Under Armour, Inc. (UA) Q3 2020 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Under Armour Inc. Third Quarter Earnings Webcast and Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Lance Allega, SVP of Investor Relations and Corporate Development. Please go ahead.

Good morning and thank you everyone joining us for Under Armour’s third quarter 2020 earnings conference call. The information being made available today includes forward-looking statements that reflect Under Armour’s view of its current business as of October 30, 2020. Considerations for future events that may impact our business moving forward. Statements made today are subject to risks and uncertainties that are detailed in documents regularly filed with the SEC and the Safe Harbor statement included in this morning’s press release, both of which can be found at our website at about.underarmour.com. It’s important to note that due to ongoing uncertainty related to COVID-19 and its potential effect on global markets, we continue to expect a material impact on our business results. But considering the duration and extent of the virus's immediate and long-term impact on the global retail environment, content discussed on today’s call could change materially at any time. Accordingly, future results could differ meaningfully from historical practices and results or current descriptions and estimates and suggestions. On today’s call, we may reference non-GAAP financial information, including adjusted and currency-neutral terms, which are defined under SEC rules in this morning’s press release. You may also hear us refer to amounts in accordance with U.S. GAAP. Reconciliations of GAAP to non-GAAP measures can be found in this press release, which identifies and quantifies all excluded items and provides our view about why we believe this information is useful to investors. Joining us on today’s call will be Under Armour President and CEO, Patrik Frisk; and CFO, Dave Bergman. Following our prepared remarks, we’ll open up the call for questions. And with that, I’ll turn it over to Patrik.

Thank you, Lance. Good morning, everyone, and welcome to our third quarter 2020 conference call. Before we delve into our results, I want to extend Under Armour’s best wishes and hope that you and your families are staying healthy and safe during the ongoing COVID-19 pandemic. This year has been challenging and transformative for Under Armour. In a fluctuating global economic climate, we’ve made difficult decisions to ensure our stability and agility to return to profitability soon. Long-term, we believe the measures we've implemented will allow us to create a business model that consistently delivers value to consumers and customers, as well as sustainable returns to shareholders. With a stronger foundation and enterprise-level discipline, we feel well positioned to pursue significant growth as we strive to fulfill our mission and vision in 2021 and beyond. I've spoken frequently about our mission, vision, and values, which unify our global culture and define our purpose. Our purpose is to empower those who strive for more, supporting those who show persistent dedication to training, competing, and recovering while pushing their limits and becoming better. With 2020 winding down, I am proud of our team's efforts, and I believe we have successfully navigated many challenges. Our target consumer and operational strategy are clear and well understood. I will leave the financial specifics of our quarter to others, but our third-quarter results reflect the progress we've made. We acknowledge there is more work to be done in this uncertain environment due to the pandemic. Therefore, we are concentrating on areas we can control, which include four key focus areas that will strengthen our company and support our goals as a premium athletic performance brand. First, we aim to enhance our brand through better engagement and consideration among our key performers. Second, we are refining our operating model to increase efficiency across all processes for our consumers and customers. Third, we are prioritizing a direct consumer approach to enhance our brand experience and strengthen our connection with Under Armour consumers. Finally, we are amplifying our focus on profitability to drive sustainable shareholder value over the long term. Regarding brand strength, our global marketing platform continues to create a unified voice that increases engagement and consideration among our focus performers. We are effectively utilizing our assets across both physical and digital platforms, allowing for more personalized engagement backed by sharper data insights. Momentum is particularly evident in our women's and footwear sectors, which represent significant long-term growth opportunities. For instance, within our trained category this quarter, key innovations like the Infinity bra and Meridian pants have shown strong performance, establishing themselves as popular Under Armour women’s products for 2020. In footwear, validating our position as a premium player is crucial for our future success. A better understanding of an athlete's performance journey enhances our innovation pipeline and our ability to improve our offerings. A notable highlight from this quarter was the launch of our first women's-specific basketball shoe, 'The UA HOVR Breakthru,' which has been well received and demonstrates our commitment to providing innovative solutions for focused performers. We are also looking forward to launching the Creata basketball shoe, featuring our newest cushioning platform, UA Flow. UA Flow represents a significant innovation in Under Armour's history, offering a fluid and distraction-free experience for athletes through its advanced materials and design that eliminates the need for a typical rubber outsole. This technology will also debut in our running platform in early 2021, enhancing our premium performance positioning. Additionally, I must mention our connected footwear platform, which recently surpassed one million pairs linked to our MapMyRun app, showcasing our progress in integrating data connectivity with our products and experiences. Moving to our second focus area, we've been evolving our operating model throughout 2020 to ensure we are strategically, operationally, and financially positioned for our current size, while remaining ready to grow responsibly in the future. Our focus on profitability has driven improvements in our go-to-market processes and inventory management, providing us flexibility in navigating these uncertain times and adapting to changes in consumer demand. In the third quarter, demand exceeded our expectations, especially in North America. Our inventory from the second quarter allowed us to meet some of this unexpected demand, and we sold through inventory at lower discounts than anticipated. These factors contributed to our flat revenue results in the third quarter compared to our earlier projections of a 20% to 25% decrease. Looking ahead, we've reduced inventory purchases by approximately 30% for the latter half of 2020, which, along with planned product deliveries in early 2021 and other factors that Dave will elaborate on, indicates we still expect some top-line challenges in the fourth quarter. However, our outlook for the fourth quarter has improved since our last call. As we move into 2021, we will prioritize effective marketplace management to ensure we are present in brand-right, profitable distribution channels that elevate the Under Armour brand among focused performers. Consequently, we are identifying certain less differentiated retail partners in North America for a more significant reduction of our wholesale footprint starting next year and into 2022 and beyond. While wholesale remains vital to Under Armour's future, we must adapt as the retail landscape evolves. Regarding our third focus area, we are concentrating on a direct consumer approach. Our goal is to become a leading retailer capable of providing a premium Under Armour experience whenever consumers engage with our brand. E-commerce has shown remarkable growth this year, exceeding 50% globally during the quarter. With the majority of our e-commerce sites on one scalable platform, we are improving our customer relationship management efforts to create more personalized interactions. In our physical stores, we continue to evolve our concepts towards more scalable, brand-consistent, and profitable formats while investing in the capabilities required for a best-in-class retail experience. We are committed at every level of our organization to a direct consumer approach, focusing on enhancing the consumer's brand journey to make better decisions that promote relevance and connectivity. Bringing all these strategies together leads us to our final priority, which is achieving sustainable, brand-right, and profitable growth, ultimately delivering returns to our shareholders over the long term. Our organization recognizes that enhancing our earnings potential is integral to our investment strategy. As we sit here today, I believe our operating model transformation, governed by strategies that elevate our brand around the focused performer and an improved cost structure, aligns well with our long-term objectives. Before I hand it over to Dave, I want to briefly address the recent announcement about our decision to sell the MyFitnessPal platform, a significant part of our connected fitness segment. MyFitnessPal has a commendable record of innovation and strong user growth, establishing its position as one of the most popular tracking apps. However, as we worked to hone our strategy over the years, it became apparent that MyFitnessPal did not align with our core target consumers. We believe this divestiture clarifies our long-term digital strategy by simplifying the consumer journey and enhancing our ability to leverage the MapMyFitness platform as we strive towards a cohesive Under Armour ecosystem. For MyFitnessPal, this transition provides an excellent opportunity under new ownership to focus on its growth. Now, I will turn it over to Dave.

Thanks, Patrik. Given the current uneven economic environment, I believe we performed well in the third quarter as we aimed to meet higher than expected demand. Let's review our performance, starting with revenue. Our third quarter revenue remained flat at $1.4 billion compared to the previous year, which was better than anticipated due to increased demand across our wholesale and direct-to-consumer channels. Our wholesale revenue decreased by 7%, primarily due to lower sales in North America, although this was still better than our previous expectations. Our direct-to-consumer business saw a 17% increase, bolstered by strong e-commerce performance and better than expected traffic trends. Our licensing business fell by 15%, mainly due to declines in North America. In terms of product types, apparel revenue decreased by 6%, primarily because of declines in our team sports and train categories, while footwear revenue increased by 19% due to significant growth in our run and train categories. Accessories revenue rose by 23%, largely driven by our new sports masks that started selling in the second quarter. Geographically, third quarter revenue in North America declined by 5%, affected by lower wholesale revenue from COVID-19 and reduced off-price sales. However, strong e-commerce growth partially offset these challenges. In EMEA, revenue grew by 31%, thanks to our wholesale business, with some shipments shifting from Q2 to Q3 due to COVID-19 impacts, along with solid growth in our direct-to-consumer business. Asia Pacific revenue increased by 15%, fueled by both wholesale and direct-to-consumer growth. In Latin America, revenue was down by 15%, still feeling the negative impacts from the pandemic, although about 80% of locations had reopened by September 30. However, our e-commerce business in direct-to-consumer achieved very strong growth. Our connected fitness business declined by 6% due to a one-time development fee from last year, which was partly offset by higher subscription revenue this year. Our gross margin for the third quarter dropped by 40 basis points to 47.9%, primarily due to roughly 130 basis points of negative impact from COVID-19 related pricing and discounting, as well as about 20 basis points from a product mix shift. These factors were partially compensated by about 60 basis points of benefits from supply chain improvements and another 60 basis points from a favorable channel mix. Compared to our expectations for gross margin this quarter, we exceeded estimates due to higher demand, which allowed for less discounting than we initially anticipated. Our SG&A expenses were about the same as last year’s third quarter at $554 million. In this quarter, we recorded $74 million in restructuring charges and certain impairments related to long-lived assets. We expect to incur total estimated pretax restructuring charges between $550 million and $600 million, mainly in 2020, with year-to-date realizations at $410 million in restructuring and impairment charges. We continue to anticipate related savings of about $40 million to $60 million for the full year. Our operating income for the third quarter was $59 million, and adjusted operating income stood at $133 million. After tax, we achieved a net income of $39 million or $0.09 per diluted share, and our adjusted net income was $118 million, or $0.26 per adjusted diluted share. From a balance sheet perspective, we ended the third quarter with $866 million in cash and no outstanding borrowings on our $1.1 billion revolver. Additionally, our inventory grew by 17%, reaching $1.1 billion. Looking ahead to the remainder of the year, I want to share some insights on our expectations for the fourth quarter. We anticipate revenue will decline at a low teen percentage rate, which is an improvement from our previous expectations due to stronger consumer demand trends carried from the third quarter into October. However, we also face several potential revenue headwinds in the fourth quarter. First, timing impacts related to customer orders and supply chain changes are expected to push more planned spring product deliveries into early 2021, negatively affecting fourth quarter revenue by about nine percentage points compared to last year. Additionally, we expect our licensing revenues to decrease by about 50% because of significantly lower contractual royalty minimums and contract settlements from last year's fourth quarter. Furthermore, lower year-over-year sales to the off-price channel will also pose a revenue challenge. Despite improved promotional activity levels, we expect them to remain significantly higher than last year, which may put downward pressure on gross margin in the fourth quarter. Before we proceed to Q&A, while it’s not our usual practice to discuss upcoming year expectations in this call, I’d like to share initial thoughts on how we envision our business evolving in 2021, assuming a continuation of the current trajectory. We anticipate several challenges in 2021, including the sale of MyFitnessPal, which comprises most of our connected fitness segment revenue, and our plan to exit certain wholesale distribution primarily in North America, which could reduce our overall distribution points significantly in the coming years. Lastly, in direct-to-consumer, we plan to continue reducing promotions and discounts to strengthen our premium brand positioning, which may have short-term implications on revenue but will support healthier margins in the long run. As for gross margin and SG&A, it's still early for specifics, but we expect an improved quality of revenue and disciplined cost management to give us more flexibility in managing our bottom line. We foresee the potential for slightly positive earnings per share in 2021. In conclusion, we are proud of our progress and believe we have addressed the core challenges of our transformation. While challenges remain, we are in a stronger position strategically, operationally, and financially to leverage our strengths moving forward. Now, let’s open the floor for questions.

Thank you. Our first question comes from Edward Yruma with Capital Markets. Your line is now open.

Hey, good morning, and thanks for taking the question, guys. So Patrik, as you start to clearly rebase the business, have built a healthier base of business and are now kind of seemingly orienting toward growth long term. Are there particular categories that you think are well suited for this focus performer where we should start to expect some outside growth? And then also, as you introduce this new cushioning technology, is this a product that will be at scale next year or is this a Pinnacle product that will take a while to work through the lineup? Thank you.

Good morning. Yes, as it relates to the categories that we are looking to be our growth drivers going forward, we still believe that there is a tremendous amount of opportunity in some of our core team sports and men's training categories. But what we've seen this year is that we're very excited about the energy in our women's business. We have a number of different products, both in apparel and footwear that are working very well for us now. Infinity bra, Fly-Buy shorts and Meridian pants, Meridian Infuse, the Machina shoe for women, the Phantom 2, etc. So, we see definitely women's continuing to be a big part of our growth and footwear. Footwear is going to continue to help drive the growth going forward. And as you talked about the platforms, we now have four platforms in the marketplace, and they all play a role. One of the things that we're very proud over the last three years to have accomplished is really the ability to start to build franchises. You've seen that through our hub, or franchise flow will be another franchise that sits on top of HOVR, at the most Pinnacle expression on the brand.

Yes, thanks a lot. So Dave, you gave us some good perspective on reducing the wholesale doors by 10,000 by 2022. So just medium term, what should we be thinking about, again, from a mix perspective on revenue by wholesale versus e-com, versus your directly owned stores? How do we think about that? And how do you think about that impacting, obviously it should be a positive margin shift, but how significant can we expect that to be over the medium term?

Yes. I mean, we're not at a point where we're going to give a lot of details as we go into 2021. We're just trying to stay high level. We still got a lot of work to do to fine-tune next year. But, we are looking at a company to lead more from a DTC approach, focused on consumer centricity to drive best experiences, unlock potential full-price retail, leverage factory house for inventory management, etc. and definitely invest in digital across our own and wholesale partners. I think the one thing that's a little bit tricky for us though, to remember is, even though we're going to be focusing a lot on DTC, the mono-branded stores in APAC are mainly partner-owned, and that runs through our wholesale revenue. So from my perspective on DTC to wholesale, you may not see a significant change in the coming years, but the actual mono-branded stores and kind of full view of the brand in those stores will increase as well.

Got it? Can I ask one more question? It sounds like Patrik, you're being much more bullish on the wins that you're seeing lately in the women's business. What's kind of been the breakthrough there has it been more marketing or just noticing on the product? And then just relatedly, just separately, I should say, on the mask side, as an owner of kind of these masks, are you seeing as a masked also helping to drive attachment within the e-commerce business where you saw a lot of growth in the quarter and how we should be thinking about the mask, at least for the foreseeable few quarters, helping to drive other channels of distribution and attachment going forward? Thanks.

Okay. Thanks. Thanks, Randy. So I'll start with the women's and then I'll switch over into the masks. With women's, it's the result of what we've done starting at the beginning of this year. Remember, again, 2020 was the first year that we were able to fully deploy our go-to-market strategy across you know, all categories of the brand. But more importantly, with a very strong singular message that we knew was going to resonate with both men and women. On the back of that, we also knew that we had better product delivered on time and with the right marketing. So this is really what you're seeing is our go-to-market and really starting to fire and as it relates to women. We have been, as I said before, successful across many different products. It isn’t just one product here or there. It's the entire head-to-toe approach. Ultimately, it's execution through our go-to-market that you're starting to see play up. It's been consistent through the year, so it isn’t something that's just started lately it was, it was there in spring, is there in summer, it's now there in fall and we believe it’s going to continue into next year. I think for us, women's is definitely one of the growth engines. But it's really nice to see how our brand is now resonating across both genders. The mask is an interesting one for us, because we decided very early on that the mask was going to be something that we made for athletes. So our approach to go with the mask and make it a sports mask and actually market it as a tool that you use when you're working out has been the differentiator for us. It's a high-quality product, that is with high functionality, great fit, and now also with a number of different colors. The last one that we just released with 'The Rock' has been really successful as well, which is more kind of an upscale version if you like the mask. So for us, we're going to be looking at that as a segment in itself if you'd like inside of accessories, where we have more products coming out around that. In terms of whether you're able to convert the people that are coming onto our platforms to buy just the mask, that's one of the things that we are working to do, based on the new e-commerce platform that we have and the capabilities we're building with CRM and loyalty. So big opportunity there for us going forward.

Thank you.

Thank you. Our next question comes from Simeon Siegel with BMO Capital Markets. Your line is now open.

Thanks. Good morning, guys. Really nice progress. Great job. Patrik, as you guys continue to elevate the brand, can you speak to how you're thinking about where your opportunity from here, it doesn't have to be next quarter, but just as you're thinking about where that opportunity lies. And then Dave, along those lines, any help on taking a step back and thinking through the longer-term EBIT margin recapture opportunity. Thank you.

One of the things we're very proud of this year is that we have managed to grow our margins while reducing revenue at the top line. To achieve this, we need to command a price for our product. We are successfully doing this with less discounting and more premium pricing and positioning. We're particularly seeing this in our footwear. This year, we launched the Mark early on, which became our highest price running shoe at $150, followed by two additional $150 shoes, the Phantom 2 and the PR 3 Rock Training Shoe, all of which are selling well. Competing at this premium level in footwear, coupled with reduced discounting and a more premium approach overall, will help drive our performance. The key indicator of this success is, of course, the margin, which we take great pride in. Dave, would you like to add some insights on this?

Yes. And I think relative to longer-term EBIT, we're excited about kind of returning to that long-term profitable growth journey next year. And we're going to keep marching that forward. There's a fair amount of opportunities across all fronts, as we think about gross margin, with the business going forward, relative to DTC mix, relative to running a much healthier percentage of off-price channel sales. Overall, just continuing to execute so much more cleanly than we may have done in prior years. As far as wrapping up this restructuring plan, we're very excited about how deeply we've been able to go, and how well we've been able to transform our operations to be more effective and efficient, and be able to draft off of that more next year and into the next couple of years after that. From gross margin percentage to SG&A percentage to revenue, there are opportunities across the board there. So longer term, our absolute plan is, to march that up to 10% plus, which year we hit that is something we'll get to at our next investor day. But we're excited about the progress we're making and stepping into next year.

Great, thanks a lot. Nice job and best of luck for the rest of the year.

Thank you. Our next question comes from Alexandra Walvis with Goldman Sachs. Your line is now open.

Good morning, and thanks for taking my question. I had another question on the plan to pull out of 2,000 to 3,000 undifferentiated wholesale doors. I wonder if you could share with us what percentage of North America revenues those represent and what the profile of those doors? Are they predominantly small chains or larger chains, department stores? What do those look like?

Sure. Hi, Alex. This is Patrik. So for the next couple of three years, we will be it will be work in progress. It will be across every size of customer, I would say, part of it is larger customers, some of it is the tail that you're cutting. Ultimately, for us, it's important that our brand shows up the right way and that we're able to drive the brand, the way that we feel as the brand should be driven. That will be the approach that we take.

That's very clear. And then my second question is related to e-commerce. You've continued to see strong growth in that channel, it continues to be a priority. I wonder if you could update us on where we are in terms of profitability of that channel and what further investments need to be made in the offer there?

Yes, I’ll start then I'll hand over to Dave. One of the great things that we were able to accomplish in this quarter I'm very proud of this, we were able to switch over from our aging, very aging, something that we actually put into the market in the early 2000s, our old, homegrown platform onto our new e-commerce platform that we had already been running for a few years in Europe. We did that in July, without missing a heartbeat. I’m very proud of the ramp down, ramp up to only seven days. The team did a phenomenal job. The benefit of that is that we're now more or less on one platform around the world apart from China. The second benefit to it is that we'll be able to benefit from, of course, best practices across the world, but also an ability to merchandise and ultimately drive our new CRM and loyalty programs on to that platform as well, which is the added benefit. That is something that will start to happen throughout 2021. We'll ramp as we get into the back half of the year. Dave, do you want to add something?

Yes, I'll just add a little bit. I mean, we were super excited with how well the new platform is performing. And globally, having growth over 50% in e-com and Q3 is a great testament to that. The team's done just a phenomenal job cross-functionally, on standing that up around the world driving forward on that platform. We expect that to continue to be a strong growth area for us in Q4, as well and as we move into 2021. The key investment areas that we've been really, really diving into a little bit last year, a lot this year, and continuing in the next year is on the CRM front, the personalization front, the loyalty program front where we're going to be rolling out various pilots around the world and then expanding it globally. Also, overall, just really expanding our omni-channel capabilities and leveraging income through that as well. So a lot of fronts that we're investing there. Digital is a massive area of opportunity for us. So we're excited about it.

Splendid, thanks for the color.

Thank you. Our next question comes from Matthew Boss with JPMorgan. Your line is now open.

Great, thanks, and congrats on the progress.

Thank you, Matt.

Thank you, Matt.

Patrik, maybe to circle back on North America and not to beat a dead horse here. On the 20% door count cut that you guys are making and maybe to size it up relative to the $3.6 billion revenue base in 2019. Is it best to think of that revenue base in North America now as a peak? Or how best to think about the market size you're targeting by the end of 2022? I guess really the question is about the sales transfer, you see, as you cut these doors relative to direct-to-consumer growth?

Yes, I think, first of all, I just want to make it very clear, we're going to grow North America. I think that's incredibly important to state. The composition of that growth is going to change over time. The exact measurement of what grows and what goes back, we're not prepared, of course, to talk about here today. But we believe that we're going to be able to execute growth with a different mix going forward.

And I think, we quoted 2000 or 3000 doors coming down, but I know you're equating that to a percentage of total doors that we may have at this point in North America. But I wouldn't translate that to a same correlation relative to revenue because there is a big piece of that is that it's kind of a tale of a smaller partner. We’ll give more color on that at our next call as well.

Exactly. And I think I would say the other thing is, of course, everybody on the call here, there is this overhanging hedge for all of us right around COVID. What we're talking about here is pending any massive flare-ups of COVID around the world, right. So that's of course not known at this point.

Great. And then just a follow-up on the SG&A front. So you've guided 40 million to 60 million cost savings this year from restructuring. As we look to next year, you've said, expect multi-year cost savings. I guess how should we think about SG&A next year, in terms of flow through versus reinvestment with SG&A dollars next year, will it be down year-over-year?

At this point, we're not ready to give a lot of color on next year. I mean, we led in here with a little bit of tidbits just on top line to be able to frame things up for you. But as far as more detail down below on the line items, we want to be careful there, it's still early. To your point, we are looking to invest in certain areas on the digital front, on the innovation front, etc., also with international growth. But the amount of cost savings we're driving out of restructuring plan will be significantly higher next year than the 40 million to 60 million that we're quoting this year. So we will absolutely see a pretty nice development there as far as SG&A to revenue next year. But whether or not it's going to be flat or grow a little bit or go backward a little bit we'll leave that for the next call.

That's great color. Congrats again.

Thank you. And next question comes from Erinn Murphy with Piper Sandler. Your line is now open.

Great, thanks. Good morning. I just had a question following up on e-com growth up over 50%? Could you just share how that breaks down by region? And then where do you see the digital mix by the end of the year?

Yes, the e-commerce growth is well distributed across all regions. We're seeing strong growth in every area, with no region facing significant challenges from an e-commerce standpoint, especially considering the current COVID environment. We're very optimistic about the investments we've made and our progress.

And just on the digital mix by the end of the year.

We're not actually giving a full kind of digital mix at this point, but it would be higher.

Okay. Got it, understood. And then...

Sure. A couple different things there. I think that when we had our last call, we got to remember back in July, we were still getting our arms around the COVID uncertainties. Therefore, we were very conservative in that previous planning. We ultimately saw much better demand than expected, as did our wholesale partners. So it was both, on the wholesale front, and on our own direct to consumer front. So we had the better sell in, better sell through. We were able to use some of the Q2 2020 unfulfilled inventory from the store closures at that point. This actually ended up translating to less than expected cancellations on the wholesale orders. Even when product was in certain circumstances slightly delayed due to COVID they weren't canceling those orders, which we had anticipated maybe they would. That was because again, the sell-in and sell-through that was going well. Also, we did so at meaningfully, less discounts and promotions than we originally anticipated. From a regional perspective, the majority of the upside in Q3 came from North America, which we mentioned, but also better momentum than expected in EMEA as well. All told, as a result, we have also increased our Q4 expectation from what was originally down 20% to 25% to now down to 18%. So really excited about the momentum there.

Thank you.

Thank you. Our next question comes from Jay Sole with UBS. Your line is now open.

Great, thanks so much. I want to ask about the comment that off-price is going to be down to 4% of sales. Can you tell us what off-price was at the peak of whether it was, whether it was 2015, 16, like what percent of sales at off-price represent at the peak?

Yes, Jay, this is Dave. We won't give the exact percentage. But, it never exceeded 10% in any of those years. So it was below 10. But certainly, it wasn't all the way down to the four that we're estimating to land this year.

And you think that number 4% can go lower as we get into 2021 and beyond?

I think there's probably a little bit more opportunity there. I think we're getting into a healthy spot here this year. Can we push it a little bit further next year? I think we probably could. That 3% to 4% range is a pretty comfortable range as we leverage our outlet stores the right way. But make sure we have the right mix of newer products in the outlet stores as well just to have a good, good merchandising experience for our customers. So we don't want to overly rely on the off-price channel. So we think that that 3% to 4% is probably the right number for us.

And I would say just add on the back of Dave's. If you think about that volume from the brand, like Under Armour compared to other people that's a pretty healthy mix we think. It's hard to not have some of it, of course, as long as you have a wholesale business. We think that that 3% to 4% is probably the right number for us.

Got it. Thank you so much.

Thank you. Our next question comes from Michael Binetti with Credit Suisse. Your line is now open.

Good morning, everyone. I appreciate you taking my questions and congratulations on the strong quarter. David, at a high level, you achieved over 200 million in EBIT last year. It seems you have a significant quality sales initiative underway that you can clearly see. We have observed the effect this can have on margins throughout the sector. Given the early planning, do you believe you can return to that 200 million plus EBIT level during this planning period? Or were you referring to the 2022 figures?

We definitely appreciate the question. We're excited about the future, too. But look, it's early. We typically don't even speak to 2021 on this call, and we wanted to give some color. So we got to be careful there. There's a lot of work still to do. We're absolutely planning to grow in 2021. We're absolutely planning to grow in North America in 2021 and continue to move forward relative to EBITDA dollars and rate. I think we need to just keep in mind too, as we think about next year, at least, what some of those revenue headwinds would be as we work to drive premium brand growth. The exits of the undifferentiated retail we talked about, we talked about also less promotional activity on the DTC front. And then don't forget the sale of my fitness platform. Assuming that closes late in this quarter, that revenue essentially goes away completely next year. So we got to keep all those things in mind as you size up 2021 growth expectations. We're excited to have in line of sight to slightly positive EPS and being back on the path to long-term brand right profitable growth. And we'll give you more details on the next call. And then longer term, at the next investor day.

Let me follow that. On the fourth quarter gross margin guidance, obviously very smart to remain as conservative as you can given what's going on. But with third-quarter much better than you feared? I'm curious, where you see the pressure, as you look at the quarter. I know some brands said that, I'm sure you see you're doing some of this too. But I think you some brands have said they're taking some actions to start showing the customer, some holiday-type initiatives early in October. Are you seeing promotions in the marketplace ramp at all in your categories?

Yes, we certainly are. And as we look forward to closing out this quarter, we do think that the promotional environment is going to be pretty heavy this quarter. A fair amount heavier than it was in Q3, so bigger pressure in Q4 than Q3 year-over-year. We also think that even though we're decreasing off-price sales in Q4, year-over-year, we think the pricing on that off-price sales could be challenged based on so many other brands trying to push into that channel. So that's probably a little bit of a headwind and Q4 gross margin as well. Plus on the revenue side, I mentioned licensing, potentially being down 50% year-over-year in Q4. They’ve done lower MRGs, and some true-ups that were in Q4 of last year that we're comping. Those three are kind of the bigger headwinds for Q4 with the promotional environment being the biggest. We'll get a little bit of tailwind from channel mix with DTC and also the lower mix of off-price sales, but also continued product costing benefits that the supply chain has been driving. A couple favorable items there, but they're going to be definitely more than offset by the negatives I mentioned, especially the promotional environment as far as our current view.

Okay, that's really helpful. Thanks a lot for everything.

Thank you. And next question comes from Kimberly Greenberger with Morgan Stanley. Your line is now open.

Great, thank you so much. Good morning. I was wondering if you can think about team sports potentially coming back in 2021. Is there any way for us to understand the potential revenue benefit that that might carry for you? And then secondarily, I wanted to just ask a little bit about the inventory. I think you mentioned you cut fall inventories by around 30%, or second-half inventory by around 30%. And I'm, I'm looking at the inventory balance here at the end of the third quarter add up 10%. Is that leftover Spring Summer product? And what's the strategy or the plan with any sort of prior season merchandise that you might have on balance sheet? Thanks.

Thanks, Kimberly, I'll start this off. It's been an emotional roller coaster for Under Armour regarding the support we've been trying to provide to our athletes and teams. The pandemic has made it really difficult for athletes, especially for kids who can't participate in their sports. The typical back-to-school sports experience has been disrupted this year. However, we have seen some recovery in the latter half of Q3 and into Q4. Overall, though, the team sports landscape has been very uncertain this season and into the spring. We are working to understand what this means for next year, but the reality is that no one really knows yet. Teams are still making decisions about winter sports and will face similar discussions about spring sports later on. We're going to finalize our approach a bit later than usual due to the unpredictability of the season. Regarding inventory, I can say that the quality of what we have now is good. I’ll let Dave provide more details.

Yes, from inventory perspective, we finished this quarter at 17% up, which is a little bit better than we anticipated, because we obviously had a lot bigger selling and sell-through than we anticipated. There is a larger portion that's tied to spring-summer product that we couldn't affect in time from the pandemic that was still coming in. In Q2, we were able to use some of that to fuel the Q3 overdrive, which was nice. We are comfortable, though, with the mix of inventory, with demand versus excess and our ability to utilize the off-price channel to a lower degree. We believe that we'll end the year around 10% growth with inventory. That decision to reduce back half inventory purchases will certainly benefit us as we progress through the quarter. We feel very comfortable with where we're going to land and being able to address that remaining inventory in a healthy way throughout next year.

Thank you.

Thank you. Our next question comes from Omar Saad with Evercore. Your line is open.

Good morning. Thanks for taking my question. Nice quarter guys. I wanted to ask about the divestiture of the digital assets. Maybe Patrik you can put it in context, how the organization's view of how to use digital technology and how to use data has evolved over the last several years and where the focus is now. I would also love for you to touch on the new flow cushioning platform, maybe give us a little bit more detail. I think it said it didn't need a rubber outsole maybe a little bit more detail around that platform? Thanks.

Sure. Hi, Omar. So first of all the sale of MyFitnessPal is of course something that we considered a great length, and the whole idea is really that as we get more and more focused and we get dialed in to the focus performer it was clear to us that actually the consumer that was on the MyFitnessPal didn't skew necessarily as strongly towards the consumer that we're targeting as our other apps did, and I'm talking about now MapMyFitness and the success we've had there with connected fitness and connected shoe. The decision was hard, but it's the right thing to do because it also enables MyFitnessPal to get a great home and for that team to be able to grow their business without having to be under Under Armour, so to speak. For Under Armour, it's also a great decision because we can now focus on what we've been intent on doing the whole time, which is building one ecosystem for Under Armour. For us, MapMyFitness will be at the very core of that. I was just talking earlier about the fact that we just had our 1 million shoes connected. We continue to see, especially through this pandemic, an incredible gravitation to do that app, and the work that that team has done has been phenomenal. We think that all the things that we've learned, while we've owned these apps over the last four or five years, has led us to this decision where we now feel that we can accelerate that part of the business and integration to do a better job for the consumer, ultimately, to connect and engage.

One thing I'd also clarify on MFP is just that we anticipate closing that deal late in Q4. So the outlook that we're giving today for Q4 does include a full quarter of full connected fitness revenue. It is definitely comparable to Q4 2019 just if there was any questions on that. And then Patrik, I think there's a question on flow.

Yes, there is. I would say that with Flow we're very excited. It's right, it's not a traditional shoe because we don't actually have a rubber outsole on the shoe. It is actually one unit. This gives us a lot of advantages in terms of weight but also the performance of the shoe both in terms of cushioning and we would like to call it separation ability that’s going to be like no other shoe out there. There are a lot of advantages that we have in weight and flexibility and in traction that goes beyond anything that we've built before, and we think it's going to be a real advantage in certain sports, especially in basketball as you think about separation ability. We're very, very excited about it. Curry's very excited about it. We're going to be starting that product in basketball as we said, and then we're going to flow it into running in early 2021. That's also very exciting for us because it gives us a pinnacle technology in running. Not that HOVR isn't doing a phenomenal job for us, but this is really a shoe that will give you superpowers. So we're very, very excited about it.

Thanks for the color, best wishes.

Thank you. Our next question comes from John Kernan with Cowen. Your line is now open.

Hey good morning and thanks for taking my question. Congrats on the quarter. Wanted to touch on international, hasn't come up as much. It was a source of upside surprise for sure this quarter. Peers were gaining some share in EMEA in both AsiaPac or some of your bigger competitors. I was wondering, just talked to the demand sensing you're seeing there. I know there was a shift in EMEA that benefited the quarter but even with that feels like you had a pretty good quarter internationally versus your own expectations, and certainly versus your peers. So how should we think about international in the fourth quarter? As we head into 2021?

Yes, hi John. This is Patrik. I'm very proud of the work the teams have accomplished. Our strategy remains consistent, with a focus on a more premium approach that's relevant in both APAC and EMEA. We are strongly concentrating on our key performers based on our efforts over the past three years, and we're rolling that out to the market with our go-to-market strategy in 2020. The good news is that the products we promote globally are performing well. For instance, the Machina has succeeded worldwide, as has the Phantom 2, along with the women's Infinity and Meridian pants. Our product teams have excelled at ensuring our key messages resonate globally. Additionally, we have spent recent years improving our position in the European market. The team there has effectively repositioned our brand from a premium standpoint, focusing on a comprehensive approach for both men and women. We're also witnessing success in our run category, not solely in EMEA but also in APAC. What’s currently unfolding is a well-coordinated initiative, utilizing innovation and our go-to-market strategy to leverage our strengths globally, further validating our focus on a more premium level. I'm particularly excited about the quality of our sales, which is crucial for us at this time. Dave, would you like to add anything?

Yes, John, I'll just give a little more quantitative color to your Q4 question. When you think about what we mentioned on the spring 2021 products shipping more in early 2021 versus late 2020, that does impact wholesale in a pretty big way, as we mentioned. So when you think about international businesses, for us, EMEA in Latin America have a bigger percentage of true wholesale. They're definitely going to have a bigger negative impact in Q4, whereas Asia Pacific, even though it has a big mix of wholesale, that wholesale is really more mono-branded stores. So they technically wouldn't have as big of an impact on that spring-summer 2021 timing shift. To give you a little bit of color, you probably see more favorable Q4 APAC and more challenged EMEA in Latin America just because of that flow change, as we move through the balance of Q4.

All right, great. Best of luck into your end. Thanks.

Thank you.

Thank you.

Thank you. And our last question will be from Jim Duffy with Stifel. Your line is now open.

Good morning, guys. Nice one.

Thank you, Jim. I have a couple of questions. First, I would like you to provide more details on the status of the cost structure realignment. It seems like there's more to come in 2021. How much of that is just from the elimination of MyFitness talent and associated expenses versus additional changes? Additionally, Dave, I'm particularly interested in your comments regarding increased agility in the expense structure for 2021. Can you elaborate on what you mean by that?

Yes, Jim, I guess a couple things. One, I commented that relative to our restructuring plan, we expect to be able to execute through the majority of that, and most of those charges in 2020. However, there probably will be a little bit of spillover of that into Q1, and maybe a tiny bit into Q2, of next year. So that's part of it, and how well we execute and the timing of that does impact the ultimate savings of those activities. But then across the board, we're really, really digging deep here. We're understanding each of the details of our cost structure. We've been benchmarking it against three different providers to be able to triangulate what would be the best goal for us to go after in each of our different spending areas. We're going to continue to leverage that discipline into next year. So, no, I'm not necessarily saying you'll see SG&A go backwards significantly next year. But you will see us continue to prioritize where we spend and really understand the return on those spends. Be very, very diligent in where that goes to be investing in the areas for long-term profitable growth. That's what we're really excited about. I think when we talk about the agility for next year, it's really just stepping back and understanding that we have done so much transformational work over the last few years. We're finally getting to the place, where those final pieces are coming together. We can start to leverage that operating model in a really solid way going forward. That does speak to the SG&A and improving significantly from an SG&A percentage of revenue next year. But also, as far as gross margin, we continue to see the benefits of what the incredible supply chain team has been doing, relative to working with our vendors, with volumes increasing, being able to drive better costing there, better visibility, the SKU rationalization work has been talked about over the last year or so continuing to come to fruition and in better costing, and then continued DTC mix. Also, we still feel longer term, APAC is going to be one of our higher growth regions. APAC has a higher gross margin and a higher EBIT rate region for us as well. So a couple different things going on there. We're going to be more nimble, more agile. We've done a ton also to solidify the balance sheet and be able to drive through there. So we've got a lot going for us as we step into 2021.

Just one more quick question on the balance sheet. Can you speak about plans for use of proceeds from the MyFitnessPal disaster and cash flows and how you’re thinking about reducing debt balances?

So we're, we're going to hold back on that until the next call. We've got a lot of different things that we're working through, but at a high level obviously, we were planning to end the year in a very favorable position from both a cash on the balance sheet perspective, and zero continuing to be outstanding on our 1.1 billion revolver, and then how we move forward relative to that cash and use of that cash. We're going to wait and discuss more on the next call.

Thank you guys for the update.

Thank you, Jim.