Under Armour, Inc. (UA) Q4 2023 Earnings Call Transcript

Good day, and thank you for standing by, and welcome to the Q4 '23 Earnings Conference Call. Please go ahead.

Thank you. Good morning, and welcome to Under Armour's Fourth quarter and full year fiscal 2023 earnings conference call. Today's event is being recorded for replay. Joining us on today's call will be Under Armour Executive Chair and Brand Chief, Kevin Plank; President and CEO, Stephanie Linnartz; and CFO, Dave Bergman. Our remarks today include forward-looking statements that reflect Under Armour's management's current view and certain forecast elements of our business as of May 9, 2023. The statements made are subject to risks and other uncertainties detailed in documents regularly filed with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Today's discussion also includes the use of non-GAAP references. Under Armour believes these measures provide investors with a helpful perspective on underlying business trends. These measures are reconciled to the most comparable U.S. GAAP measures, a reconciliation of which, along with other pertinent information can be found in this morning's press release about underarmour.com. With that, I'll turn the call over to Kevin.

Thank you, Lance, and good morning to everyone joining us on today's call. In Under Armour's 18th year as a public company, I'd like to thank our shareholders for their continued support and belief in the dream we collectively share. Your trust and confidence have empowered us to become one of the world's largest athletic brands, a responsibility that permeates everything we do. However, we also know that it's been at times an inconsistent journey, one we acknowledge has not created the shareholder value that we see this brand capable of. Over time, we've seen periods of significant growth and challenges that have tested our grit and resolve along the way. In response to these, we've built a tremendous foundation of talented people, operational and financial agility and most importantly, brand love. With new leadership in place, continued strategic evolution and a renewed mindset, I am both proud and confident in the steps we've taken that put us in a position to begin to reach the full potential we all believe is available for this brand. Next to me is Under Armour's new President and CEO, Stephanie Linnartz. With less than 3 months in the role, she has been hard at work assessing Under Armour's capabilities, leadership talent and focusing on the strategic priorities necessary to put us on a path towards reigniting growth. Her deep brand and consumer expertise and her fresh perspective on the business have laid the groundwork for challenging some of the ways that we work and reenergize the leadership team across UA as we lay out the growth strategy in our next chapter. As one of the most unique brands in sport, Under Armour has a right to compete at the world's highest professional levels, a legitimate on-field, authentic, athletic presence with tremendous headroom for which to grow. This, coupled with broadening our aperture to include sports style, marks a significant evolution in our journey and our ability to win the hearts and minds of consumers everywhere. Witnessing the emotional connection between Under Armour and young athletes, the insights we gain and the enthusiasm of our team as we continue to evolve our strategy is infectious. Our history is deep. Our confidence is strong and our commitment is all-encompassing. None of this is possible without innovations like the products we deliver to our global roster of teams and athletes that continue to push the boundaries of what is possible. As one of the most iconic athletes in Under Armour's history, this couldn't be truer than our partnership with Stephen Curry. In late March, we announced that we're deepening our partnership with Stephen by forging a long-term commitment. Together, we are dedicated to pushing performance and prioritizing the impact of sport on communities worldwide, and we see growing the Curry brand as one of our more significant catalysts. Under this new deal, Stephen also becomes a meaningful shareholder, a testament to his long-term commitment to our joint success and belief in an incredibly bright future. This brings us to another highlight of the quarter. As Stephen once said, everyone has to come back to their roots to remind themselves who they are. Well, we did just that with the relaunch of Protect This House, a tenant of Under Armour, that's ubiquitous for perseverance. Protect This House is not really a tagline. It's an ethos in the bedrock of our messaging. It's a rallying cry for UA athletes that galvanizes unity and a mindset for switching effortlessly between offense and defense. With activations in the months ahead, we'll continue to add dimensions to this iconic phrase across some of the most important sporting events and social platforms, encouraging the next generation of young athletes to Protect This House. From energy comes opportunity. In the product spectrum of good, better and best, Under Armour has built a $6 billion brand with a lot of good products, a fair amount of better and an opportunity with consumers for much greater representation of best level products. A great example of why we believe we can be successful in this strategy, a better and best focus is the real-time reaction we have seen with Under Armour's SlipSpeed, our versatile training sneaker engineered with our Curry Flow outsole, double lacing system and the defining feature of its convertible heel. Launched in February, this $150 game-changing innovation, with a design that is on point and is being authentically adopted by athletes everywhere, quickly becoming one of our most reviewed products and carrying a 94% recommendation rating. Available in full-price UA direct-to-consumer and a select number of partners, including DICK'S Sporting Goods here in the United States, with the global launch rolling out now in EMEA and APAC, along with well-orchestrated authentic storytelling. UA SlipSpeed is working. This is a prime example and template of what we will do moving forward, innovative product, inspirational design and the it factor that only UA can bring, and our product pipeline is full, inclusive of new innovations like SlipSpeed and specifically ensuring that we finish the play on SlipSpeed by bringing the technology to additional sneaker categories soon, that makes this a platform and not just a singular shoe. In addition to new innovation, our pipeline also consists of some of our past greatest hits that we will be reintroducing to athletes and have great confidence that heritage of success combined with a modern 2023 lens is a great formula for us to pursue. We will ensure this cadence of new becomes the consistent theme of product freshness from UA. The key to continuing to unlock this consistency is pulling the best product lines of the planet together. The good news is that we have great talent at UA, we're now empowered to ignite this plan of product attack but have also been proactive in recently bringing on a few outside experts in both apparel and footwear to help exploit our incredible product opportunity. Moving forward, we'll continue to challenge and energize ourselves in the industry to create even greater excitement in the marketplace. We also know that doing business as usual, doing what we've done in the past, just slightly better is not enough. We are committed to the principles that got us here and understand the urgency to become better focused and more aggressive in managing for growth and the trust you're placing in us to get this done. I believe the trust is built in drops and lost in buckets. This phrase has been front and center in our culture for years. It plays a part in consumers' decisions about what to buy, where teammates choose to work, and where shareholders decide to invest. In Newsweek's 2023 survey that ranks most trustworthy companies in America across those 3 criteria, Under Armour ranks #1 as the most trusted company in our sector. Congratulations to the 17,000 strong UA teammates whose character, ethics and leadership earned this recognition, one drop at a time, well done. What is now time for us to marry the fundamentals to make UA a great brand and trusted company with groundbreaking innovation, style, storytelling and execution for consistent growth and increase shareholder return. And with that, I'll hand the call over to Stephanie.

Thank you, Kevin, and good morning, everyone. I'll open my remarks today by underscoring that I am honored and thankful for the conviction that Kevin and the board have placed in me to lead Under Armour. In the past that led me here, respect for iconic and innovative brands, love for sport and admiration for Under Armour's hard-earned and unique reputation have remained a constant backdrop. Reflecting on my first 70 days here, it's been exciting, intense and eye-opening. There are quite a few topics I plan to touch on today, and I will be as transparent as possible about my observations and thoughts thus far. Having learned much in a short time, I will say that the potential for this brand is even bigger than I imagined when I walked through the door at the end of February. I am realistic about our challenges and I am confident that we have the right core components and are developing the right plans to reignite growth in the company and to create value for shareholders. That said, like any athlete, we must measure ourselves against our competition and potential. Operating in the athletic performance, sportswear and retail sector, which has a huge addressable market and consistent revenue CAGRs to tap into, we have yet to capitalize on our full potential. For athletes, customers and shareholders, we must realize this potential and stop at nothing until we deliver renewed growth. Growth is without a question, our highest priority. Throughout my career, I have prioritized people and believe that the only way to succeed is to have a great team around you. This is something that I noticed right away at Under Armour. The teammates working here are talented, hard-working and passionate about our purpose of empowering those who strive for more and our mission to make athletes better. This energy will be a crucial asset as we leverage our strengths, drive through areas where we need to finish the play and accelerate our ability to reshape our future trajectory. Under Armour has always had a unique strength in the commitment and engagement of Kevin Plank, bringing his passion and energy to the business in ways only a founder can do. Having worked in a founder-led culture for the past 25 years, I know firsthand the advantage that this presents. Over the past few months, I have had deep dives with teammates, key wholesale customers, athletes, and have piled through a mountain of analyst reports. As a result, there are 3 areas that I would like to address today as an initial assessment of our strengths and opportunities: brand, product and North America. In light of this, I've set 3 priorities to drive clarity and business alignment across the company, and appropriately, we are calling this Protect This House 3 or PTH 3, which is about 3 big things over the next 3 years. With the plan taking shape, I am excited to share my initial ideas on it today and look forward to providing more details and progress reports in the coming quarters. Of course, execution will not happen overnight. It's a journey that will require improved execution in some areas, new talent and greater accountability for our leaders to drive positive and tangible business results. At its core, it's about focus, execution and accountability. With that, let's start with brand. Under Armour is one of only a few brands that can be found on the field of play globally at the highest levels of competition, meaning Under Armour products are chosen by professional athletes who trust us to equip them as they push the boundaries of what is possible. With the demand to support nearly $6 billion in expected revenue in fiscal '24, our base business remains solid and sizable. Yet we are not pulling in our fair share of market growth. I believe a causal factor here is the inconsistency of how the Under Armour brand shows up across our regions, with the most significant opportunity to improve in the United States. Outside the United States, our brand has received in its most premium position in Europe. This results from nurturing strong quality wholesale relationships, disciplined channel segmentation and consistently optimized brand activations. And this, of course, shows up in our results. In fiscal '23, EMEA was our highest growth region with a 23% increase in currency-neutral revenue. Moving forward, we'll continue to build on this momentum, focusing full-funnel medium sports marketing efforts, especially with global football in the U.K. and Spain to win with 16- to 20-year-old varsity athletes. In APAC, particularly China, Under Armour's view is what locals generally describe as a professional athletes brand. So, the connection of brand heat delivering results continues to be consistent with our objectives. Growth-wise, fiscal '23 was challenged in the first 9 months of the year due to ongoing lockdowns and market disruptions from lingering COVID impacts. As we ended the year, however, currency-neutral revenue was up 31% in the fourth quarter. So, the environment seems to be normalizing more now. With fitness of the tailwind, improved storytelling and a growing loyalty program in China, we remain bullish on the region's future. In North America, specifically the U.S., there is no question that athletes love the Under Armour brand. And while our consumer insights tell us that we have tremendous brand awareness, there is also a high level of latent brand equity. Latent because consumers are aware and engaged, yet conversion is more dormant than it should be. I attribute this state to inconsistent execution across our product, marketing and retail efforts. From aligning products to be premium at every price point to disciplined channel segmentation to more consistent product marketing. There is a significant opportunity to activate more simply across the dimensions that matter and drive improved brand affinity. So how is this translating into action? From both the global and U.S. perspectives, we're assessing how our products, athletes and marketing strategies are or are not breaking through to reach our target consumers. From brand activations to a roster that includes Stephen Curry, Justin Jefferson, Jordan Spieth and others, we have a massive investment in place. Yet, it's clear to me that we are not capitalizing on our assets to our best advantage or return. Driving brand heat, of course, is not a one-size-fits-all approach. We cannot simply apply the same storytelling product and distribution strategies across the regions and expect to generate the same levels of brand heat globally, yet unifiers can be crucial to driving consistency. As Kevin mentioned, one unifier we are all proud of is the relaunch of Protect This House. Since then, the execution of our teams and positive response from consumers has been impressive and inspiring and a simple reminder of the strength of Under Armour's core brand DNA. Reinventing Protect This House is a new call to action for young athletes whose motivations differ from the generations who came before them, will continue to be brought to life across many dimensions, including this summer's Women's World Cup. Targeting young women, our World Cup campaign will feature Kelley O'Hara and Alex Greenwood and the journey to compete, highlighting the grit, edge and swagger necessary to perform on the world's most elite stage, employing a digital-first content strategy that distorts beyond typical media placements we're utilizing; an always-on approach to meet athletes where they live, train, compete and recover. Also, local activations like our all American and UA Next events will continue in North America and transition into other regions like EMEA to drive brand advocacy further. Taking a step back to accelerate my understanding of how the various components of these elements play together. I have made some leadership changes, and we are in the midst of a search for a Chief Consumer Officer. So for now, the heads of brand, sports marketing and digital all report directly to me. As I get closer to these areas of our business and continue to assess our needs, we are working on adding new world-class marketing and commercial talent to ensure our teams have the right leadership and capabilities to fuel our growth expectations. To wrap up this section, when taken in total, driving global brand heat with a focus on the U.S. becomes the first of 3 priorities that I laid out for the company. With love for a brand that plays considerably larger than the business, I am confident that simplification and doing more with less will be an outstanding unlock to generate excitement and increase conversion towards greater top-line growth. Next up is product. From a core athletic performance perspective, we continue to deliver industry-leading innovations that once athletes have them, they can't imagine living without. That said, we haven't finished the play on becoming premium at every price point, nor created a critical mass business in the better part of the product pyramid, especially in footwear, where most of our peers enjoy considerably larger businesses. From any cut, footwear remains our single most significant growth opportunity. We have built a successful $1.5 billion footwear business, which is challenging given the barriers to entry in competition. A large part of this momentum is due to our focus on building franchises which have resulted in loyalty and repeat business. From Velocity, Phantom and Infinite in running to Curry Breakthru and basketball to our coveted highlight and spotlight fleets in American football. This business is established, gaining strength and ready to realize greater future potential. That said, you will hear us talking a lot more about sneaker culture, especially as we open the aperture to Sportstyle. Additionally, Under Armour sneakers are ripe for collaborations, which will become a larger part of our future offering. To do this and do it well, we are bringing in sneaker and branding experts who will add industry-proven design horsepower to the team, especially as we expand our Sportstyle offerings. Ultimately, it's about getting the right talent in the right place to ignite our product and marketing engines in performance and style. Our performance apparel business also continues to deliver on our promise to make athletes better. With a strong portfolio of products that have made us famous like HeatGear, ColdGear and Compression, we have an excellent base to leverage into existing and new categories. In our current lineup, RUSH Energy, Peak Woven, Flex Woven and Vanish along with our Bras collection, they all continue to elevate our premium offering. Additionally, given our strengthened partnership with Stephen, there is a significant opportunity to amplify the Curry brand in basketball in categories like Golf. And speaking of Golf, we are working on a premium collection and partnership with a top designer to be launched this time next year, strengthened by one of the world's best players, Jordan Spieth. Golf is a business that I believe we have underserved as of late, and it is an area where we have a right to win, where product performance and style win the day. So expect more here too. Another significant opportunity is our women's business. As a woman and an athlete, I believe we make exceptional women's products in specific collections. However, at less than 1/4 of our revenue, we are still not cutting through enough to realize the growth available in the marketplace. In apparel, we have had success, specifically with our bras and bottoms products. But we have yet to make our definitive must-have product, so that it is top of mind as we work to drive more significant growth. Footwear must also be part of the long-term equation to grow the women's business. And here, too, we have a solid base from which to grow, but we need accelerators. The consistency of great design fit and the all-important style factor across the entire offering is not where we need it to be and where I am confident we can take it. So to underscore this opportunity, we will go after women harder than this company has ever seen, full stock. Another important area of opportunity is Sportstyle, where we have begun leveraging the credibility of our solid athletic performance foundation to compete deeper across the marketplace. Here, we are progressing by repositioning some of our current products and showing them in non-active occasions, the live part of an athlete’s day. To be clear, Sportstyle through an Under Armour lens is the intersection of our style and design meeting performance. This means easy to wear premium executions of fabric fit and finish. With a robust product roadmap continuing to take shape due to the product design cycle, this business will not become a material driver until fiscal '25. Even so, we have seen early success in our essentials and Unstoppable apparel collections, fleece and warm-ups, and we are looking forward to new offerings as our SlipSpeed footwear platform adds new options this fall. Of course, footwear, women's and Sportstyle are not mutually exclusive. They are a diagram of opportunity that takes our total addressable market to more than $300 billion globally. That said, linking back to our first priority, brand heat must always work symbiotically with product, and I don't believe we've done a great job at this consistently. Through research, we have discovered that even our athletes are not fully aware of the depth of innovations we offer. The opportunity to close this gap will require the redeployment of dollars to support better storytelling to enhance demand. Here, too, we are on it. So all of this translates to our second priority, which is to deliver elevated design and products with a focus on footwear, women's and Sportstyle. And this brings us to the third area, which is North America. Assuming we execute well with the first 2 priorities, drive global brand heat and make better products, we expect growth to return to North America in fiscal '25. Digging into this a bit more, historical context is important to understand where we were and where we are. Following the sector-wide promotional environment of 2017 and '18 and the current one, which started last year, Under Armour is continuing to navigate a legacy of higher-than-desired promotional activities in our home market. I believe this can be attributed to many of the factors I have discussed today, inconsistent product, marketing and segmentation discipline, along with sector-wide inventory malaise, all of which have constrained brand affinity in the U.S. That's not to say we have not made progress in the quality of our U.S. business. For example, going into the pandemic, we exited undifferentiated wholesale doors, reduced our off-price exposure by more than 2/3 and reorganized our people, systems and processes. As a result, we have seen customer acquisition and retention metrics improve, establishing a healthier base for growth. In North America, we run a very productive and profitable outlet business with our Factory House concepts, but these represent about 90% of our physical DTC locations in the region. That leaves only 18 full-priced brand health stores in our home market, not many places where we can showcase our brand in the best presentation possible. So compared to the roughly 75-25 split that many of our competitors have working for them, this is an opportunity for premium growth. As such, we plan to focus our full-price stores and productivity and consumer experience, driven by smaller, easier to navigate store formats, better storytelling to appeal to young athletes, exceptional customer service and always being in stock. By the end of this calendar year, our full-price concepts will also be revamped to showcase Sportstyle products with a more robust curation. Longer term, we want to build on this progress by expanding the number of full-priced health stores as we perfect this. Nearer term, based on learnings from our Flatiron New York City pop-up as part of the SlipSpeed launch, we are working to identify additional ways to support critical moments like sporting events, competitions and festivals. From a digital perspective, we will continue to work to reduce promotional activities in our e-commerce business. However, in short order, ua.com must become a showcase for our brand. So we are investing in improving the digital experience, including better product presentation, streamlined checkout and faster mobile site speed. The team understands the interconnectivity between physical and digital retail and is making the right investments to ensure that our stores and website drive more meaningful sales across our broader North American ecosystem, including our wholesale partner business. That said, we are making good progress with our U.S. loyalty program, which we plan to roll out more broadly later this year based on a successful pilot. Early reads continue to show meaningful improvements in metrics including higher conversion rates and average dollars per transaction and program members versus nonmembers in our test markets. In our wholesale business, we have solid relationships with best-in-class sports specialty, department stores and pure-play e-com companies. Still here, too, the critical mass in our U.S. business is oriented towards good level products. So we have an opportunity to build out the better and best part of our segmentation. In addition, we continue to evolve our strategic partnerships towards areas where we believe we are under-penetrated, including the mall and run and golf specialty shops as examples. To wrap up, this becomes our third strategic priority, which is to drive U.S. sales. Improving our U.S. business is critical to growing our global business. As the most profitable region, growing faster here means more future dollars to invest in product, marketing and our international business as well as increasing returns to shareholders. With that, you now have the 3 initial priorities I've mandated for Under Armour over the next 3 years: PTH 3, obsess driving global brand heat, stay relentlessly focused on elevating design and building better products and drive growth in the U.S. As I said, while these priorities are clear, they are a starting point, and we have just begun thinking about how we can make UA better. I look forward to providing more detail on these in the coming quarters. I love and believe in Under Armour, and I couldn't be more excited to be here. I want this brand to win, to really win, by achieving the vision we all have for it. We are operating and executing with our eyes wide open. We know there is much work ahead of us and that we must move with urgency. Although fiscal '24 will be a year of building as we lay the groundwork aligned with our priorities, I am confident that we will achieve the growth and profitability that I know this brand is capable of over the long run. Now is the time for bold decisions and distinct actions that yield results. Our athletes, teammates, shareholders and brand deserve it. And with that, I will pass it to Dave to review our financial results and outlook.

Thanks, Stephanie, and welcome to your first earnings call at Under Armour. As a nearly 20-year veteran here, my love for this brand runs deep. Having worked closely with Stephanie in her first few months here, her desire to execute, her sense of urgency and most importantly, our dedication to motivating, inspiring and energizing the team have been magnificent. With PTH 3 underway, I am confident the path we're laying to drive increased brand heat, elevate our product and drive growth in the U.S. will create a more advantageous position to unlock more consistent, sustainable growth for our shareholders over the long term. Diving right in, Fiscal '23 results were in line with our expectations, and we closed out the year with a solid fourth quarter with revenue up 8% to $1.4 billion. On a currency-neutral basis, revenue was up 10% in the quarter. From a regional and segment perspective, fourth quarter revenue in North America was up 3%, driven by growth in our full-price and off-price wholesale businesses. Our DTC business was flat during the quarter with solid e-commerce growth offset by softness in our retail stores. In our international business, EMEA revenue was up 14% and up 20% on a currency-neutral basis, driven by strength in both our wholesale and DTC businesses. APAC revenue was up 24% in the quarter, or up 31% on a currency-neutral basis, driven primarily by significant growth in our wholesale business, benefiting from China's reopening and an easier comp against last year's meaningful COVID impacts. We also saw solid performance in our South Korean business. Revenue in Latin America was down 8% or down 13% on a currency-neutral basis, primarily due to a temporary fulfillment issue that impacted our wholesale business. From a channel perspective, fourth quarter wholesale revenue increased 10%, driven by solid performance in our full-price business and growth in sales to the off-price channel. Our direct-to-consumer business was up 3%, led by 6% growth in our e-commerce business and 1% growth in our owned and operated retail stores, and licensing was down 3% due to softness in our Japanese business. By product type, apparel revenue was up 1%, with strength in our golf and run businesses, partially offset by softness in training. Footwear was up 27%, driven by strength in team sports, run and golf. And our accessories business was down 1%, with strength in team sports and outdoor offset by softness in training. Relative to gross margin, our fourth quarter declined 310 basis points to 43.4%. This decline was driven by 400 basis points related to higher promotional activity within our DTC business as we manage through prior season products and unfavorable pricing related to sales to the off-price channel, 70 basis points of unfavorable product and channel mix and 40 basis points of adverse effects from changes in foreign currency. These headwinds were partially offset by 180 basis points of supply chain benefits related to inbound ocean and airfreight tailwinds, which more than offset product cost and freight to customer headwinds during the quarter, and 20 basis points of favorable regional mix, driven by higher APAC sales. Moving down the P&L, SG&A expenses were down 4% to $572 million, primarily due to lower marketing spending and lower incentive compensation during the quarter. Our fourth quarter operating income was $35 million, thus in line with our previous expectation. After tax, we realized a net income of $171 million or $0.38 of diluted earnings per share during the quarter, excluding an $87 million fourth quarter benefit, primarily from a tax valuation allowance release related to prior period restructuring; our adjusted net income was $84 million or $0.18 of adjusted diluted earnings per share. From a balance sheet perspective, inventory was up 44% to $1.2 billion, which came in better than the 50% increase we had anticipated. As mentioned earlier, this negatively impacted gross margin but was a result of a proactive choice to reduce inventory levels, which was prudent given the dynamic industry environment. That said, the composition of our inventory is generally current and healthy, and about half of the $366 million year-over-year increase is pack and hold to service designated future demand. To wrap up, our cash and cash equivalents were $712 million at the end of the fourth quarter, and we had no borrowings under our $1.1 billion revolving credit facility. Looking forward, we're closely watching several factors we believe will continue to impact our business, including consumer spending and retail demand, especially in our largest market of North America. We are also monitoring the pace of inventory normalization globally across our peers and key wholesale partners. As Stephanie mentioned, fiscal '24 will be a year of building for Under Armour as we focus on implementing our PTH 3 priorities and leveraging our innovative expertise to drive into new categories and markets. Within this context, we are laser-focused on expense control as we shift investment dollars to the areas that underpin these efforts. So jumping into our initial outlook for fiscal '24, we expect revenue to be flat to up slightly with North America expected to be down slightly and our international business to be up at a mid-single-digit percentage rate. For gross margin, we expect the full year rate to improve by 25 to 75 basis points from last year's rate of 44.9%, primarily driven by tailwinds related to lower freight costs. These tailwinds are expected to offset negative impacts from channel mix as we anticipate revenue from the off-price channel to increase yet still remain within our 3% to 4% of revenue operating principle and higher promotions primarily in our DTC channel as we continue to work through inventory. Next, we expect SG&A to be flat to up slightly in fiscal '24. We will prioritize investments that support the 3 strategic priorities that Stephanie outlined while continually looking for ways to simplify and optimize our cost structure. This translates to an expectation that operating income will reach $310 million to $330 million. As a percentage of revenue, this represents an operating margin of approximately 5.5% versus 4.8% for fiscal '23. Dropping this through, we expect diluted earnings per share for fiscal '24 to be in the range of $0.47 to $0.51. And a slight decline as our effective tax rate normalizes back to a low 20s percentage rate following fiscal '23's one-time events. Next, I want to provide some color on the first quarter of fiscal '24. From a revenue perspective, we expect sequential improvement in our quarterly growth rates as the year unfolds, as our priorities take shape and our wholesale order books gain momentum. That said, for the first quarter of fiscal '24, we anticipate a low- to mid-single-digit revenue decline amid a challenged U.S. wholesale landscape. Next, we expect the first quarter gross margin to decline 75 to 100 basis points as higher planned promotions continue to outpace freight tailwinds. After that, gross margin should expand for the rest of fiscal '24. Considering these factors, we expect a slight operating loss in the first quarter with a diluted loss per share of $0.03 to $0.05. Turning to inventory. As a reminder, our levels were especially lean through the summer of calendar 2022 due to our previous constrained strategy and supply chain disruptions from prior periods. Thus, we're still normalizing in our first quarter. Accordingly, we expect inventory to be up at a high 30s percentage rate at the end of Q1, a high single-digit rate at the end of Q2 and then decline in the second half of the year to end fiscal '24 around $1 billion. So as we move forward into fiscal '24, our teams are driving hard to position Under Armour to win in the long term through our PTH 3 strategic priorities while smartly managing expenses and deploying resources to areas with the highest returns. As these initiatives take hold and we drive greater global brand heat, deliver elevated design and products and excite consumers, we look forward to returning to growth in North America in fiscal '25 and while maintaining positive momentum in our international markets. We are confident that with the necessary focus, execution and increased accountability across all levels of the organization. Under Armour is on the right path to achieving better growth and profitability. With that, we'll turn it back to the operator for your questions.

Our first question comes from Jim Duffy from Stifel.

Welcome, Stephanie. I want to start on brand and product in the U.S. Stephanie, you referenced inconsistencies in the U.S. market, how do you fix the inconsistencies in real wake and engagement? I'm curious is the wholesale distribution appropriate, and we appreciate you a lot more product depth in the best categories. Do you need to abdicate some of the good product offering representation to elevate the brand and reawaken engagement?

Thank you, Jim. I'm glad to be here with everyone today. Regarding the challenge of product inconsistency, you're correct that it won't be resolved quickly, but we have already begun addressing it. One of our first steps is to reposition some of our existing products in a more premium manner. We have several products in the higher tier and we are enhancing their presentation through improved storytelling and merchandising, primarily in our stores and on our website. This is just the initial step for the short term. Looking at the bigger picture, it involves developing the higher-end portion of our product lineup. What excites me most about driving consistency and growth is our plans for Sportstyle. As stated earlier, this expands Under Armour's total addressable market to $300 billion. A significant aspect of Sportstyle will focus on footwear and women's products, which are key growth areas for us. This will also occur in two phases. In Phase 1, we will start by repositioning our current products. We have excellent offerings like the unstoppable joggers and fleece graphic tees, which we will market differently. Phase 2 will introduce new products delivered consistently. It's important to note that this effort isn't just about the products; it's also about enhancing our marketing strategies and distribution. We have several initiatives in place to reach new consumers and while we will continue collaborating with our existing wholesale partners, we also plan to explore new distribution avenues, including mall locations and new department stores. Our own sales channels will remain a priority as well. In summary, our approach to addressing consistency will follow a two-phase strategy.

Okay. Great. And then you have big ambitions for product newness and increasing the frequency of newness. I'm curious, are there KPI targets to benchmark Q2, or do you have any specific objectives for penetration of new products as a percent of the mix?

Yes. So we are great question. We are putting together KPIs and metrics around the percentage of products and that better and best bucket, their growth trajectory, we'll continue to do voice of the customer work to understand how consumers are relating to that better and best part of the pyramid and of course, talking to our customers. So we are putting together that scorecard of KPIs as we march forward. I've been here 2.5 months, so we're just getting started and pulling that together, but we're hard at work at it. So Kevin, anything to add from your lens?

Thank you, Stephanie. Before I respond, I want to highlight how impressive it has been to have Stephanie on board. In just 70 days, she has gained an impressive understanding of our company, bringing invaluable executive experience. Our team shares this sentiment, and we are excited to welcome her. What you see is very promising for us. Stephanie has encouraged me to focus more on the product side of the business. Innovation has always been important at Under Armour. For example, SlipSpeed is a recent innovation that we are proud to showcase. We also have unique products like our 7-pocket pants and the new Meridian line that we’re actively promoting. We aim for a consistent flow of new products, and a good case in point is our SlipSpeed, which we soft launched on Halloween last year and then revisited on Valentine's Day. Our goal is to make those holidays special for consumers, setting their expectations for regular innovation from Under Armour. Additionally, we’ll be refreshing some of our legacy products while continuing to innovate. In footwear, we are transitioning from a footwear culture to a sneaker culture, exemplified by our brand's achievements, such as winning the New York City Marathon last year and the success of athletes like Stephen Curry and Joel Embiid. Our shoes are performing well, but we also want to be relevant outside of traditional sports contexts. In apparel, we see strong potential for Under Armour to lead in innovation, captivating consumers with our offerings. We are committed to enhancing our products and exploring collaboration opportunities that align with our brand's relevance.

And our next question comes from Simeon Siegel from BMO Capital Markets.

Welcome, Stephanie, look forward to meeting you in person soon. So your excitement for growth from here is really coming across, it's nice to hear. Recognizing that Under Armour has always been about growth. Can you just elaborate a little bit more? And apologies if some of this gets repetitive, but it'd be interesting to hear what gives you comfort and the opportunity for growth now, maybe why it's different than the past? And then how you're thinking about the balance of growth versus the focus on improving profit dollars into '24 as you talk about the turnaround there and then into '25 as well and beyond.

Sure, what gives me confidence in our potential for significant growth is the strong foundation we have in performance. In my first two and a half months, I've had the opportunity to meet with some of our athletes, coaches, and athletic directors, including Justin Jefferson and coach Freeman from Notre Dame. It's clear to me that athletes genuinely love Under Armour and trust the performance of our products. This positions us well as we expand into areas like Sportstyle, which significantly increases our total addressable market. I outlined some key elements of our strategy focused on product, marketing, and distribution. We aim to improve our product offerings, enhance our marketing efforts, and expand our wholesale partnerships while also improving our retail stores and website. Running a company requires attention to detail, and I believe we can succeed by focusing on three areas: focused execution and accountability. When I arrived, there were numerous projects in play, many of which you've already heard about. We've since narrowed our focus to a select number of initiatives for the next three years to concentrate our efforts effectively. Execution is crucial; we're working to break down silos between different teams, including product, marketing, and regional operations. I dedicate significant time to fostering collaboration across these teams to drive our business forward. Lastly, accountability is key. I'm committed to holding myself, my executive team, and everyone accountable for our business outcomes. I recognize that the time for action is now, and we must deliver results. Although it may not be glamorous, these tactical elements are essential for executing our strategy, which includes focus, execution, and accountability. As we pursue our objectives, we're concentrating on boosting our top line while also prioritizing bottom-line profitability. I'm delving into understanding the sources of profit at Under Armour, ensuring we drive profitable growth. Ultimately, our success will be measured by our ability to achieve this growth, especially in fiscal year '24, and continuing into '25 and beyond, where we anticipate our efforts will yield significant results.

That's great. And maybe just following up on that and maybe for you or for Dave. Just thinking about the composition of the moving pieces embedded in the gross margin guide for the full year? Any way to help think through those puts and takes?

Yes. I mean there's a couple of things that are going on there. Absolutely, we're excited about some of the tailwinds that we're seeing on the freight cost side, whether it be the ocean carrier rates that have normalized a lot, but also just a lot less utilization of air freight now that supply chain is more caught up and we're in a better spot there as well. But on the flip side, we're also being real relative to what's out in the market. There's some fairly heavy inventory levels out there, not just in North America, but a little bit in other parts of the world as well. And we want to make sure that we're planned to be able to move through that. And so that includes a little bit more sales to off-price channel, even though we're going to keep it within that 3% to 4% range of revenue. It also means that we will utilize our outlets more for an even higher percentage of excess product, which has a little bit of an impact on gross margin as well. So there's a couple of different things that are really going on there that kind of come into play. But what I'm more excited about, and Stephanie alluded to this a little bit, is stepping into fiscal '25. We do believe that the inventory situations out there are going to be much, much more normalized as we get into the back half of our fiscal year and certainly into fiscal '25. And we're doing a lot of different initiatives right now on our overall product costing structure, which we believe are going to have some real nice benefits in fiscal '25 and beyond as well.

And our next question comes from Jay Sole from UBS.

A couple of questions. Is it possible to sort of give us like a high-level vision of sort of what your financial objectives are? I mean, how big do you think Under Armour can be in terms of sales? What kind of operating profit margin should it have in your vision? And then maybe, Dave, for you, just on China, can you just talk about how the China business progressed in the quarter, and what you're expecting for China growth and fiscal '24. And at the same time, on the inventory, you mentioned some pack and hold. Can you just tell us how much pack and hold you're holding when you plan to sell that inventory? And how much confidence you have that inventory is going to stay fresh until the time you sell it?

Sure. Well, I'll start, and then I'll flip it to Dave. But on your question about growth, I'm not ready to put a figure out there quite yet, but I am absolutely confident that we can grow this company significantly over the years ahead. Just a couple of statistics that I think about in that context, when our footwear business is only $1.5 billion today, that's great, but it's only 25%. So that's an area of exponential growth. I mentioned the women's business, relatively small. That's another area of exponential growth. So again, we have a lot of work to do over the coming weeks and months to flesh out the details of our plan in terms of our medium- to long-term growth targets, including our profit targets, which would incorporate our growth. The way we're thinking about gross margin. But again, not prepared to call the number today but absolutely prepared to call that we have significant growth ahead of us in the years ahead. But Dave, I'll flip it over to you for the questions on China, et cetera.

Yes. We are very proud of how the team handled the challenges in fiscal '23, particularly in China. Considering the early impacts of COVID and subsequent lockdowns, we had a strong Q4 for both China and the APAC region overall. Q4 benefited from comparisons to significant COVID challenges from the previous year and a slight rebound after the lockdowns. While we do not expect that same level of growth for APAC in fiscal '24, we anticipate a healthy growth rate and feel confident about our ability to continue driving progress. There are numerous opportunities for expansion, especially in opening more locations and improving product offerings. Regarding inventory, we wrapped up fiscal '23 with a high growth rate, but our inventory turns were stable at around three, which is good for us. The current inventory situation is healthy with minimal aged stock. We're holding about $175 million in inventory that we know will have demand in fiscal '24, rather than selling it off at low prices in the latter half of fiscal '23. We are comfortable with this decision, especially since we plan to utilize our outlet stores more effectively. We expect inventory levels in the market to be higher in Q1 and Q2, normalize in Q3, and by Q4, we anticipate a year-over-year inventory reduction of about 13% to 14%. This positions us well for efficient operations in fiscal '25.

And our next question comes from Bob Drbul from Guggenheim.

Stephanie, welcome. Best of luck. I just had a question for you, and then I have a follow-up for Kevin, if you’re still there. Besides the Chief Commercial Officer, can you just talk about any hiring priorities that you're focused on hiring targets, the needs in terms of the team that you really see besides the Chief Commercial Officer?

Sure. Good morning, Bob. It's great to be with you. The top priority we have right now is filling the Chief Consumer Officer position, and we have an excellent group of candidates lined up, with hopes to fill this role in the coming months. We're also searching for a Chief Communications Officer since marketing and communications are crucial in how we convey our story to athletes, consumers, and other stakeholders. These are two key roles that I'm actively searching for in my leadership team. Additionally, I'm delving into identifying further needs on our team. I've only been here for about two and a half months, so I'm excited to have all these direct reports during this interim phase. Having the head of brand marketing, sports marketing, digital data, and analytics report directly to me allows me to engage deeply with the details and determine what additional talents and capabilities we require, particularly in that area. Finally, talent is a critical area for us, and we're also looking to bring in outside expertise to assist with collaborations and similar projects. It's still early for me to fully grasp our needs in this domain, but it is definitely a significant focus for me.

Yes. The Warriors are down 3:1, and I wonder if you think they can make a comeback. We're actually creating a new superpower T-shirt for Stephen to wear underneath his uniform, along with some new sneakers. It’s exciting to see both Joel and Stephen play; it’s extraordinary. We're all eager for those amazing moments that seem impossible, but it should be thrilling for both the Warriors and the fans. We're with you.

And our next question comes from Brian Nagel from Oppenheimer.

Stephanie, welcome. My first question is about the new operating plan, the PTH 3. We have your guidance, and you mentioned in response to the previous question some of the new hires you're considering. As we think about this repositioning of the business, do you anticipate significant investment in that area? Is there a need to keep improving the core, or is it more about making process changes at Under Armour?

Well, I think we need both over time, both investment and then anything is always about people, process and systems, right? And so there is a talent element to what we're going to be pulling off with PTH 3. There is a system and process piece of it, and that will require investment over time. As Dave mentioned in his prepared remarks, we're laser-focused on expense control and simplifying and optimizing our cost structure. And as we do that and particularly in the short term, what it's going to allow us to do is redeploy resources against our top priorities, which links back to my plan on focus. So keeping our costs very much in line with where they should be. But I do think a lot of the things that we're going to do over the years ahead will require investment. I mean, I'll use a real-life example. We have a lot of work to do on our website and our app. I have a real vision for where we're going to take our website and our app. We've made some progress, improve things like site speed and product spec pages, more kind of the way the site works from a more tactical standpoint, but I have a much bigger vision of where we can take it. And it should be the most premium way we can bring our brand to the world. So things like investing in our digital assets will be a focus for us. So again, there are many more examples, but that's the one that comes to mind right away. But again, it is about talent, it's about investment in systems and it's about process.

And Brian, this is Dave. I would maybe just tack on a little bit there, just relative to cost structure and investments. I think we've proven that we've done a lot of work to be able to be more nimble from how we spend and where we invest and the leverage that we showed in fiscal '23. And you can see with the outlook for fiscal '24 that we're actually not showing really much leverage for fiscal '24. And that's primarily because of a few reasons. We do need to invest in a few of these areas, as Stephanie mentioned. And absolutely, we're going to be pressuring certain areas. And with that nimbleness, we're able to do so better than we have before. But we're also going to be pouring more into the areas that Stephanie mentioned or PTH 3 initiatives. So that's really one of the aspects that goes into the outlook that we've provided.

That's very helpful. And then a follow-up, just with regard to inventories, so as we're hearing, again, a big component of this that the PTH 3 plan is a new product, better product. So is there really thought then with inventory still being elevated to more aggressively clearing out the product you have now in the near term before this new product is introduced?

Yes, to a degree, Brian. I mean, we started that in Q4. You saw us overdrive on revenue and at the detriment of gross margin because we took some of those opportunities in Q4. And as you think about our outlook for gross margin for fiscal '24, especially the first half, it has some of that expectation built in there as well. But at the end of the day, I think as a reminder, even though our inventory growth rate seems fairly high, it's off of a very lean base. Therefore, when you look at the actual composition of our inventory right now, it is very healthy. There's not very much old or inactive SKUs. So our ability to be able to move through that fairly well and stay in that 3% to 4% mix range of off-price to normal sales, we feel very comfortable with that. So again, we will work through, and we'll get into an even better place than we are now. But we're very confident in the process and the tools we have laid out to be able to do that and then really be able to run into fiscal '25 with higher growth and also with a smarter inventory build.

And our next question comes from Laurent Vasilescu with BNB Barbas.

Dave, I wanted to follow up on your comments about first quarter revenues being down in the low to mid-single digits, given the challenging U.S. market. Could you clarify how much North America is expected to decline in the first quarter? Additionally, you mentioned that overall revenues are expected to show sequential improvement as the year goes on. Should we expect that the second quarter will be the turning point, or is that more likely to happen in the second half of the year?

Yes, I guess a couple of things there. Yes, Q1 is going to be our most pressured revenue quarter. And when we think about that, that is going to be driven primarily by North America and primarily by wholesale within North America. And a lot of that has to do with a fairly cautious order book coming in from wholesale partners based on the levels of inventory that they were carrying towards the back half of our fiscal '23 and as we go into this year. So that's a big piece that's at play. We do see that or anticipate that, that is going to start to work its way out as we get further into our Q2 and then even more so by Q3. So we do see that Q1 is going to be the most challenged quarter for North America and as the biggest region, therefore, the most challenged quarter for global Under Armour. And then we do see Q2 being the turning point back to growth, and we're excited to be able to keep driving forward from there. I think also, you'll see that with some of the pressures with wholesale buildup of inventory, you're going to see our direct-to-consumer outperform a little bit versus wholesale as we go through this year as well, which is something that we're completely fine with. We control the brand very well there, great display of all the different products and breadth and a place that we can start to shine relative to more and more curation around Sportstyle as we move forward.

That's very helpful, David. And then maybe as a follow-up, I think you called out for international to grow mid-single-digit rate for this year. APAC is about 40% of your international business. Obviously, China is reopening. Can you just maybe unpack a little bit more why international is sequentially slow? And then just a quick follow-up as well. CapEx spend is meaningfully up for this year $250 million to $270 million. Is that driven by the new HQ? Or are you also anticipating new store growth for this year?

Yes. I think when we think about APAC, again, excited about what the team was able to drive through in fiscal '23. Keep in mind, Q4 of fiscal '23 for APAC had some over-index benefits from comping the China COVID bigger issues a year prior, but also kind of the rebound out of the lockdowns in Q4. So we wouldn't necessarily expect that level of growth to continue into fiscal '24, but definitely a healthy growth, especially in China, but really in all parts, Southern APAC, South Korea, et cetera. For us, though, we do look at the overall picture there. And there are still some heavy levels of inventory there as well. There's a lot of brands that have been closing doors. There's a lot of brands that have been really pushing through a lot of excess inventory more so than we have. And so we've got to be a little bit careful with what that looks like and how that impacts Under Armour. So obviously, we hope that we can be able to overdrive that, but we think we're planning prudently in this outlook. But when you think about CapEx, you are right. There is a larger increase in CapEx in fiscal '24 planned. Some of that is store growth around the world on an operated store growth. Some of that is also investing in e-commerce as Stephanie had mentioned, whether it be in the loyalty program, whether it be in further site speed, et cetera. But then, yes, there is a portion of that that is the build-out of our headquarters here in Baltimore, which is just going to be a magnificent place to show the brand and feel the energy of Under Armour with the track and field and the new teammate headquarter building. So that is a piece of it. However, we still plan and will manage CapEx within that 3% to 5% range of revenue, even including the headquarter build-out. I think we're doing a great job of prioritizing there. We're certainly not holding back on driving into the revenue-generating aspects even on the IT front as we're investing in end-to-end planning, we're investing in retail POS, PLM system, transportation management, so a lot of great things that will continue to enable us more so in fiscal '25 as they're actually live and really working to our benefit. So a lot of exciting things that we're jumping into there.

And our next question comes from Matthew Boss from JPMorgan. This is our last question. Again, this is our last question from Matthew Boss.

So Stephanie, you cited fiscal '24 as a year of building the brand. And then fiscal '25 is the opportunity to return to growth in North America. So maybe 2 questions. How do you view overall health of the brand today? And then as you've sized up the opportunities, what provides confidence in sustainable North American growth from here, or what is the material change in structure that you're really putting in place?

I'll start by discussing the current health of the brand. As mentioned in our prepared remarks and in some of Kevin's responses, we are performing very strongly in the performance category. Our base business is solid at the good level of the product pyramid, but we need to improve and strengthen our presence in the better and best segments. Consistency in our marketing and distribution is crucial. While we've faced challenges, there have been areas where we've excelled, such as with HeatGear, ColdGear, and compression. Recently, Kevin highlighted SlipSpeed, which exemplifies our success when we effectively manage product, price, place, and promotion. The brand is in a good position performance-wise, but we must focus on growth in the higher segments. Regarding my confidence in our growth for fiscal year '25, I am very optimistic. We have established all the essential elements for growth. Our strong foundation in performance puts us in a favorable position compared to being a sportstyle or athleisure brand trying to pivot into performance. Building credibility in performance has taken us 25 years of hard work. I am particularly excited about the potential for significant growth in footwear and women's categories, which currently have relatively low performance numbers. Additionally, we are making investments in talent and systems, which will support our goals. I'm very optimistic about our future in 2024, as it will be a critical year for further solidifying our growth foundation.

And I am showing no further questions.

Great. Thank you, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.