Under Armour, Inc.
Q1 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Under Armour First Quarter 2021 Earnings Webcast and Conference Call. I would now like to hand the conference over to Lance Allega, SVP, Investor Relations and Corporate Development. Thank you sir. Please go ahead.

[Lance Allega:]

Thank you. Good morning and thank you to everyone joining us for Under Armour's first quarter of fiscal 2021 earnings conference call. Yesterday after the close of market we announced that we have entered into a settlement with the U.S. Securities and Exchange Commission resolving a previously announced investigation related to disclosure and the impact of certain pull forward sales for the third quarter of 2015 through the fourth quarter of 2016.

[Patrik Frisk:]

Thank you, Lance, and good morning, everyone, and welcome to our first quarter 2021 conference call. With the continued disciplined execution of our strategic playbook, we're happy with our results, which marks a better than expected start to our year. As with many companies, our-year-over year comparisons are affected by the significant COVID impacts we experienced in 2020. Putting these dynamics aside for a moment and perhaps what we're most encouraged to see at this early point in our year is that on my two years stack that is skipping over 2020 we're running a better, higher quality, and more profitable business. This is even more evident because of the strategies we've employed over the past couple of years including significantly reduced sales to the off price channel, proactive supply constraints against demand signals, the early days of exiting undifferentiated distribution, and certainly on an annual basis, the absence of MyFitnessPal, which we sold at the end of last year.

[David Bergman:]

Thanks, Patrik. Today's results are strong evidence that our transformed operating model can efficiently serve strong demand for the Under Armour brand against the continued backdrop of uncertainty due to the COVID-19 pandemic. With an outstanding start to the year let's dive right in with our first quarter results. Revenue was up 35% to 1.3 billion compared to the prior year. This was better than expected due to higher demand across our wholesale and DTC businesses. From a channel perspective, our wholesale revenue was up 35%. Keep in mind, approximately two thirds of this growth was due to a Q4, 20 to Q1, 21 shifts related to COVID-19 impacts connected to customer order flow and changes in supply chain timing as noted on our last call. In addition, most of our Q1 wholesale over delivery was due to stronger sell through and higher demand from our North American customers. Our direct to consumer business increased 54% led by a 69% growth in e-commerce and 44% growth in our owned and operated retail stores. Our DTC results were better than expected primarily due to higher average order values in retail and higher e-commerce conversion rates. Our licensing business was up 9% driven primarily by North America.

[Operator:]

Your first question is from the line of Erinn Murphy with Piper.

[Erinn Murphy:]

Great, thanks. Good morning, and congrats to the team there. I was hoping you could spend a little bit more time Patrik talking about the North American landscape. It sounds like the outlook here is a lot brighter than you would have thought three months ago, which seems like the main reason for the guide up today. Can you just share more about what you're seeing? And then really on the wholesale order books, I'm very curious what's implied in the back half, given the second quarter strength that you're seeing. It seems like you've still left some wiggle room there. So just any insights the from data as well on what the retailers are looking at for the second half. Thanks so much.

[Patrik Frisk:]

Good morning, Erinn. Thank you. Well, let's start with North America. For us, thinking about North America today and the journey that we've been on I mentioned in my script that we feel that the North American business is in a healthier position this year than it's been in a very long time. And that has to do with the quality of what's in the market for us right now as a brand. And the fact that we understand the consumer better, and what's working for them, we're leveraging that into our go to market. We're also leveraging our marketing spend more efficiently and we're doing that through the work, the return on investment and marketing model that we now have here at Under Armour. And this whole go to market that we started to deploy in early 2020 that makes us better each season and part of that is the execution that you're now seeing across innovation, across gender, across our various categories, and across the world and in North America being our biggest business, it just has a disproportionate impact, we believe. We're also seeing strength in the fitness and wellness industry that we're benefiting from for sure. And we believe that's going to continue as we go into the rest of 21 and beyond at this point. So a lot to be proud of from the team. There is definitely a spring in our step at this point in terms of how we think about North America. Execution is, of course, everything and we are executing, we're getting the right stuff, the right place, the right time, better innovation, better product, better marketing, all coordinated and the consumers responding. Dave, I don't know if you want to add a little bit of color there.

[Dave Bergman:]

Yes. Erinn I think maybe what I would just remind on, when we think about back half North America the demand constraints work that we've put in place, we think is the right thing for premium growth. But that has a little bit of an impact on back half. But then also, the plans to exit undifferentiated retail, and really focus on premium side is more of a back half impact for North America as well. And then also we mentioned the sport mask businesses is a factor as well, as far as being down back half versus back half of last year. So a couple of different factors that are going on there. And then we are still operating in highly uncertain times with COVID-19. So we're trying to be prudent with our planning as well.

[Erinn Murphy:]

Got it fair enough. And if I can just ask a follow up on what you're seeing in the women's department right now. Just how did men versus women's kind of perform on that 35% of payroll growth in the quarter? Thank you.

[Patrik Frisk:]

Yes. Women's really, as we came into 2020, our women's business started to show meaningful improvement and a lot of that I would attribute to better product, better communication, better marketing, and across both tops, bottoms, as well as footwear we're resonating with the consumer right now in many different styles. If I had to make a call out I think what's really encouraging for me in our run category for example, in the footwear space, the launches that we've had around the Flow Velocity Wind continuing with the HOVR and Machina and Sonic and Infinite is resonating for both genders and when it comes to apparel for women our Infinity cross bra as well as our Meridian leggings, and many other products that we're now innovating into for women as relates to leggings, like our no slip waistband, for example, which has really been a great innovation for us this year, are all resonating. So it's more comprehensive, it's across more styles, it's across categories, its tops, its bottoms, its footwear and it's that holistic approach that we're taking to the business, head to toe through the go to market. But it's also about the communication. We are showing up in a way that the consumer expects Under Armour to show up in and it's resonating. So very excited about what that might mean for us going forward.

[Erinn Murphy:]

Right. I will hop back.

[Operator:]

Your next question is from the line of James Duffy with Stifel.

[James Duffy:]

Thank you. Good morning, everyone. I wanted to start on the inventory position. Given where you guys have come from, I'm really pleased to be asking this question. But I'm curious as you look at the accelerating demand how you feel about the inventory position? Do you feel you have enough to capitalize on the demand that's materializing? Can you give us an update on your capacity to chase? Should demand outstrip your supply? And then I have a follow up on that.

[Patrik Frisk:]

Sure, James. Good morning. This is Patrik I'll start it off. And I'll hand over to Dave maybe he can give you a bit more color to. While we came into this year and we've talked about this now for the last six months and last two calls around this notion of demand constraint what it means is that we're tightening how we think about inventory across both in terms of exiting undifferentiated retail which is exiting somewhere between 2,000 to 3,000 doors that will take full effect in the back half of this year. We're also tightening the buckets that sit in inventory things like auto replenishment and add ones and dialing it in better, making sure that we have of course the right product at the right place. But not necessarily spreading ourselves so thin across. But being very-very selective with our investments. The reality is James that we won't have a tremendous amount of opportunity to capitalize on accelerating demand beyond what we're actually seeing and what we're thinking about right now, simply because we are constraining ourselves. That's part of the model that we're running right now and we believe very strongly and because we do want to continue to tighten up the availability of bad inventory, making sure that we're staying as clean as we can in every channel and every point in distribution and as it relates to chase, that's going to be something that we're not going to do so much off in 21. We're doing that also to be careful with what we're seeing right now in terms of everything that's happening in supply chain. We think that would be a very risky proposition at this point. So we're being very careful with any sort of chase for the back half of 2021. I don't know Dave if you want to add some thought on that thing.

[David Bergman:]

Patrik, I think you covered it pretty well.

[James Duffy:]

And then, Patrik, you spoke to this in your prepared remarks. But thinking about the foundation of revenue for 2001, a much healthier base of business than prior years, more direct consumer as a percent of the mix I'm curious as you look relative to prior years if we were to think about units versus ASP in that revenue base, how would that shape up? Is there any way to frame the ASP accretion that you've seen over a couple year period relative to that 2019 days? And then do you see opportunities with your tighter inventories, healthier revenue base to leverage pricing power in the product line?

[Patrik Frisk:]

Yes, it's a little different when you go across in terms of what's going on. A lot of this of course, is driven by a combination of factors. One is the actual availability of inventory. One is the better product that you're launching and the better ability to launch product well which is resonating with the consumer. In other words, you're getting a bang for your buck in both ends in terms of us being able to be more premium as it relates to less promotional activity in our own channel in terms of markdowns, driving our average selling prices up. It's also resulting in less markdown in the wholesale channel because our innovation is matching our inventory levels. So the weeks on hand are lower and as a consequence, they're selling our products better, which means that we're not diluting our gross turnout so much. And what we're seeing right now with this approach that we've taken is that all of those things are happening simultaneously and it's about balance. It's about balance in terms of how much inventory you have in those different channels and buckets, and how you're able to communicate your innovation and your product stories to the marketplace, which will we're doing much better. And I would just highlight also the fact that if you think about the digital revenue aspect of this, the work that we've done on our e-commerce over the last 18 months specifically as it relates to what we did midway through last year for example, with the new North American site and our ability to merchandise better be faster, we now also upgrading the European site to the same standard as the North American side, they're on the same platform, which will enable us to capitalize a little more on being better off and digital in the back half of the year. I don't know Dave, you want to talk about some of the gross to net maybe?

[David Bergman:]

Yes. I mean, I think just to kind of sum it up, maybe James with the healthier mix that we're seeing vs. 2019 that does bring along higher AUR and average order value AOV. So we are seeing that progress, and we are excited about continuing to drive that healthier business forward.

[James Duffy:]

Excellent. Thank you guys. Keep up the good work.

[Operator:]

Your next question is from the line of Randal Konik with Jefferies.

[Randal Konik:]

Good morning, guys. Quick question. So just on just to be a little more specific on the improvement and sell through is there any kind of quantification you can give us on the changes you've seen on sale through improvement let's say today versus I don't know, six months or a year or two years ago? Just give us some perspective there. And maybe a little more color on the differences and changes you've seen on that sell through in apparel versus footwear in the business. Thanks.

[David Bergman:]

Randy, this is Dave. We typically don't quantify the sell through changes but what I would say is that the bigger improvements that we started really seeing in sell through, were really back half of last year and continuing forward through Q1. And we're excited about the fact that that's also leading towards less need for promotions, less need for markdowns, less need for returns. So again kind of the revenue dilution aspects of that have been fairly favorable as well as we continues forward. And that's helping from a gross margin perspective, that's helping from an inventory management perspective, and taking back less returns, and also making it maybe a little bit easier also to manage that off price third party mix in that kind of 3% to 4% range that we think is kind of the sweet spot as we go forward. So we continually monitor the weeks of stock that are at our wholesale partners, which has been at very-very healthy levels for really two to three quarters now and we continue to see that. We continue to have great partnerships and discussions with our key accounts and we're excited to working together with them to maximize sell through as we continue to move forward.

[Randal Konik:]

Great, helpful, and then maybe a follow up on just your journey and path towards a long term thought process around double digit operating margins. Can you give us some framework on how you're thinking about how the DTC business more specifically online, kind of factors into your assumptions and kind of just the way you're thinking about the margin structure across the business around that channel distribution?

[Patrik Frisk:]

Yes. I mean, there's a couple different things going on there. Randy, great question. And we are definitely on that journey towards double digit operating margin. It is going to come in a different couple different ways. You're right, we are going to continue to lean forward on DTC and really the best expression of our brand and driving those touch points with the consumers. That will continue to mix up a little bit of our revenue as we go forward. Keep in mind though that a lot of the doors we open in A-Pac are partner doors and those go through wholesale, so that might temper the increasing mix of DTC a little bit but you will continue to see the DTC mix go up and with that comes generally higher gross margin when you couple that with a lot of the costing improvements that our supply chain has been driving over the last few years. So part of that journey is continued positive developments on the gross margin front, but then also there is kind of a two part story within SG&A. As you know, when you start to mix up in DTC on a revenue besides that does bring with it a little bit more in SG&A and operating costs with rent and everything else. So that does pressure kind of the SG&A to revenue a little bit. But with all the extensive work we've done with rebasing the cost structure and the operating model and restructuring, we feel like we're in a really good spot. It's kind of rebasing that cost structure to be able to leverage a lot better as we grow. And that's what we're going to be doing as we go into 22 and beyond. So you'll continue to see a little bit of improvement SG&A and revenue, a little bit of improving gross margin. And that's really kind of the simplest way to lay out the journey to double digit operating margin. So we're excited about running forward on that.

[Randal Konik:]

Super helpful. Thanks, guys.

[Operator:]

Your next question is from the line of Paul Trussell with Deutsche Bank.

[Paul Trussell:]

Yes. Good morning, and congrats on the very strong results and momentum. I wanted to continue on the margin conversation. If you can give a little bit additional detail on the updated forecasts for SG&A this year, the second half in particular, I think of prior guidance for the year with slight growth. So it certainly sounds like there's a major step up. So just want to better understand that the prior guide did not include that majority of marketing investments that you now plan on making. And it also sounds like the assumption is maybe little incremental revenue despite the brand building campaign that you're pursuing?

[David Bergman:]

Yes, Paul, this is Dave. Excluding the incremental investments that we're making in the marketing and that we plan in incentive comp, we do expect the rest of SG&A to grow slightly, which is what we had mentioned on our last call and this is similar to what we expected coming into the year driven by continued investments into retail and international offset by savings initiatives related to our restructuring and our capital preservation strategies from 2020 along with lower legal expenses as well. So you are seeing a increase from our last forecast especially in marketing as we want to invest more in the brand and continue that momentum in the back half of the year. And then you are seeing a higher expectation of incentive compensation with the improving results. But again, we feel good about the cost structure as we drive into 22 and going forward, and these increases that we mentioned versus the prior outlook are not long term commitments. So it is something that we can continue to adjust and as we move into 2022 continue to rely on that reset cost base.

[Paul Trussell:]

Understood. Thank you. And then I guess just my follow up, maybe just turning to other geographies outside of North America, could you maybe just give a little bit more detail on what you're seeing in Europe, in China, specifically? And then also how to think about the LatAm business?

[Patrik Frisk:]

Yes. Hi Paul. This is Patrik. Well, Europe, maybe I'll start there very quickly, as most of you know it's locked down basically as it relates to retail apart from the UK that opened up a few weeks ago. And we've seen the business there rebound really well after the reopening and we expect Europe to gradually open up in this quarter. And it might be a little bouncy opening up closing down. So we'll see how that plays on the back half of the year. In terms of China we're really excited about the progress we're making there in terms of our digital space, in terms of our e-com and the opening up of additional doors this year. We're doing that in a careful manner making sure that we're prioritizing profitability of course. But we've seen the traffic rebound especially in the outlet business but I would say that China is a more promotional market now than it was before COVID hit. So we're watching that and just trying to understand when the new normal, so to speak, will be there. But from a traffic perspective, traffic has been stronger and outlets than in full price and continues to be strong online. And we're going to continue to build out stores in China in this year and accelerating from last year, of course, but we're looking for quality again over quantity there.

[David Bergman:]

And Brian on LatAm it's really continued focus on profitability and continuing some of the potential distributor model shifts to continue to improve both predictability and profitability while building the brand. So that's kind of our continued drive in LatAm.

[Paul Trussell:]

Thank you. Best of luck.

[Operator:]

Your next question is from the line of Brian Nagel with Oppenheimer.

[Brian Nagel:]

Hi, good morning. Congrats on the results.

[Patrik Frisk:]

Hi Brian.

[Brian Nagel:]

My first question just with regard to the sales trends in particularly, they have a significant improvement sales we saw here in Q1. So I'll kind of merge two points together. But Patrik, you mentioned the product launches. Is there a way that I say my question is, is a way to break out to help us understand that to what extent these new products, whether they be in run or other categories are helping to drive the sales? And then second recognize there's a lot of moving parts here but is there any way that you look at your business sales stimulus, the government, right stimulus, helping drive sales?

[Patrik Frisk:]

Brian, I think the way to think about what we're seeing with the brand right now is I would use the word holistic and the reason I'm doing that is because the growth that we see in the brand really is global. It really is across categories. It's across gender and it's really happening in both apparel and footwear. In the U.S., I would say that it's hard to understand exactly how much of that is driven by the stimulus or not. But certainly some of it is. But also at the same time, I would say traffic is still down and retail. So yes, there is certainly some stimulus going on. But we've also been very good at converting a lot better both in our e-commerce business as well as our retail business and we're seeing that consumer convert into higher priced product as we're being less promotional. So I think holistically we're doing a better job executing across our categories, across gender, across our innovation, across our go to market, across the globe and that's really what's going on at this point.

[David Bergman:]

And I think, Brian, also I think it's important to note that just in general the fitness and wellness sector is doing very well. It continues to be pretty strong mid COVID and strong consumer behaviors, workout tendencies, etc. So obviously, that's a benefit as well.

[Brian Nagel:]

Great if I can, thanks for all that. And then just one follow up to those points. But no, again, sales clearly much better here in Q1. As you look at the landscape, you're hopefully heading towards a post-COVID world. Do you think, should there be bigger market share opportunities, meaning are you seeing signs of competitive fallout that could lead to better market share as we pull out the crisis?

[Patrik Frisk:]

I think to Dave's earlier point, Brian, the sector we're in right now, athletic performance, wellness health is going to we believe continue to be a growth sector. And I don't think that you've fully seen any dramatic fallout in our sector yet because it is buoyant. So I think it's going to come down to being in our case, very consumer centric, understanding the expectation from consumer, understanding the consumer journey, delivering against their expectation with great product, great marketing to make them better, which is why we're here. And that way, we'll stay competitive and we'll get better every time because our go to market is engineered that way. It's engineered for us to continue to get better and to make our focus performing consumer better. And as long as we're focused on that we're going to be okay.

[Brian Nagel:]

Appreciate all the color. Thank you.

[Operator:]

Your next question is from the line of John Kernan with Cowen.

[John Kernan:]

Good morning. Thanks for taking my question.

[Patrik Frisk:]

Hi John.

[John Kernan:]

Dave I wanted to go back to gross margin. Obviously, a lot of upside in Q1 and you took the guidance up for the year. Q2 there's obviously decline and it looks like fairly flat in the back half of the year. How much has the increase in freight in some of the other areas of inflation like commodity inflation affected your gross margin outlook for the back half of the year?

[David Bergman:]

Yes, I mean, it's definitely been a factor and one that we've been discussing a lot lately John. I mean, obviously, globally, there's a lot of pressure just on logistics on container availability, port delays, things like that. And I believe our supply chain has done a remarkable job navigating that to-date, but it is challenging. And so we do have some of that pressure built into this updated forecast. I wouldn't say that it is a massive factor but it is big enough that we wanted to call it out and that we actually did adjust our forecast to make sure that we're covering for it. The good thing is that the improvements that we've been seeing versus our expectations in our pricing ability, including the lower promotions, markdowns off price and then also inventory reserve assumptions relative to the health of our inventory those improvements are actually out weighing the new, tougher news relative to freight and logistical challenges. So net, that's why you're seeing a little bit of the higher outlook that we're giving for the full year on gross margin than our prior call. So we're monitoring it. Our supply chain is on it and we're navigating it fairly well, at this point.

[John Kernan:]

That's helpful. Thanks. And then maybe on the revenue side, versus the 2019 pre-COVID days how do we think about how you're planning the back half of the year? It looks like your overall up low single digits or so. So I'm just curious what are the macro assumptions embedded in that you came into the year taking a fairly conservative view of the overall macro environment then came in and there was a fair amount of upside your Q1 outlook. I'm just curious how you're thinking about the back half of the year from a bigger picture perspective both in North America and international?

[Patrik Frisk:]

Yes. I think again it really gets back to a lot of positives relative to the momentum of the business improved to four orders coming in. So a lot of favorable developments. But we got to just continue to think about the fact that there are a fair amount of those back half headwinds as well which are not as related to health of the business. So the sale of MyFitnessPal that was 85% to 90% of our connected fitness segments. So that's a pretty big impact for back half of the year. The demand constraint work we've been talking about exiting on differentiate retail, which doesn't really come into play until back half of this year. The LatAm business model changes have more of a back half impact, and then the sport mask business as well. So those are definitely some pretty decent size headwinds. Relative to 2019 I think, again, the biggest call out is just overall health of the business mix of accounts and we're excited about continuing to kind of drive that forward.

[John Kernan:]

That's helpful. Thank you.

[Patrik Frisk:]

Thanks, John.

[Operator:]

Your next question is from the line of Matthew Boss with JP Morgan.

[Matthew Boss:]

Great, thanks, and congrats again on the nice quarter.

[Patrik Frisk:]

Thanks Matt.

[Matthew Boss:]

So Patrik, you cited accelerated marketing as a potential opportunity to drive greater brand awareness. So if we took a step back, where is overall brand awareness today, and where do you see the lowest hanging fruit as we think about marketing, maybe as we think about men's women's or apparel versus footwear?

[Patrik Frisk:]

To think about our marketing journey, if you like in terms of inside of our go to market that really began last year, with the only way is through early in the year that we then had to switch to through this together in March when everything went digital. But the only advantage of that was we learned a lot and with our new tools and our modeling capability that we have, we were able to actually use the time especially in the digital space to really learn what works for Under Armour in terms of how to think about resonating with the consumer to make them better. So as Dave and I saw the numbers improve here this year now, it's much easier for us to make the decision to invest back into the brand because we understand what buttons to push and we understand what kind of returns we should be expecting and it is really around building brand top of funnel now for us in the back half of the year more so than we thought we would be able to do coming into the year. So it's just that understanding of what works for us as a brand and having the right asset base to be able to activate against in the right space to really connect with the consumer and raise the engagement level both from an awareness and consideration perspective. So very excited that we're able to do this and it should really set the stage for us also for 22.

[Matthew Boss:]

Great. And then maybe Patrik as we think post pandemic, how do you think the athletic industry exits this crisis? And what do you see as a reasonable annual revenue growth rate for Under Armour? I think in the past you talked about mid to high single digit. Is that still the best way to think about Under Armour on an end annual growth rate? And then with that, lastly, David is SG&A up slightly? So is that now with the pieces that we have, is that the best way to think about SG&A dollar growth multiyear again only given the pieces that we have today is that the best way to think about it?

[Patrik Frisk:]

I'll kick it off Matt. And I think when we see what's going on right now in the marketplace, we're being a little bit cautious, of course, in terms of what the future holds post-pandemic as it relates to the consumer. We're still busy working and making sure that we're building our foundation as strong as it possibly can be here in 21 and going into 22. We're in the long game here for us and the long game for us is eternal. So we're going to continue to make the right decisions to make our foundation stronger and make no mistake on _ returning to growth. We're a growth brand. We have a growth mindset. I think the difference now it's a holistic growth mindset across top line, bottom line spend everywhere. So for us, we're going to be very excited to at some future date have all of you come to our investor day and we'll be able to lay out the future for all of you. Dave, you want to add a little bit?

[David Bergman:]

Yes Matt, I completely understand the interest in discussing longer term revenue growth rates, but we're just not in a spot where we want to talk about that yet. We continue to drive forward and we're really-really excited about this foundation that we've laid and as we're driving through 2021 and relative to SG&A and going forward due to all the work that we've done, yes, we will be able to leverage SG&A more as we go into 22 and beyond and continue to work that estimated revenue percentage down as we go forward over the next couple years. Relative to what growth rate that relates to we'll probably discuss that a little bit more at a future date when we're ready to discuss more about the revenue growth as well.

[Matthew Boss:]

Great. Best of luck.

[Patrik Frisk:]

Thank you Matt.

[Operator:]

Your next question is from the line Sam Poser with Williams Trading.

[Sam Poser:]

Good morning. Thank you for taking my questions. A couple that was on your increase marketing spend. I mean, we've seen this from lots of other companies, when they started investing more into their direct to consumer marketing, you see sort of a faster response to the sales increases. So the question is how much of your revised sales plan is reflective of your increased direct to consumer marketing?

[Patrik Frisk:]

Good morning, Sam. This is Patrik. That's a great question. And just to clarify, the marketing spend that we're now driving in the back half that predominantly is going top of funnel versus down funnel and performance marketing, where you would see most of the quick returns so to speak. So we're really balancing and making sure that we're driving towards a more balanced funnel something that we've been wanting to do for quite some time. And we've been somewhat hindered by because we've had also a lot of commitments in the past to tie to long term contracts and other things that hasn't really permitted us to go up funnel and drive brand marketing. And that's what we're able to do now. So hence my commentary a little bit around how we're now investing for the future and really a lot of that top of funnel marketing is really to set the stage for 22 and beyond. It doesn't mean we're not going to spend down in the funnel. We have already planned that to support the revenue that we now have guided to. So this is really about additional brand marketing that we're talking about. And Dave, I don't know if you want to add something.

[David Bergman:]

Yes, Sam. I think just to take that a step further. The majority of the or the largest piece of our increase in our revenue outlook is driven from the wholesale side. And to Patrik's point the revenue that we are seeing is incremental versus our last call. There is not much of that is directly tied to the increased marketing. So it is much more of the opportunity for longer term investment in the brand and so we'll see more benefits from 22 and 23 relative to these investments.

[Sam Poser:]

Let me just follow up. I mean your direct to consumer business was very good both in your stores and on your digital business. So and that digital, incremental digital marketing isn't as expensive as doing sort of bigger picture things. So are you increasing your digital and consumer, direct consumer facing marketing in the back half? Is that part of the increase? Even though I understand it's the increase picture. So?

[Patrik Frisk:]

Yes it is. It is Sam. That was my commentary earlier against what we have been able to learn through a lot of the new capabilities, tools, and other things that we put in play that we were able to actually accelerate in 2020 due to the pandemic. A lot of that span that now is going into the back half of the year isn't digital, even though it's top of funnel, it's actually digital top of funnel. And that is absolutely what's going on.

[Sam Poser:]

Okay, great. Thank you very much.

[Patrik Frisk:]

Thanks, Sam.

[Operator:]

Your final question is from the line of Jay Sole with UBS.

[Jay Sole:]

Great, thank you so much. Dave my question is just about the normal inventory reserve requirements that you normally take that you saw maybe did not take this quarter and the pricing gains that you had. How did the reserve requirements in this quarter and the price that you got compared to what you would expect to see in a normal quarter in terms of did you normally, it was better, but I mean, it's sort of been planned to be better, but there was upside. You just give us an idea of how those two factors really impacted gross margin?

[David Bergman:]

Yes I mean, I think that the best way to look at it would be that it wasn't exactly the driving factor for year-over-year. Again, year-over-year, we've talked about the 370 basis points, but as far as versus our actual expectations, it is definitely a factor. We obviously have moved through inventory very-very well. We set ourselves up well the back half of last year for tighter supply chain management, but then coming into this year with the incremental drive through in Q1 and then also with the updated forecasts we are running even healthier inventory than we originally thought and the mix of that inventory is healthy as well, not just the level of the inventory. And so when you add those things together and our ability to sell through more at full price it does have an impact and your required reserves are lower than anticipated. We haven't broken out the exact basis point of that difference versus our prior outlook. But it is meaningful enough that we wanted to call it out.

[Jay Sole:]

Understood. And if I can ask one more, just on the balance sheet there's a lot of cash in the balance right now much more than there would be at the end of the normal Q1. The new guidance suggests you'll generate a decent amount of free cash flow this year. What's the plan for how the balance sheet might change over the course of the year? And is that taking into account? Obviously it's not in the guidance, right. But I mean, just maybe give us a sense of how the balance sheet might change.

[Patrik Frisk:]

Yes. I mean, right now, again, we are very focused on continued working capital improvements, CapEx prioritization and all that work has been going very well. And you see that coming through the numbers and you see that in the updated forecast. So yes, we do intend to be able to drive continued free cash flow this year. And we will be at a pretty high cash balance as we drive through the remaining quarters of this year. Right now we are happy with being very-very liquid, and very nimble as well. And we mentioned on the last call that would we consider something like maybe debt buyback or something along those lines, we are considering it. But at this point in time, we feel really good about where we are and we're continuing to be nimble and drive forward. So, more of that in the future. We're continuing to work on that, but we feel good with where we are.

[Jay Sole:]

Got it. All right. Thank you so much.

[Patrik Frisk:]

Thank you, Jay.

[Operator:]

There are no further questions. This concludes the Under Armour first quarter earnings webcast and conference call. Thank you for your participation. You may now disconnect.