Under Armour, Inc. (UA) Q3 2021 Earnings Call Transcript

Good day everyone 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. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over to Lance Allega, SVP, Investor Relations and Corporate Development. You may proceed.

Thank you. Good morning to everyone joining on this call this morning for Under Armour's third quarter of fiscal 2021 earnings conference call. The information provided on today's call will include forward-looking statements that reflect Under Armour's view of its current business as of November 2nd, 2021. Statements made 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 on our website at about. underarmour.com. It's important to note that the ongoing uncertainty related to COVID-19 and its potential effects on the global retail environment could continue to impact our business results moving forward. We may reference non-GAAP financial information on today's call, 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 under U.S. GAAP. Reconciliations of GAAP to non-GAAP measures can be found in our press release, which identify and qualify all excluded items and provides our view about why we believe this information is helpful to investors. Joining us on today's call will be our President and CEO, Patrik Frisk, and CFO, David Bergman. Thank you. Patrick.

Thank you, Lance, and good morning. In the third quarter, higher-than-expected demand for the Under Armour brand and outstanding execution from our global team allowed us to drive strong top and bottom line results. Everything we do at Under Armour is based on driving sustainable long-term growth while at the same time ensuring we're setting a solid foundation to deliver near-term value to our shareholders. This is the balance you should expect from us, and it is the commitment we work towards every day. We strike this balance by leveraging our strategic playbook across key elements of our business, including a consumer-centric strategy to drive deep, authentic and emotional connections with focused performers. Innovative products and experiences that advantage and inspire an athlete's journey. A constant focus on operational excellence to ensure we manage the marketplace efficiently, and steady financial discipline to create meaningful levers to drive greater profitability. These strengths were evident in our third quarter results with revenue up 8%, gross margin up 310 basis points to a record 51%, and solid adjusted EPS performance at $0.31. In this spirit, as we work to close out 2021, I feel good about the progress we've made, the resiliency we've earned, and the potential we have to do even better in the future. Demand for our product and consideration for our brand is growing. That gives me confidence that despite potential impacts from near-term headwinds, the long-term opportunities before us and our ability to compete and win in an ever-changing global landscape are stronger than ever. Of course, it all starts with brand, so with that, let's get into some third quarter highlights, starting with the incremental investments we're making in marketing and how they're translating to improving brand affinity from our focus on consumer awareness, attraction, and consideration. As part of our holistic journey to compete strategy, which centers on goal setting, training, and what it takes to earn results, we use the team sports lens to focus on the importance of mental strength as a means to realize one’s full potential. Through uniquely Under Armour execution by our social media, TV, retail, and digital activations, the Only Way is Through and Train Your Mind, Train Your Game showed up as one global brand and voice across categories, channels, and our marketing funnel. Coming off this effort, we've now shifted gears into fourth quarter activation, which is centered on cold weather training. Knowing athletes sometimes see cold as their kryptonite, our human performance research lab is helping equip them and reshape this type of training as an asset to take their performance to new levels. Validated by the experiences of our most elite athletes for inspiring and educating focused performers for the winter ahead. With powerful storytelling, workout routines, product reviews, and premium retail capsules, our ecosystem is well set to inspire and capitalize on growing demand. Turning to product, given the third quarter bridged summer and fall, we realized success on both sides of the temperature spectrum, including solid sell-through of our ISO Chill apparel products, which cool you and fleece, which saw strength in men's and youth as athletes gear up for the cooler months ahead. There's also continued momentum in men's unstoppable bottoms and women's leggings, including Meridian and our no-slip waistband technology. And finally, the Project Rock collection and tops featuring Rush also built on the year-to-date momentum, so consistency in some of our best sellers. In footwear, our core running products including Pursuit, Aurora, and Assert saw strength in all regions globally. Additionally, Project Rock footwear performed well and we had success in our slides business. Regionally, a few of the highlights included the Curry HOVR Splash and Mega Clone in APAC HOVR Street and Bandit Trail in EMEA and Flow Velociti SE and cleated footwear in the Americas, driven by better-than-expected back-to-school demand as team sports return. Let's turn next to our regions, starting with North America where revenue was up 8% to $1 billion. Indicative of improving brand health in our largest market, we had stronger-than-expected back-to-school and direct consumer demand. In fact, North America drove the majority of the third quarter overdelivery for the Company, so encouraging to see continued progress here. Compared to 2019, North American revenue was up 2% in the third quarter. It is important, however, to revisit some key differences in these comparable periods, 2021 North America versus 2019, including a significant increase in our direct consumer business, substantially lower off-price sales, reduced promotional and markdown activities, proactive supply constraints, and undifferentiated wholesale exits. So all in, meaningfully higher quality and more productive dollars going through our P&L now than just two years ago. Turning to our international business, revenue in our Asia-Pacific region was up 19%, driven primarily by wholesale growth. Given some recent market trends, particularly in China where traffic continues to struggle, our consumer insights data tells us that our brand health is holding steady in an otherwise dynamic environment. We attribute this to the investments we're making into marketing, CRM, and store expansions, including opening our thousandth store in the region. Versus 2019, third quarter APAC revenue was up 37%, so solid progress on a 2-year stack. Next up is EMEA. Revenue was up 15%, driven by wholesale, which saw continued momentum from our distributor partnerships and solid direct consumer performance. In our two most prominent countries in this region, the UK and Germany, we remain focused on brand development, building long-term relationships with our key wholesale partners, and strengthening our direct consumer team and retail capabilities. EMEA wholesale growth was balanced across our full-price and distributor businesses. Versus 2019, third quarter revenue in EMEA was up 50%. And finally, our Latin America region was up 27%, driven by strength in our full-price wholesale and distributor businesses. Versus 2019, third quarter revenue in Latin America was up 8%. As previously detailed, we are transitioning certain countries in this region to a strategic distributor model, of which most of this change takes place in the fourth quarter. Accordingly, we expect top-line pressure in Latin America as we finish out 2021. Another highlight is the performance of our direct-to-consumer business, which was up 12%. And although traffic trends were somewhat mixed in our own stores and mirrored various COVID restrictions around the world, we continue to see improvements in average selling prices and productivity. Due to higher-than-expected demand during the quarter, we further reduced promotions and realized higher-priced sell-through, which, of course, you see in our gross margin results. Versus 2019, direct consumer was up 31% for the third quarter. Overall, we're pleased that our strategy towards improved presentation and experiences in our stores and online are driving better economics throughout this business. In summary, we're pleased with our third quarter performance, and our ability to achieve Under Armour's split adjusted EPS this year in our history. In the near term, however, we remain both confident and cautious. With several fluid headwinds continuing to impact nearly every sector, it's important to remember that Under Armour is battle-tested and mission-proven. I am incredibly proud of our global team and how we work to maintain balance and trajectory regardless of what is thrown our way. We continue to get sharper, smarter, and more efficient. Across our business by channel, product, or region, there remains one constant. We obsess over the intersection of Under Armour serving focused performers, industry-leading innovations, and premium experiences. Heart-led but data-driven, we empower those who strive for more. And with that, I'll hand it over to Dave.

Thanks, Patrik. With three quarters of the year behind us, our strong third quarter results demonstrate our ability to execute quickly to meet the needs of our consumers and customers, all while driving toward record revenue and earnings in 2021. Let's dive right into our results. Compared to the prior year, revenue was up 8% to $1.5 billion, versus our previous outlook, this overdrive was primarily due to higher demand across our full-priced wholesale and factory house businesses in North America. Patrik covered our regional performance earlier, so now let's click down into our channel results on a global basis. Third quarter wholesale revenue was up 10%, driven by higher-than-expected demand in our full-price business, particularly in North American wholesale, which was tempered by a reduction in sales to the off-price channel, as we continue to work to elevate our brand positioning. Our direct-to-consumer business increased 12%, led by 21% growth in our owned and operated retail stores, partially offset by a 4% decline in e-commerce, which faced a difficult comparison to last year's third quarter. But I would also note that, when compared to the third quarter of 2019, our e-commerce business was up over 50%, and licensing revenue was up 24%, driven by improving strengths within our North American partner businesses. By product type, apparel revenue was up 14% with strength across all categories, particularly in train and golf. Footwear was up 10%, driven primarily by strength in running. And our accessories business was down 13% due to lower sales of our sports masks compared to last year's third quarter. Relative to gross margin, our third quarter improved 310 basis points over the last year landing at 51%. This expansion was driven by 400 basis points of pricing improvements due primarily to lower promotional activity within our DTC channel, along with lower promotions and markdowns within our wholesale business. And 120 basis points of benefit due to channel mix, primarily related to lower mix of off-price sales versus last year's third quarter. Partially offsetting these improvements was about 100 basis points of negative impact related to the absence of MyFitnessPal and 90 basis points of negative impacts from higher freight and logistics costs due to COVID-related supply chain pressures. Versus our previous expectation, our higher-than-expected Q3 gross margin improvement was primarily due to lower-than-planned promotional activity within our DTC business and more favorable pricing related to sales to our off-price partners. SG&A expenses were up 8% to $599 million, due to increased marketing investments, incentive compensation, and non-salaried workforce wages. Relative to our 2020 restructuring plan, we recorded $17 million of charges in the third quarter. In this morning's press release, we noted that we have reduced our plan expectations by $25 million, so we now expect to recognize total plan charges ranging from $525 to $575 million. Thus far, we've realized $500 million of pretax restructuring and related charges. As a reminder, all remaining charges are related to initiatives outlined in 2020, meaning nothing new has been added in 2021. We expect to recognize any remaining charges related to this plan by the first calendar quarter of 2022. Moving on, our third quarter operating income was $172 million. Excluding restructuring and impairment charges, adjusted operating income was $189 million. After tax, we realized a net income of $113 million, or $0.24 of diluted earnings per share during the quarter. Excluding restructuring charges, loss on extinguishment of $169 million in principal amount of senior convertible notes, and the non-cash amortization of debt discount on our senior convertible notes, our adjusted net income was $145 million or $0.31 of adjusted diluted earnings per share. In this respect, we are excited to report that the $0.71 of adjusted diluted earnings per share that we've realized year-to-date has surpassed our highest previous full-year split adjusted earnings. Thus, solid traction and excellent progress. Inventory was down 21% to $838 million driven by improvements in our operating model and inbound shipping delays due to COVID-related supply chain pressures. Our cash and cash equivalents were $1.3 billion at the end of the quarter, and we had no borrowings under our $1.1 billion revolving credit facility. With respect to debt, during the third quarter, we entered into exchange agreements with certain convertible bondholders for $169 million in principal amount of our outstanding convertible notes and terminated certain related capped call transactions. We utilized net $168 million in cash, issued $7.7 million shares of our Class C stock, and recorded a related loss of approximately $24 million, which is captured in other income and expenses. Following this transaction and our actions in the second quarter, $81 million of convertible notes remain outstanding. Now, moving onto the balance of the year. As we noted earlier in this call, the current global retail environment remains varied with some markets realizing a steadier return to growth like in the Americas, albeit with continued weak traffic trends, somewhat mixed environments across different regions in EMEA, and conservative assumptions about APAC as it navigates ongoing phases of closures, reopenings, and restrictions. Factoring in the current supply chain challenges emanating from Southeast Asia and logistics challenges being experienced worldwide, we're staying appropriately cautious in the near term. However, it is important to note that today's revised outlook assumes no additional shutdowns of manufacturing partners or further retail sector disruptions as we close out 2021. Now, turning to our updated 2021 outlook, let's start with revenue, which we now expect to be up approximately 25% for the full year. This reflects a high-20s percentage rate increase in North America and a mid-30s increase in our international business. From a channel perspective, wholesale is expected to be up at a mid-30s rate, and our DTC business up at a mid-20s rate with e-commerce up at a low-single-digit rate for the full year, against 2020. Concerning our top-line expectation for the fourth quarter, the same significant headwinds from our last call remain in play, in addition to the developing COVID-related supply chain issues currently facing the sector. Turning to gross margin: on a GAAP basis, we expect the full-year rate to be up approximately 130 basis points against our 2020 adjusted gross margin of 48.6%, with benefits from pricing and changes in foreign currency being partially offset by higher expected freight expenses and the sale of MyFitnessPal, which carried a high gross margin rate. The gross margin improvement relative to our previous outlook is primarily due to pricing benefits, partially offset by increased freight expenses related to supply chain challenges, which we continue to monitor. Versus 2020, we now expect that full-year SG&A will be up 6% to 7%. As laid out previously, specific to 2021, we have taken advantage of our improved results and proactively made incremental investments, particularly in marketing, to build even deeper connections with our consumers. We also expect higher incentive compensation, which is up against 2020 when we had significant reductions against target levels, as well as higher non-salaried wages. With that, we now expect operating income to reach approximately $425 million this year, or $475 million on an adjusted basis. Translated to rate, we expect to deliver an operating margin of just under 8%, or an adjusted operating margin of approximately 8.5% in 2021. All of this takes us to an expected diluted earnings per share of approximately $0.55, or adjusted diluted earnings per share of approximately $0.74 in 2021, with an average weighted diluted share count of approximately 468 million shares. And finally, from a balance sheet perspective, we expect to end the year with inventory relatively flat against 2020's year-end. And we expect to close the year with approximately $1.5 billion in cash and cash equivalents. Looking forward, a reminder that we are changing our fiscal reporting year in 2022. Mechanically, the first calendar quarter will serve as a transition period until we begin our new fiscal year 2023 on April 1st. Accordingly, we are not providing color for next year on today's call. That said, there are supply chain pressures that are challenging the industry in the near term. And while we believe the impact to our P&L in 2021 are expected to be relatively minimal, we are taking precautions to navigate some of the volatility and anticipated business disruptions in the first half of 2022, including the work we began in the second quarter of 2021, to adjust orders and shipping with our factory partners and logistics suppliers, working with wholesale customers to narrow and edit our spring-summer 2022 order book, and assessing various mitigation offsets for inflationary pressures, including elevated logistics costs and higher wages. Given the situation is still fluid, it is difficult to estimate the full extent of potential effects on our business at this point. However, based on what we know today, we are forecasting material impacts for the first half of 2022. And therefore, with respect to the first calendar quarter, we expect revenue to be up at a low single-digit rate. Concerning a longer-term view, as of this week, nearly all factories that Under Armour does business with, including those in Vietnam, are open. Definitely encouraging news. Of course, full capacity will take some time to ramp back up. And this is only one part of the equation. Over the next several quarters, we expect longer than usual transit times, as backlogs and congestion find balance, so this may create some variability in our results. That said, the proactive strategies we're employing, greater operational agility and overall demand for the Under Armour brand give us confidence in our ability to navigate effectively through the coming environment. With that, I'd like to close today's call by returning to Patrik's opening thought and the balance we are committed to striking between driving sustainable, long-term growth while delivering near-term value to our shareholders. All global companies operate in a constantly changing environment. In over the past few years, through our transformation and the pandemic, Under Armour has demonstrated its ability to effectively manage our business under a range of conditions.

Thank you. Our first question will come from Erinn Murphy with Piper Sandler, your line is now open.

Great. Thank you. Good morning and really nice to see the strong performance to date. Dave, I wanted to follow up with something you were just talking about as it relates to the supply chain challenges. Can you share a little bit more about your ability to get product to the North American and the European market here in the fourth quarter, as we think about holiday? And then with your guidance or your preliminary look for the first calendar quarter up low-single-digits, is that, again, just ability to get product or have you really just seen the impact of the curtailed manufacturing as it relates to your ability to just even produce spring, summer? Thank you.

Sure, Erinn. Regarding the supply chain issues in the fourth quarter, as I mentioned, most of our factories in Vietnam are now operational. Vaccination rates in Asia continue to improve, which is helping alleviate some congestion and container availability at the origin ports. However, the local ports of entry are where we are encountering more significant challenges, which we are closely monitoring. Thus far, we have experienced some changes in the timing of incoming products and how we can distribute them to our partners, but we have not faced any cancellations. Therefore, we feel confident about the forecasts and outlook we provided for the remainder of the year and the fourth quarter, while acknowledging that the situation remains quite dynamic. For the first calendar quarter, the challenges are related to factories not operating at full capacity, making it difficult to produce enough orders to meet demand. As a result, we have had to cancel some of our purchase orders for spring-summer '22 products to alleviate some pressure on the factories. Based on these factors, we now expect a low single-digit growth rate for the first calendar quarter.

Got it. That's super helpful. And then just if I can follow up on the North American segment. Looks like in the first 9 months of this year, you're up about 3% versus 2019, so squarely in line with your long-range plan. I'm curious if you can talk more about how you think about the go-forward trajectory. It seems like the fourth quarter, you've been guided nicely ahead of that. So I would love to hear about the brand momentum that you're seeing currently in the North American market. Thanks so much.

Erinn, this is Dave. We are excited about the momentum. The key point I want to highlight is the health of our revenue. We are not only growing compared to 2019, but our sales mix is significantly improved, with a smaller portion coming from off-price sales to third parties and a reduction in promotions and discounts. Overall, we have a much healthier revenue stream at the same time we are returning to growth, which is really exciting. Our focus is on strengthening relationships with larger partners who truly support our brand and understand our key performers. While we can't provide specific details about growth rates for next year yet, we are very enthusiastic about the momentum. Patrik, do you want to add anything?

I want to emphasize that some of the demand constraints are now fully impacting us as we exit around 3,000 doors in North America. This will have a significant effect going into next year. Together, these factors give us strong confidence that we have established a new foundation for the brand, positioning it towards a more premium status. I feel very positive about this.

Great. Thank you and all the best.

Thanks, Erinn.

Thank you. And our next question will come from the line of Matthew Boss with JP Morgan. Your line is now open.

Great, thanks and congrats on a really nice quarter.

Thanks, Matthew.

Patrick, after nearly two years in charge, how would you describe the broader vision? What is your perspective on the brand recognition in men's and women's apparel at this point? Additionally, do you think we have reached a crucial moment for expanding our footwear offerings? I'm interested in discussing potential opportunities moving forward.

Yeah, thank you, Matthew. First of all, I'm confident that we've now gone through what I would characterize as the majority of our transformational work. We're now in the new operating model, but not just the operating model, we've also gone through at the same time, a reset for our product engines and our marketing engine, so our go-to-market is really doing a great job of driving the brand to a more premium position. What you see now in our numbers, there's a balance here, right? You see a balance between wholesale and DTC. You see also balance across the categories in terms of footwear and apparel. And we also now saw, specifically on the third quarter, the back-to-school happening again in a more normal fashion, I guess you could say, in terms of team sports being played, and Under Armour really coming into its own with the performance we saw now in things like cleated product and team product as well. So across the board, whether it's team sports, train, or run, men's or women's, we are able to really drive our brand in all of those different categories and scenarios. And that's really what I feel really good about, is the holistic win for the brand right now in the marketplace. And we really feel like we have proven that out now, and now for us, it's all about driving forward and continuing to fuel the brand which we've been able to do here in the back half as we've reinvested some of the money here into marketing and really been able to activate full funnel. And you see the results.

Okay, that's helpful. And then maybe a follow-up for Dave. Can you speak to pricing power that you're seeing for the brand? Maybe both across apparel and footwear? And if we tie the AUR opportunity to gross margin, is there any feeling to think about as your gross margin exits this year, I think, around the 50% level?

Yes. I guess, there's a couple of aspects there. We do continue to see pretty strong benefits that we're able to drive by holding price higher, not doing much promotions or discounts. Sell-through has been good with wholesale partners, so not having a discount or giving many markdown dollars. So that is definitely contributing a lot to some of the pricing benefits we're seeing and some of the gross margin benefits. And that all ties into our longer-term strategy of continuing to drive the brand to a more premium position. We're definitely excited about the momentum to be able to do that and the sell-through that is allowing for that as well. We are also looking at ticket pricing, also when you think about some of the inflationary pressures, wage pressures, etc. We have a team that's been looking at that, and we're going to be very strategic and targeted in how we might do that, but we do think that there is some opportunity for us as well, based on our premium positioning and the quality of certain groups of our products versus others. We're going to keep driving on that front as well.

Great. Best of luck.

Thank you.

Thank you. And our next question will come from the line of John Kernan with Cowen. Your line is now open.

Excellent. Thanks for taking my question. Congrats on a really strong 9 months.

Thanks, John.

Yeah. Patrick, if we look at the first nine months of this year, you're at a double-digit operating margin. I know that was the long-term target. Can you give us any update in terms of the timing of reaching those targets on a full-year basis? Certainly tremendous progress made towards those targets this year, regardless of what happens in the fourth quarter this year. And you've done it in the face of a lot of disruptions. Just curious if you pulled forward the timing of reaching those double-digit operating margin targets?

John, this is Dave. I'm actually going to jump in here because Patrik gets pretty excited about this topic. Yes, we're obviously very pleased with the progress we're making on overall margins and being a leverage to cost structure better. And to your point, I think that our ability to drive the double-digit operating margins is something we feel very, very good about and probably better about than even previously, based on the momentum that we're having. But at this point, we're not ready to be able to share details for the upcoming years, but we are excited about the progress. We do think there are continued opportunities on gross margin and SG&A leverage. And you can be sure that we are going to be driving towards that.

Understood. One quick follow-up. DTC, obviously, it's had an outside contribution of growth this year. Off that free COVID base you've made some adjustments to wholesale distribution. Any comments on DTC profitability and how that has changed as e-commerce has become a bigger portion of the mix? Your overall view of the direct consumer channel and what we can anticipate for normalized growth in that channel as we go into your new fiscal year and beyond?

John, this is Dave. Great question. As you know, we don't necessarily give channel profitability publicly. But what I would say is that we have been focusing a lot on DTC. We've been making a lot of investments there and we're starting to see some of the benefits of that pay off. I think one of the areas that we've also put a lot of work in is just to our retail full-price commercial concept. And so we are seeing continued profitability improvements from that output, which is going to help overall DTC profitability as well. And then obviously, our factory house business has been an extremely profitable business, and e-com as well. We're pushing on all cylinders, but we're not disclosing the actual percentages. Although we do believe they are continuing to improve with the benefits we're driving.

I'll just add a little bit more color. We are making great progress, but there's still a lot of work to do. We believe that as we go into future years here, we're going to have an opportunity to continue to get better across both our own retail and our own e-com. Very excited about the progress we've made so far, but there is more work to do and we'll be updating you accordingly as we move into the future.

That's great. Best of luck in the holidays.

Thanks, John.

Thank you. And our next question will come from the line of Jim Duffy with Stifel. Your line is now open.

Thank you. Terrific results, guys. Good morning.

Thank you.

I'm hoping you can speak to your view on product costs into next year and pricing strategies. You mentioned you've taken some pricing action that's helping the margins. Do you expect you can offset the entirety of the inflation that you're seeing, or is that yet to be determined?

Dave, why don't you take that one?

Yeah, Jim, great question. The inflationary pressures are real. And we are tracking those. We are working with our vendors, obviously. But I think there's a couple of parts there that we're going to be able to help on the top-line side of gross margin as well, which is continuing to stay more premium, continuing with especially on the DTC front being less promotional, less discounted, which will help offset some of that. But then as we mentioned, we do have a team that's working in partnership with our product organization and also with our commercial teams around opportunities to increase price for the brand. I don't know that we would be able to affect too much of that for spring, summer. But when you think more about fall, winter of next year, there's probably a bigger opportunity there based on life cycle and timeline, and we're excited about that. We think we're earning that in certain areas and that's where we're going to go after it. But it will be very strategic, very targeted. And in general, we are looking to continue to improve our gross margin percentage as we go forward.

Got it. Dave, we've heard from some other companies a view on product cost environment into next year. Is there anything you can share specific to your portfolio? A range of the type of inflation that you're seeing on the product cost side?

To be frank, it's continuing to develop. And so at this point, I think we're going to be cautious in level of detail we give for that on next year. We do have another call or two that we can give more detail coming up, but we're going to hold for that and continue to work with our supply chain and our partners to drive through and get the best clarity on that before we give more comment.

Thanks very much.

Thank you.

Thank you. Our next question will come from the line of Randy Konik with Jefferies. Your line is now open.

Thank you very much, and good morning, everyone. I wanted to follow up on a comment you made earlier regarding the off-price channel. You mentioned stable pricing with off-price partners. Could you provide more details on whether that situation is changing? Additionally, could you give us some qualitative or quantitative insights into how much you've reduced exposure to the off-price channel, which clearly benefits your brand in full-price channels and distribution? Thank you.

Sure. Over the past couple of years, we have been focusing on reducing our reliance on the third-party off-price channel to achieve a revenue range of about 3% to 4%. This year, we are pleased to have driven it down to around 3%, which positively influences our gross margin percentage as that mix decreases. Additionally, we have improved our supply chain processes and implemented demand constraints. These measures help maintain our brand's premium image while reducing excess inventory. Overall, we are operating under a tighter framework that allows us to sell more of that excess through our factory outlet stores profitably. Furthermore, even as we decrease our sales to the off-price channel, demand for our brand remains strong, leading to our partners seeking more product. When demand exceeds supply, it typically results in higher prices for us. We are noticing better pricing on the reduced quantity sold, which is contributing to our gross margins. Moving forward, we intend to manage our off-price channel sales within the 3% to 4% range globally, so it shouldn't significantly affect our revenue or gross margin in either direction; it's just a small part of our overall business that we will maintain.

That was very helpful. And then, last question would be, can we get an update on the progress or the initiative around SKU cap reduction and improved productivity around that initiative? Give us some color there on what you've done on both the apparel and footwear side? Thanks, guys.

Yes, sure, Randy. This is Patrik. We did a lot of work around SKU management. Actually, as far back as 2017 and 2018, and we got it down to a reduction of about 50% or so. We never have expanded from that point, so in other words, we readjusted ourselves to a level that we felt would be able to sustain the growth that we were planning. And we're still at that level. And then, the way we think about it going forward is really in a balanced way. In other words, we will invest in areas where we see opportunity, but we're also very diligent about taking things out through our life management cycle for our products, ensuring that we're not getting on top of our forecasts in terms of the balance of this holistically across the Company. The other interesting thing is also the fact that at that point in time in 2017, 2018, in our first round of transformation, we also took down our trims and our materials both by about 80% and we've been able to maintain those levels, too. So coming back a little bit to what Dave talked about previously here, in terms of our operating efficiencies, because we now have a way to make sure that we are holding ourselves accountable to what different products should be doing in our line to help grow the brand and the business. The teams are doing an excellent job maintaining the discipline. And as a consequence, we'll grow our SKUs a little bit as we grow as a brand going forward, but it's always going to be in a controlled way, where we're holding ourselves accountable.

Very helpful. Thanks, guys.

Thank you. And our next question will come from line of Sam Poser with Williams Trading. Your line is now open.

Thank you for addressing my questions. I'd like to follow up on the supply chain situation. Can you provide some insight into how it might affect you in the March quarter and possibly beyond? Where are these issues occurring? What is your exposure to southern Vietnam? I've noticed that on the apparel side, many of the products are widely distributed. Will this problem impact footwear more than apparel? Could you elaborate on your sourcing situation?

Sure Sam, this is Patrik. First of all, we feel well-positioned in terms of sourcing, with about 50% of our production coming from APAC and the remainder spread across the Middle East, Europe, and Latin America. This gives us a balanced portfolio for sourcing. Currently, factory closures have significantly affected the industry, particularly in Vietnam, where there is a blend of apparel and footwear production, especially in South Vietnam. Our factories are now open, but it will take the rest of the year to ramp them up to full capacity. Looking ahead, we have already made adjustments to our order books for the start of next year to ensure we can meet expectations for our partners and consumers. Presently, our main challenge is related to logistics and transportation, primarily affecting inbound operations due to congestion at various stages of the supply chain, including container availability, chassis access, and port procedures. We anticipate that logistics and shipping will be our biggest concern in the medium term as we move into 2022.

And I guess, Sam, just to give a little quarterly color. We see some minimal impacts for Q4 of this year, which is already assumed in the outlook we gave. Definitely incurring a fair amount more in inbound freight costs to get things here and catch up a little bit, and that is an impact for Q4 on gross margin. And then calendar Q1 and calendar Q2 is probably where we see a little bit of a bigger revenue impact because of the cancelled POs, to be able to realistically get the factories back up and caught up and not be missing POs to customers. So we've worked with our customers on those PO cancellations. So that's a bigger impact on calendar Q1, calendar Q2. And then after that, it should start to dissipate and we're continuing to work through it. I think we have really good partnerships with our suppliers, but some of the challenges down the pipeline that Patrik mentioned, once the product actually gets to the inbound port, are still a pretty big challenge.

Patrik, this question is for you. I understand that many of the issues you're facing are positive in nature. However, do these challenges ultimately benefit the brand in the long run? Even though you might wish they didn't exist, do they contribute to making your brand more premium and help you become more focused due to the supply chain delays?

That's a great question, Sam, and I think it's a good observation. When faced with a constraint, it forces you to make choices. We've had to make some choices, especially as we think about the first quarter of next year. We need to be strategic about what we're delivering to the market based on our capacity. So the answer to your question could be somewhat yes, as it helps us prioritize what goes where and ultimately contributes to the premiumization we are driving with the brand. I think it's a good observation, Sam, and there's some truth to that.

Thank you very much. Continued success.

Thanks, Sam.

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

Hey guys, congrats on the ongoing progress. Great job.

Thanks, Simeon.

Patrik, I wanted to follow up on that. The other side of supply chain challenges is the overall industry trend towards increased discounts. I'm interested in your perspective on industry promotions for the holiday season and your thoughts looking ahead to next year. Additionally, could you discuss what you think will happen when promotions return across the industry, considering how you've established the brand and your ability to maintain pricing? Dave, you've implemented several impressive strategic changes in your marketing approach. Can you share your thoughts on marketing expenses for next year, whether in terms of dollar growth, percentage of sales, or your strategic focus? Thank you.

Yes. Simeon, this is Patrik. Yes. So I think in terms of how we're thinking about driving the brand going forward, we're going to be continuing to follow our strategy, which is ultimately now a consumer-led strategy, right? So in other words, we're laser-focused on the consumer and understanding the consumer, understanding how the consumer moves through his or her journey as they're on their way to do an activity in sports. And really this year, to pivot a little bit into your second question around marketing, we have really activated against this concept of the journey to compete. Through the same campaign that we started last year, the only way is through change of game and being on the offensive. And I think for us, that marketing spend and the activation that we're able to do is being done much better now. And it's being done better because we understand through our return on marketing investment models that we're able to run how to do it better. So we're more effective, we're more efficient. And it's having a better effect on the consumer as we're activating against it. We're going to continue to do that into the future and invest in marketing for the brand. And I don't know Dave, do you want to add a little bit more on that?

Yeah, I guess relative to the dollar investment. We've talked a lot about heavying up our investment this year. Based on our overdrive and being able to reinvest a fair amount of that back into the brand, which has been really exciting to do. And is definitely back-half weighted this year. A lot of top of funnel marketing around brand awareness consideration, which we're super excited about, what that could mean for us as we go into next year with that behind our backs. But I would say that although we're going to run a higher percentage of revenue this year, we do expect to be able to leverage marketing as a percentage of revenue as we go into next year and the following year, because we need to leverage every area of our cost structure going forward and we feel confident about being able to do that and still get more return and more bang for the buck, based on what we've been doing this year. And based on all the ROI work we've been doing from a marketing perspective, and changing the mix in how we spend through the restructuring activities as well. So you will probably see some leverage in marketing as a percentage of revenue as we go into next year and beyond. But I don't think you will see any decrease in the power of our marketing. If anything, you should see an increase in the power.

Yes, that's right. I'll just add a comment around your question about holiday and promotional environment. I think that there currently is a perceived scarcity around product in general across different sectors in the marketplace. And I think that's going to enable us to continue to drive a more premium position for our brand. What is unclear is a little bit around traffic patterns. We're seeing some things going on with the consumer around the world, which is not necessarily consistent. But in terms of our offering and how we think about promotions, we're going to be less promotional than 2020 and 2019, and we're going to continue to drive the brand to higher levels. That's really our approach going into holiday this year.

Great guys. Congrats, again. Thanks a lot and best of luck for holiday.

Thank you.

Thank you. Our next question will come from the line of Brian Nagel with Oppenheimer. Your line is now open.

Good morning. Great quarter. Congratulations.

Thanks, Brian.

I have a couple of questions, particularly focusing on the supply chain. I'll combine my questions. First, you have outlined the projections for the holiday season and into early next year. As you look ahead to the first quarter, are there options available to you, like utilizing airfreight and bringing in products potentially at a higher cost? Would you consider that? My second question is about the data reflecting sustained robust sales growth for your brand, especially in the United States. Do you think that your company's effective management of the supply chain is contributing to gaining additional market share?

Thank you, Brian. I'll begin and then hand it over to Dave. Overall, our current operational capability, agility, and the enhancements we've made in our supply chain and vendor relationships over the past years have positioned us to adapt in various ways. We've discussed our capacity to manage through the pandemic, where we reduced our orders by 30% and then increased them again for 2021, while also dealing with a challenging logistics and transportation situation. We adjusted our order base for the first half of 2022. All of these factors are only achievable by running an efficient and effective operation. What you're witnessing from Under Armour now is our ability to handle any challenges that come our way while doing so as efficiently as possible. Consider the last two quarters: our inventory was down 26% last quarter and is now down 21%. We are also forecasting a flat finish to the year. This reflects our improved understanding and management of demand, allowing our supply chain to execute more effectively. Additionally, relating to what Dave mentioned earlier about our off-price sales and how we manage them alongside our wholesale and direct-to-consumer channels, our ability to navigate the past two years demonstrates this team's execution capability. Dave, would you like to add anything?

Sure, I can expand on that. You mentioned airfreight, and we are making every effort to mitigate issues and maintain a strong experience for our customers and consumers. We've utilized a significant amount of airfreight this year, which isn't ideal, but it's necessary given the current challenges. Looking ahead to next year, we anticipate using airfreight, although likely not as much as we did this year, but still more than we did in 2020 before COVID. This use will primarily focus on the first half of 2022, which may pressure our gross margin, but it helps us manage timing challenges and lessen the impact. It's a complex situation, and we're making progress. Our supply chain has worked well with our partners, including factories and logistics providers, to address these challenges effectively, and we're optimistic about navigating through them. We're also focused on maintaining strong relationships and managing our purchase orders to stay ahead.

Great, I appreciate. Thank you very much.

Thank you.

Thank you. And our next question will come from the line of Bob Drbul with Guggenheim Securities. Your line is now open.

Hi. Good morning. Just a couple questions for me. Thanks. The first one is you talked about the recent trends in China. I was just wondering if you can elaborate a little bit with what you saw in the quarter and sort of what you're seeing this quarter to date, and how you have that planned into the fourth quarter. And then you called out running as a category. I was just wondering if you could give us maybe a little more color on basketball and even the kids' business? Thanks.

Hi Bob, this is Patrik. In China, we are still experiencing the effects of COVID on consumer behavior. There are many fluctuations on a weekly or monthly basis due to local closures affecting physical stores. Full-price traffic has not yet returned to pre-COVID levels, and this is the reality we are facing. We also notice a decline in e-commerce traffic, largely influenced by major platforms like Tmall and JD, which are experiencing similar reduced traffic. The digital landscape in China is changing, with smaller platforms and commercial ventures emerging around these larger ones. Fortunately, we have made significant investments in our digital teams there over the past few years, enabling us to navigate this new environment. However, it is a complex situation, and it’s not entirely clear how this holiday season will unfold in China. There is currently a noticeable softness in traffic patterns in the region.

Can you talk a little bit about maybe basketball and the kids' business?

Oh, yes, basketball and the kids. We're very excited about that. As I mentioned earlier, both basketball and kids have seen more normalized back-to-school this year. It's clear that all of our team sports are performing better, and basketball is definitely included in that. We're also thrilled about our latest women's release that just hit the market and our breakthrough basketball shoe, which has been doing exceptionally well. Our Curry line is also performing great. We believe there's a renewed energy in the team sports sector that we've not experienced in a few years. This enthusiasm extends across kids and basketball, as well as other team sports like American football and baseball. Overall, this year compared to 2020, we're seeing significant growth rates that exceed both men's and women's categories, which is a very positive indicator.

Great. Thank you very much.

Thank you. And our next question will come from Paul Lejuez from Citi. Your line is now open.

Hey, guys. Thanks. Curious in prior to your purchase cancellations that you mentioned. Curious how you were thinking about your unit buys for 2022 and how were you thinking about that differently, and your direct-to-consumer business versus the units that would be required to service your wholesale accounts. And then post-PO cancellations. How is that unit buy shaking out? So just what percentage did you have to cancel? Thanks.

Hi, Paul. This is Dave. We haven't been giving real unit numbers as far as in our expectations. And I appreciate the interest in next year's unit growth, but it's not something we're ready to give color on yet. We'll be talking about that more on the upcoming call or the one following that, knowing that our fiscal year change happens on April 1 as well. We're being careful relative to how much detail we give on the go forward.

Okay. Thanks. And just a follow-up on a couple of other questions that were asked that you mentioned, I think maybe sells and differences in geographies. From a consumer perspective, how would you characterize the promotional environment as you think about the different regions. Are you seeing big differences in APAC versus EMEA compared to the more tamed promotional environment that we're seeing here in the U.S.?

Hi, Paul, this is Patrik. I'll give you my high level around the globe if you like. I think that you are seeing more of a discounted environment in China right now in APAC, with softness in traffic patterns. In Europe, we see a pretty interesting phenomenon where actually, the consumer has gone back to brick-and-mortar more strongly than we would have anticipated, actually, creating a bit of softness in the e-commerce digital channels. Not just for us, but also for the pure players in Europe. The consumer really is enjoying being back out and shopping in stores. And they're doing so at a premium level. So not really a very discounted level. And in North America, I think the consumer has stayed in digital and has continued to go back at higher rates in terms of traffic to the stores at a more less discounted and innovative level for us. So I think it's a mixed bag across the world. The 3 regions are behaving a little bit differently right now, which makes it a little bit challenging, perhaps to understand exactly how they're going to navigate through this next couple of months. But at the end of the day, we feel confident that the forecast that we currently have given today is going to be kind of where we're heading. But it is interesting. I don't think I've seen it like this before where everybody is at different stages with COVID. Everybody's at different stages with retail and e-commerce. But in general, in the western world, there is definitely less discounting and more so in China, at least in terms of how we think about our sector right now.

Thanks a lot, Patrik. Good luck.

Thanks, Paul.

Thank you. And our next question will come from the line of Jonathan Komp with Baird. Your line is now open.

Hi, thank you. Just a follow-up on the running category. Would you say that's the best example where your strategy to move more premium is underway? And when you think about the broader brand metrics, I know you track a lot of them internally. Could you share maybe a couple of insights just on the recent movement or improvement you're seeing across some of those metrics?

Yes. Hi Jon. I'm very excited about our running category. It's been a category that we have methodically and strategically, and tactically really worked on in a meaningful way since '18 when we launched our HOVR platform. This year, we came out with our Flow platform with the Velocity Wind and Velocity SE, on the back of the Curry release last year in basketball. And, I think, what you're seeing now with Under Armour is really an ability to execute on running head to toe. And we're doing that across the globe, which I'm very excited about in a premium way. So really what you've seen over the last three years is this running effort evolving into becoming a new platform for Under Armour across both men's and women's across apparel and footwear. And we're very excited about the innovation that we continue to drive in this category and how we think about it going forward into '22 and beyond. More to come on this from Under Armour. But we're here, we're in it. We're in it to win it. We're going to stay in running and do a better job there as we go forward. So very excited about that.

Okay. That's helpful. And then Dave, just one follow-up. I know you mentioned this stub quarter or the March quarter, could grow low-single-digits for revenue, even with the headwinds that you mentioned. Should we be thinking that overall moving more towards a mid to high single-digit growth rate, given that Q1 you'll be still low single-digits even with the constraints? Trying to get a sense of more of the underlying pace that you might be at?

So Jonathan, great question. And I'd love to give you more details on that. But we're not ready to give that exact numbers or impacts yet for calendar Q1, or for the new Fiscal '23 next year. So definitely appreciate the question. We wouldn't call out the impact of the supply chain cancellations if it was not material, so it is definitely a pretty big impact, but kind of giving a normalized run rate growth isn't something that we're ready to give at this point, but definitely appreciate the question.

Alright, understood. Thanks again.

Thank you.

This concludes our question-and-answer session for today. Everyone, this also concludes our webcast and conference call today. Thank you very much for your participation. You may now disconnect. Everybody have a wonderful day.