Under Armour, Inc. Earnings Call Nuggets: Apparel Business, SKU Rationalizations

On Friday, Under Armour, Inc. Class A (NYSE:UA) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Apparel Business

Robby Ohmes – Bank of America Merrill Lynch: Two questions. The first question is just on the apparel business. I thought it was interesting that it was balanced between men’s, youth and women’s, and I would have expected or was expecting youth’s and women’s to be outpacing men’s kind of going forward, and I was hoping that you could sort of remind us or elaborate on what happened in the quarter and if you expect core apparel to grow similarly across those or if we should expect that to change going forward? Then my second question is just under a new leadership that you’ve hired for international, can you give us any more detail on what we should expect to see? What the steps we should expect to see over the next couple of years in Europe and in Asia and Latin America? Thanks.

Kevin A. Plank – Chairman, President and CEO: Robby, it’s Kevin. So first and foremost, I thought it was that big statement in my script that said when we innovate, we win, and I think we are continuing to do that specifically on the apparel side. So, to start with the basics, this core basics, HEATGEAR t-shirt, COLDGEAR mask, and you are seeing us come back and reinvent these. Most specifically, this past spring we are seeing with the Tech Tee. This isn’t 1 million unit program. This is millions and millions of units program, and number one, going back and taking a program that’s heritage to us, going back four, five, six years, and reinventing it with the consumer first with better product, softer hand, better fabric, better performance, and then also taking the price point up from $20 to $23, it’s – obviously, it’s a value add for our customers meaning our distribution and then of course, a huge value add for us, but especially great for the consumer. So they are voting with increased performance and sell through and in some cases, 1.5 to 2 extra sell throughs that we saw on the old product. So it means that number one, in creating these heritage programs we have these franchises, we need to keep reinventing them and bringing them back. We think the ability to continue to augment our existing apparel business and the message I talked about with ColdBlack of bringing technologies to basics like take our Performance Polo and here is a product that is doing very well for us. But then we added new technology like ColdBlack, which you know effectively gives you the feeling of keeping yourself about 10 degrees cooler than wearing a shirt that doesn’t have the ColdBlack technology in it. So it’s constantly finding ways for us to innovate around that and I’ll get to the footwear answer maybe a little later in the call. But I think what you’re seeing from us, is this constant commitment to innovation and having it come through and having it really pour out in everything that we’re doing. So on youth side, I agree, we think there is huge opportunity. One of the biggest (struggles) we have is really from a distribution standpoint. We’ll continue to find the right stride within our existing distribution, so we’ve been talking to our partners, the big guys specifically and everybody wants the youth business, nobody is really sure exactly how to get at it. But at the same time though, we are leading the way there. We’re the number one youth brand, virtually everywhere we’re doing business and I think that we are the ones that are really carrying that lantern and really trying to blaze trails there. So I don’t know if we have it perfected, but we are seeing great growth. We’re seeing that youth kid continuing to vote for our brand as well, so we think there is lot of opportunity. So there is more to come we think within our existing distribution first and foremost, but we also think there is some ways for us to be creative there. On the leadership front, we’re really excited, first of all, about the announcement we made with Charlie coming here. This is an executive, who has been doing this for 20 plus years. They know the industry, they know the people, they know the players, they know the manufacturers. It is something, which we think we are perfectly positioned to take advantage of. So, we are excited for Charlie to get here and get onboard and what that’s going to mean to our global business. So speaking about that for a just a second. We’ve been in Europe for – coming up on 6 years and again Charlie is a German national and so he will bring great experience and he has spent time in Europe as well working for the other brands. And so what he brings to the table we think that there is a ways for us to up that tipping point. I think I said on the last call we believe it is getting closer and closer for us and we are waiting for it to accelerate. But meanwhile we have got a team of people in Amsterdam that are working towards in our European business, just doing an amazing job, and we continue to look at the examples of some of the things we have done with success that we have found in Japan which this year will close on a $200 million business worth in Japan. So again it was seven years for $35 million and then the business began to double. As we sit here in our European business we think there is great upside to come. Globally on a leadership standpoint we made a couple of other really important hires too that will give the human resource and planning and supply chain functions a real kick that will give us a much better global perspective as well. So evolving from a pretty good North American wholesale apparel brand into a truly global brand, I think, is something that you are seeing coming from us right now.

SKU Rationalizations

Joseph Parkhill – Morgan Stanley: I was wondering if you could talk a little bit more about the process you are going through from the SKU rationalizations, how the retailers are responding to this initiative and if you think it’s having any impact at all on your sales growth in 2012.

Kevin A. Plank – Chairman, President and CEO: Joseph obviously we talked about SKU rationalization in our last call too and that was all built into our guidance. To be honest with you it’s being in the early stages of this, a lot of the rationalization we’re doing has very little impact to the top line, and there is very little impact relative to our retail partners. So our goal as we kind of say is to get to a 20% reduction in SKUs by the end of this year, and I am happy to say that it looks like right now that we’ll probably be a little bit ahead of that especially in the style side. But on the color side be pretty much right on that target maybe a little bit ahead. So that was process that would start by about year and half ago and on the product side led by Henry Stafford and we’ve done a great job there.

Joseph Parkhill – Morgan Stanley: Then also just operationally speaking I know last year you had some margin drag from sales allowances due to missing on-time deliveries if you could give us any update on how on-time deliveries are trending this year and should you get any gross margin benefit from there?

Brad Dickerson – CFO: We also talk about turning that dial pretty slowly on the inventory management side and as we have talked over the last few years. So inventory management improvements and our planning process isn’t how we are buying our inventory. Always balancing that with the full rate and how we are servicing our customers and to your point we call some issues out there we had last year. So the good news here is that bulk of those metrics are heading in the right direction obviously as you’ve seen the inventory growth rate coming down as we mentioned in the last call from growth rates last year. And our fill rates are pretty much coming in as expected so they are improving, they are still not where we want them to be longer term. But the good news is that they are improving as we expected. So from a benefit to these sales allowances and discounts a lot of that was built into our original guidance we gave three months ago for the year. As we anticipate they are having more confidence in our inventory management abilities. We put some of those benefits in our guidance so a lot of that was already built into our future guidance margins.