Under Armour, Inc.
Q2 2010 Earnings Call Transcript

Published: 27 Jul 2010

[Operator:]

Good day, ladies and gentlemen, and welcome to your Under Armour Second Quarter Earnings and Webcast Conference Call. [Operator Instructions] I would now like to introduce Ms. Alex Pettit, CFO [ph 0

[Alex Pettit:]

Thank you, and good morning to everyone participating in this morning's conference call. During the course of this conference call, we'll be making projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements contain [ph 0

[Kevin Plank:]

Thank you, Alex, and good morning, everyone. This morning, I'd like to cover two key topics. First, how we are continuing to lead in the performance apparel market to the right balance of great product and a great story. And secondly, how we are building the organization that will take us beyond the $1 billion platform that we discussed on this morning's release. We have consistently talked about the abundant growth opportunities we see for the Under Armour Brand and how we are balancing that growth with making the right assessments to ensure we are doing two things

[Brad Dickerson:]

Thanks, Kevin. With Kevin having taken you through some highlights and strategies for our business, I would now like to spend some time on our second quarter financial results. Our net revenues for the second quarter of 2010 increased 24% to $205 million. Year-to-date, net revenues are up 19% to $434 million. This strong growth is largely driven by Apparel, which was up 34% to $150 million during the quarter and up 32% to $323 million year-to-date. Notably, our second quarter Apparel performance was the highest growth we experienced since the third quarter of 2007. Double-digit Apparel growth was registered across the Men's, Women's and Youth apparel businesses during the quarter, with particular strength in Women's. Our Direct-to-Consumer net revenues increased 60% for the quarter and 66% year-to-date, representing 21.3% and 19.6% of net revenues, respectively. Second quarter net revenue growth in Direct-to-Consumer was driven by a combination of new Factory House stores, strong same-store sales growth and the Web business. We opened six new Factory House stores during the second quarter, increasing our Factory House store base to 45. We expect to end 2010 with 52 to 54 total Factory House stores, representing nearly 50% year-over-year growth. International net revenues increased approximately $2 million to $9 million in the second quarter and represent approximately 4% of revenues. Footwear net revenues were down roughly 4% to $36 million in the second quarter. We've previously indicated Running and Training footwear revenues were expected to decline in 2010 compared with 2009. Second quarter gross margins were 48.8% compared with 44.8% in the prior year's quarter. Several factors contributed to the 400-basis-point gross margin expansion. First, we continue to see strong growth in our higher-margin Direct-to-Consumer business, contributing approximately 130 basis points. Second, we experienced more favorable Apparel gross margins during the quarter due to favorable product mix and sourcing efforts, accounting for approximately 120 basis points. Third, lower sale returns, markdowns and apparel liquidations accounted for approximately a 100-basis-point improvement. And finally, as previously forecast, a lower mix of lower-margin footwear sales contributed approximately 50 basis points. Selling, general and administrative expenses as a percentage of net revenues increased to 45.4% in the second quarter of 2010 compared with 42.7% in the prior year's period. Let me take you through the four major components of SG&A, many of which are consistent with our story last quarter. Marketing costs held relatively steady at 13.4% of net revenues in the second quarter compared with 13.3% in the prior year. Second, selling costs increased to 10.4% of net revenues from 9.3% in the prior year, primarily driven by the continued expansion of our Factory House stores, which carry better gross margins but also incur higher SG&A expense as a percentage of revenue. Third, product innovation and supply chain costs represented 10.8% of net revenues in the second quarter compared with 9.6% in the prior year. This increase was primarily a function of increased investments in personnel associated with the design and sourcing of our expanding apparel, accessories and footwear lines. Finally, corporate services increased to 10.8% of net revenues compared to 10.5% in the same period of the prior year as we invested in additional corporate personnel and facility expenses to support our growth. Operating income during the second quarter more than doubled, to $6.9 million compared with $3.4 million in the prior year. Operating margin was 3.4% compared with 2.1% in the prior year quarter. In other expense, we experienced only a modest net loss of $170,000 related to foreign currency during the quarter and a net loss of $850,000 year-to-date. Our hedging strategy allows us to limit our exposure to foreign currency exchange fluctuations. With that said, there is no perfect hedge, and risk remains that with future currency fluctuations, we could have positive or negative foreign currency impact. Our effective income tax rate in the second quarter was 43% compared with 40.9% in the second quarter of 2009, primarily reflecting discrete items which positively impacted the year-ago rate. Based on continued tax-planning strategies, we now expect our effective tax rate in 2010 to improve approximately 120 basis points from the 2009 rate of 43.2%. Our resulting net income in the second quarter increased to $3.5 million compared with $1.4 million in the prior year period. Second quarter diluted earnings per share increased to $0.07 compared with $0.03 in the prior year. Now shifting over to the balance sheet. Total cash and cash equivalents at quarter end increased 96% to $156 million compared with $80 million at June 30, 2009. Cash, net of debt, increased $81 million at quarter end to $140 million compared with $59 million at June 30, 2009. We currently have no borrowings outstanding on our $200 million credit facility. Inventory at quarter end decreased 1% year-over-year to $179 million compared to $181 million at June 30, 2009. While inventory growth has significantly trailed our top line performance in recent quarters, we expect this trend to reverse for the back half of 2010. I will add more color on that later. Our invested and capital expenditures was approximately $8 million for the second quarter and approximately $16 million year-to-date. We continue to anticipate capital expenditures in 2010 to be in the range of $35 million to $40 million. Now moving on to our updated outlook for the remainder of 2010. Previously, we provided an outlook for 2010 net revenues in the range of $965 million to $985 million, an increase of 13% to 15% over 2009, and 2010 diluted earnings per share of $1.05 to $1.07, an increase of 14% to 16%. Given the sustained strength in our Apparel and Direct-to-Consumer businesses and our improved visibility for the remainder of the year, we are raising our full year outlook. We now expect 2010 annual net revenues in the range of $990 million to $1,010,000,000, an increase of 16% to 18% over 2009. We also expect 2010 diluted earnings per share for the full year in the range of $1.11 to $1.13, an increase of 21% to 23% over 2009. To give a little more context on our updated 2010 guidance, we want to elaborate on three areas

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Chi Lee from Morgan Stanley.

[Chi Lee:]

Question on the gross margin side. Of the 120 basis points that we saw coming from sourcing efficiencies as well as the Apparel mix, how much on the sourcing-efficient [ph 0

[Brad Dickerson:]

Yes. We lock our prices in about six to twelve months in advance. So obviously, the pricing that we're seeing right now was locked in last year. With some of the headwinds that have been talked about a lot out there in the industry, we will see somewhat of an impact of that in the future. But the biggest drivers of our gross margins in the near term and the longer term continue to be our Direct-to-Consumer business and the mix of footwear to apparel. So just strictly on the Apparel side, we don't anticipate seeing the improvements that we’ve seen recently year-over-year in just Apparel, but we still see the ability to maintain our margins in the near term within Apparel.

[Chi Lee:]

Okay, great. And then, Kevin, with some of your retail partners talking about starting to showcase some basketball product in the current quarter, can you just update us on your thoughts in terms of timing and strategy on the basketball side?

[Kevin Plank:]

Yes, well, basketball, first of all, it's not an “if” as much as it’s a “when” for us. We've been out in the market testing product, and you've seen it between our AU programs, more than 10 Division 1 teams, 20 high school teams and of course, star rookie last year Brandon Jennings for the Milwaukee Bucks. So we think we have a lot of assets to build on. And I think what you're going to find about basketball, while we're not making any decorations of timing right now, what you will see from us, hopefully, is all the learnings that we’ve found in footwear over the last five years. And hopefully, we will apply a lot of those learnings that I think we've learned and we, frankly, have paid for into our approach into the basketball category. So we're tempering words like launch, we're tempering the way that we're going to get in the market. But when we do, we expect that to take [ph 0

[Chi Lee:]

Okay. And presumably, then, what you're looking at in terms of the third quarter strategy is really just again testing consumer tastes with limited product?

[Kevin Plank:]

I mean, again, we're going to approach basketball when the time is right and make that decision when we come across it, so…

[Chi Lee:]

Okay.

[Operator:]

Our next question comes from Jim Duffy from Stifel, Nicolaus.

[Jim Duffy:]

Less inventory in the model, can you comment on how service levels have been trending? And maybe the opportunity to meet more demand by increasing the inventory balances some?

[Wayne Marino:]

Jim, this is Wayne. Service levels have been acceptable to a point, but we think there's going to be a greater opportunity if we provide some additional safety stock within our core programs. Our core programs, for example, are offered mainly throughout the year. We feel that's a very deliberate debt on our part. To increase that, we broadened our core programs as well. So one of the strategies in the near term is to increase that safety stock level, and that will have an impact on the inventory levels that Brad mentioned.

[Jim Duffy:]

Is that a third quarter phenomena? Or is it really something that you're looking at into spring of next year?

[Wayne Marino:]

We'll start to see that, Jim, in the third and fourth quarter this year.

[Jim Duffy:]

Okay. And then, recognizing that the past three years have been anything but normal, what's the maturity curve that you've seen on the Factory House stores? And then related to that, looking to the back half of the year, given the growth in Factory House stores, would you expect stronger year-to-year growth in the fourth quarter?

[Wayne Marino:]

Yes, this is Wayne, let me start that. The basis for the Factory stores initially was to liquidate our excess inventory. And then, what we did was we learned that there was a consumer out there that we could reach. We really take a lot of effort in building around our core customer base first, and we'll add consumers who we’d like to reach with other points of distribution. We're finding that the Factory House is another opportunity, another point of distribution to reach other athletes. As we continue to expand the factory base, we're certainly not going to have enough excess inventory to be able to fill that demand, so we'll start to move towards a made-for [ph 0

[Kevin Plank:]

And Jim, Kevin. Some of the numbers that we have, we’ve opened 10 stores year-to-date. We’re on track to open a total of 17 to 19 new Factory House stores this year. And we're very selective in looking for the opportunities that meet our specific criteria that we have for opening. But with that, we're still, by the year end, we'll be in the 40s in terms of the total number of stores that we have, in the high 40s, and that leaves us, I think, a lot of opportunity to continue to grow there. But as Wayne mentioned, made-for [ph 0

[Wayne Marino:]

Jim, one last point on your question around the back half of the year revenue growth. My answer is maybe in a broader context, but obviously, we did see pretty strong revenue growth, particularly on Direct-to-Consumer channels, in the back half of last year. So the comp in the back half of this will be a little bit tougher than it was in the font half of this year because of that. And in addition, we've been calling out all along that the biggest impact of the decline in footwear year-over-year when it happened in the first quarter, which we saw, and also in the third quarter of this year too. So that also has an impact on the back half of the year comps.

[Jim Duffy:]

I see. And so I'm thinking about the number of new Factory House stores that you have and trying to get my arms around how they ramp from, say, year one to year two. What type of comps or increase have you seen in stores that are just entering the comp base?

[Wayne Marino:]

Jim, this is Wayne. We're not going to go into specifics about comp store sales. What we can say is, the factory outlets have been a very additive piece to our gross margins and also very positive in terms of profitability, and they also have a very favorable return-on-cash model. So it's, as Kevin pointed out, one of the strategies for us that we will consider within our Direct-to-Consumer strategies.

[Jim Duffy:]

Great. Seems like it’s been a big driver.

[Operator:]

Our next question comes from Omar Saad from Credit Suisse.

[Omar Saad:]

Kevin, I wanted you to expand a little bit around your opening comments on the organization structure and the reporting lines in light of David McCreight’s departure. What's changed, or how is the organization changing in terms of how you're viewing the best way to structure the management teams? And which businesses are reporting in to you versus Wayne or other people? And also, if you could comment on rumblings of a cotton-based product and the fact that it might open up kind of the whole new casual market to you guys and to the Under Armour brand?

[Kevin Plank:]

So first of all, when David joined the company two years ago, we were in a much different place, and I think it's important that we let everyone know how much better of a company, how much better structured and organized we are, of a company today because of the team that we've been able to build and put in place. And David was an important part of that. With that being said, we made a decision to realign the organization for what was better, I think, to get accountability from the different business units that we built. And so, roughly, there's nine different business units that we have as an organization, and the way that we're managing them is really in a monthly review format. And so it gives us the ability for executive committee. That includes Brad, Wayne and three or four other of our key executives here, where we bring the different heads of the business units in to come present their business. And in those meetings, you'll have the president of the business unit and then you’ll also have their head of strategy, their head of finance, and they’ll bring in whoever else they need to tell their story. And the way that we view those meetings is as simple as answering three questions. Tell us, number one, about how you're tracking for the year, tell us about how you’re tracking for your 2013 plan. The second set of questions would be around structure and people. Is there anything, as we get bigger as an organization, that's slowing down? Requisitions sitting on desks, people that you need, people that you need to move to different parts of the organization? And third and probably most importantly, tell us the top five things you're working on to ensure that the organization stays aligned. As we’ve grown, becoming from a pretty good North American wholesale apparel company into an organization that has a lot more complexity to it, bringing in Women's, bringing in footwear, we want to make sure that we leave accountability within business leaders that can drive their businesses but make sure it's all working in one song that works for the Under Armour brand. So I tell you, we've had it for the last several months, and it's been really effective, the way that we’ve been running the company. So I think it's given great empowerment. Secondly, what both our consumers and our retailers, they’ve come to expect Under Armour being about thought leadership when it comes to product, so any category that we enter is going to be a large, scalable business, because we like large, scalable businesses. And you're going to see us attack that with innovative products and higher price points. But you think you'll continue to see like in the fourth quarter us moving to a wider consumer base with things like our ColdGear product. It's a wheelhouse product for us, the franchise business for us in the millions of units, that has been only offered in compression. And the fact that we’ve now offered that in a fitted silhouette and fitted style, we're opening ourselves up to more consumers. So I think what you're going to see from Under Armour going forward, I'll tell you, is that we'll be much more sensitive to the idea of opening up to a wider broad-based sets of consumers versus a consumer who can, frankly, handle wearing a compression T-shirt all the time.

[Omar Saad:]

Okay. So does that mean cotton is no longer the enemy?

[Kevin Plank:]

It means that performance is our friend, Omar, always.

[Omar Saad:]

All right, great.

[Operator:]

Our next question comes from Taposh Bari from Jefferies.

[Taposh Bari:]

Just wanted to get a sense of what you're hearing from your retail accounts as we head into the fall season here. Just maybe talk about how you see your inventories positioned at retail. And maybe talk about if you're seeing any restocking at retail. Or just some thoughts about that. And I also just wanted to get just a quick follow-up on that accessories coming in-house. I appreciate the color there. I wanted to get a sense if any of that $60 million is going to be accretive to EPS for 2011. And if so, if you can maybe help quantify that.

[Wayne Marino:]

Let me start off first, this is Wayne. As far as our inventories at retail, right now, we're having very strong results, as you can see, for the quarter and for year-to-date, up over 30%. And our inventories are in line at retail. In fact, there is still a strong demand for us to increase our fill rates to our retail partners, which is one of the reasons we indicated earlier that we're going to take a greater position within our key and core items as far as inventory in the third and fourth quarters. So I say we're well positioned and in good shape as we get into the second half of the year.

[Brad Dickerson:]

Taposh, this is Brad. On the accessories question, as you mentioned, $60 million accretive top line year-over-year in 2011. Right now, it's a little too early for us to talk about any kind of outlook or guidance for 2011 in general, but part of the criteria about bringing the licensing in-house, along with looking at the products and synergies with our other product lines, is the economics of that business. So just to tell you that we would look at that, and we would expect accretive operating income dollars to bring that in-house. But at this point in time, too early to talk about 2011 EPS.

[Taposh Bari:]

Great.

[Operator:]

Our next question comes from Michelle Tan from Goldman Sachs.

[Michelle Tan:]

I know you guys don't want to get too much into 2011, but I was wondering if you can give us any sense of, as we think about the SG&A investments behind some of these initiatives like footwear and taking the licenses in-house, how much of it is being front-loaded into 2010 and leverage-able for next year? Versus how much incremental spend you're going to anticipate for '11 as you bring these initiatives actually online?

[Brad Dickerson:]

Hey, Michelle, this is Brad. To answer that, first of all, maybe if I can just go back and kind of reiterate the data points we did give you for 2011 so far, even though we're not giving any kind of outlook or full year outlook for guidance. A couple of data points we did give you, obviously, is on the Direct-to-Consumer side, relatively same number of new stores in 2011 that we had in 2010. And Kevin did mention Footwear will grow in 2011. And also, we talked, obviously, about bringing Hats and Bags in-house and the incremental revenue for that. As far as the SG&A related to those, I think you look at our SG&A and look at what's the ROI near-term versus maybe longer term in some of these businesses. Obviously, on the Apparel side, we're seeing a lot of benefit from our investments over the last few years currently, and we'll see that benefit in the near term too, especially around our wholesale apparel and our Direct-to-Consumer. You’ve seen some benefits there. As far as costs in 2010 that are for the benefit of the future, I think obviously, we've talked about increasing our investment in the Footwear team and the Footwear business, and we've also talked about the Footwear revenues coming down in 2010. So obviously, with Footwear growing again in 2011, you would see that there’s a benefit on the Footwear side going into 2011. From an Accessories perspective, obviously, we've been building the team in-house over the last 18 months or so to bring the Hats and Bags business in-house. So obviously, there is some cost over the 18-month period of an investments that had no revenue attached to it that will have revenue in 2011.

[Michelle Tan:]

Great. And thinking about both of those teams, I mean, is the majority of the build out in terms of personnel happening this year? So you wouldn't need to necessarily add a lot of people, add a lot of headcount to manage those businesses as the revenues come online? Or is it something where it’s kind of a two-year process to build up those teams?

[Brad Dickerson:]

Yes. I think that there's an ongoing investment that’s needed with all of our teams, obviously, with our growth rate and our growth trajectory. There's a constant need to bring talent in-house and investing our businesses, so even though we do see some maybe heavier investment here over the last couple of years, we'll continue to see investments drive our business going forward.

[Michelle Tan:]

Okay, that’s helpful.

[Operator:]

And our next question comes from Robbie Ohmes from Bank of America.

[Robert Ohmes:]

Actually, two questions. The first question was just, you mentioned the new ColdGear fabrication and also on the cotton apparel that I think a lot of us were expecting to see in spring 2011. Are these programs mainly targeting existing customers? Or would these be opportunities for you guys to broaden your distribution into accounts that you're not dealing with? And then, the second question is just, if you could comment at all on the Youth apparel business momentum versus Men's and Women's? It sounds like you flagged Men's and Women's, and then when I listened to the programs that you're coming out with, in maybe cotton or the ColdGear program that you mentioned, might be more targeted towards adult versus youth? And if you do expect your business to skew towards that demographic.

[Kevin Plank:]

Hey, Robbie, it's Kevin, so let me start with the categories we've commented on. So Fitted ColdGear, to begin with, I think it’s a huge opportunity for us. And number one, building around the franchises that we have, I think, leveraging the places where the consumer expects us. ColdGear is one of those obvious places, it's almost become a brand in and of itself, that a consumer walks in the store and they refer to ColdGear, frankly, as the brand. And so in doing that, we realized that there are the large consumer base that we weren't hitting by just offering compression. And so, part of the logic that we actually -- we baited this spring with our HeatGear and Fitted HeatGear. And we have the same concerns I think the market does. When you offer fitted product, what does it do to cannibalize the existing business? And the good news there, it actually did nothing. We grew the overall pie as the business and we're selling more base layer products. And so, I think we've changed some of our vernacular internally as a company, from saying, “We're a compression business,” to, “We are a base layer business where we want to be dominant.” And that means not in just one fit but in multiple fits. And so, number one, never giving any ground and continue to own compression, but also, I think, attracting new consumer by offering them someone who isn’t interested in having it suctioned to their body in a compression shirt and giving them a little more room to breathe in the shirt. And frankly, that's not influenced just by the fact that I'm getting older, either. Secondly, so we see that in we've done in Fitted HeatGear, our $25 basic all year long and now, having Fitted ColdGear, I think you’ll continue to see that trend where we just become a little more aware of what the market is looking for. And in fact, we're moving to multiple fits like we've done in our Women's business. We're also doing the same thing in our Men's business, from a compression fitted, a loose and a semi-fitted, fits across the board. So you'll see roughly four fits from the company. And again, it's about attracting new consumers there. With regard to our Youth and our Men's and our Women's biz, number one, Youth continues to be a huge driver for us. When you look at the places that we’ve seen and had success, particularly Footwear is a great example of that, some of our biggest successes come out of our entry and in our relevance with the Youth consumer. Europe is another place where we’ve found that when we enter a market, we really resonate with that Youth consumer and driving around brands that matter. So we don't see any weakness in our Youth. In fact, as we've aligned and begun to put our business units together, Youth will get a renewed vigor and focus, because we see that the big opportunity that I think the company has yet to really capitalize on.

[Robert Ohmes:]

Okay. Terrific.

[Operator:]

Our next question comes from Sharon Zackfia from William Blair.

[Sharon Zackfia:]

As Women's continues to be one of your strongest, if not the strongest category, and growth in Apparel, I'm just curious kind of what you're learning about how that female consumer shops for Under Armour? Is she shopping at different places? And how maybe the product choices of that consumer is influencing the design of the product going forward. So just any learnings that you're getting from the Women's side of the business?

[Kevin Plank:]

Yes, well, five years ago, when, I think, we went on our road show and we talked about having five distinct growth categories and growth levers for business, and it was Men's Apparel, Women's Apparel, Footwear, international and direct consumer. And part of the strategy we mentioned is that we envision a day where Women's would actually be larger than Men's, which I think a lot of people didn’t, frankly, believe. And until you see the momentum that we've been able to put around our business today, it's really beginning to come to life. An example I use is of our recent line review, and this is, I guess, more than five or six weeks ago now. As we're came and we were looking at spring '11 we started getting the first rounds of fall ’11 products, and in the room, it wasn't a team of one product person building products for Women's. It's a comprehensive team that’s includes both product and marketing and sales and across the board, where we’ve really done the things and put the infrastructure in place to become a relevant Women's brand. And that doesn't happen overnight. And I think the last five years have been good learning for us, but what I can tell you is that the excitement that we’ve generated not only, I think, in some of the fall '10 product that's out on the floor and just hitting right now, we feel very good about. And what you're going to see in spring '11 is even better. So most importantly, I think our head of sales in the West Coast, she put it really well for me. She said, “Kevin, you remember three or four years ago when I said, ‘The problem with our Women's is we just don't have a point of view.’?” She said, "Well, today, we have a point of view on Women's." And I think we’re very proud of that, and I think we’re excited about what that’s going to mean for us. So we’re going to continue to invest there, and I think it's a fantastic product that has a unique positioning to the market.

[Sharon Zackfia:]

As a follow-up to that, in which channel is your Women's next to highest?

[Kevin Plank:]

I mean, it's sporting goods, is where we've seen the biggest impact. But I think that's pretty good. We have not been, from a distribution standpoint on the Women's side, there is more opportunity for us to find and to sell in places where women shop. I think in the past and, number one, that means helping our existing retailers drive more women to their stores, to see that as a women's destination, but we do think there’s an opportunity for us to find and be in more relevant distribution as well, which is another task, another opportunity that we have in front of us.

[Sharon Zackfia:]

Okay. Great.

[Operator:]

Our next question comes from Kate McShane from Citigroup.

[Kate McShane:]

With such strong demand for your product, can you talk about any challenges you have experienced with freight? And have you had to resort to air shipping to meet some of this demand?

[Wayne Marino:]

Kate, this is Wayne. I think Brad touched upon it. As far as input costs, which has been a conversation that's been out recently, we've been committed for the next six to twelve months, so we feel pretty good about our input cost, our total cost, as it relates to our season through spring '11. As far as freight costs, there’s no doubt that the cost to move product has been increasing. Air freight is not something that we use on a regular basis. It would be an exception basis. So we're certainly able to weather whatever increases that we've seen in the marketplace. I think the key point in terms of costs, and then Brad was really key on nailing this, would be our Direct-to-Consumer business and how that impacts our overall gross margins has really been the key lever for us in offsetting some of the increases that could be creeping up in logistics.

[Kate McShane:]

Okay, great. And then my other question, I think the number is that you have UA shop-in-shops at Dick's that only represents about 60% of Dick’s stores. Can you update us on how many more shop-in-shops we can see in Dick’s stores in 2010? And how maybe they’ll look differently from what you currently have in Dick’s? And also, what role will UA be playing in the new Sports Authority stores?

[Kevin Plank:]

So I think when we go to Dick's, a couple of years ago, we invented and we went around a program called Under Armour City that we invested at Dick's Sporting Goods. And as we built that out, I think there are a few legacy stores, particularly some of the old Galleon [ph 0

[Brad Dickerson:]

And just to jump on that, one of the key growths for us would be comp store growth within existing shops. And we haven’t fully taken advantage of the floor space that we we’ve been able to invest in, in the last couple of years. So it's going to depend on the type of door and the presence that we have, but I just want to note that, especially within Men's and also in Women's, you'll start to see if you go into a shop that we don't always have all of our pictures on the space that we've built out. And that's one of the growth levers that we're going to see going forward.

[Kevin Plank:]

I think, Kate, with regard to the Sports Authority, the new SA shops that they have in place, so the model there is less brands and more focused in higher-end product and story gelling [ph 0

[Kate McShane:]

Great, that’s really helpful.

[Operator:]

Our next question comes from Matt McClintock from Barclays Capital.

[Matthew McClintock:]

So, Kevin, understanding that this is more of an investment in your Footwear. But can you, perhaps, provide us with some color on how some of the new product launches are performing, particularly like the Fleet or the Captive? And what lessons you've been able to incorporate into those lines?

[Kevin Plank:]

Yes, well, I mean, one key thing about 2010 is we actually didn't launch anything this year. And part of our approach in the repositioning of Footwear for our brand was that we wanted to become excellent in categories that we're currently in today. And that means going back and, of course, beginning at the top, beginning with leadership and Gene McCarthy, who is still less than a year in the chair, and the one thing that people need to understand about Footwear as well is that there's an 18-month product calendar that takes place. And so, frankly, the impact Gene and his team is not something that's in the market today. And so while we feel very good about the product that we have out in the market in 2010, again, we've really taken a strong approach at balancing a price-to-value relationship with a product that we have in the market. And we're not waiting by any stretch, but we have, again, recalibrated our footwear. And it’s something that, beginning in 2011 and throughout 2011 and, frankly, into 2012, you're going to begin to see what happens as Under Armour becomes dominant in footwear. And I say that with the confidence of an example, what we've done in Women's and the same reaction that people have and they said, "How can you possibly become a Women's brand in 2005?" It just has taken some time, and now, we may be one of the least patient companies in the world, but what I can tell you is that we do have the resolve and we continue to show and demonstrate our ability to invest in this business, that we're going to figure it out. And as we have been doing, it's not just in the personnel that come in, it’s the relationships with factories, it's the learnings that build with the infrastructure throughout a company. Apparel and Footwear do not leverage the business, and as we sit here in year five and we look towards when does that breakeven point and when do you start really getting momentum? Number one, we don't believe we're far away, and number two, we think that we continue to put ourselves in a position to have a great product and a signature product in the market at any time. And can you make that evaluation of new categories that we'll enter at the appropriate time too. But short answer, we've learned a lot, and hopefully, we're beginning to apply some of those lessons profitably.

[Matthew McClintock:]

All right.

[Operator:]

Our next question comes from Dan Wewer from Raymond James.

[Daniel Wewer:]

A question on the inventory grid. You noted that, that reflects the increase in the safety stock inventory as well as bringing the licensed product out. At what point will the renewed effort on Footwear begin to impact inventory growth? Is that next year? Or in the fourth quarter of 2010?

[Brad Dickerson:]

Yes, Dan, this is Brad. We don't really see Footwear being a major driver of our year-over-year inventory growth. I think to go back to the things we called out, it’s the biggest three divers we see, really, is that increase in safety stock on core programs. I'll also recall that we also are increasing our auto-replenishment programs year-over-year also, so we have more products on auto-replenishment, which is part of that driver, along with increasing our safety stock levels across auto-replenishment products. And obviously, there are two items we called out, Hats and Bags coming in-house, and also the increase in made-for [ph 0

[Daniel Wewer:]

Okay. Second question I had, accounts receivable growth of 13%. Is that a good proxy of the revenue growth that you are seeing from your core customers? I know we'll get that data when you release the Question, but is that going to be a good proxy of the revenue growth from your core customers?

[Brad Dickerson:]

Yes, in general, yes. Our DSOs, whether you look at them in total or with or without ETC, are improving year-over-year slightly. But in general, that's relative to the growth of our core consumers.

[Daniel Wewer:]

Okay. In the second half of 2009, you called out the cold weather as being ideal for your ColdGear sales. Obviously, weather is unpredictable. Can you tell us as to how that impacts your forecast for second half revenues?

[Wayne Marino:]

Dan, it's Wayne. First thing we learned a long time ago is not to bet on weather. We're going to put ourselves in a position, ColdGear is one of those items that is an auto-replenishment and safety stock item, so we're going to be well positioned for that. The consumer demand will come. The timing of it depends on various factors. So we're not sitting here betting on weather, but we're sitting here making sure we’re going to have the position for the Fitted ColdGear as compression as well.

[Daniel Wewer:]

Wayne, was that a reason why you did not raise your revenue guidance for the second half of the year?

[Brad Dickerson:]

Dan, I'd go back to the tougher comps in the back half of the year relative to Direct-to-Consumer, first of all. And second of all, also we also called out with that the biggest impact year-over-year decline of Footwear would be in Q1 and Q3. So the decline in Footwear is pronounced in Q3 versus last year, and we had a very strong Direct-to-Consumer in the back half of last year also, which we’ll be comping this year. Those are the biggest drivers.

[Daniel Wewer:]

Okay, great.

[Alex Pettit:]

We have time for one final question.

[Operator:]

Our last question comes from Mitch Kummetz from Robert Baird.

[Mitchel Kummetz:]

Kevin, on the Apparel businesses, you talked about the broad-based strength in the quarter. Could you guys be a little more specific on how Apparel grew wholesale versus consumer direct. I know consumer direct was very strong on the quarter as a whole for the company.

[Kevin Plank:]

Let me speak, I'll let Brad follow up. Again, yaddar seen is that [ph 0

[Brad Dickerson:]

This is Brad. So just to kind of look at the growth rates in the second quarter, obviously, we don't get into the details of wholesale versus Direct-to-Consumer and so forth but a couple of data points that we did talk about. Direct-to-Consumer was 21% of our business in the second quarter and accrues 60%. Obviously, a majority of our products through Direct-to-Consumer is on the Apparel side. So if Apparel grew 34% for the quarter, obviously, the Wholesale business would have to be a very strong growth rate too, as that’s a major part of our Apparel business.

[Mitchel Kummetz:]

Right. Can you talk a little bit about how you're thinking about your wholesale distribution right now? I know you guys have said that there are certain major markets in the U.S., whether it's like Los Angeles or New York, where you feel you're under-penetrated relative to some other ones where maybe the brand’s just been more established historically. How are you guys thinking about that? How do you feel like you can get better penetration in some of those markets? Is it through your Direct business? Or is through things like the new TSA concept? Or working more with like the longer finish line [ph 0

[Kevin Plank:]

Yes, well, when we look at distribution as a whole, we begin with looking at from a consumer point of view. Where is our presence lacking? And where is our target consumer shopping? And we do believe that we're under-penetrated in certain regions of the United States. A great example of those numbers is that in the Minneapolis-St. Paul area, for instance, we have more than 100 points of distribution for the Under Armour brand. In New York City, we have just less than 30. So when you look at where are we showing up and where are we appearing as a company, we think there's opportunity for us to be a bit more aggressive there. We brought in, and a great example of that too is, we have existing partners that we still have opportunities to grow. For instance, Foot Locker is, and in the mall channel alone, we're in 700 or 800 Foot Locker doors today, with more than 4,000 doors globally for us to continue to move into. So we're declaring is not that we need to go to new partners as much as, I think, there's [ph 0

[Mitchel Kummetz:]

Okay. Brad, you talked about SG&A growth. I think you said in the third quarter that you'd expect it to be up a similar rate as Q2. Is that correct? And then, how do you see that going into the fourth quarter?

[Brad Dickerson:]

Yes, to that point. Q3 growth and SG&A will be similar to Q2. That's mostly going to be driven by marketing. So we see in the back half of the year marketing be a big driver of Q3. But again, marketing in total will still be at 12% to 13% for the year. But a higher growth rate in Q3 than versus Q4 driven by market.

[Mitchel Kummetz:]

Okay. And then lastly, on the Direct business, I know 45 stores, or Factory stores at the end of this quarter. What was that number at the end of Q2? And I don't recall if you said what your comp was in the second quarter.

[Wayne Marino:]

Yes, Mitch, this is Wayne. Let me just take that. This year, our range is about 48 to 53 stores. I just want to clear that up. If we have opportunities to get over 50 and if there's places for us that are right for us in the right locations, we're going to be able to take advantage of that.

[Mitchel Kummetz:]

All right.

[Kevin Plank:]

Okay, thanks very much.

[Operator:]

Ladies and gentlemen, this does conclude today's program. You may now disconnect, and have a wonderful day.

[Kevin Plank:]

Thank you.