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

Thomson Reuters StreetEvents

Q1 2017 Under Armour Inc Earnings Call

BALTIMORE Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Under Armour Inc earnings conference call or presentation Thursday, April 27, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David E. Bergman

Under Armour, Inc. - CFO

* Kevin A. Plank

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

* Lance Allega

Under Armour, Inc. - VP of IR

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Conference Call Participants

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* Andrew Shuler Burns

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

* Kate McShane

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

* Matthew J. McClintock

Barclays PLC, Research Division - Senior Analyst

* Michael Binetti

UBS Investment Bank, Research Division - MD and Senior Analyst

* Randal J. Konik

Jefferies LLC, Research Division - Equity Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Under Armour, Inc. First Quarter Earnings Webcast and Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Lance Allega. Sir, you may begin.

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

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

I'd like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to certain uncertainties that could cause actual results to differ materially. These uncertainties are detailed in this morning's press release and documents filed regularly with the SEC. The company assumes no obligation to update forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now turning to our balance sheet. Cash and cash equivalents was up 10% to $172 million. Inventory was up 8% to $902 million, while we focus on efforts to manage product flow with demand to ensure brand and channel health. Total debt was down 8% to $861 million. And finally, CapEx was down 28% to $65 million, demonstrating our disciplined approach to infrastructure investments.

With respect to our full year 2017 outlook, there are no changes from the prior targets we gave on January 31, which were included in our press release this morning.

Next, I want to provide some color on the balance of the year. As we look to transition our new SAP platform early in the third quarter, we are proactively taking measures to ensure as little disruption as possible to our business operations and delivery of customer orders. With some potential movement depending on how SAP timing flows through, we expect the revenue growth rate in the second quarter to be approximately 1 point higher than the first quarter. And in the second half of the year, we expect revenue to be up at a mid-teen percentage rate, with, by far, the strongest comparison of 2017 being in the fourth quarter.

We expect first-half gross margin to be down approximately 120 basis points due to the impact of changes in foreign currency, efforts to manage inventory and higher air freight expense, which more than offset the benefits of channel mix. In line with revenue expectations, gross margin should also see its strongest comp in the fourth quarter of this year.

Turning to SG&A. The previously mentioned timing shifts of marketing and other expenses into future quarters, combined with ongoing investments in our DTC, international and footwear businesses, are expected to result in an operating loss of approximately $15 million to $20 million in the first half of 2017.

And finally, we expect a mid-teen effective tax rate in the second quarter due, again, to discrete international items.

To close, I've been with Under Armour for 12 years, and I've seen a constantly changing map versus terrain and have the greatest confidence in the team we have in place to meet these opportunities as we continue to position ourselves for the future. We are focused on financial and operational discipline that drive efficiency across the organization. We are working collaboratively to determine the balance between growth, share and scale, and the right return on investments necessary to deliver consistent and profitable long-term growth.

We have already begun to identify specific opportunities to reduce complexity and drive towards a leaner and more responsive organization. And we look forward to sharing more details later this year.

With that, I will turn it back to the operator for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Bob Drbul of Guggenheim.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [2]

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I guess, the 2 questions that I have for you this morning, the first one is on the footwear, with the 2% number this quarter, what did you learn and sort of the optimism that you have going forward for a rebound in footwear? And the second question is you engaged in detail on the expectation for the revenues to reaccelerate throughout the remainder of the year, especially the back half, can you just discuss a little bit more of the confidence that you have in that forecast as well?

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

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Bob, so number one, let me just begin with as regards to the footwear is that we don't like it, we don't accept it. We believe in footwear. We believe what we've built in the infrastructure that's now in place. And our footwear for the year is actually going to outpace the overall growth of the company for '17. So we realize the base that we put in place going back to '16 crossing $1 billion, and that's given us scale and has given us the ability to invest. So the infrastructure that we have from the global innovations (inaudible) over the last 11 years, we've been building locally, where we manufacture (inaudible) where it all comes together at the Under Armour Lighthouse as well as the new footwear building that we're putting up in Portland, where our team can have a house that they can actually call a home. So we understand though, as we look at what's happening in the marketplace, number one, we're a performance brand and we continue to see momentum in some of our on-field and on-court categories, things like cleated and things like running, as well as what we're seeing in basketball. There's other momentum that we have in the marketplace. But we see and we understand the shift in lifestyle. The one thing, we think is important though is that all the lifestyle that we'll introduce, whether it's apparel, whether it's footwear, will things that will build on the credibility we have because of our authentic athletic base. We've also seen some things in our lifestyle families like the 24/7, our Encounter product and the new product we just unveiled called Threadborne Shift a couple of weeks ago. It's also important to note that the international demand for our footwear is very, very strong right now. It's a competitive landscape here in the U.S. and that's nothing we shy away from. But we understand that we can win and we are doing that. And it's -- and we're doing it at premium price points. So there's 3 things we're really focused on for footwear right now. And first and foremost, it always comes back to products. Innovation and building great, great product, and I want to tell you that our pipeline is full. And we understand the need and the key for beautifully designed product that also raises our technical game. We also have some technical game that we can bring into that through beautiful delivered product, things like our new Connected shoe, which we launched V2 of this year at CES. And there's more innovation coming in the future, where, we believe, leveraging the business that we have at Connected Fitness. We think that there's a real product opportunity there. And we've seen some things that really give us encouragement. We're also doing some things in the personalization standpoint, like UA Icon, which is going to be launching later this summer, which is a customization capability for consumers to go on to ua.com and be able to build their favorite Under Armour footwear and customize it to anything that they'd like on the shoe. So a couple of programs we really think are going to make the differentiators for us. But we understand that this comes from driving product first and foremost. And for us, that means building franchise. And this is sort of an ethos for the company this year, is that Under Armour is officially out of acquisition mode and we're in activation mode. We have franchises in footwear, things like Bandit and Gemini, Slingflex, Highlight, Curry and many more in the pipeline, which has proven that we can sell a product above $100, and that's the unique thing for any brand. So as we sit here as the third largest brand in the world, and we think about the competition we have in front as well as that behind us, we understand that, that's the key. With running styles approaching nearly 20 running styles above $100, we need to make sure that they all sell through and that happens. We also have to focus on -- thirdly, is our expanding access to consumers. And we're fortunate to be in that position that we have the distribution lever to be able to utilize this year, because that is what helps gives us the critical volumes to compete with the 2 companies in front of us versus worrying about the multiple companies behind us. And again, just to remind you, when we say expanding distribution, we are not going to any new distribution other than what's been commented on out there. We said a couple of years ago that we have 11,000 points of distribution. We are targeting 13,000 points of distribution. We feel good about where we are right now. And we feel that this is going to give us a distribution lever that allows us to continue to push the critical volumes that we can continue to build product at the premium end of our business as well. So Under Armour is focused on $100-plus footwear, and we feel like we're making great strides to get there. So we, again -- and I just want to reiterate again is that we do see the growth for the full year outpacing the overall company growth, too.

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

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And Bob, this is Dave. I'll jump in on the second part of your question relative to back half and Q4. Q4 and back half confidence comes really from product, distribution and also pricing strategy. From a product perspective, we have new offerings, such as our Unstoppable lifestyle product with new running technology. We also have a lot of confidence in Reactor product, just as a few examples. And also, we learned a lot from last fall-winter. And so we broadened our fall-winter assortment with more layers, such as lightweight fleece to be better prepared for any type of winter. We've revisited our auto replenishment program. We also have more price and distribution levers that we're pulling, as Kevin mentioned, along with a better strategy to refresh our product on the floor more quickly. So -- and you add it all up, we also have a smaller comp in Q4, and we're just definitely excited about what we can deliver in the back half and Q4, all together.

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Operator [5]

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And our next question comes from the line of Kate McShane of Citi Research.

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Kate McShane, Citigroup Inc, Research Division - MD, Head of the U.S. Discretionary and U.S. Apparel and Retail Analyst [6]

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My first question is just on the North America market. I think there's been evidence of a high-level promotions in this market. How are you feeling about North America over the next few quarters from a promotional standpoint? And do you think we can return to inflation and price increases after a prolonged period of promotion?

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David E. Bergman, Under Armour, Inc. - CFO [7]

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So Kate, this is Dave. I'll start off with that one. North America being down 1%, simply put, we don't like it, and we don't really accept it. It was in line with our expectations, though. We expected the choppy promotional environment with carryover from Q4. We did anticipate that our new distribution wasn't going to be enough to offset the prior year bankruptcies. But we are proactively managing our inventory and brand health in the marketplace and that also included less liquidation this quarter. So in general, we did expect the lower growth in Q1 for North America, but it's not something that we're going to accept.

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Kevin A. Plank, Under Armour, Inc. - Founder, Chairman, CEO and President [8]

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So Kate, let me start underscoring that from David. But more importantly, like the promotional environment that exists out there, it's pervasive. It's something that's very real and it's something that we need to be prepared for. And I think I feel really good about it. In the back half of '16, it's something that we knew we could have done a better job with and it's the lessons learned that we are applying going forward. So that being said, it's just understanding the way that we've approached 2017 because when we look at growth overall for our company, it's been a heck of 3 years of going of doubling the business over that period of time and has us looking forward about what's next. And so we really are focused this year on operational excellence and what we can do to being a better-run company. And again, we're going to do that while still adding more than $0.5 billion in revenue. So we're definitely not going to stand still. And we certainly don't like going backwards. And so focusing on going forward is where we are. We have a lot of executional opportunities in the near term and also, while building, I think the bigger better engine for the future. And as we do that, I think there's a couple ways that we're looking to make that happen. I mentioned in my script 3 real focuses we have at the company. First is structure. I think of having just the alignment of evolving from a small company to a mid-company to getting to a bigger-sized business. Category management, we believe, is going to be a big difference of keeping us close to the consumer as well giving P&L responsibility in a matrix approach that allows and drives real accountability for us. Secondly, but probably, it's the most important, it's absolutely the most important, is just great product. Reinventing our core basics, that's one thing that I wanted people to know is that, that is where my focus has been. As we've seen and looked at sort of where we are right now when we made the calibration of things, '17 for us is the year that we're going to change the growth outlook. And so we have the ability to make the best decisions for our business and making sure that there's 3 ways we want to look to do that, is reinventing our core basics, which means being productive, is that we lived on a legacy business for a long time where our product would just sell. And we had these big key item volumes. But now, when you hear me emphasis the idea of go-to-market strategy, I think really being clear and deliberate about the products that we have in the marketplace, with each and every product, not just selling because it's heritage, but selling it because it's the best product out there. And I feel like we have addressed that and particularly, in the back half of this year. It also means getting behind from the planned programs we have for energy and excitement this year, things like Project Rock and our new sleepwear line. And then also, I touched on this, but the new product that we're bringing to market. And listen, we get it. We understand what lifestyle is about and we have a new product line called Unstoppable that'll be hitting in toward the end of Q3 and into Q4 of this year, too. So we're chasing the opportunities. And I think probably, more importantly, a better way to say is we're attacking those opportunities. And third and finally is that we're editing. The reliance that we've had on that key item volume is something where we can't just put items into the marketplace and expect them to sell. The consumer expects more. But more importantly, our shift to lifestyle isn't about a new line or one collection or one drop. It's about truly evolving the entire company toward the space. And so you'll see that reflected, and this is nothing new. We've been in the lifestyle business for over 2 years, building it out, starting at the premium and evolving that throughout our product line. As far as it goes with the promotional environment, that's the reality of where we are today. We don't feel like we control that. We feel like people are making decisions from all different angles, which are going to impact what's happening in the broader base. So I think one thing that I just want to sort of underscore, as you think about North America maybe, which is a broader statement on where the company (inaudible). Under Armour is a performance company and we don't want to shy away from that. We know our foundation, but we also know that, that foundation is what gives us the credibility because there's a lot of people that have now jumped into the athletic space in some way, shape or form. But as companies endured, and as brands endures, Under Armour is a great brand and we expect to endure through this. And so we're going to play offense this year, but we'll be prepared for whatever the market brings us. And we feel pretty good about that.

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Kate McShane, Citigroup Inc, Research Division - MD, Head of the U.S. Discretionary and U.S. Apparel and Retail Analyst [9]

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Kevin, if I could just follow up with one quick question that I think kind of rolled in to what you were saying. Could you comment at all about how you're thinking about segmentation, especially now that you're in Kohl's? And how are you feeling about the differentiation of product between what you're selling there in the mid-tier versus your premium-end customers?

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Kevin A. Plank, Under Armour, Inc. - Founder, Chairman, CEO and President [10]

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Yes. So as I mentioned a minute ago, we told you a while back that we had about 11,000 points of distribution. We were targeting roughly 13,000, so we've now hit that. As far as distribution goes, number one, it's important to me that we -- when we announced the expanded distribution, that was the same day that we announced being on Fifth Avenue and committing to building the greatest retail store in the world that will open the middle of 2019. So our commitment to being premium brand has never wavered or changed, but to compete at the levels where we want to run, we feel that we need to be the best. And we feel like we need coverage, and coverage is about some of the volumes that we can drive. And again, where we talk about being in 13,000 points of distributions, it's important to remind people that some of our key competition has more than 23,000 points of distribution in North America alone. So apples-to-apples, we feel very good about where we are. Now that does lead to the question of segmentation strategy, which we told you then the beginning of 2016 was the first time that we really stood up merchandising for ourselves as a brand. And with that comes having clear segmentation between our product lines. So I think that we're good today, but we understand that consumers are -- or what our customers want. And they want differentiation, and they expect it, and they demand it. And frankly, that we have a brand that has the capability of doing it. In things like some of the investments we're making between systems and between some of the structural things in category management, we feel pretty good about our ability to do that. As far as additional distribution or anything there goes, we are completely, as I said, out of acquisition mode and in activation mode. The goal that we have is making all of our existing partners better, and this means doing a better job in the stores where we are. And so you're not going to hear of any additional big-box opening happening in the United States for a very long period of time. We like the team that we have on the court. We like our distribution. And we think that we have a great, great opportunity there. As far as our relationship, the kickoff and launch that we've had at Kohl's has been -- it's exceeded our expeditions to date and they've been a very good partner. That being said, I want to reiterate that we have some amazing partners right now as well. And our goal that we have as a company is focusing that we don't have to -- I don't believe we have to open any new distribution. I don't think that we need new categories. I don't think that the platforms that we've unrolled -- unveiled as a company doesn't mean we won't have any new ones. But I'm really giving my team the ability to just relax and just focus on what we have right now in becoming excellent in every category, every sports marketing asset, in the pieces we have and using 2017 as the year to get better at doing that.

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Operator [11]

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And our next question comes from the line of Matt McClintock of Barclays.

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Matthew J. McClintock, Barclays PLC, Research Division - Senior Analyst [12]

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Kevin, the comment was made just a second ago about that you're proactively managing the brand health. And I thought it would be helpful if maybe at high level, we could just get your assessment of where the brand health stands today overall. And then as a follow-up, I was just wondering if you could elaborate a little bit more on the innovation. You've talked a lot about lifestyle and there's been a lot of discussion about that. But what changes to the innovation pipeline are you making? And maybe can you provide some visibility into innovation on the horizon in '17 and maybe beyond?

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Kevin A. Plank, Under Armour, Inc. - Founder, Chairman, CEO and President [13]

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Yes. Thanks, Matt. So first of all, financially, we did exactly what we said we're going to do this quarter. So I think anything as it relates to brand health from that standpoint is that we had a pretty good idea of where we were. As far as our brand goes, and this is somebody with 21 years having been in this industry, I truthfully wouldn't change positions with anyone else in the world, with any other brand. I believe that our brand is positioned. I believe that our brand is strong. I believe that our brand demonstrates that we can take punches. And I believe that our brand also demonstrates that we can throw them too. So you look at the bevy of assets that we built and the things that we have as a company today. We've got international business that's growing more than 50%, which remains one of our largest opportunities as a company. As far as the base of partnerships we have here in the U.S., we've got more than 40 all-school collegiate deals where we outfit them head to toe. We're introducing ourselves to the State of California this year with the introduction of signings of Cal-Berkeley and UCLA. We've added a new outfitting deal with Major League Baseball that goes through 2030. And declaring to build the greatest retail store in the world on Fifth Avenue that opens in 2019. This brand is looking forward, and we expect to bring our consumers with us. And if you're starting a brand today or looking at who we had and the support that we had, I think a lot of these things have been misstated in terms of where and how people are aligned with our company. Tom Brady, Dwayne "The Rock" Johnson, Stephen Curry, Lindsey Vonn, Misty Copeland, Jordan Spieth, Anthony Joshua, who will be fighting for the heavyweight championship of the world this weekend, as well as some that you've never heard of like a boxer from Baltimore named Gervonta. There's more people buying Under Armour this year than they did last year. We're adding and putting -- standing up new systems. Our category management structure and energized flow of exciting new product experiences from -- for our consumers. And we're also adding $0.5 billion of revenue this year. So I can't tell you exactly how other people feel, but I know how our athletes, our team, our partners and I know how I feel about the future of the company. So I think we definitely have work to do. But I think the strength of the brand is something that's been built over the last 21 years. And I think as people continue to learn and hear our story and as you start to hear our marketing and our voice tuned up throughout the balance of this year and amplified, we feel pretty good about where that would be. On innovation, if you want me to keep riffing, I can give you sort of where we are and how we see from a product standpoint is that anything that begins with brand health just comes back to products. It's where we've been focused. It's where we are right now. So let me give you sort of innovation as we're seeing it in 3 buckets. The first should be apparel. So a big part of our marketing push this year has been around the platform of Threadborne. The Threadborne is -- it's not going away and it's something we're going to continue to lean on. It is a ridiculously soft and beautiful performance fabric that fits into a number of different platforms for us and something that goes from apparel all the way through to footwear. You're also going to hear about something called Reactor, which is an exclusive down insulation that allows your body to heat up, cool down, depending on what's happening from external temperature side. On the footwear side, I mentioned the Connected Shoe before, which is something that's pretty -- we believe in that market and we think there's a story. We think we're the ones who can tell the story because we don't think it's been told yet. And that's on the come. And then -- we also -- I think we've got lifestyle and few things like Slingflex. It's on (inaudible) at $100. A new product. Again, I mentioned the Threadborne Shift. And then it's also innovating around our core. Again, we've got this consumer, with the youth of this country, we believe we have great positioning with things like the Highlight Cleat. We're looking forward to the Curry 4 and building those franchises. And the third thing, I'd say, from an innovation standpoint and this may not be innovation to others, but for us, it's something that's a key growth driver of where we're going. It's just the addition of lifestyle. Lifestyle and what makes us unique, when we talk about innovation, is ours won't just be product that just looks better. Everything does something. It will all fit the Under Armour DNA of being better, being best-in-class. And so you'll see that happen through -- and I mentioned Unstoppable, the Inspired collection by Misty. We've got The Rock. More launches, dropping super event, a few surprises in store as well. So our differentiation, we believe, is something that's significant. And we think that our credibility as an authentic, athletic brand is something that gives us the right to be here and play here. And we'll -- frankly, there'll be few standing as all these different trends come and go.

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Operator [14]

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And our next question comes from the line of Michael Binetti of UBS.

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Michael Binetti, UBS Investment Bank, Research Division - MD and Senior Analyst [15]

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Just a quick modeling question and maybe just a higher-level clarification for Kevin. The -- can you talk to us a little bit more about the puts and takes on the gross margin as we head into the second quarter? It looks like the first-half guide implies 2Q will be down about 180 basis points. Obviously, worse than the first quarter, but the compares get easier. I would think the currency you pointed out would start to diminish. Inventories look like they're in better shape and it seems like you took some pain in the first quarter there to clean it up. I know you said something about air freight being a bit more of a headwind in 2Q. But maybe just give us a little bit more on the second quarter and what some of the headwinds are get to a more significant 2Q compare versus 1Q.

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David E. Bergman, Under Armour, Inc. - CFO [16]

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Mike, this is Dave. I'll take that one. When you think about Q2 gross margin, some of the inventory management and promotional environment challenges we had in Q1, we're still expecting to persist into Q2. We also did mention that we're going to have a little bit higher airfreight. Some of that has to do with managing around our SAP go-live. We do expect some continued headwinds from the FX impacts. But also, our international business is actually growing a little bit faster than we even planned, even though we were excited about to begin with. And as you know, that creates a little bit of a margin headwind also. So when you add all of those up, it does make Q2's margin a little bit tougher. But then as you trend back into the back half of the year, we do expect in our planning on a little bit more of improved product costing benefits in the back half, which we're excited to see. You'll have less year-over-year impacts to promotions and discounts when you're comping that. And also we're expecting a beneficial mix of product -- or actually, channel when you think about DTC going to be -- being up more and then also the fact that we've talked about liquidation being a smaller mix of our business. So we've got some bigger favorability in the back half, which should be able to, for the most part, offset the continued pressure on FX headwinds along with the footwear and international pressure that we always have with their high growth rates. So we feel pretty good about the back half.

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Michael Binetti, UBS Investment Bank, Research Division - MD and Senior Analyst [17]

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Okay. I mean, Kevin, just sort of higher level. You mention sportswear, the very first category upfront there today. So maybe just tell us a little bit about -- you're in the second round there, maybe how you see the evolution of that sportswear business going over the next few years as far as maybe how you see it -- how you see distribution growing and when you think it could be a more meaningful contributor on the total company revenue line. And then the same question for Connected Fitness.

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Kevin A. Plank, Under Armour, Inc. - Founder, Chairman, CEO and President [18]

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Okay, so let me begin with sportswear. So there's 4 categories or ways that we think about our overall brand positioning with the different categories we have. The first would be on field and think about them left to right. On-field would be cleated. Sport performance would be things like you could wear with a pair of jeans, like basketball. All the way out to the right would be sportswear, which is what we launched this past fall with UAS. And sitting right in the middle, which is the meat of the business, which is more than 1/3 for our 2 largest competitors of their business, is what we call sports lifestyle. So today, we obviously want to get to the sports lifestyle category, but we thought we'd have a better opportunity of doing that by putting this flag all the way out there, which is UAS. And so having time for that to curate and position ourselves at the high end of fashion, giving us the ability to attack the massive market of sport lifestyle from the top versus trying to simply evolve it from the field. So we believe that's important, so having that positioning is something that we're very bullish on. Sport lifestyle still remains, again, our largest opportunity and, frankly, by a mile. And we look at the different categories of where we can grow. And so everything we've been doing to authenticate ourselves has put us in a position for sport lifestyle. It's not a new category for us, but I think I keep coming back to saying what's going to make us different and unique is that some brands rely on their logo being cool or a good line. What's makes Under Armour unique is that every product does something. And so that DNA is something that we'll carry through in every product we do. And again, where the emphasis is not just going to be on the fiber technology, like, we get it, like, we're not just blind and saying we're just looking at product through a performance lens. But we think there's a much bigger opportunity. We think authenticity and equity are really what drive us there. And again, it's not something, which needs to be a new category for the business. It needs to be something that can really evolve into our overall total business. So -- but we've got the cool people. We have access to all the same color agencies that the rest of them do. We feel like we're driving there in a big way. So we understand the emphasis of getting the lifestyle, but it doesn't mean abandoning what we have in performance, so wrapping our arms around the fact that we are a deep performance company and getting ourselves to the next step. Connected Fitness, Michael, your question there.

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Michael Binetti, UBS Investment Bank, Research Division - MD and Senior Analyst [19]

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Just on the -- how you see the evolution from here yet.

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Kevin A. Plank, Under Armour, Inc. - Founder, Chairman, CEO and President [20]

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So I think it's a good opportunity for me just to sort of explain where we were when we made the acquisitions, the original vision that we have of becoming digital as a company and what we think that payoff is for us. So the Connected -- I'm sorry, the Connected Fitness investment for us was always about having a better understanding of our consumer. And we view that through the lens though is that it would help us sell more shirts and shoes. To be clear, like that was the goal. And we believe that original vision is still very much intact. The resources community team that Connected Fitness has given us has really -- it's opened the aperture of the way that we believe consumers are going to expect an athletic brand to deliver for them in the future, like, helping them make better decisions about how to improve their lives, like, it's not just going to be a cool logo or a nice shoe. It'll be all those things. Of course, it will be stylistically portrayed, but it also has to be in the context of how are you helping me live a healthier life. So today, just for perspectives and a reminder, our Connected Fitness community, we have the #1 app in the fitness store with just alone our MFP, across the 3 of the 4 different apps that we have, we have over 200 million strong with more than 80,000 downloads occurring every single day, downloading 1 of our 4 apps and giving us the insight that we believe gets us much closer now. I mentioned we're just beginning to plug in some aspects of the SVoC program, the Single View of the Consumer, through some of our SAP go-live. And we think the data that we'll have as a result of that is ultimately going to help us drive toward selling more shirts and shoes. The information that we have with the holistic experience from fitness, to activity, to sleep and nutrition, we think gives us a purview of: number one, that helps us and it's good for consumers and that we have great trust and respect of protecting that for them. But it also helps us be a better brand for them and help build better products that will get them closer. And as you look at things like standing up category management, it's pretty powerful and we can see how many people went for a walk in Australia or how many people are running or what the average run trend was. The last part I want to say is we also recognize that monetizing this is very important. We've been doing that. And again, understanding this is less than 2% of our total as a company, it doesn't mean that we like small numbers or accept them. So we recognize that we have today a pretty amazing ad platform in Connected Fitness and one that we want to drive forward. And so we're attacking that right now inside the existing business while utilizing this data. The last thing I'll say about Connected Fitness because when we get people looking at us and asking what the big plan there is. Speaking now as the third largest brand in the world with the 2 in front of us that are long ways away and the many behind us that are not too distant, we believe that Connected Fitness differentiation for potential quantum leap in our industry. And we think that's something that's only beginning to take hold and something that will play out over the next 6 months effectively, but through the next year and as we look to the future. And meanwhile, utilizing some of those resources just make us a better connected company. So we are bullish about our investment in digital and what this means and how this combines into not only the direct benefits for our consumer, but also how it ties back into our dot-coms like E-Commerce and giving us intelligence about our consumer and making us make better decisions, better products for them.

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Operator [21]

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And our next question comes from the line of Randy Konik of Jefferies.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [22]

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I guess, a question for Kevin. I just want to kind of get some perspective on how you think your marketing strategies will continue to evolve or need to change or not change. We went from the football kids on the bus to now, more athletes. And you have Rock as well. So how do you think about -- you have this huge community of fitness people with the MyFitnessPal, et cetera. How do you want to market digitally to them, showing them specific products or not? And how do you think about the evolving message of the brand or to communicate some of the lifestyle offerings you plan to -- you'll further bring to the market? How do you kind of try to want to change the marketing tactics with the consumer?

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Kevin A. Plank, Under Armour, Inc. - Founder, Chairman, CEO and President [23]

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Yes, the kids on the bus is a good walk down memory lane. It's a great spot. And it was a different time when people were just looking at the 30 or the 60 commercial that we ran during live broadcast. Today, it's changed very much. And I think that we've got some great amplifiers for us within the athletes that we have, the teams that we have, the partnerships that we signed recently. And it's really all inclusive is that the understanding what social means for us -- and I don't think we've been a great social company to date. I don't think we've done a great job with our social media. And I think the understanding is there's a couple ways for us to leverage our social media. One is that we have an incredible athlete community that's creating authentic content for us every single day. And simply as curators of our athlete community is something that I think that we can do to tell bigger, bolder brand stories that keep us out there in the marketplace. I think from a social media standpoint, you'll also see us get much better with what we do with telling product stories. The market is incredibly crowded now. The things that made us unique -- Under Armour unique 3 or 4 or 5 years ago, there's -- everyone has their version of athletic something. Every company has gotten into their version of jumping on athleisure or jumping and making their version of a tight. And so moving beyond just yarn differentiation of what makes our fiber fabric better is no place for us to live. And so I keep coming back and driving home this theme of when you think about companies that last and there is a -- it's a difficult time for many retailers out there. As we look at Under Armour, like, we understand the shifting landscape, we look at the investments that we've been making, we look at 2017 and delivering what we said we are going to do. And we understand the focus that we have of making ourselves a better company by getting closer to category management and having the true insights that allow us to understand what that consumer wants and delivering for it, both especially beginning with the product that delivers (inaudible) to them and to the way that we communicate them is that Under Armour product, it's complex and what we've always done a good job is that heat gear you wear for when it's hot and cold gear for when it's cold. So we've got a lot more innovation. There's a lot -- much broader competitive set that we have now as well, that we need to make sure we're explaining that product. When I talk about our positioning for lifestyle, I think it's one that no other brand can have, is that it can be a beautiful sweater, that V-neck and comfortable and something that you could wear to the office or out to the club. We want to make that sweater, but we also think it's important that the sweater performs and maintains the DNA that's Under Armour. Now we're not going to be blind to this. We just need to make beautiful products. We get it. But we also needed to understand that the reason the consumer will buy our beautiful product is because of the DNA that makes us authentically Under Armour and authentically sport. And so you'll continue to see us partner with whether it's the sleepwear line that we did with Tom Brady, the Project Rock collection that really begins to hit his consumer dead on and he's been a great partner for us and also the reach that they have. Dwayne "The Rock" Johnson has over 80 million Instagram followers. And so when he gets behind something, it can move the needle. And so we actually have -- between -- amongst all of our athletes, we have a pretty powerful channel that you'll continue to see us activate. And you'll also see -- continue to see them bring lifestyle more into what they're doing. So that's a bit of a mixture question. Hopefully, you got a bit of mixture answer there between we expect to tell great stories about the products that we build. We expect them to be more relevant, more stylistic, more beautiful and still performing. And so I think we're just getting started this journey, but we feel good about our basis and really, where we're heading with it directionally.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [24]

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And can I just follow up with one more item? I'm just intrigued by the amount of -- the systems implementation, and it sounds pretty exciting. Can you give us maybe some perspective on any type of measuring sticks or yard sticks you're trying to kind of work towards -- like, we think the systems can help us reduce our inventory levels by some amount or the liquidation levels can continue to move lower, our design to market cycles can be reduced by some level of X. And I'm just curious what your thoughts are there. And then you said these systems are going to also help with things like the implementation of Curry 4. Are you going to kind of you -- is the system -- these systems going to allow you to use a different type of [penetrating] strategy and so forth? Just curious there.

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David E. Bergman, Under Armour, Inc. - CFO [25]

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Randy, this is Dave. I'll take that. I mean, we're not going to give you specific numbers or percentages, but as Kevin mentioned, we're definitely investing in the one global instance of SAP across our business. So it really does enable us to simplify and automate our process, enable a more transparent supply chain. The largest part of that implementation goes live in early Q3, but there will be stages after that as well. It's definitely be creating capabilities to efficiently operate a value chain at scale. When you think about some of those future benefits you were mentioning, we'll definitely see some of that relative to revenue growth and speed-to-market, definitely around inventory optimization, also service level improvements because there's a big supply chain component to that, and all that comes through on effective margin management as well. So there's definitely a lot of exciting aspects that we'll see. I think you're going to see more of the meaningful improvements of that coming out in 2019 and beyond, but it's definitely a big play for us.

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Operator [26]

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And now we'll take our last question from the line of Andrew Burns of D.A. Davidson.

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Andrew Shuler Burns, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [27]

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As a follow-up, I'm trying to better understand how quickly you can pivot the assortment to where you want it to be with your key wholesale partners as well as in DTC. From a consumer's point of view, as they shop your key wholesale partners and DTC in the upcoming holiday season, how visible will this assortment shift be? And how do you expect to communicate the lifestyle and sportswear initiatives to consumers?

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Kevin A. Plank, Under Armour, Inc. - Founder, Chairman, CEO and President [28]

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Thank you. So I believe in 80-20 rules. And I still believe that the basis that we have is the foundation that people need. People need T-shirts and people need golf polos and people need quarter zips. But beyond that, there's a lifestyle component that we think that we can accelerate onto our brand. The ability for us to affect that in Q1, Q2, we look at where we were in the first half of the year and frankly, the lessons learned coming out of the end of 2016, we said we think we can be better and where we were able to affect once we had that information was really going after Q3 and Q4. And it doesn't mean there needs to be a seismic shift, but it means some of the key items were -- the Unstoppable collection was something that we drove hard, really, from December last year to be able to deliver this year. So it's great practice for us of learning just how fast we can be as a company from a supply chain standpoint and understanding why we're not that fast everywhere. And so fast fashion in the way that they operate, being close to consumer is something that we want to get a lot smarter about and something that we're continuing to drive. We feel good about the collections that we have now. We feel good about the line that we have out on the floor. We're just saying we can be better, and better means a real sense of focus. And I guess, if -- when I started to feel and sort of look at the year and where we are, the one place that I've thrown myself into in the last several months and really looking at this year where I want to be going forward is just in the product, any product -- any issue that anyone has with any company. You can create the greatest commercial you can do, anything that you want, but it just comes down to product. And where we look at 2017 and part of our alignment was how do we get our product in line with being the kind of growth company that the market has become accustomed to Under Armour being, we know how to do that. We haven't missed any trends in the marketplace. We could be faster. We could be better. But again, this comes back to the foundations of what we're going to do going forward. And so I think that people walk out and they're not sure if we understand what cool looks like, and we can't do style what a consumer wears. I believe in the sport authenticity that we have. I believe the consumer likes us. I believe the consumer loves us. I believe we just have to tell them why they do. And most importantly, we need to show them product that inspires them to want to love us. And so it is a -- the consumer has a pretty short memory, and they also have a really long, I think, affinity though. So I think that we've established that to a point and where they might have gotten to know Under Armour as a tight shirt compression T-shirt company, we also then evolved to a full-scale athletic brand. Where they might have known us as just a North American company, I think we're doing a pretty good job evolving to being a true global brand. Where they might have known us as just as performance company and just that tight T-shirt, I think what you'll see is us continue to evolve moving into being a truly -- a true company that could be worn in a lot more wearing occasions than just the gym, on the field, on the court or the pitch. So we're pretty far down that road and I think we feel pretty good about where we're going. We're not perfect. We don't think we're there yet. It all speaks into the guidance or the outlook that we provided for the year. So we're using 2017 as the year really to get better. And I think we've got a lot of seismic internal things that we're doing, meaning just make us a better company that will position us because we haven't said the word being a $10 billion company in a while. And I want you to hear that. You're not hearing people talk about that. But I want you to know, Under Armour is leaning forward, Under Armour is moving forward and we're moving on and ready to run.

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Operator [29]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.