it's called, no loser talk. And it's the last thing we would ever do.

And I want our shareholders to know how hard this company fights for every single dollar at the bottom line, but how we're looking honestly at this moment in time and saying it's time for us to invest. We have the best team and we've got the best brands and we expect to continue to grow..

Thanks for all the detail, Kevin. I'll re-queue with my other questions. I appreciate it..

Thank you..

Our next question comes from the line of John Kernan with Cowen and Company. Your line is now open..

Good morning, Kevin. Thanks for taking my question..

Thank you..

It seems like product flows into the retail channel and your wholesale channel are changing pretty dramatically, and we've heard from some of your competitors. And it just seems like there's a need for speed out of the supply chain and the sourcing from all the brands.

Can you just talk about the change in product flows and how it's going to affect your business going forward?.

I mean, product flows for us, there's a lot of ways for us to think about it. So first of all, we're seeing a tough story that as we look or think about North America, you've heard a couple of people talk about it.

And again, it's nothing's going away, but it's definitely been reflective in just some of the bankruptcies and the other things that we've seen recently. The people we're doing business with, I believe are doing very well. They're getting very smart about the way they're managing and running their business.

But it's definitely, you know, you're not finding our accounts that are taking big inventory positions and betting on the cold weather. So, those are the things that are leading for us that's requiring us to run and to drive a better business.

Today, I would define Under Armour as a great brand and as a great brand with a – but probably a good company. The opportunity we have is things like what we see with some of the speed to manufacturing.

Things like recently when we announced our partnership at City Garage here in Baltimore and when we talk about a local-for-local strategy, which means bringing manufacturing back to the United States and again that's not a made in the USA initiative as much as it's an initiative for us about making great product anywhere.

It's that the people of America want product made in America, the people of Europe want the same, the people of São Paulo want products from Brazil, so we're going to continue to answer that and look to drive on that answer. But there's a lot of investment on the front end.

And the good news is that the sad thing about our industry is that a shirt and a shoe are still made the exact same way they were 100 years ago and we see a massive opportunity for that to improve.

So some of the things I talked about in my script and my comments was how that we have the ability, I think, to accelerate the speed at which innovation can happen there. Right now to make a single shoe, for instance, it takes upwards of 300 pairs of hands to make a single shoe.

So we think there's a lot of room for innovation, we're finding a lot about ourselves and I think that's continuing to move for us as well..

Okay. And if I can just sneak one more in.

I think longer term, what people see as they see one of your big competitors out in Portland with a mid-teens operating margin, they see one of your other competitors in Germany with a mid-single-digit operating margin, where does Under Armour fit in long-term? What's the true driver of margin expansion long-term? Is it really just following more through by better SG&A leverage, or gross margins and product margins can move higher? What pushes the operating margin longer-term when we think beyond just 2018?.

Hey, John. This is Chip. A couple of things..

Hey.

How are you?.

As we start to get to $10 billion, there's a couple things that will happen.

One, the gross margins, we should start to get expansion on the gross margins and we'll start to get that because we won't be faced with as much of a mix shift that we're faced with today and the improvements we're seeing on the cost side of the house, we are seeing those today and they'll continue; but over time, as we start to gain more and more scale, we'll see that gross margin improvement.

And on top of that as we get more into lifestyle, we'll see more gross margin as well. So, once we start to get towards $10 billion we'll see gross margin. At the same time, that's when we should really start to be able to leverage our expense structure. We're investing across the world.

We're investing in offices, we're investing in IT systems, we're investing in distribution capacity. All of those things are happening today and will continue to happen over the next couple years, but we will start to see that leverage.

So, it becomes sort of a perfect storm, once we get to $10 billion and we'll start to see operating income margin expansion. And I think we'll head towards more the premium level versus the other person or the other competitor that you're speaking with..

Okay. Thanks. Best of luck..

Yeah. Thanks, John..

Our next question comes from the line of Erinn Murphy with Piper Jaffray. Your line is now open..

Great. Thanks. Good morning. I guess just on that last point Chip, for you, on the gross margin, the analyst that you talked about, 49% gross margin and now it sounds like you're saying that you need to get kind of bigger scale towards that $10 billion mark to really see that gross margin pick up.

I mean, can you just help us think about at least over the next couple of years from a planning horizon perspective how should that gross margin line metric look?.

Yeah, Erinn. Well, first off, in any given quarter there will be noise around liquidations or FX. So that can happen in any given quarter, but over the course of the next couple years, we as a company will probably see flat gross margins.

We're going to have mix as a headwind as we continue to grow our footwear at two times to 2.5 times our apparel and accessories business and the disparity between those gross margins creates a mix shift for us. At the same time, we're already seeing improvements in our footwear margins and we'll continue to see those improvements.

And so net-net, we think we can overcome that mix shift through the improvements we're seeing on the costing side for the next couple of years; but net-net, it will be flat.

Then as we start to approach $10 billion as I mentioned earlier, that's when we believe that we will have the scale and we will have a much more significant mix at that time of footwear that you'll start to see an expanding gross margin come $10 billion..

Okay. That helps..

Erinn, we're also – I mean, I think it's just good to drive home the point about footwear and the opportunity we see there. So, Under Armour today, we're in the low to mid-30%s when it comes to our footwear gross margin that nets out compared to our competitors which are 10% or roughly 1,000 bps in front of us.

And so, we've made great strides in the last couple of years actually taking hundreds of points of gross margin and calling that back and we see great opportunity as well. And so there's no secret sauce that someone else has that we don't.

It's been time, it's been energy and experience and frankly having just gotten back from a trip from Asia about four weeks or five weeks ago and seeing the investment that our manufacturing partners are making us throughout China but also through Vietnam and the Philippines where you're seeing a lot of these new facilities going up, there is a great belief in a company and a brand like Under Armour that just a couple years ago, I think footwear is important to lay out.

Last year, we made 30 million pairs of shoes. 2016, we'll make 40 million pairs of shoes. Obviously, you hear how bullish we are in footwear, so that number is increasing. And again, that's impressive, but it still compares to the hundreds of millions of pairs of shoes that are made by our competitors.

So as we build scale, this will massively come on board as well it will help with people like Colin Browne, who is our new President of Sourcing, in some of the things that we'll do driving some of these initiatives.

So, we see there's great opportunity in gross margin and this is nothing that we're laying back in – there's no excuse for what we're doing with operating income as it relates to – or the way that we're attacking gross margin across the board..

Okay. That's helpful. And then just on inventory up 12%, so fairly lean. I mean, do you feel like you have enough inventory if you go into the holiday season? And I think you're still planning for 20% growth in that Q4 and early part of 2017.

How should we just think about that at the end of the quarter as well?.

Hey, Erinn. It's Chip. We feel like we're in really good shape from an inventory perspective. We did have very large growth rates over the course of late last year and then the early part of this year.

So that growth rates come down, but the inventory is in great shape, and the inventory we have, we do have availability in the event that we all hope that it gets cold and it'll be nice and we do have the inventory to supply for that..

Okay. And then just last, Kevin, for you on women's. I didn't hear you talk much on this call on the women's opportunity.

Can you just flush out where we're at now and kind of where you see that as you think about your 2018, $7.5 billion goal? Is that still unchanged in terms of the opportunity?.

Yeah, completely. So, I want to be clear is that women's remains one of our brightest opportunities for growth in our business. Women's is still growing in the quarter, up 17%, I think 18%. And again that the heart of this is category management.

I spoke about it in my prepared remarks and we've done that with women's to specifically call it out and make sure that it gets the emphasis it needs. Pam Catlett is leading that. She's an industry vet and has been a complete pro in bringing the pieces together, but there's a lot of pieces to bring together.

Probably the best thing I could say is, when you talk about our women's business, we have $1 billion women's brand. It's taken us one heck of a long time to get here, but we're incredibly proud of what that means.

And but, you know what, I think probably looking at women's through the lens of – I gave the example about footwear in one of my earlier answers, and we have six people in our women's footwear team. We just built our first Women's Last, last year for the first time and those are the things from an operating income standpoint.

I want to say is that when people say you don't have enough – people dress toe to head.

It's the way they start with their shoe, but if the shoe isn't right, if the fit isn't right, if the color isn't right, if we don't have the right team, you know, the reason we didn't build the Women's Last before is because we were focused on the ability that we couldn't afford it.

And so we're making a lot of those small decisions right now that we truly believe that looking at 2017, 2018, making the investment as unfortunately and fortunately because our growth rate is so great, it creates that drag. But making this right investment in footwear is important.

So we go back with women is that one thing we think is incredibly important is that the football cleated opportunity and what we're doing being the number one cleat there isn't doing much for the women's category.

But the confidence that we're demonstrating in running from our knit products, this is the – again, this will be the first year in the market that we'll have that Women's Last on people's feet, on women's feet and we also think that as we continue to drive a better product for driving both performance, style, strength and beauty, the focus is we'll have.

And so I think we've got a terrific team in place. We are investing in our women's team as well. We think footwear will be one of the catalysts for it, but achieving $1 billion business in women's is a pretty big feat and it's something we're certainly not stopping or satisfied with..

Thank you. And best of luck..

All right. Operator, that's all the time we're going to have today for questions..

Okay. I'd like to turn the call back to Ms. Gillard for closing remarks..

Thank you all for joining us today on our call. We look forward to reporting to you our fourth quarter and year end 2016 results, which tentatively have been scheduled for Tuesday, January 31, at 8:30 a.m. Thank you, and have a great day..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day..