Under Armour, Inc. (UA) Q2 2024 Earnings Call Transcript

Good morning and welcome to Under Armour's Q2 2024 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation there will be an opportunity to ask questions. Please be advised that today's call is being recorded. I would now turn the call over to Lance Allega, Senior Vice President of Investment Relations and Corporate Development. Please go ahead.

Good morning and welcome to Under Armour's second quarter fiscal 2024 earnings conference call. Today's event is being recorded for replay. Joining us on today's call will be Under Armour President and CEO, Stephanie Linnartz; and CFO, Dave Bergman. Our remarks today will contain certain forward-looking statements that reflect Under Armour’s management's current view of our business as of November 8, 2023. These statements may include projections for our business at the present and in future quarters and fiscal years. Forward-looking statements are not guarantees of future business performance and our actual results may differ materially from those expressed or implied in the views provided today. Statements made are subject to risks and other uncertainties detailed in this morning's press release and documents filed regularly with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Today's discussion may also include the use of non-GAAP references. Under Armour believes these measures provide investors with a helpful perspective on underlying business trends. When applicable, these measures are reconciled to the most appropriate U.S. GAAP measures, reconciliations of which, along with other pertinent information can be found in the morning's press release and at about underarmour.com. With that, I'll turn the call over to Stephanie.

Thank you, Lance, and good morning to everyone joining today's call. I'm pleased that our second quarter results, particularly our profitability, were better-than-expected. I'm also encouraged by the progress we're making in strengthening the parts of our business that will set us up for greater success over the long-term. That said, we did update our full-year outlook to reflect additional top-line pressures for the balance of fiscal ‘24, mainly due to our North American business, which we'll address later in this call. First, though, I'd like to discuss the strategic levers we are exploring to put us back onto a path of greater returns in the years ahead. Over the past three months, our team has focused on assessing the opportunities and the challenges we face as a brand and as a company. Through multiple workstreams across strategic, operational, and financial lenses, we continue to dig into our product pipeline, distribution strategy, operating model, and the financial discipline necessary to drive a more consistent trajectory for our future. Our team and the leadership responsible for making this happen are central to these efforts. In this respect, our new Chief Consumer Officer, Jim Dausch, has hit the ground running, including in-depth market visits around North America and EMEA to assess directly what is working and where opportunities exist for us to show up even better for our athletes and wholesale partners. With work underway to improve our consumer-facing functions by prioritizing efforts to advance our digital business, I am excited by the possibilities he has identified to optimize our marketing spend to ensure the highest possible returns. Elsewhere in the organization, we're putting the right people in place to pursue best-in-class operational practices. Last month, we announced Shawn Curran as our new Chief Supply Chain Officer. After a 30-plus-year career at The Gap, Shawn has responsibility for end-to-end planning, product sourcing and manufacturing, vendor management, distribution, and logistics. We are thrilled to add Shawn’s experience and perspective to UA as we strive to gain a greater edge in our supply chain. Turning to our strategic Protect This House 3 or PTH 3 construct, as we mentioned on our last call, fiscal ‘24 is a year of building front Armour. It's a year of assessment, resetting, and simplifying our approach to balance the short-term optimization and profitability of our business with long-term brand building and the ability to deliver more consistent top-line growth. Within this construct, we are confident that driving global brand heat and delivering elevated products and design will combine holistically over the long run to drive sales growth in the U.S., while maintaining momentum in our key international markets. To touch on some progress, I'll start with driving brand heat. As a brand rooted in athletic performance with a North Star of team sports, a well-deserved congratulations goes to the Las Vegas Aces and UA Athlete Kelsey Plum, who wore the Curry One Retro MVP shoes as they cemented their place in WNBA history by winning their second consecutive championship. This year's MLB season also gave us highlights, including Bryce Harper with one of his best-ever post-seasons powered by his signature Harper 8 Cleats. And congratulations to our hometown Baltimore Orioles for their best season in decades, including the AL East with UA Athletes Gunnar Henderson and Ryan Mountcastle helping lead the charge. In running, following her win at last year's New York City Marathon, Sharon Ledecky placed third in this year's race, only 10 seconds out of first, wearing our UA Flow Velocity Elite II running shoes, demonstrating the consistent footwear innovation we're bringing to the elite levels of road racing. Another highlight during the quarter was a marketing activation featuring one of the most talented wide receivers in American football, Justin Jefferson. The campaign blends athletic excellence, music, and culture, targeting 16 to 24-year-old varsity team sports athletes. In the spots, Justin is featured wearing the unstoppable fleece, full zip, and joggers, and the recently launched Jet Fuel Slip Speed Trainer. The best part was Justin's involvement with the development process, demonstrating how we're marrying technical innovation and style to translate performance and individual expression into culturally relevant products. And the response has been great, with a significant improvement in web and store traffic and revenue metrics exceeding past activations. Our relationship with Notre Dame also exemplifies a deeper collaboration with our athletes and teams to develop new products and create brand heat moments. Last month, we launched a limited edition UA coaches collection for Coach Marcus Freeman. From hoodies to crew necks, fans can now access Coach Freeman's looks he wears on game day. And quarterback Sam Hartman, who has hundreds of thousands of social media followers, posted a day in his life, showing the versatility of our slip-speed training shoe. We also drove brand heat in EMEA with the start of the European Global Football season, including activations across TV, digital, and social media, as well as our first outdoor placements in London, Madrid, and Barcelona. With Protect This House as a backdrop, more than 1,600 retail and wholesale doors in the region showed how Under Armour products can make you better, integrating our famous base layer products, our Magnetico Elite football boots, and HOVR Machina running shoes to help athletes in their journey to compete. Each of these brand heat moments during the quarter signals a significant evolution in our approach to marketing, which is much more focused on capitalizing on our assets to generate returns via product marketing rather than simply leaning into large-scale anthemic campaigns. By activating more consistently across the products and franchises that matter, I am confident we will continue to drive improved brand affinity. Finally, we are driving a new approach to our digital and social media strategy, yielding improved performance metrics across our channels with strong double-digit growth in followers, shares, likes, and reach across our Instagram accounts, all leading indicators that our strategies are working. And on TikTok, which continues to be our fastest-growing platform, we've seen significant increases in followers, engagements, and views on the Under Armour channel. Next is our second priority of delivering elevated design and products, emphasizing our footwear, sports style, and women's businesses. Strengthening leadership in this area, we recently announced John Varvatos as our Chief Design Officer. He has quickly added leadership maturity, direction, and strength to our design organization, bringing a fresh perspective and helping us elevate our approach to our athletes' lives outside the gym. With the search for a new head of product underway, a new head of design, and using sneaker and branding experts to add horsepower to the team, it's about getting the right talent in the right place to maximize our innovation and marketing engines to break through at the intersection of our style and design meet performance. Above all else, our single most significant growth opportunity is footwear. And while we have a solid foundation in performance footwear and aim to grow in sports style, at about $1.5 billion in a hypercompetitive space, we have yet to capitalize on our full potential. We have started the work to evolve our footwear strategy, and I am confident that we are putting together the right components to scale this area of our business more aggressively. But this is a multi-year journey that will take time. It's also evident that we will need to invest more in footwear to support our long-term growth expectations. Therein lies the challenge, balancing productivity and profitability, which as we've demonstrated, remains a priority for us to deliver to shareholders in the near-term. In this respect, we are continuing to dig into our product and marketing cost structures to determine how to best prioritize investments to the areas of highest return and deprioritize areas that may not be as productive for the brand. In this respect, we are assessing the productivity of SKUs, styles, categories, sports marketing assets, and distribution channels to determine the most optimal path forward. Back to the quarter, we have a lot of newness to be excited about this fall, holiday season, and into next year. Starting with the most innovative shoe thus far in the Curry portfolio, the Curry 11 Future Curry dropped on October 13th. The first iteration of the Curry 11 speaks to Stefan's desire to inspire the next generation of players. It features UA Warp upper technology and dual-density UA flow cushioning for premium comfort and control to support his demanding dynamic style of play. As we continue to grow the Curry brand, we are excited to bring more talent under the Curry umbrella, including our recent signing of rising star De'Aaron Fox. Marking the first time an active NBA athlete brand has added an active NBA player to the portfolio, we're working on a Curry brand signature De'Aaron shoe that will embody what he brings to the game. Turning to our UA Slip Speed platform, we launched Slip Speed Youth footwear a few weeks ago. Scaled down, so all ages can enjoy the versatility of this industry-leading innovation, Slip Speed Youth is only available in our direct channels and DICK'S Sporting Goods. Next up for the platform will be a Curry-Bruce Lee collaboration due out later this month and then our Slip Speed Running Shoe in February, just in time for the start of the 2024 running season. So more drops, more energy, and, of course, more versatility to come. Rounding out our product highlights, in our sports style and women's businesses, we launched several better and best offerings for her, including premium products from head to toe that will keep her warm and comfortable, from the locker room and field to out on the town after the big game. Here, it's all about premium executions of fit, fabric, and finish infused with the swagger and style our athletes desire. Starting on top, our Unstoppable Fleece collection has all-day comfort and four-way stretch material with just enough warmth to keep her ready for anything. On the bottom, our Meridian Cold Weather leggings take our super soft and stretchy performance knit fabric to the next level by adding extra thickness for warmth. Her outfit is complete with our retro sportswear inspired Forge 96 shoes, the ultimate expression of comfort and style. Wrapping up our product update, although we know it will take time for our focus on elevated design to deliver expanded, better and best level collections, we are not standing still. While re-merchandising existing products, we are selectively infusing limited-run releases and capsules with an expectation that greater critical mass will arrive towards the end of next year. This brings me to our third strategic priority, which is to drive U.S. sales. During the second quarter, our North American business was down 2%, which was in line with our expectations. However, when we look towards the balance of the year, we expect a further contraction in North America, mainly due to ongoing pressures in our wholesale business, which have gotten tougher since our last call. Several forces are at play here, including inflation and consumer confidence, normalizing inventory levels amid still broad promotions, and overall softness in our future wholesale order book. As a result, we lowered our fiscal ‘24 revenue outlook to reflect these challenges. Amid these conditions, we are, however, making progress on our premium wholesale distribution strategy in North America. Leveraging the strength of key footwear franchises, including Curry, our mall penetration is expected to be up more than 40% by the end of fiscal ‘24. This is an early win, and I'm confident that as we drive brand heat and deliver better products, we will continue to gain premium shelf space. Shifting to our direct-to-consumer business, our U.S. loyalty program, UA Rewards, which went live in late July, has exceeded our initial expectations. In October, we made the program available in our retail stores, adding to our momentum. Having surpassed 1 million members in our first few months, we see more robust engagement amongst our members. So far, UA Rewards members are almost twice as likely to make a repeat purchase and return to the brand within 90 days. So early points on the board in building greater brand love and loyalty. As a cornerstone of our consumer engagement strategy, we are confident that UA Rewards will inspire better sales conversion as we continue to scale the program. In concert with our loyalty program, we are investing resources in our digital platforms, including our website and our mobile app. Most of our consumers start their shopping journey on social media, our website, and our app. So it's critical that we improve this experience. Within this context, our teams are working hard to accelerate our e-commerce business by enhancing our search and browse capabilities, upgrading our size and fit guides, adding athlete shop the look sections, and increasing mobile speed. All enhancements that we know will deliver a more premium experience. I understand what a world-class digital offering looks like, and this team is strengthening the foundation for our long-term success. Turning to our international business, we continue to maintain momentum in EMEA and APAC. EMEA was our highest growth region during the quarter, reflecting solid growth in our DTC and wholesale channels. In July, we opened our fourth London Brand House on Oxford Street, marking an exciting milestone as we expand our presence in the U.K. and drive greater brand affinity across this important market. Our APAC business also grew in the second quarter, driven by solid performances in our wholesale and DTC channels. Over a broad array of different countries and cultures, our focus is on customizing our product and marketing strategies with the local athlete in line and leveraging the success of our loyalty program. With 7.5 million members in our APAC loyalty program, we're now piloting franchise partner implementation, and our members are spending almost 30% more than non-members. Encouragingly, there are many learnings that we can leverage from APAC to make our U.S. loyalty program even better. In summary, at the halfway mark of fiscal ‘24, we are progressing against our PTH 3 priorities. Acknowledging that this is a multi-year journey with much work ahead of us, most immediately we are focused on operational efficiencies and controlling costs to ensure we remain responsible stewards of the business. With our continued strategic evolution and a renewed mindset, I'm confident that we are building a stronger Under Armour with brand heat, more premium product offerings to inspire athletes worldwide, and ultimately a more robust profitable growth story in the long-term. With that, I will hand it over to Dave.

Thanks, Stephanie. Diving right in, our second quarter revenue was flat versus the prior year at $1.6 billion, which was in line with our outlook. Excluding the impact of foreign currency, revenue was down 1%. On a regional basis, North American revenue declined by 2% coming in at $991 million, which was in line with our expectations. Wholesale was down at about the same rate due to challenges in our full-price business, partially offset by growth related to inventory management strategies, which included normalization of our off-price channel mix from low levels last year. Our North American DTC business was down slightly during the quarter. EMEA revenue was up 9% to $287 million, or up 4% on a currency-neutral basis. This was driven by solid growth in our DTC business related to new store openings and a strong underlying comp business. Our EMEA wholesale business was also up during the quarter. APAC revenue was up 3% to $232 million, or up 7% on a currency-neutral basis. Despite the dynamic environment, we saw growth in our wholesale and DTC channels. China was a leading contributor to second quarter growth. And finally, our Latin American business was down 8% to $54 million in the quarter, or down 19% on a currency-neutral basis due to the timing of distributor orders. From a channel perspective, wholesale revenue was down 1% to $940 million, with decreases in our distributor business partially offset by higher sales to the off-price channel. Our full-price business was flat compared to the prior year. Direct consumer revenue increased by 3% to $596 million, due to a 4% increase in our own and operated store revenue and a 2% increase in our e-commerce business. And licensing revenue decreased 14% in the quarter to $29 million, driven by declines in our North American and Japanese licensee partners. By product type, apparel revenue was up 3%, driven primarily by growth in our train and golf businesses. Following several quarters of solid growth, footwear was down 7%, driven primarily by softness in our team sports and run categories. Within team sports, we did see strong growth in basketball. As a reminder, during the second quarter of fiscal ‘23, a significant amount of footwear products that were previously delayed due to COVID-related factory constraints made their way into the wholesale channel. For the second half of fiscal ‘24, we expect footwear to be relatively flat as we comp against last year's 26% growth in the second half. And finally, our accessories business was up 3%. Moving down the P&L, gross margin was up 260 basis points to 48% during the second quarter, driven by approximately 410 basis points of supply chain benefits mainly due to lower freight costs. These tailwinds were better than our previous expectation and were responsible for most of the overdrive on gross margin. These benefits were partially offset by 120 basis points of unfavorable pricing due to deeper discounts in our sales to the off-price channel and our proactive strategy to reduce inventory through our factory houses. And about 20 basis points of unfavorable channel mix related to a higher percentage of off-price sales. In the second quarter, SG&A expenses were up 2% to $606 million driven by higher marketing costs. Next, operating income was $146 million, which was above our outlook of $115 million to $135 million. After tax, we realized net income of $110 million, or $0.24 of diluted earnings per share, coming in above our outlook of $0.18 to $0.21 for the second quarter. Now, moving on to the balance sheet. At the end of the second quarter, our inventory was up 6% to $1.1 billion. This was in line with our outlook, and as a reminder, we anticipate consecutive declines in Q3 and Q4 to end the year down at a mid- to high-teen percentage rate, or about $1 billion. As our levels normalize, we feel very good about the quality and composition of the inventory we have on hand. Rounding out the quarter, our cash and cash equivalents were $656 million, and we had no borrowings under our $1.1 billion revolving credit facility. And finally, we repurchased $50 million of Class C common stock during the second quarter, thus retiring 7.6 million previously outstanding shares. Under our two-year $500 million program, we have repurchased $475 million or about 42.5 million shares of Class C stock. Next, let's turn to our fiscal ‘24 outlook. As Stephanie mentioned, several pressures impacting our North American business have persisted longer and are tougher since our last call. The macroeconomic environment remains uncertain with continued inflation, mixed consumer confidence, and the effects of wholesale channel de-stocking having led to softness in our future order books. And while we're not seeing significant cancellations, we don't anticipate as many at-once or automatic replenishment orders as initially planned, so we've revised our full-year outlook expectations. Accordingly, we now expect revenue to be down 2% to 4% versus our prior outlook of flat to up slightly. Looking down into our full-year revenue outlook, we're now expecting North America revenue to be down 5% to 7% versus the previous expectation of down 3% to 4%. And there is no change to the expectation that our international business should be up at a low double-digit rate. Next, given lower freight and product costs, we now expect gross margin to be up 100 basis points to 125 basis points versus our previous expectation of up 25 basis points to 75 basis points. Moving to SG&A, we now expect our expenses to be flat to down slightly versus our prior outlook of flat to up slightly. We remain committed to ensuring our investment dollars are optimized to the areas with the highest returns while proactively identifying areas to manage expenses appropriately. That said, our operating income outlook of $310 million to $330 million and diluted earnings per share of $0.47 to $0.51 remain unchanged. Turning to color on the second-half of fiscal ‘24, we anticipate revenue to decline at a mid-single-digit rate in the third quarter due to softer wholesale orders in North America, partially offset by continued growth in our DTC business. This implies that our fourth quarter revenue will be down about 3% to 5% versus the prior year. Next, we expect gross margin to be flat to up slightly in the third quarter. And as a reminder, this is the smallest quarterly gross margin improvement this year, due to anticipated actions to manage our inventory down further. As we finish the year, we expect an expansion of around 200 basis points in the fourth quarter due to supply chain benefits from product costs and an easy comparison related to elevated promotions in last year's fourth quarter. Bringing this to the bottom line, we expect third quarter operating income to reach approximately $65 million to $75 million and $0.09 to $0.11 of diluted earnings per share. This implies a fourth quarter operating income of about $75 million to $85 million and $0.12 to $0.14 of diluted earnings per share. To wrap it up, thanks to the outstanding efforts of our team, we are progressing on our PTH 3 priorities and at the same time taking a balanced approach to mitigate near-term pressures. We are relentlessly focused on driving brand heat and delivering elevated design and products while driving operational efficiencies and controlling costs. We are confident this will foster sustainable, profitable growth over the long-term. With that, I'll return it to the operator so we can take your questions. Thank you.

We will now begin the question-and-answer session. Our first question will come from Jay Sole with UBS. You may now go ahead.

Great, thank you so much. Two-part question. Stephanie, for you, just as you continue to get deeper into the business, I mean, what have you learned over the last 90 days in terms of where you see some of the biggest opportunities and what gets you most excited about being able to drive sales growth going forward? And then secondly for Dave, can you talk about the gross margin in Q2 and then also your guidance for Q3? What were some of the puts and takes in Q2 and some of what those are in Q3 to explain, why you're seeing the gross margin that you're seeing in Q3? Thank you.

Good morning, Jay. Thank you for your question. I'm excited about many developments from the past quarter. We’re seeing real early successes from our PTH 3 strategy. On the global brand front, we’re rethinking our marketing approach. As I mentioned earlier, we're focusing less on traditional top-of-funnel marketing campaigns and more on utilizing our strong assets like Steph Curry, Justin Jefferson, Sam Hartman, and Kelsey Plum, while increasing our product marketing efforts. We're seeing promising results in social media marketing as well, aiming to connect with 16 to 24-year-old team sport varsity athletes. This has led to increased engagement in terms of likes and shares. Regarding product marketing, we're clearly promoting items like Flip Speed, the Magnetico football boot, and our EMEA base layer. I’m also thrilled that John Varvatos has joined us. He started in September and is fostering a design-driven culture in the company. Although our product development takes about 15 to 18 months, we will begin to see his influence in the latter part of next year. However, he is already impacting current collections. We have exciting products coming, including a new Curry Bruce Lee collaboration and the Slip Speed line. Our unstoppable collection and Meridian collection are exceptional and stand out against competitors. Though we are not satisfied with the pace of sales growth in the U.S., I'm pleased with the launch of our loyalty program, which started in late July and already has over a million members. Engagement is key here. This loyalty platform also provides valuable data on our consumers, enabling targeted marketing and personalization. We’re also making progress with our expansion into premium retail, aiming for a 40% higher mall presence by the end of fiscal year ‘24. Overall, we're seeing early successes in the three pillars of Protect This House 3: enhancing global brand presence, improving our marketing and product design, and increasing U.S. sales. We’re off to a promising start.

And Jay, relative to the gross margin comment, for Q2, it was really two main things. The big positive was really the supply chain impacts, mainly around the lower ocean freight rates and costs there, but also less utilization of air freight as we're getting more caught up there versus last year from a supply chain perspective. So freight costs was a really, really big favorability there year-over-year. And then that was partially offset by some unfavorable pricing relative to selling into the third-party off-price channel. The pricing into that channel started to get a little bit tougher in Q4 of last year, and we've seen that kind of continue this year. And then also we've been a little bit more promotional relative to our direct-to-consumer business as we move through Q2 as well. So those partially offset the big favorability on the freight costs in Q2. When you flip to Q3, it's a little bit of a different story. We still expect tailwinds relative to the freight cost. But we also continue to see lower pricing on our sales into the off-price channel. And also we're going to be doing a little bit higher volume in Q3. We're really using Q3 to move through a fair amount of inventory. The other piece of that is that relative to our outlet stores, we've reduced the mix of our MFO or Made For Outlet to be able to also help us move more excess. And so that's also a year-over-year gross margin headwind. So there's a couple more kind of offsets going on in Q3 versus Q2, but a lot of it has to do with really just getting ahead and moving forward relative to our inventory position. So we feel good about what we're looking at there. And I think the last thing for Q3 is, as we come into this holiday period, we are being careful relative to a promotional environment and what that's going to look like in the holidays. We want to make sure that we're going to be prepared for that as well. So we feel like we're in a good spot.

Got it. Thank you so much.

Of course.

Our next question will come from Simeon Siegel with BMO Capital Markets. You may now go ahead.

Thanks, everyone. Good morning. Hope you and your family are doing okay in these challenging times. So how are you guys thinking about go-forward footwear performance, just given the excitement you talked about with the innovations and the drops, so how we should think about the progression there and timing? Maybe similar question around domestic store expansion as well, so how we should be thinking about what you're thinking about store opportunities there? Thank you.

Absolutely, and good morning, Simeon. Thanks for your question. I believe the first part was on footwear. Footwear is without a doubt the single most significant long-term growth opportunity for us. And I just spent some time with our footwear team out in Portland, Oregon, and was very encouraged with the innovation that I was seeing, the lean into sports style. There's some great stuff going on with our team out there. John Varvatos has spent quite a bit of time out there as well. And, you know, we're seeing green shoots and positive results with Curry, with our Forge, which is kind of a retro shoe that's more sports style, aberration. I spoke about Slip Speed quite a bit. Slip Speed really is a wonderful example of us driving brand heat and getting some innovation momentum. You know, we're selling a non-signature shoe at $150, and it's our most reviewed sneaker on the site with a 93% recommendation rate. You know, as I mentioned, we launched Youth a few weeks ago, a running expression coming out in February of next year. So excited with the traction we're getting in terms of footwear. As it relates to the second quarter, Dave touched on this, but demand was softer than we expected due to general weakness in the North American wholesale environment. And he talked about some of the tougher comps that we saw in the second quarter. And that for the year footwear will be flat. But the broader opportunity is significant. I think it goes back to some of my comments on the product pipeline. It takes 15 to 18 months of lead time to get things out the other end. So we are working very, very hard on our footwear, and it's just going to take some time to get even more traction in the space. So a big, big area of focus for us. On your question related to domestic store opportunities, there is a real opportunity there. You know, we are working on a new brand house concept that is our full-priced store. And there's a real opportunity, particularly here in the United States, to open more full-priced physical retail. We have 17 brand houses today, and we are aiming to open more of them in the years ahead so we can get that outlet to full-price store mix right. We're a little off kilter right now with about a 90%, 10% mix, and we want to get that in better shape. I think physical retail is also so important, because we know it's not just about driving sales and profitability from that box; it's about the ecosystem around the store, when you have a fabulous brand house at a great location that drives e-commerce sales and also drives sales in our wholesale partner. So we think about it from an ecosystem perspective too. So lots of great work underway. I mean, we need to give people a reason to walk over that lease line into our store because they're going to experience something just really fabulous when they go to an Under Armour store and we're hard at work at that. So I'm excited with the progress we're making on building out our physical retail, particularly a big focus here in the United States. So more to come on that front too.

Great. Thanks a lot. Best of luck for the rest of the year.

Thank you.

Thanks.

Next question will come from Jim Duffy with Stifel. You may now go ahead.

Well, thank you. Good morning. I'm hoping for some additional perspective on the U.S. wholesale environment looking out to 2024. Can you speak to shelf space expectations in 2024? I know you mentioned some gains in the mall-based channels. Is that with both footwear and apparel? And are you seeing any notable changes in North American shelf space elsewhere that might be an offset to those gains? Thanks.

Yes, Jim, this is Dave. North America, we have talked obviously a lot about some of the macro impacts there and some conservatism we're seeing from accounts relative to the order books. And obviously the impacts that we're speaking to with our revision to Q3, Q4 back half outlook. We are making some progress relative to the mall business to your point, and we are excited about that. That is relative to new spaces with new partners, but it's going to take time to really develop that into a more robust and meaningful volume of revenue. And a lot of that has to do with footwear, and a lot of that has to do with sports style, both of which as Stephanie mentioned, we are hard at work on. And then we continue to edit relative to our wholesale segmentation. We want to continue to improve there and continue to get cleaner and push the envelope further there. We've done a lot of work there, but we still got a fair amount to go. And also just from a high-low perspective and just overall premium distribution, we want to continue to be able to expand more at the higher end and get into a little bit more specialty, et cetera. So a lot of different things that are in play. We are excited about some of those initial relationships, but again, from a volume perspective, it will take a little bit of time relative to the product pipeline that Stephanie mentioned.

Understood. Thanks. And then you maintain the guide for the international business as you look through your spring order book. Is there any evidence that economic challenges are catching up in markets that have been resilient for you like Western Europe?

Yes, I mean I think we're really bullish on our international markets. Both APAC and EMEA have been doing well for us. They continue with some really solid momentum there. I think that we also need to think about that even though there are some macro pressures out there, we do have a little bit more non-comp business as we open more doors internationally in the back half of the year, which helps a little bit. And then within APAC, we've been talking more recently about moving to more local product design in China, and also relative to marketing development localized in China. And we're starting to see the benefits of that, and we see that starting to come into kind of the Q4 orders and business for APAC. And so we're excited about, how that could help continue to fuel their momentum within the APAC region.

Thank you, Dave.

Thanks, Jim.

Our next question will come from Laurent Vasilescu with BNP Paribas. You may now go ahead.

Good morning. Thank you very much for taking my question. Dave, I wanted to follow up on your point about international growth for the year, growing double-digits. If you could maybe potentially unpack that a little bit across the key markets, EMEA and APAC. Should we expect both regions to grow double-digits this year? Just the reason why I'm asking that question is because we did see a slowdown in APAC. I know, I recognize you mentioned that China did well, but maybe you can just give us some guardrails around that, those two regions?

Yes, I mean, both regions are, again, doing very well for us, and we expect solid growth within each of them. I wouldn't necessarily say that one is necessarily going to be outgrowing the other in any big way, because you also have some offsetting currency impacts. But they're both driving very well. I think that the opportunities that are there are still great for each of them. We're still fairly small in each of those two regions, especially if you think about our China business, compared to some of our competitors. So continued opportunity down the road for us, and we're excited about what those teams have been able to drive for us.

Very helpful. And then I think, Dave, last quarter you mentioned that we should expect inventories for the end of the year to be down, mid-teens to be around $1 billion. Is that still the case? And then maybe just kind of following up on Jay's question about the gross margin, that 410 basis points of supply chain benefit, can you maybe just kind of help us frame how that benefit evolves over the next two quarters in bp terms?

Yes, I mean we've been really excited about our progress on the inventory management strategies and what we have planned for the rest of the year. Some of that relates to, if you remember, we talked last year about doing a fair amount of pack and hold last year. So we packed away seasonless product with future demand instead of discounting those products last year when we would just need to buy them again this year. And so we're now selling that pack and hold product in the back half of this year which is one of the factors in our year-over-year inventory improvement. But then also we were pretty proactive with factory buy reductions when we saw some softness in the demand. So that's helped us this year with managing inventory as well. And then we've also been leveraging our outlet stores more than in the past, so doing more movement of our excess product through our outlets in a brand-controlled way and less MFO through our outlets. So all those things are coming together to be able to drive our inventory into a really good spot. So we're expecting inventory to be down year-over-year as we hit 12/31 and then, mid- to high-teens down as we get through the end of Q4. When we look at gross margin, a couple different things that are coming into play. So yes, in Q2, huge benefit there on the supply chain side, mainly with the freight costs. When we think about Q3, still seeing a pretty big benefit relative to the freight costs. But then obviously I mentioned we're going to be pushing through a lot more inventory and so there's some offsets there relative to pricing and mix of third-party liquidation. And then as you step into Q4, the supply chain benefits will start to change a little bit in that the benefit of the year-over-year freight costs will start to become a little bit less of a factor as we start comping some of that improvement in Q4 of last year. But the other piece that starts coming into play that benefits Q4 is we've actually been working through a lot of better negotiations with our factory partners on product costs. So our sourcing team has done a phenomenal job working through that and we're going to start to see those product costing benefits come through starting in Q4 of this year. So that helps to be a tailwind as well in Q4 and gives us a little bit of an extra gross margin benefit there. And then the pricing impact actually starts to be slightly favorable for us in Q4. And what I mean by that is the third-party liquidation channel, the pricing got pretty tough in Q4 of last year. So now we're comping that in Q4 of this year. So it's not the headwind that it is in Q3 and prior. So that's really helping us out. And then also in Q4 of last year, we went pretty aggressive and deep from a discounting perspective within DTC. And we don't foresee having to go that deep in Q4 of this year as we believe that the market and inventory levels out there will start to normalize as we step into the next calendar year a little bit. So a couple different things going on there, but that's why gross margin in Q3 is a slight improvement versus Q4 and a larger improvement for us.

Our next question will come from Bob Drbul with Guggenheim. You may now go ahead.

Hi, good morning. Just got two questions. Stephanie, can you give us a bit on where you are focused on the women's business and what you see happening there? And I guess the second question is just a little bit more on pricing, sort of, progress that you're making on ASPs, but also some of the new products that you're bringing into market. Can you just give us an update on sort of where you think ASPs are growing with some of the new launches and maybe a little focus on slip speed? Thanks.

Sure, good morning, Bob. Thank you for your question. I'll begin with your inquiry about women's. As we've mentioned in previous calls, this area presents a significant opportunity for us, currently representing less than 25% of our sales, indicating potential for growth. Women's sales actually increased this quarter, and we are committed to succeeding in this segment by focusing on offering elevated footwear and sports style products. Despite the wholesale challenges we discussed, we experienced growth in Q2. Our short-term successes with women are particularly in bras and bottoms. Some of our higher-end collections, such as Unstoppable and Meridian, are performing well, but we acknowledge that there is more work to be done. The product team, along with John Varvatos, is dedicated to this initiative. Given the 15 to 18 month lead time in our product development process, we need more time to design, source, manufacture, and distribute products. Hence, we are intensely focused on this area. Equally important is our approach to marketing towards women. It's essential to not only have the right products but also to market them differently, ensuring our creative aligns with our female audience. Distribution plays a key role as well; moving towards more premium distribution will allow us to reach additional department stores and specialty boutiques. My perspective on women driving our business involves a comprehensive strategy encompassing product, place, price, and promotion, and we are actively working on this with encouraging early signs of progress.

And to your pricing point, we are absolutely working on driving higher ASPs. And that does get to, ties back to the point about more better and best product. We need to get our mix of high, low, and better equilibrium. And so we will be driving on better and best products that, of course, will have pricing implications. You mentioned Slip Speed, it’s a great example of a non-signature shoe. We're selling it at $150, and it's getting, again, fabulous reviews. We're also, as it relates to pricing, we're focused on our digital assets, in particular our website and our app. We're spending a lot of time not only making it more functionally easier for consumers, less friction, but figuring out a way to wean off some of the discounting on our website and our app. That must be a premium expression for the brand. So as we get that mix and better shape over time, that will drive up ASPs as well. So, I mean, there's many pieces moving parts here as we drive higher ASPs, but it is absolutely an area of focus for us across the board.

Our next question is from Matthew Boss with JP Morgan. You may now go ahead.

Great. Great, thanks. So Stephanie, you mentioned striking a balance between returning the brand to growth multi-year relative to the investments that may be needed. So maybe help us to think higher level about this interplay maybe as we think about next year or 2025? And just the timeline that you see as reasonable to return North America to revenue growth?

Thank you for the question, Matt. We’re currently navigating the challenge of balancing growth for the company while also identifying opportunities to improve our margins. I’m excited about some of our initial successes, but we are also aware that this year has presented challenges for top line growth. We are actively looking for ways to enhance cost efficiencies, particularly in our cost of goods sold. Dave mentioned some initiatives that will impact us more in the fourth quarter, particularly in collaboration with our vendors. We are closely examining SKU rationalization and exploring better segmentation to help drive average selling price expansion. At the same time, we need to prioritize our investments, focusing on demand creation efforts to return to growth while managing costs in areas that aren’t yielding sufficient returns. This balancing act involves finding both cost and operational efficiencies to strengthen our bottom line, while also seeking ways to reinvest in future business opportunities. Footwear represents a growth opportunity, but it will require investment to be successful. Another exciting area for us is the Curry business. I’ve had several productive meetings with Steph Curry, and he is highly engaged in our growth strategy. While basketball will remain central to the Curry brand, we also have promising new sports-style apparel launching, including De’Aaron Fox’s signature shoe. However, achieving this growth will necessitate investment. We are working diligently on this balance, and while we aren’t ready to discuss fiscal year 2025 and beyond yet, we believe we’re laying the groundwork for long-term growth.

That's great color. And then Dave, just how would you characterize health of the broader sportswear channel today? Maybe what are you seeing from promotional activity in the space relative to your expectations? And maybe just high level, could you just elaborate on the change in the wholesale backdrop relative to three months ago?

Sure. From what we're observing, the industry appears to be preparing for the holidays with a leaner inventory compared to last year, which is a positive sign. However, this does not necessarily mean that promotions will decrease since demand has softened somewhat due to broader economic conditions. Our outlook anticipates a return to normal by the spring of 2024, but the situation remains mixed and somewhat unstable. We also notice that some of our wholesale partners are being cautious in their purchasing decisions. We are closely monitoring this every day and are actively enhancing our relationships, products, and marketing strategies to take advantage of better conditions when they arise. What was the second question you had, Matt?

Just the overall promotional activity in the space, what you're seeing out there?

Yes, as I said, you know, it is fairly promotional still. It was turning pretty promotional in Q3 and Q4 of last year, and we're seeing that continue this year and we're planning for that. And that is fairly broad. I mean, obviously, North America I think we're seeing the most, but some of the other regions as well. And again, I don't or we don't foresee that to be changing a lot until we get further into our Q4 and further towards spring of next calendar year.

That's great color. Best of luck.

Thanks, Matt.

Thanks, Matt.

Our final question will come from Paul Lejuez with Citi. You may now go ahead.

Hey, thanks, guys. On the weaker wholesale channel, I'm curious if that was equally disappointing or has been equally disappointing in both the apparel and footwear side? And maybe if you could talk to sports style reception specifically. And also Steph, you mentioned deprioritizing certain things, curious what you might have in mind to help pay for some of what you want to prioritize? Thanks.

Good morning, Paul. I'll begin, and then Dave can provide additional insights on wholesale. The softness in wholesale has affected both apparel and footwear. Looking at the company overall, we anticipate flat performance in both categories for the year, but we have seen weakness in both areas. Regarding sports style, let me briefly explain that it represents the blend of performance and style. When we talk to athletes aged 16 to 24 involved in team sports—many of whom have teenagers—they may not use technical terms, but they want stylish products that look good on the field and can also be worn socially. This is the core of our focus. We believe in evolving our product offerings instead of making drastic changes. We currently have excellent sports style options and plan to introduce even better ones. Our first phase involves re-merchandising and re-marketing products to highlight non-active usage occasions. We've made significant progress on this in the last nine months, which is reflected in some of the social media statistics I shared earlier. These metrics are linked to our efforts in re-merchandising and re-marketing our existing sports style products. However, we do need new and improved products, which we expect to roll out toward the end of next year due to production lead times. In terms of where we'll seek savings or de-invest going forward, we are examining all areas, including sports marketing and costs across the profit and loss statement. Dave can elaborate further, but we are currently in the thick of evaluating where we can enhance profitability, drive growth, and identify areas where we may not be succeeding, allowing us to scale back and focus more resources on growing segments like sports style, footwear, and our women's line. Dave, would you like to add anything?

Yes, I mean, I would just say that over the past few years we've worked really hard to become more agile from a cost structure perspective. We certainly have more work to do there and we understand in continuing to dig into the areas of highest returns and kind of validate where our best investments are. But we've been pressuring down our costs appropriately, whether it be in our hiring or tightening up our marketing, prioritization, spending, reducing T&E, other areas of our costs. But to Stephanie's point, while doing that, we are trying to make sure, and we are investing in design talent, investing in e-comm relative to loyalty and site speed, investing from an end-to-end planning perspective, retail POS perspective, PLM system, etc. So a lot of enablers to growth and to also help fuel the brand are what we are freeing up dollars and putting money into. So it is kind of a continued balancing act there.

Thank you, guys. Good luck.

Thank you.

Thank you.

With that, we'll conclude Under Armour's second quarter fiscal '24 earnings conference call. Thank you for attending, and have a good day. You may now disconnect.

Thank you.

Thank you.