Under Armour, Inc. Q4 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Under Armour Fourth Quarter Earnings Webcast and Conference Call. At this time, all participants are in listen-only mode. After the presentation, there will be a question-and-answer session. Please be advised, today’s conference may be recorded. I’d now like to hand the conference over to Lance Allega, Senior Vice President, Investor Relations and Corporate Development.

Good morning. Thank you, everyone, for joining us for Under Armour’s fourth quarter and full year fiscal 2021 earnings conference call. The information provided on today’s call will include forward-looking statements that reflect Under Armour’s view of its current business as of February 11, 2022. Statements made are subject to risks and uncertainties that are detailed in documents regularly filed with the SEC, and the safe harbor statement included in this morning’s press release, both of which can be found on our website. It’s important to note that the ongoing uncertainty related to COVID-19 and its potential effects on the global retail environment could continue to impact our business results moving forward. We may reference non-GAAP financial information on today’s call, including adjusted and currency-neutral terms which are defined under SEC rules in this morning’s press release. You may also hear us refer to amounts under U.S. GAAP. Reconciliations of GAAP to non-GAAP measures can also be found in our press release, which identify and qualify all excluded items and provides our view about why we believe this information is helpful to investors. Joining us on today’s call will be Under Armour President and CEO, Patrik Frisk, and CFO, Dave Bergman. Patrik?

Thank you, Lance, and good morning, everyone. And welcome to our fourth quarter and year-end 2021 conference call. At the beginning of last year, we were confronted with significant uncertainty about our business due to impacts from the COVID-19 pandemic. With dynamic changes in purchasing behavior and marketplace demand, we faced several obstacles as we worked through what we believe to be a recovery year following a difficult 2020. At that point, it would have been easy to stay conservative and adopt a wait-and-see strategy, yet the tremendous progress we made following our multiyear transformation, including healthier demand for the Under Armour brand and the passion that this team shows up with every day meant going on offense was the only path for 2021. And because we stayed on offense, Under Armour delivered a record year of financial results, exemplifying the power of our long-term strategic plan and our ability to stay hyper-focused on execution while leveraging our core strengths to position us more strongly for our next chapter of growth. Throughout 2021, we worked methodically to expand our brand’s awareness and engagement, ensuring we showed up more consistently and with a sharper point of view about the distinct role we play in an athlete’s journey to compete. We underscored our commitment to performance by delivering some of the most innovative products that we’ve ever produced. We forged deeper and more productive relationships with our key wholesale partners. We saw significant progress in our largest long-term growth drivers: our international, direct-to-consumer, women’s, and footwear businesses. And we’re stronger financially than we’ve ever been. In this respect, looking at some of our highlights, while our year-over-year comparisons benefited from the significant COVID-19 impacts we experienced in 2020, we are equally pleased with our performance over the past two years. For the full year 2021, revenue was up 27% to reach $5.7 billion, which is a record. Versus 2019, revenue is up 8%. So, solid progress from before the pandemic and the result driven by several strategies that have lifted the quality and composition of our sales compared to a few years ago. Breaking that down, wholesale revenue increased 36% to $3.2 billion in 2021. On a two-year basis, wholesale is up 3%. As detailed in previous calls, this performance has been tempered by the strategic decisions we’ve made to improve brand health by reducing our sales to the off-price channel and exiting approximately 2,500 undifferentiated retail doors in North America, an effort which is now concluded. Our direct-to-consumer business was up 26% to $2.3 billion in 2021. Versus 2019, direct-to-consumer is up 29%, with strong momentum in our owned and operated stores and our eCommerce business. Following a 40% increase in 2020, our eCommerce business was up 4% in 2021, equating to 45% growth on a two-year stack. This result gives us confidence that this business is well-positioned following a prolonged period of elevated promotional activities. 2021 gross margin was up 210 basis points to a record 50.3%. Versus 2019, gross margin is up 340 basis points, driven by benefits from pricing and a more favorable channel mix being offset by supply chain headwinds related to COVID-19 and the absence of MyFitnessPal, which we sold at the end of 2020. Rounding out the P&L, our full year operating income reached $486 million; net income was $360 million; and our diluted earnings per share was $0.77, all three of which are records. We also realized strong balance sheet and cash flow performances with inventory down 9% to an absolute dollar value that is only slightly higher than in 2015 when we were a $4 billion business. And finally, one more record, having ended the year with $1.7 billion in cash. All-in, what an incredible period for Under Armour. Having operated for nearly two years amid a global pandemic, I am proud of the progress we’ve made, the resilience we’ve shown, and the potential we have to do even better in the future. By staying focused on our key strategies, we are competing and executing at progressively higher levels, helping us unlock value and returns for our shareholders. Driving us forward at the heart of why we exist is our purpose. We empower those to strive for more. For Under Armour, everything is about the journey. From an awful workout when you want to quit but don’t, to pushing through that last rep and adding one more, to earning that PR because you put in the work, Under Armour makes you better. We do this by delivering innovative products, experiences, and styles influenced by athlete insight and real-world data, innovations wrapped norm. Engineered to empower the journey to sport through training, competition, and recovery. 2021 was an exceptional year for Under Armour products. There are too many to list, but a few standouts on the apparel side include Rush, Iso-Chill, Rival Fleece, Crossback, Infinity, Unstoppable, and Meridian, all names that delivered a 33% increase in revenue we achieved. On the footwear side, franchises like HOVR Sonic, Machina and Infinite, UA Flow Velociti Wind, Charged Pursuit, Assert, Aurora, Curry, and Project Rock contributed nicely to 35% growth, validating one of our largest long-term growth opportunities. 2021 was also an exceptional year in Under Armour’s progress to connect our brand even more deeply with consumers. From the optionality we created in our P&L, we were able to make incremental marketing investments, which we expect to fuel even stronger brand momentum in the years ahead. At the center of these efforts, product, experience, and inspiration fit The Only Way is Through. More than a mantra, it’s become an ethos, synonymous with the hard work necessary to power the journey, and it’s always a journey. From an initial product drawing to shopping bag to the closet, we obsess athletes and those who strive for more. However, being purpose-led means that it’s about more than just shirts and shoes. And sport is so much more than just a game. It teaches us to push past our limits, to be collaborators, to be leaders. It increases confidence, reduces stress, and improves mental health. Yet many young athletes face barriers that prevent them from starting their journey to sport. With a lack of fields and courts, gaps in coaching, shrinking leagues, and a shortage of gear to play, train, and compete with, we recognize that not everyone has access to sport. Addressing this opportunity, a few weeks ago, we announced the long-term commitment of our resources, focus, and energy to break down these barriers. As we lay the foundation for our Access to Sport initiative, we are excited to share more in the years ahead as we build opportunities for millions of youth to engage in sport by 2030, ensuring that the next generations of focused performers are inspired even more holistically than those before them. Now back to our business. The last two years have proven to be one of the most dynamic yet opportunistic times in Under Armour’s history. Managing the marketplace prudently through a constant focus on operational excellence to ensure we’re keeping the brand healthy and moving forward, we are delighted with our results. That said, let’s look at how our regions performed in 2021, starting with North America, where revenue was up 29% to $3.8 billion, or up 4% since 2019. In our largest market, we continue to focus on three fundamentals. First, becoming a better retailer by creating more compelling in-store experiences and delivering best-in-class service across our fleet. Additionally, this means continuing to build on the momentum we’ve seen in our eCommerce business. Realizing we’d likely see traffic declines compared to the abnormality that was 2020, we stayed focused on quality by investing in high-return vehicles like targeted PLAs and improved product wayfinding to improve our online shopping experience, and it’s working. In 2021, while we did experience a year-over-year traffic decline, it was more than offset by a meaningful increase in conversion and therefore, solid revenue growth. Second, with the critical mass of undifferentiated wholesale door exits behind us, we are encouraged by the productivity KPIs we’re seeing across this channel in North America. A more premium position driven by outstanding inventory management and promotional discipline is translating nicely to additional shelf space opportunities with our largest strategic partners, higher AURs, and significantly better turns. This execution gives me confidence that we’re in an excellent position to adapt to however the environment may develop over the short term. Third, we are continuing to drive performance by investing more smartly in marketing, which shows up in improved brand affinity scores around awareness, consideration, and conversion. Gaining better productivity from how and where we spend has always been the goal. By delivering higher quality traffic through strategic paid media and targeted email activations, our ability to connect more meaningfully across key moments and multiple platforms has never been greater. Turning to our international business, revenue in EMEA was up 41% driven by nearly 50% growth in our wholesale business and continued momentum in direct-to-consumer. We are encouraged by the quality of business results delivered in 2021. Our efforts to position Under Armour as premium performance, healthier wholesale relationships, and improved retail capabilities continue to validate the power of our playbook. Our two-year performance is strong as well, with revenue in EMEA up 36% versus 2019. Next up is Asia Pacific, where revenue was up 32% in 2021, driven by nearly 50% growth in our wholesale business and a strong increase in direct-to-consumer sales. Clearly, the story here is about a more challenging environment that has developed in China as evidenced by a 6% decline in our fourth quarter APAC revenue. The recent market trends in China are impacting our business. However, our focus in China remains the same: staying premium, continuing to invest in digital innovation, including working to deliver much improved end-to-end consumer engagement platform and ensuring that store expansions are done at an appropriate pace in the dynamic market conditions. Versus 2019, revenue in Asia Pacific was up 31%, so strong growth on a two-year basis. And finally, revenue in our Latin America region in 2021 was up 18%, driven by strength in our full-price wholesale and distributor businesses. As a reminder, we have transitioned certain countries in this region to a strategic distributor model, a decision we believe will begin to optimize this region’s ability to grow and contribute more profitably in the years to come. Versus 2019, revenue in Latin America is about flat on a two-year basis. So, in closing, we remain both confident and cautious in this operating environment. And while current macro factors are having a material impact on our business, we have no intentions of sitting idle. Innovation, consumer connectivity, and inspiring those who strive for more are not tactics at Under Armour. They are a way of life. Moving forward, we believe that the things we control will continue to serve us as strength, just as they did in fiscal 2021. Regardless of the short-term environment, we are running a stronger, better company, one that is increasingly more capable of delivering sustainable, profitable growth and value creation for our shareholders over the long term. I am pleased with where Under Armour is sitting, incredibly proud of this team. And in my nearly five years here, I have never been more excited about our future. And with that, I’ll hand it over to Dave.

Thanks, Patrik. Since the beginning of the COVID-19 pandemic, our intent has been to deliver appropriate financial performance while protecting the Under Armour brand and positioning ourselves for sustainable, profitable growth over the long term. Leveraging the strength of a data-driven, consumer-centric strategy and a constant focus on operational excellence, we believed we could emerge from this unprecedented time as a stronger, more profitable company. Despite the high level of uncertainty, we committed to staying agile to minimize downside risk while executing against our playbook to help us capitalize on upside opportunities as they arose. In 2021, we did just this. That isn’t to say that uncertainty is over. We remain vigilant about the dynamic environment we are operating in, including ongoing supply chain headwinds, rising wages, and inflationary input cost pressures that continue to permeate the marketplace. Yet we remain confident in our ability to deliver against our plan by staying focused on our business strategies and remaining nimble as we implement them. Our fourth quarter results reinforce that confidence. Compared to the prior year, revenue was up 9% to $1.5 billion. As a reminder, we expected several headwinds in the quarter, including lower sales of sports masks, lower sales to the off-price channel, the absence of MyFitnessPal, and proactive supply constraints, among others. Versus our previous expectation, our revenue overdrive was primarily due to higher demand across our full-price wholesale and direct-to-consumer businesses, particularly in North America, coupled with better-than-expected supply chain execution during this challenging environment. From a channel perspective, fourth quarter wholesale revenue was up 16% driven by strong performance in our full-price business, partially offset by lower year-over-year sales to the off-price channel. Our direct-to-consumer business increased 10%, led by 14% growth in our owned and operated retail stores and 4% growth in our eCommerce business. In addition, our eCommerce business is up more than 30% on a two-year basis. And licensing revenue was down 33% driven primarily by the recognition of timing of minimum royalty payments. By product type, apparel revenue was up 18%, with strength in our training and outdoor businesses. Footwear was up 17%, driven primarily by our running and training categories. And our accessories business was down 27% due to planned lower sales of our sports masks compared to last year’s fourth quarter. From a regional and segment perspective, fourth quarter revenue in North America was up 15% to $1.1 billion, driven by premium growth in our full-price wholesale and direct-to-consumer businesses. So, excellent barometers to improving brand strength and consumer demand in our largest region. Compared to 2019, North American revenue was up 8% in the fourth quarter, driven by higher quality revenue than two years ago. In our international business, EMEA revenue was up 24%, driven primarily by strength in our wholesale business. Compared to the fourth quarter of 2019, revenue in EMEA was up 11%. Next up is APAC, where the business was down 6% in the quarter, driven by softer demand in our wholesale business, which more than offset DTC growth. Compared to 2019, total APAC revenue was up 19%. And finally, in line with expectations, Latin America revenue was down 22% due to the change in our business model as we moved certain countries to distributors, an effort which is now completed. Versus the fourth quarter of 2019, Latin America was down 20%. Related to gross margin, our fourth quarter improved 130 basis points to 50.7%. This expansion was driven by 350 basis points of pricing improvements due primarily to lower promotional activity within our DTC business, favorable pricing related to sales to the off-price channel, and lower promotions and markdowns across our wholesale business, and 90 basis points of benefit related to lower restructuring charges. These improvements were partially offset by 190 basis points of COVID-related supply chain impacts driven by higher freight costs, which meaningfully offset product cost benefits during the quarter, 80 basis points related to the absence of MyFitnessPal, and 50 basis points of unfavorable product mix related primarily to lower sports mask sales, which carry a higher gross margin. Versus our previous expectation, our fourth quarter gross margin overdelivery was primarily due to favorable pricing developments from lower-than-planned promotional activity within our DTC business, more favorable pricing related to sales to the off-price channel, and lower-than-planned promotions and markdowns within our wholesale business. SG&A expenses were up 15% to $676 million, primarily due to increased marketing investments, incentive compensation, and non-salaried workforce wages. Related to our 2020 restructuring plan, we recorded $14 million of charges in the fourth quarter. In this morning’s press release, we noted that we have reduced the high end of our planned expectations by $25 million. So, we now expect to recognize total planned charges ranging from $525 million to $550 million. Thus far, we’ve realized $514 million of pretax restructuring and related charges. We expect to recognize any remaining charges related to this plan by the end of the first quarter of our fiscal year 2023. Moving on, our fourth quarter operating income was $86 million. Excluding restructuring and impairment charges, adjusted operating income was $100 million. After tax, we realized a net income of $110 million or $0.23 of diluted earnings per share during the quarter. Excluding restructuring charges, income related to our first year of the MyFitnessPal divestiture earnout, and the noncash amortization of debt discount on our senior convertible notes, our adjusted net income was $67 million or $0.14 of adjusted diluted earnings per share. From a balance sheet perspective, inventory was down 9% to $811 million, driven by continued improvements in our operating model and inbound shipping delays due to COVID-related supply chain pressures. Our cash and cash equivalents were $1.7 billion at the end of the quarter, and we had no borrowings under our $1.1 billion revolving credit facility. Finally, following last year’s convertible bond exchanges, we are proud to share that our cash position less debt of $663 million nearly doubled to $1 billion by the end of the fourth quarter. Looking forward, one last reminder about our fiscal reporting year change. Mechanically, the current period we’re in right now, January 1st through March 31st of 2022, will serve as a transition period until we begin our new fiscal year 2023 on April 1st. To revisit what we detailed last year, we believe this change, namely putting our two largest quarters in the middle of our new fiscal year, will provide us with greater visibility when providing our initial annual outlook. In this respect, by the time of our next call, which is expected in early May, we’ll have booked orders in hand for the majority of our fall/winter wholesale business. Accordingly, we are not providing a financial outlook for fiscal 2023 on today’s call. That said, let’s turn to our outlook for the current transition quarter. From a revenue perspective, we now expect our transition period to be up at a mid-single-digit rate compared to the previous expectation of a low single-digit rate increase. This includes approximately 10 points of revenue headwinds related to reductions in our spring/summer 2022 wholesale order book from supply constraints associated with ongoing COVID-19 pandemic impacts. Moving forward, we expect many of these headwinds to continue well into fiscal 2023 until longer-than-usual transit times, backlogs, and congestion find balance, associated freight and logistics costs normalize, and inbound shipping delays subside. At this time, we do expect these uncertainties to cause material impacts and variability in our future results. Accordingly, we will remain cautious and agile as we operate our business into fiscal 2023. That said, the proactive strategies we’re employing, greater operational agility, and overall demand for the Under Armour brand, give us confidence in our ability to navigate this dynamic and challenging business environment effectively. We believe these COVID-related supply chain pressures are just a temporary speed bump on our road to continued profitable growth over the long term. Turning to gross margin, we expect our transition quarter rate to be down approximately 200 basis points against our Q1 2021 adjusted gross margin, which includes approximately 240 basis points of negative impact from higher freight expenses related to ongoing COVID-19 supply chain challenges in addition to an unfavorable sales mix, partially offset by pricing benefits. With that, we expect operating income to reach approximately $30 million to $35 million and diluted earnings per share to be approximately $0.02 to $0.03. In closing, we’re proud of the record results we achieved in 2021 and the consistent progress we’ve made over the past couple of years. This gives us great confidence in our brand and business and our team’s ability to navigate this dynamic environment. As we work through our transition quarter heading to fiscal 2023, we’re monitoring and tracking the dynamic supply chain and inflationary pressures. And we’ll be mindful of the uncertainty and volatility that comes along with it. These conditions demand that we maintain a high degree of agility, and I am confident we will. With that, we’ll turn it back to the operator for your questions.

Our first question comes from Matthew Boss with JP Morgan.

Congrats on the next quarter.

Thank you.

Thank you, Matt.

So Patrik, can you talk to overall health of the athletic channel today? And on your mid-single-digit topline sub-quarter outlook, I guess how best to think about the underlying demand for your brand in North America and international relative to that mid-single-digit as we consider the 10-point supply chain constraints that you cited on your reported numbers?

Yes. Thank you, Matt. First of all, I believe that currently, the inventory levels in the channel are probably the healthiest they’ve been in the last decade. And I think that sets us up for a good trajectory going forward. A lot of what we’re seeing right now, and Dave called it out in his script, we have about a 10-point headwind in this quarter alone simply based on logistics, I would say, in transport and inbound, outbound, and all that stuff. For us, we feel the brand is continuing its trajectory. We feel that our playbook is working. We see in our metrics in terms of both awareness, consideration, and engagement from the consumer that we continue to get stronger. The extra marketing that we talked to all of you about in our last earnings call has really started to make the impact that we want to. So feeling very good about athletic, feeling very good about the Under Armour brand and the trajectory we’re on right now. And we’re looking forward to navigating through this, what we believe to be a short-term speed bump.

Great. And then, Dave, while I know you’re not providing explicit full year guidance at this time, given the multiple moving parts in the sub-quarter, how best to think about this year’s 9.3% operating margin as a base? Meaning, is the expectation for continued gross margin expansion and SG&A leverage from this base multiyear as we think moving forward?

Yes. It’s a great question. Again, we’re not at a point where we’re going to give any real details on fiscal ‘23. But we’re excited about what we were able to deliver for 2021. A lot of things are coming together from all the work that we’ve done, whether it be on the GTM and the operating model, the help with our major accounts, and then getting to a point now where we can really prioritize better and manage our cost structure and be much more nimble after the restructuring efforts that we’ve been driving through. It does set us up well going forward. Our continued goal is to invest in the brand for the longer term. But at the same time, we have to be able to continue to leverage our cost structure, which is definitely one of our constant goals. So, as we move forward, we do see opportunities in gross margin and in leveraging SG&A. We are going to have some near-term pressures in the first half of fiscal ‘23 because of these supply chain issues, whether on top line or whether on the freight costs as well. Again, we see that as temporary and expect that to dissipate in the back half of fiscal ‘23.

Our next question comes from Erinn Murphy with Piper Sandler.

I guess, my question is around North America and the strength that you’ve been seeing in this market. How sustainable do you see this growth? I think it was up 8% on a two-year stack basis and then particularly as we lap the stimulus comparisons from last year here in March and April. And then secondly, again, related to this marketplace. I think, Dave, you talked about seeing additional shelf space here in North America. Can you just expound upon what you’re seeing? What type of accounts are kind of taking incremental space from you guys? Thank you.

Thank you, Erinn. I’ll kick it off and then I’ll bounce it over to Dave when I’ve given some color. First of all, the health of our growth right now is dramatically different than where we were in ‘18, ‘19, right, in terms of the composition of the revenue, significantly less off-price sales, reduced discounting, markdowns, and promotions in all of our channels, the type of inventory management that we have, and subsequently, much better turn in both our own as well as our wholesale partners. The fact that we’ve exited about 2,500 doors that we felt were undifferentiated, and in fact, that was still growing despite that just shows the type of trajectory that we’re expecting going forward. So for me, at this point in time, we’re continuing to earn back shelf space. We’re able to invest in the right way behind the brand, which also comes on the back of a much better understanding of our return on and marketing investment models that we’re running. I don’t know, Dave, do you want to add something to that?

Yes. I mean, it’s important to note that the momentum in North America is definitely real. If you think about the overdrive that we delivered in Q4, over 75% of that was driven by the North America business. It is definitely not a demand challenge as we think about this transition quarter or even going into the beginning of fiscal ‘23. It is a supply challenge with the COVID impact. And so, that’s a position we’re excited to be in and really challenge our supply chain team to be able to continue to deliver for us.

And just one more thing. We’re not taking our foot off the gas as it relates to marketing here in the transition quarter either. We’re going to continue to spend on the brand for future seasons.

Got it. And then just on the shelf space gains, just curious on what types of accounts or kind of where you’re seeing that most.

Well, right now, we’re not at a point where we’re going to be giving kind of an account level or distribution level input there, but I appreciate the question. Thank you.

Our next question comes from Simeon Siegel with BMO Capital Markets.

Congratulations on the ongoing gross margin results. It’s really great to see. You mentioned pricing. How was the average unit retail? Also, since you mentioned the sports masks, are we comparing similar items now? Is there anything important to consider there? Lastly, what are your thoughts on how you’re prioritizing inventory between direct-to-consumer and wholesale given the current constraints?

Yes. A couple of things there. Gross margin, definitely, we’re excited about the growth there as well. It is unfortunate, the amount of freight costs that we’re dealing with. The sport mask headwind has been real in the back half of ‘21. We expect that that’s going to continue a little bit here through the transition period and a little bit into early ‘23. But definitely starting to become a lower impact as we go forward and definitely normalize more by the back half of fiscal ‘23. That does create a tiny bit of a gross margin headwind just from that aspect, but again, the biggest challenge we have on the gross margin side right now is the freight cost. If you think about in the stub period here, we actually would be going forward further year-over-year in the stub quarter in gross margin if it wasn’t for these freight costs. So I think that’s important to keep in mind.

Great. Thanks. And then because you mentioned it a few times, I mean, the cash generation has been great. So, you’re growing cash. Unlike your peers, you’re also growing your share counts. Any thoughts on the cash?

Yes. I mean, I think at this point, we continue to evaluate our options. We’re very pleased with what we’ve been able to drive from a liquidity management, working capital management, and overall profitability here. We’re staying focused on navigating the current environment and therefore, operating with agility. Having that additional cash is helpful there. We will be reinvesting some of that back into the business, whether through the DTC expansion, whether through some of our systems, or a little bit with the headquarter consolidation work that we’re going to be doing. We’re also evaluating would we consider a possible further debt buy down. So, that’s a consideration as well. And then even a share buyback is a possible consideration also. But nothing finalized there, but we’re definitely looking at opportunities, but pleased with the position that we currently have.

Our next question comes from Paul Lejuez with Citi.

I just want to understand the 10-point headwind that you’re seeing in the stub quarter a little bit better. Is that the lead product that’s still coming to you just late, or is that product that wholesale partners canceled because of the expected timing of when it would be received, and that caused you to cancel orders? So just maybe to alleviate a product back up, I just want to understand that dynamic a little bit better. And to what extent are you trying to get your wholesale partners to order early for fall just to maybe avoid some of these supply chain issues for the upcoming year? Thanks.

Yes. A couple of things. Relative to the 10-point headwind on the transition quarter, this is not really expected timing delays. This is actually us proactively understanding the capacity issues with our vendors and then working with them and also working with our customers to actually cancel purchase orders for production and also cancel sales orders with our customers ahead of time. We worked with our customers on that so that we all had the visibility and transparency together to be able to drive through those decisions. We did prioritize those decisions to make sure that we were protecting premium DTC and also our top wholesale accounts. We wanted to go about it that way because those pressures were real. If we didn’t approach it that way, then we would have a lot of product coming in late. It would not be making it to the floors, and our wholesalers would probably be frustrated with the late visibility to that. We would probably end up with some excess inventory. So, to proactively avoid all that, we actually got ahead of this a while back and canceled those orders. That’s what’s driving this headwind. We expect that it’s temporary and will continue into Q1 and Q2 of ‘23.

To take the second half of that question, Paul, as it relates to deliveries in future seasons and order books, we continue to work with our accounts and internally, of course, in our own channels to make sure that we’re balancing the remainder of the first half as well as into the second half of ‘22. We see, to Dave’s earlier point in the script, still some challenges, but we’re ahead of it, and we’re really working through that right now. But it is about balance because we need to not just look at North America. We need to look at it globally, and we need to look at it across channels. We’re now battle-tested in terms of having done this for many seasons now. The relationship with our internal teams, and our external partners in wholesale are excellent right now. I’m sure we’re going to get through it well.

Our next question comes from John Kernan with Cowen.

Hey. Good morning, everybody, and congrats on a strong year.

Thanks, John.

Thanks, John.

Dave, as you look out into beyond spring/summer, what’s the duration of these freight costs and supply chain costs into the back half of your next fiscal year? Obviously, we all see the impacts in the first half. I’m just curious, going to have duration into the back half on freight costs and air freight and shipping? Curious as your thoughts of how we just think about gross margin beyond just Q1.

Yes. I mean, again, we’re not going to give a ton of detail yet on fiscal ‘23. But what I would say is we anticipate that we will continue to use and need heavier air freight in this transition quarter and also in the first two quarters of fiscal ‘23. We do not anticipate to have to use a lot of air freight in the back half of fiscal ‘23. We believe that air freight costs could actually become a tailwind for us in the back half of fiscal ‘23, whereas it would continue to be a headwind for us in the front half of fiscal ‘23. Relative to ocean freight rates, that’s also been a developing cost increase as well. That one is probably going to take a little longer to subside. So, we’re continuing to monitor that and work through it. That’s kind of what we’re seeing at this point.

Got it. That’s helpful. I have one follow-up. Asia Pacific has been a bright spot for you, especially compared to some of the results your peers are reporting, though it may be a bit more challenging in the fourth quarter. It accounts for nearly half of your total sales growth since the 2019 baseline at the end of 2021. I'm curious about what you're experiencing in Asia. How are you managing in China? Are there any structural changes in how you engage with Chinese consumers on the ground there? Thank you.

Yes. Hi, John. For sure, APAC is still probably most affected at this point in terms of traffic patterns due to COVID, especially in China. That’s certainly something that’s affecting the marketplace there. I would say some of the supply chain challenges we’re dealing with are not isolated to China. That’s also having an impact in China. As it relates to Under Armour, we have an advantage in China to some degree. It’s a smaller part of our business overall than some of our competition. We continue to really be focused on our strategy there, staying premium, continuing to invest in digital innovation and this entire end-to-end consumer engagement platform. We’re also continuing to build out stores. But we’re very cautious about how we do that, of course, in this current environment. We feel good about what we’re doing over there. Again, we think it is shorter term in nature and are very, very pleased with the progress we continue to make despite of these headwinds.

Our next question comes from Sam Poser with Williams Trading.

Good morning. Thank you for taking my questions. Firstly, could you provide a breakdown of the marketing expense and other expenses for the quarter? Additionally, I’d like to know how much of your inventory is currently in transit. I also noticed the store on 58th and Fifth Avenue is wrapped with Under Armour. What is the status of that location?

Yes. A couple of things. From an SG&A perspective, our global marketing spend was in the neighborhood of $200 million, maybe a little bit more. Definitely one of the highest percentage marketing to revenue quarters that we’ve had, and we did that on purpose to really invest in the brand as we go into next year. We’re going to continue to invest pretty heavy year in the transition quarter as well to keep the gas on as we step into fiscal ‘23. Relative to inventory in transit, I don’t have that exact number handy, but I think our inventory management continues to be a huge focus for us. We’re proactive in how we handle the supply-constrained situation. So, we’ll have some ups and downs in inventory, but we’re going to continue to manage it tightly and protect the working capital and cash conversion cycle that we’ve driven this year, which is something we’re really proud of. Last on Fifth Avenue, we’re continuing to market the space. It’s not exactly a great market right now, but that’s okay. We’re continuing to work through it, and we’ve planned for that.

Thank you. I have a quick follow-up. It seems like you are getting ahead of many things in this transition quarter. Although you're not providing guidance, does this suggest that we might start to see some leverage in marketing as a percentage in the third quarter of fiscal '23?

Well, I would say that, again, we’re at a point now where we can manage SG&A relative to revenue and gross margin. We have that ability now. So, we’re going to stay agile yet balanced while making appropriate brand investments to continue to fuel the growth. As I mentioned earlier, cost structure leverage is a constant goal, and that comes with marketing as well. It’s an area we’re always going to try and protect more than other areas. But we need to continue to leverage our cost structure and continue to grow profitability and bottom line as well.

Our next question comes from Kate Fitzsimons with Wells Fargo.

Yes. Hi. Good morning. Thanks for taking my questions. I guess, not to beat a dead horse, but just when looking out on the stub quarter, Dave, you had alluded to 240 basis points of freight pressures. Should we think about that being the height of the freight pressures maybe relative to what you’re expecting in the first half of F ‘23? And Patrik, you alluded to several times in your prepared comments just about greater consideration and awareness that the brand has made. I’m curious if you can just speak more directly to strides you’ve made in some of the growth categories, especially women’s and footwear coming off of calendar ‘21? Thanks so much.

Yes. I would say that as we think about Q1 and Q2 of fiscal ‘23, those freight impacts are going to be pretty sizable. I don’t know that we’re ready to give detail on whether it’s going to be a little larger or smaller than what we saw in or what we’re expecting in the transition quarter. But it will be significant, and it will impact our gross margin in the first half of the year.

Yes. And Kate, as it relates to our metrics and KPIs, we’ve talked a lot today about how we’re going to continue to spend. How we’re spending is really more in top of the funnel. That was something we weren’t able to necessarily afford to do in years past. That’s what we’re going to continue to do. The idea is to increase both awareness and attraction, and then ultimately further down in the funnel consideration for the brand. What we’re seeing right now is strong momentum in all of those metrics compared to where we were just a few years ago. We’re very excited about that. That’s also why Dave and I feel so confident in continuing to spend here in the stub quarter. The leverage we’re getting out of our ROMI metrics while continuing to engage consumers in their decision journey gives us confidence this is the right decision to do at this point in time. Very excited about where we are and what that means for the brand going forward. Just to add a little color on that, too, our current campaign, The Only Way is Through, just kicked off here a few weeks ago with the theme of what we call the Gift of the Game, which is already showing really good results for us as well.

Our next question comes from Jonathan Komp with Baird.

Thank you for the follow-up on the 10-point headwind you've mentioned. It seems that your actions are very intentional regarding this. Can you provide insight into the magnitude of this drag over the next few quarters? Additionally, could you discuss your pricing plans for the year? Does the stub quarter fully reflect your intended pricing, or are there further actions yet to come?

Jonathan, this is Dave. We’re not going to be giving exact numbers here yet for fiscal ‘23. But I would say that from the proactive work we’ve done, the supply chain constraints and therefore, impacts to our top line for fiscal ‘23 Q1, Q2, they’re not going to be that significantly different than what we’re expecting here in the transition quarter, at least that’s our current visibility. Again, we’ll give a lot more color on that in the early May call. But that’s what we’re seeing at this point. And definitely not seeing that kind of impact for Q3 and Q4 fiscal ‘23.

As it relates to pricing, we have most of our benefit right now in terms of our gross to net in the stub quarter and coming out of ‘21. We will be raising some prices here in ‘22. It’s really about a continuation of our pricing strategy. As the brand gets stronger, as the market evolves, we're opportunistically looking at raising prices where we can, but it’s going to be more surgical in nature versus an across-the-board approach.

Okay. That’s helpful. And then, just one broader question on the margin outlook. Given everything you’ve seen today about the performance last year and then the current headwinds, has anything changed in terms of the timeline to get back to low-double-digit operating margin, anything that’s changed in your view?

Look, I think over time, our goals and our strategy are still solid. We’ve made a lot of progress in 2021. As we navigate through these short-term impacts with supply chain through the first half of ‘23, we believe we’re well on the road towards that trajectory. We’ll give more details in the early May call, but we’ve got the momentum. We’ve got control over our cost structure. We’ve got great relationships with our accounts. As soon as we can get past these logistical challenges, we’re ready to run.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Okay, great. Thank you so much. Nice recap on a great year, Patrik. I wanted to ask about the sort of unmet demand that you’ve got here both in the transition quarter and in the first half of the upcoming fiscal year. In your mind, does that represent sort of organic demand for the brand that you think you might be able to capture in maybe calendar year 2023 and beyond? Is that how you would characterize it, or do you think this is more if you can’t meet the demand today, it’s possible that it goes away?

According to how we see things, and Kimberly, what Dave said before is very true. This is real demand out there for the brand. It’s quality demand. We don’t believe that because we are not able to meet that demand right now due to these proactive decisions that we’re going to somehow be disadvantaged going forward. We believe that the inventory levels now in general are healthier than they have ever been in this sector, and in our sector, perhaps the best they have been for a decade. As we continue to now also spend on the brand, as we have now pruned our distribution to be in the right places, continue to win shelf space back and be more specific and focused around what we’re doing, we’re going to continue to grow this brand going forward. Again, it’s very short-term. We believe it’s a speed bump. The communication and engagement we’re driving with the consumer is still there. Once things start to unlock, we believe we’re going to be able to unlock the sales again.

Fantastic. And looking at that inventory that you mentioned, Patrik, inventory coming out of 2021, it’s down 9% compared to 2019, but revenue is up 6%. So, you’ve got a nice 15-point differential there. The channel inventory is clearly very lean. How are you feeling about your own inventory levels? I’m wondering if maybe you wish it had a little more. It sounds like you’d have an even more robust revenue outlook if you had a bit more? And how should we think about the way that you would be planning inventory over the next one to two years if this level is maybe just a little too lean?

Yes, good questions. Dave, if you kick it off with some of the numbers, I’ll take some of the inventory at the end.

Yes. I mean, again, we’re very comfortable with the mix of inventory, with demand being kind of versus excess. We’re excited about where we were able to end the year, but we’re not at a point where we feel like we’re leaving sales off the table. We’ve had to cancel a lot of purchase orders, which we’ve mentioned, because of the supply chain constraints. Outside of that, we feel like the operating model is working. As we get past the speed bumps with the supply chain challenges, we believe we can continue to grow that top line and continue to manage inventory tightly. We’re excited about being able to do that and what that means for continued free cash flow going forward.

Yes, it’s about balance, right? We’re certainly going to make sure that we’re not missing opportunities in terms of driving revenue where there’s opportunity, but it’s also about making sure that we continue to become more efficient in where and how we place inventory. One of the great things about the work we’ve done through our transformation is the ability to do just that. In terms of working closely with both our wholesale partners and our internal teams as well as our vendors to really demand plan better. We have built out a demand planning function that works incredibly well with our supply planning function. We’re getting better at predicting where demand is going to happen. That is a skill. It takes time to build out. You need the systems, people, and expertise, and Under Armour is at that stage now.

Our last question will come from Michael Binetti with Credit Suisse.

I wanted to clarify one of the earlier questions. Dave, could we reflect on something you mentioned? Last quarter, you talked about reductions in the spring/summer order book during the third quarter call. Is the 10 points you referred to today higher or lower than you anticipated at that time? Additionally, regarding SG&A, the implied figures for the upcoming stub quarter appear to be a bit higher as a percentage of revenues than what we typically see in the March quarter pre-COVID. I acknowledge the efforts you've made to reduce fixed costs. While we won’t discuss specifics for '23, could you provide some insights on how the SG&A leverage profile might look in the medium term? You've mentioned maintaining strong marketing efforts in the first quarter, but could you share some broader thoughts on SG&A as we approach fiscal '23?

Sure. So, Michael, first, on the spring/summer ‘22. Three months back, we were signaling that we were going to have that headwind pressure, and the amount of that pressure actually is pretty close to what we anticipated three months back. So we called the ball well relative to that as far as the proactive management with our vendors and our accounts. Relative to SG&A, Q4 was a big quarter for us in ‘21 just with the magnitude of that marketing expense being in that $200 million range plus increased incentive compensation that comes along with the performance this year. We also, and we talked about this before, did some minimum wage increases relative to our retail stores in North America and also our distribution centers. So, all those investments came through Q4 ‘21 and were partially offset by continued cost efficiencies across the enterprise from all the restructuring work and the operating model evolution. When you think about the stub quarter here that we’re currently in, it’s still a heavy SG&A quarter, and that’s on purpose. It’s really driven by increased marketing investments that we are strategically making and that we want to fuel the brand to roll into fiscal ‘23 in the right place from a brand perspective. That does have continued increases in the non-salaried wages I mentioned. So, as we think about fiscal ‘23, again, I’ll reiterate that we want to continue to find ways to leverage our rebased cost structure while protecting the key investments. The balance around that, we’ll be ready to talk about in the early May call.

That concludes today’s question-and-answer session. Thank you for participating. You may now disconnect.