Day, ladies and gentlemen, and welcome to the Under Armour Inc. 3rd Quarter Earnings Webcast and Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Tom Shaw, Director of Investor Relations. You may begin.
Thanks, and good morning to everyone joining us today's Q3 conference call. During the course of this call, we'll be making projections or other forward looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. These risks and uncertainties are described in our press release and in the Risk Factors section of our filings with the SEC. The company assumes no obligation to update forward looking statements to reflect events or circumstances after the event on which the statement is made or to reflect the occurrence of unanticipated events.
Joining us today's call will be Kevin Plank, Chairman and CEO followed by Brad Dickerson, our Chief Financial Officer, who will discuss the company's financial performance for the Q3, provide an update to our 2013 outlook and introduce our preliminary 2014 outlook. After the prepared remarks, Kevin and Brad will be available for Q and A sessions that will end at approximately 9:30 am. Finally, a replay of the teleconference will be available at our website at approximately 11 am Eastern Time today. And with that, I'll
turn it over to Kevin Plank. Thanks, Tom, and good morning, everyone. From our very first day of existence, Under Armour has been about making athletes better. Executing against that promise in 1996 had its own set of challenges, but they're dwarfed by the complexities of running a global brand with over $2,000,000,000 in revenues. Our consumers' expectations shift constantly higher and they count on their favorite brands to consistently take them someplace new.
The company that we are building to deliver on that promise is in constant evolution. We are a different company every 6 months. Our consumer moves quickly and fortunately so does Under Armour. Today, I want to discuss that evolution, how it's manifesting itself in product innovations like SpeedForm and Coldgear Infrared with emerging athletes like Stephon Curry and Jordan Spieth and new retail experiences in Shanghai and New York City, all key elements of our growth story, yet all of them have only become important under our stories in the past few months. So while this evolution is taking place throughout our organization, I want to talk today about 4 areas of our business where our focus is helping generate growth in 2013 and beyond.
First, I will cover how we will be more integrated than ever when it comes to telling our brand stories. How we will have our product communications and retail presentation aligned unlike anything we've done in the past aggressively bringing our consumers into retail at key points during the year. The second area is around innovation and how when we innovate not only do we win with consumers, but we drive an industry leading pricing model. Because wherever we show up in regional sporting goods or department stores or our new retail experience in Shanghai, we are a premium brand. That premium status comes from our ability to innovate and that innovation enables us to drive that pricing power.
3rd, we are winning with America's youth as we continue to resonate at the highest level with our youngest consumer. Apparel continues to drive our youth numbers, but we have had solid momentum in footwear as well, a great indicator of the long term equity we are building in our brand. And 4th, our team is constantly evolving as well. I will talk to you today about some new additions to our senior leadership and some other moves we are making to become a more globally focused organization. And most importantly, we are doing this as we grow our business at an industry leading pace.
This was our 14th consecutive quarter with net revenue growth of 20 plus percent and our 15th consecutive quarter with apparel growth of 20 plus percent. Our core is strong and that gives us the firepower to grow in new geographies with new categories and new consumers. So the first topic, how can we better integrate our product, communications and the presentation of our brand to consumers? Clearly, it starts with product. And as I said on our last call, the pipeline of innovation at Under Armour has never been more robust.
Our cold gear infrared just hit retail in Q3 and it's off to a great start. This latest innovation utilizes ceramic thermoconductive inner coating to absorb and retain body heat. This industry leading technology provides warmth without the weight and enables us to bring our consumer apparel that exceeds our expectations around cold weather protection. In footwear, our big story for 2014 is SpeedForm. We are bringing to Under Armour footwear what consumers have come to expect from our apparel, innovation around fit.
And we're bringing that innovation to the world of footwear by not making these shoes in traditional footwear factories, but in bra factories that understand the importance of fit. With innovations like these, our challenge is to align our communications and how we show up at retail for maximum impact with our consumer. We started that effort this year with our 3 brand holidays, the third of which will hit next month with athletes like Olympian Lindsey Vonn, freestier Bobby Brown and the locks for PGA Rookie of the Year, Jordan Speith, who will help us tell a great story around cold year infrared. And no story about Under Armour and the outdoors would be complete without an appearance by our friends from Duck Dynasty. In 2014, we will take an even more integrated approach to our brand holidays with greater focus on key products and a more extensive effort with our retail partners designed to drive traffic into their stores at key points throughout the year.
That greater integration will also be on display at our Brand House here in Baltimore, at our newest store in Tysons Corner that we announced earlier this week and the next evolution of Under Armour retail, our store in Manhattan that we will open in spring of 2014. Combined with our New York office that is opening early next year, this new retail space in SoHo will give us a meaningful presence in the city and enable us to bring a local Under Armour story to New Yorkers and the millions of tourists that make their way there as well. Just a week ago, I was in Shanghai for the opening of the Under Armour experience, a first of its kind retail theater featuring an immersive multidimensional video experience that combines the high energy of our brand with our commitment to telling authentic athletes' stories. The experience in Shanghai's brand new Jing An Cary Center on Nanjing Road is connected to our branded store with a curated assortment of Under Armour's best apparel and footwear technologies. One of our big goals with this new retail experience is to help educate our Chinese consumer on what it's like to be an athlete.
In order to do that, we had to break the traditional model a bit. While most retailers more like 80% product and 20% storytelling, we flip that and are really concentrating on storytelling as the primary focus of the store. You enter through a red carpet through an illuminated hallway and are greeted by a video image of Michael Phelps, who's your host and guest trainer. He leads you through a series of vignettes that define the will of an athlete, including a training session with NBA star Brandon Jennings, rooftop yoga in Shanghai and the exhilaration of running out on the pitch before a match at White Hart Lane, the home of Tottenham Hotspur. The second piece I wanted to cover was how our innovation agenda enables us to win with consumers and drive a powerful pricing model.
Our strategy is fairly simple. Wherever it is that we show up as a brand, our goal is to be best in class, Whether it's at our national sporting goods partners or regional ones like Shields and Dunham Sports, our innovation agenda is what enables us to be the premium brand at that retail destination. So when we have success with a cold year infrared long sleeve at $50 or a woven stretch Capri at $55 it reinforces our promise to deliver that best in class innovation to our consumer. We saw great evidence of that in Q3, where our average selling price grew by 5% in apparel alone. We believe our ability to continually innovate for our consumer and the pricing power that comes along with it is a key element of our growth story and one that helps separate Under Armour from our competitors.
The third thing I wanted to cover was our success with the young athlete or as we refer to them next. Our continued strong growth in youth is prime evidence of our ability to make that emotional connection with a young athlete both on and off the field of play. We are winning with youth in both boys and girls and it's not just in our core apparel where we would expect to be strong. Our youth footwear business is extremely strong and we anticipate that strength continuing in 2014. One great indicator is that in categories like basketball where we are performing very well in authentic distribution with a slightly older consumer and we are making great strides in the category with our youth consumer as well.
And like we laid out at our Investor Day this past June, our focus when it comes to Under Armour athletes is all about next. So when we partner with a great up and coming athlete like Stephon Curry of the Golden State Warriors, We're connecting with a hardcore athlete who knows he set the NBA record for 3 pointers made this past season and a 12 year old kid in New York who remembers him dropping 50 on the Knicks on his last visit to the Garden. It's athletes like Stefan, Jordan Spieth, Bryce Harper, Cam Newton and Sloane Stephens, none of them over 25 years old that help us connect with our young consumer and challenge us to raise our product development game up to their level. The 4th and final piece for me today is about our team, a team that is evolving from within, but also adding a new dimension to our leadership with experience from the outside. First, the internal piece.
Kip Folks, currently our COO is adding the new title President of Product. In this expanded role, she will now directly oversee the design and development of all products including apparel as well as our supply chain and information technology areas. Henry Stafford, who has served as Senior Vice President of Apparel since joining Under Armour, will take on the role of President of North America. In this newly created position, Henry will be responsible for our North American wholesale business, retail marketing, global retail and global e commerce. Working together, Kip and Henry will drive an integrated product and merchandising strategy that will ensure we remain focused on growing our core business here in North America while providing the foundation for the product, merchandising and retail development to help Charlie Madott drive our business outside of North America.
In addition to Kipp and Henry's new responsibilities, we've elevated Matt Merchant to the new position of Executive Vice President of Global Marketing. Matt, Kipp and Henry all embody the Under Armour culture and I'm confident in their proven ability to lead. In addition to these appointments from within, we're adding 2 new members to our senior leadership team. Susie McCabe is joining Under Armour as Senior Vice President of Global Retail. She comes to us from LaF Lauren with extensive retail management experience.
Also joining the team is Jason LaRose, as Senior Vice President of Global Ecommerce. Jason joins Under Armour from Express and will oversee our online consumer experience and drive our web business strategy. In their new positions, both Susie and Jason will report to Henry. So I'll now turn it over to our CFO, Brad Dickerson. But I want you to know that there are multiple other areas of our business where we are working with just as much intensity as the four areas I focused on today.
We will continue to be a growth company in constant evolution on all fronts. We will use our brand momentum here in the U. S. To fuel our global ambition. We will stake out a new position with today's athletic female and we will become a more digitally relevant brand for our consumer in the next 12 months and there will be much more.
As I said earlier, we are a growth company and one that is focused on our future, but delivering results now. With that, let me turn it over to Brad. Brad? Thanks, Kevin.
I'd now like to spend some time discussing our Q3 financial results followed by our updated outlook for 2013 and preliminary thoughts on 2014. Our net revenues for the Q3 of 2013 increased 26% to $723,000,000 Apparel grew 26 percent to $561,000,000 during the quarter from $445,000,000 in the prior year, representing the 16th straight quarter of at least 20% growth for our largest product category. In apparel, we continue to perform best when we deliver newness and innovation to the consumer, a powerful dynamic that help drive average selling prices approximately 5% higher during the quarter. Apparel results benefited from new innovations like the recently introduced Coldgear infrared technology, expanded platforms in areas such as storm and charged cotton and enhanced design across both legacy and new offerings. From a product category standpoint, while training remained our largest category and drove majority of dollar growth, we experienced strong growth rates in our running, hunting and mountain categories across genders.
We also continue to see momentum in our women's studio line as well as significant growth across our youth business. Our direct to consumer net revenues increased 34% for the quarter, representing approximately 25% of net revenues compared to approximately 24% in the prior year period. In our retail business, we opened 6 new factory house stores during the Q3 increasing our North American factory house store base to 112 up 17% from 96 locations at the end of last year's Q3. We currently expect to open 4 additional factory house stores during the remainder of the year, bringing our total door count to 116. We are also on track to expand 9 existing locations in 2013 as part of our efforts to better service demand with our broader assortment in areas such as footwear and women's.
Looking at our full price brand house stores, we continue to see positive results at our store in Baltimore and we'll open our 2nd location at Tyson's Corner near Washington D. C. In early November. Our story in our e commerce business remains consistent year to date. Strong results driven in part by positive trends in average order value given our improved inventory positioning across the channel.
3rd quarter footwear net revenues increased 28 percent to $81,000,000 from $63,000,000 in the prior year, representing just over 11% of net revenues. Running footwear remains the largest contributor to growth with continued expansion of UA Spine and improved penetration across wholesale. We also concluded successful football season with cleats led by our expanded highlight lines where we continue to take market share. Our accessories net revenues during the Q3 increased 18% to $64,000,000 from $54,000,000 in the prior year period led by strong year over year gains in both headwear bags. International net revenues increased 38 percent to $44,000,000 in the 3rd quarter and represented 6% of total net revenues highlighted by strong growth in our Europe and Asia regions.
Moving on to margins. 3rd quarter gross margins contracted 30 basis points to 48.4% compared with 48.7% in the prior year quarter. 2 primary factors contributed to this decline during the quarter. First, we experienced a higher U. S.
Import duty exposure on certain products imported in prior periods which were identified and reserved for during the quarter negatively impacting gross margins by approximately 90 basis points. In addition, as expected, product costs were also impacted by the resourcing of fleets to more reliable, but higher cost suppliers, negatively impacting gross margins by approximately 30 basis points. Partially offsetting these gross margin headwinds, ongoing supply chain enhancements contributed to lower apparel sales discounts and allowances and air freight expenses, benefiting gross margins by approximately 70 basis points. Selling, general and administrative expenses as a percentage of net revenues leveraged 120 basis points to 31.7 percent in the Q3 of 2013 from 32.9% in the prior year's period. Details around the 4 SG and A buckets are as follows.
1st, marketing costs decreased to 10.3% of net revenues for the quarter from 11.4% in the prior year period, primarily driven by the planned timing of our global marketing campaign this year as well as overall expense leverage given our top line performance. 2nd, selling cost increased to 8.1% of net revenues for the quarter from 7.9% in the prior year period, primarily driven by the growth in our direct to consumer business. 3rd, product innovation and supply chain costs decreased to 7.3% of net revenues for the quarter from 7.5% in the prior year period, primarily driven by a shift from a third party distribution facilities in California last year to a consolidated in house facility this year. And finally, corporate services decreased modestly to 6 percent of net revenues for the quarter from 6.1% in the prior year period. Operating income during the Q3 increased 33% to 100 and $21,000,000 compared with $91,000,000 in the prior year period.
Operating margin expanded 90 basis points during the quarter to 16.7%. Our 3rd quarter tax rate of 39.4% was unfavorable to 36.1% rate in last year's period, primarily driven by a lapping of state tax credit last year and higher levels of investment international investment this year. Our net income increased 27 percent to $73,000,000 compared with $57,000,000 in the prior year period. 3rd quarter diluted earnings per share increased 26 percent to $0.68 compared to $0.54 last year. Now moving over to the balance sheet.
Total cash and cash equivalents at quarter end increased 19 percent to $186,000,000 compared with $157,000,000 at September 30, 2012. Long term debt including current maturities decreased to $54,000,000 at quarter end from $72,000,000 at September 30, 2012. Inventory at quarter end increased 59% year over year to $497,000,000 compared to 312,000,000 dollars at September 30, 2012. As previously discussed, the normalization of our fleet levels following last year's delivery challenges was a significant driver of a higher inventory growth rate during the Q3. In addition, we have moved some capacity back to certain suppliers after last year's challenges.
In an effort to help smooth capacity with our suppliers, we have brought in some products earlier than otherwise planned. Our investment in capital expenditures was approximately $23,000,000 since Q3. We currently expect 2013 capital expenditures of approximately $95,000,000 ahead of our prior guidance of the high end of $85,000,000 to $90,000,000 with the incremental investments driven by international supply chain initiatives and domestic retailing. Now moving on to our updated outlook for 2013. Our prior outlook call for 2013 net revenues of $2,230,000,000 to 2,250,000,000 dollars representing growth of 22% to 23% and 2013 operating income of $258,000,000 to $260,000,000 representing growth of 24% to 25%.
Based on our current visibility, we are raising our net revenues outlook to approximately 2,260,000,000 dollars representing growth of 23%. We are also updating our operating income outlook to approximately $260,000,000 representing growth of 25%. Below operating results, we continue to expect a full year effective tax rate of 40% to 41%, while our full year fully diluted share count is now expected to be approximately 108,000,000 which is at the low end of our prior range of 108,000,000 to 109,000,000. We have several additional updates pertaining to guidance for the balance of the year. First on net revenue.
As we have previously outlined, we continue to plan our business assuming comparable weather year over year. Due to significant shifts in the timing of shipments, we also expect minimal growth in both footwear and international during the Q4. Moving on to gross margin. We expect a year over year decline in the Q4 of approximately 50 basis points with the factors driving this decline consistent with those delivery challenges and lapping last year's excess disposition strategy at our outlet stores. The negative factors include more expensive resourcing of key products an FX impact on our licensing revenue stream from Japan and the impact of the previously discussed change in our Canadian import duty methodology.
While we have a lot of moving parts for the quarter, we still expect the full year gross margin rate to improve modestly from the 47.9% level in 2012. Switching over to SG and A. In marketing, based on year to date spending trends and leverage from higher revenues, we now expect the full year marketing expense rate will be closer to 10.8% compared to last year's 11.2% rate. Looking at the other 3 SG and A buckets in aggregate, we expect expense deleverage during the Q4 given higher incentive compensation levels and ongoing investments to support our global growth initiatives. Overall, although we now expect a slight increase in the consolidated SG and A spending rate for the full year, we still expect to achieve a modest operating margin expansion from the 11.4% level achieved in 2012.
As we indicated last quarter, we remain opportunistic with any additional net revenues or gross margin upside to our plan during the Q4 by reinvesting in SG and A to help support our growth initiatives in future years. Thus, we expect more ability to improve our operating dollars in the event of better than planned results and non operating margin. Finally, a little more color on inventory. The same factors that impacted the Q3 are expected to persist in the Q4. However, we expect the inventory growth rate will ease sequentially in the Q4, but remain higher than sales growth.
Before we turn it over for Q and A, we'd also like to provide you with our preliminary outlook for 2014. Based on our current visibility, we anticipate 2014 net revenues and operating income to be at the lower end of our long term growth targets of 20% to 25%. I would emphasize that our focus will remain to drive higher operating income dollar growth balanced with making the right investments to drive our long term global success. We wanted to outline 2 preliminary factors to consider for 2014. For net revenues, we expect accelerated growth rates for footwear and international with most significant growth impacts for each expected to incur in the 1st and 4th quarters.
For gross margins, we expect modest full year gains driven by ongoing supply chain efficiencies partially offset by a less favorable sales mix. As has been our custom as we finish up the current year and get more clarity on next year, we will provide more color on 2014 during our Q4 earnings call in January. We'd now like to open the call for your questions. We ask that you limit your questions to 2 per person, so we can get to as many of you as possible. Operator?
Thank
The first question is from Matt McClintock of Barclays. Your line is open.
Hi, yes. Good morning. Thanks for taking my question.
Hi, Matt. So Kevin, I was just wondering if
you could drill down more into the women's business. The improvement to product that you've made in the fall, what you're seeing there specifically? And then if we could actually extrapolate that into what you're doing with the studio shop in shop and how you think about using that to potentially transform what traditionally hasn't been a place for women to shop the sporting goods channel to actually draw women to that channel? Thank you.
Great. So our women's business remains a tremendous opportunity we think for the brand. And as we stated all along, we believe that women's has the potential to be larger than men's and frankly that it will be larger than men's someday in the future. Women's today is nearly 30% of our apparel business versus who's less than 16% when we were a public company that we'll celebrate here in just another week or 2, more than 8 years ago. So, in addition, we've also added more than $2,000,000,000 in revenues during that time.
So, we're very pleased I think with the trajectory that women's has is outpacing our overall growth as a company. Our women's business as we stated at Investor Day as well is something we anticipate to be nearly $1,000,000,000 business for us by 2016 and we're highlighting that with the emphasis around opening our New York office sometime the end of this year, early part of next year, led by Leanne Fromar who joined us from Theory within the past year. And we're seeing the team that Leanne is building out. And again, in addition to the other brand experts that we already had here, the momentum that we have and the ownership we believe we have with that female athlete, I'll try and be making more beautiful product for her, taking her from beyond just on the athletic field and taking her to places that I don't think they'd expect the Under Armour consumer to be in the path. We're also I think putting our money where our mouth is around women's.
You mentioned the shop in shops and so you'll see a big emphasis on that. One thing that we've done differently in 2013, we think that paid really good dividend for us was our use of the brand holidays. And we've had 3 of them as I mentioned in my script, the first two that have already taken place, the third of which will happen in the next couple of weeks. And we're planning to commit at least one of those brand holidays exclusively to women's in 2014 also. So we want to make a big statement that we believe that Under Armour women's has really arrived and something can be extremely important for Now probably one of the best vehicles we've seen our women's product come to life has been the idea of women's studio.
And I think it's really our commitment with number 1, any of you that are here at Investor Day, you see it highlighted particularly in our own brand house store. But really some of the excitement we have in some of our key partners like Dick's Sporting Goods where we've built out this new studio presence. And I think we've all gotten extremely excited about what it can mean and what it's done, I think, to the dimension that's been added to the brand, but also showing, I think, a different side of Under Armour than the female consumer has seen us before is that we're much more than compression shorts and sport bras and I think we've demonstrated that with the range that we have as a product. And I can tell you it only gets better and better. We're also from a distribution standpoint.
We talk about the department stores as being something that's important to us. We're in roughly 1,000 apartment stores today. The majority of that assortment and I want to be clear, these are not full assortments we have there. Majority of that is youth underwear and there's a women's product. So, we believe there's a lot of growth available for us there and frankly it's a way for us to reach the female consumer where she shops.
And so, we're going to hit it at all levels. 1st and foremost, in our core sporting goods partners, we're going to become more comprehensive in the way that we present ourselves there. We also have some initiatives that we stated of building out things like the women's studio shops, like the Luxe shop that we have at Dick's for instance. And then we also are going to continue to emphasize I think the places where she's shopping and again as I mentioned department store business. So women's for us remains a tremendous opportunity and it continues to outpace our overall growth as a company as well.
Thanks a lot, Kevin.
Thank you. And the next question is from Eric Tracy of Janney Capital. Your line is open.
Eric?
Eric, please check to see if your line is open. I'm on mute, I'm sorry.
Hello. Kevin, can you hear me? Yes.
All right. Sorry about that. So we really want to dig in on the footwear piece here a bit. Maybe just talk about sort of the evolution of spine as we go into spring next year, the introduction of SpeedForm, sort of the cadence and how we should think about the distribution strategy there. It seems to be again we're in an inflection point and acceleration, but just want to sort of gauge your thoughts updated thoughts on footwear.
Yes, I think I keep level setting I think with the expectations we laid out back in June at Investor Day. But one of the things we talked about was being a top 3 footwear brand in sporting goods. And we look at where we're successful and where we're winning and obviously the apparel floor space in any given sporting goods stores, Under Armour has a significant impression. And unfortunately, we haven't represented that way on the footwear side. And so we've got a couple of things.
When Kipp first took over the footwear business several years ago, one of the initiatives we had was building shoes that cost $100 And I think we saw success with things like Charge RC. We've seen success with the first price point we introduced Spine with. RC was at $120, Spine was at $100 And I think we came to realize is that just picking some number isn't necessarily the right place for us to be, particularly in sporting goods where you're really winning there is at $70, dollars 80, dollars 90. And so we've changed that mindset a bit that we're very pleased I think with the premium product that we have and things like Charge RC and things like Spine and in products that we have like SpeedForm, and I'll get to that in a second. But we also have some products we're really excited about heading into the year with some wheelhouse price points like an $80 product that we have called Engage coming out.
So we really want to emphasize and focus on winning where we're already being successful in the apparel side, which is in sporting goods. We also believe there's a tremendous opportunity in the mall. Our key partners in Finish Line Foot Locker that have been incredible partners for us and continue to give us great runway. So SpeedForm is going to be a critical component of what that means. So let me back up for a second and just talk about Spine.
Spine continues to sell very well for us. The latest iteration that we have is called Vice and we're about to launch a new even lighter, sleeker and faster version in early 2014. I mentioned Charge RC, so you'll see us coming back with new styles and colors and updates to that style that ranges somewhere between $110 $120 And then what we have with SpeedForm that we introduced in a really small way just to get a taste of what we thought the product could do at $120 this year in specialty. And the product has been incredibly pleased with it at this point. For instance, we made the cover of Competitor Magazine being labeled the best innovation in 2013.
We're coming back from a bit of a more commercial product that we have, we're going to call SpeedForm Apollo, which will launch at $100 in a lot more volume in many more of the places where you'd expect to find Under Armour. The feedback we're seeing on the product has really, really been good though and something that we believe that we're in a position to do well. All of this that we stay running and I think we've been clear that we need to win in running. So, we are it's great not to just be talking about 1 style heading into a season, but being able to talk about $120 Charge RC, dollars 100 SpeedForm, a $90 spine, an $80 engage, you're seeing us begin to add some dimension to the brand. But at the same time, it's all underpinned by I think the authenticity that we're driving on field.
Football for us included and I think people roll their eyes a little bit, but I can tell you the authenticity that we get from being as good as we are and grabbing market share in places like cleated has been extraordinary for us. Football for us as a whole, we're up 28% in units and 42% in dollars with the highlight cleat leading the way. And we enter a market with that type of innovation. We're seeing it cascade into many other products and we're selling the highlight fleet at $100,000,000 $110,000,000 What that does for us in some of our $70,000,000 $80 price points as well, It really drives business and it moves market for us. We're also seeing, I think, really nice progress in things like basketball.
We recently announced Stefan Currie joining our roster of athletes and somebody we're really excited about again, broke the record in the NBA for 3 pointers last year. And I think a tremendous competitor and somebody that really fits well with the character of our brand and frankly somebody I think like the DNA of all of our athletes, someone who really wanted to be with us. And so, I think we're getting more presence on court, but I think we're doing in a prudent way. We're not trying to buy royalty.
I think we're demonstrating, we're earning it, whether it's on the football field or it's on
the basketball field or You you're seeing us show up I think in more relevant ways with our brand. And again, all these things underpin the success that we've had in apparel, but I think you're beginning to watch it move toward an area like footwear too.
And Eric, I just wanted to tie in to Kevin's comments and clarify my prepared remarks around the Q4 growth rate in footwear. And again, just to emphasize, this is a timing issue. The 4th quarter actually is our lowest volume quarter for footwear. And this is really more around the timing of our baseball fleet shipment. And again, it's our lowest volume quarter.
So, our year to date 2013 growth rate in footwear is around 25%. And again, we've called out the fact that footwear is going to be above the company growth rate in 2014. So, the Q4 growth is just a timing issue.
No, that's fair. And then I guess Brad to follow on that, the footwear acceleration next year, understand that dynamic in terms of weighing on gross margin. But the early sort of color on gross margin next year of modest gains, Given supply chain enhancements, given now pricing seems to be, again, whether it's within footwear or even apparel, a nice tailwind. Some of these one time sort of upfront costs should go away. So maybe just walk through again the gross margin dynamic next year, where the potential is for upside or is it purely just the mix on the footwear that should be the drag?
Sure. And to be honest with you right now on the gross margin side, looking at the data we have and the data that we have yet, we have pretty clear visibility in the spring summer 2014 and don't have all the data points in fall winter 2014 yet. So we're kind of using spring summer 2014 as a proxy for our guidance for the full year of 2014. And if you kind of look at the front half of the year and the things that you have, you have couple of things working in your favor. A lot of the things you mentioned, some supply chain enhancements that we've been making along the way.
We would continue to expect to see some benefits from those going into next year and for the full year. Some of the things working against us is the mix piece. So, obviously, if we're calling out things like footwear and international, those are two parts of our business that from a gross margin perspective, although both improving year over year within themselves are still a drag on gross margins overall for the company. So that would be a big part of offsetting some of those supply chain enhancements that we'd make during the front half of the year. So again, positives supply chain side, again, positives there working for us.
The negatives on the gross margin side would be the businesses that are growing above the company growth rate in footwear international.
Okay. I appreciate it. Thanks guys. Best of luck.
Thank you. And the next question is from Evelyn Kopelman of Wells Fargo. Your line is open.
Hi. Can you hear me?
Hi, there. Yes.
Okay. I wanted to ask on the inventory, maybe thinking both the inventory on your books and also thinking about the channel, excluding the place and timing compare issue you mentioned, how do you feel about it, about the content of it? And thinking the second kind of interrelated question is how is the sell through performance in the channel in the quarter? Maybe was there difference in sporting goods versus department stores versus others in the wholesale channel? Thanks.
On inventory in general and then sell through, from an inventory perspective, like I
said, there are a couple of big issues that will drive investment in a year over year growth rate. We are absolutely comping a challenging service levels last year that we talked about last year, especially in the fleet business. So more normalization of our inventory levels on the fleet side. If you remember, our inventory growth last year in Q3 was a minus 2%, just kind of going back to some of the challenges we were having last year at this time. In addition to that, we kind of are in this kind of in the middle of a period here of improvement relative to some supply chain things, specifically on the inventory side.
We talked a lot in our Investor Day about our 3 year planning process and the benefits that's going to have specifically to the supply chain longer term. Those really probably 20 until we get into 2015, maybe the end of 2014 into 2015. So in the meantime, we've talked about kind of resourcing some of our products to our existing suppliers and putting more capacity to our existing suppliers. So part of the byproduct of that was making sure with them, really working with them and managing their capacity level loading of inventory and manufacturing, the ability to smooth that out and take some inventory in earlier too. So the impact of that's been a little bit more than we anticipated coming into the back half of this year on top of again the comp issue that we were absolutely having in the back half of last year too relative to our service level.
So those are really the 2 big things that are driving inventory. As you look again into Q4 and into early next year, I would assume pretty similar stories. Again, I think if you looked at our growth rates in inventory in Q4 last year was minus 2% and Q1 this year was flat year over year. So if you look at some of those challenges we were having on the supply chain side, we're definitely all in the back half of last year and in the beginning of this year. So we'll continue to have some of those comp issues we'll continue to have this issue of level loading with our vendors too from a capacity perspective until the benefits of 3YP start to kick in a 3 year planning process.
On the sell through side, obviously we're posting really strong results here in the quarter. We've seen really good results in our direct to consumer business, obviously, as I stated in my prepared remarks. On the wholesale side of business, we've absolutely had another strong quarter and anticipate a strong quarter in the 4th quarter. Have we seen some impact to the much publicized softness at retail? Absolutely, I think everybody sees some impact of that.
We've seen a little bit of that as we got towards the end of Q3 and the beginning here of Q4. But again, all that's kind of built into our guidance and we're working through It has impacted our business a little bit. But again, I think much, much less than it has probably other people in the space.
Thank you. And the next question is from Camilo Lyon of Canaccord Genuity. Your line is open.
Thanks. Good morning, everyone. Hi, Camilo. Kevin, I wanted to just touch on youth and in particular Alter Ego. It seems like that's been a runaway success for you.
I was curious to hear your thoughts on how you plan to expand distribution. I know that you started going into your wholesale partners with the product this quarter. How do you see that broadening unfold? Do you think about the shop in shops dedicated to the youth category?
So, first of all, All 3 Eagle Force has been a really great success in 2013. It's a business that in June of 2012 didn't exist. We ideated it, tested it, built the product and had it in store this year. We primarily were in market with just a couple of our key partners, only maybe 2 or 3 of our partners. So we're just starting to get in front of them on the production side where we can get the product out there.
So within our existing distribution, there's a lot of runway I think for Alter Ego. At the same time, as good a partner as Marvel and DC Comics have been for us with this process, we're also we'll go after this cautiously optimistic about how many Batman and how many Superman T shirts. First of all, there's a whole slate of characters that they have and so we're making sure we spread that and we don't want to get caught holding the bag as trends move up and trends move down. However, we believe in it. We think there's plenty of runway there.
What we discovered I think as a company though is that not as much about just any one particular character as it is about the want and the desire and the need for newness and for novelty. And so we believe that we've invented this new category of novelty. And so whether it is Batman, Superman, Iron Man or whoever else we use or whether it's a slogan, we know that the consumer is not looking for a basic white T shirt with an Under Armour logo, a black Under Armour logo on the left chest that we need to provide them a little bit more. And that's frankly across the board what we've seen with our all of our styles is that particularly on our direct to consumer business when the consumer comes to us, they're not looking for the basics, but they're looking for the things that have a little more surface texture, have a little more interest, a little more technology and frankly higher price points too. So Under Armour is really getting decommoditized I believe to some extent while we play with big volumes and big programs and we can make some pretty wheelhouse programs and products, we think that the consumers continue to push us to ask for more innovation And luckily, we've got an innovation pipeline that's really full.
Youth, as you mentioned, Camilo, it's been really just on a care force. Our youth business as a whole continues to, I think, really lead the market as best we've seen. Our product alone on the used side is up. It's outpacing by almost 2x our total company growth. We haven't found the top.
The biggest challenge we have is finding appropriate distribution. Our own key partners have never exactly emphasized departments and use sessions in their stores. And I think because of the success that we've seen, we're testing that more and more and we're looking to be creative, I think, with some of their own floor space and some categories that are more attractive than saying, how can we build out bigger U section. So, that's something I think you'll see come from us. And as I mentioned in my own script, where youth this is not a youth apparel conversation either.
I think I made the statement of challenging somebody and go ahead and take a dozen 12 and under year olds and give them $100 and tell them to walk into a sporting goods store and buy 1 piece of apparel and 1 pair of shoes. And I think there's a really good chance that they'll walk out with a piece of Under Armour apparel on the top. And based on what we're seeing in the last 6 12 months in footwear, there's about as good of a chance these days as them walking out with a pair of Under Armour shoes too. So we're really resonating with that kid and we're looking forward to doing a great job for them and growing up and growing old with them too. So I think it has a position very, very well.
Great. Thanks for that color. And then Brad, just quickly, you talked about assuming a similar weather pattern as last year. How do you view your ability to meet at once orders should weather become more favorable? And how do you think of that as a source of upside?
And then just finally on the gross margin, have you begun to realize the mix benefits in your direct to consumer business as you skew more towards made for versus excess?
Yes. First on the weather side, yes, absolutely. If weather is in our favor, there will be upside for us. But again, the part of AR business and the part of our business that is extremely weather dependent is much less than it maybe was 5 or 6 years ago. So a lot of our Q4 product is going to be in the fleet side, which is much more versatile and maybe less dependent on weather than maybe how we looked 5, 6 years ago.
So, would there be an upside for us if weather was cold? Yes. But let's just make sure we're prudent on how much upside there would be relative to that. From an AR perspective, absolutely our AR fill rates are much better year over year. We were in the high 80s last year in AR fill rates and now we're in the mid 90s where we probably should be.
So again, if the weather gets cold and somebody is looking for that product that's an AR style, we should be able to service that demand in the Q4. Relative to the gross margin and the realization of benefit for mix, Yes, we're still seeing some of that benefit on the made for mix. It was definitely there in the Q3 also. It was being offset though by some other mix issues specifically with the growth in footwear for us in the Q3 also. So yes, we're seeing consistent benefit in the make for mix and the margin upside of that.
It just was a little bit muted in the Q3 because of some other things going on in mix.
Got it. Thanks and good luck for the balance of the year.
Thank you. Thank you, Kumar.
Thank you. And the next question is from Michael Binetti of UBS. Your line is open.
Good morning, guys. Congrats on a nice
Hey, thanks, Michael.
So Brad, since you mentioned it early on the international investments in the quarter, that was a big point of the conversation at the Analyst Day you guys had at headquarters this summer. Maybe you guys could talk a little bit about the plan for international as you look just into 2014 in the context of what you guys talked about at the Analyst Day and the headquarter, what some of the investments may look like? It was obviously a material component of how you guys guided operating margins as well. So, maybe just a little bit more about how the near term looks on that?
Yes. Michael, let me take this and just do sort of a big overall and spend a minute on international for us. So, first of all, I think we laid it out very well and it was great to have the ability to introduce Charlie to I think the investment community and get you to see the type of leadership that we have there. So we have a couple of basic rules here at Under Armour and one of them is that great ideas get funded, but only great ideas with great leaders get funded. And so we're putting our money where our mouth is on that side as well in addition to the women's.
And what we see is that international has great dividend for us, but we know it's going to be an investment, it's going to take time. And part of our restructuring was really built around that. The movement that we did with KIPP and with Henry was really to put some of our better leaders on our cash generators. And the philosophy that we're driving, I think our corporate strategy with these days is this principle I had in my script where I said our North American growth and cash creation are going to be the engine that feeds our global ambition. Because we have the success in North America, it allows us to make these longer term investments.
And so we're going to be investing appropriately internationally, but we believe we've got some really good ideas and we believe we have some really good leadership. So let me work my way around the world and start with Latin America, which is what Charlie had been working on prior to coming to Under Armour, specifically for the last 8 years, but not exclusively of course. Mexico, we're in the process of bringing back in our Mexican and making them Mexican distributor into a subsidiary by the Q1 of 'fourteen. We just opened our 1st specialty store in Mexico City on middle of in the 1st week of October and it's doing very well. So, I think we're seeing that we're resonating with that consumer.
Brazil is obviously a big topic of conversation for everyone. The team that Charlie has assembled there is literally second to none. Unbelievable amount of experience, 1, the 50 years of experience that we have. That office is open now and we'll be beginning to probably look to move our product. We'll be in there by in time for World Cup in 2014 without a huge presence.
But again, it will give us traction and I think you'll see an even bigger presence as we build up to the Olympics in 2016 also. Chile is another office that just opened in the past month. We announced the deal that we did with Colo Colo, who is one of the largest soccer clubs in Chile as well and again with just a proven professional who is running our business there. Moving across the pond to Europe, it's a place where we've been in Europe really since 2006. We just opened a new office in Manchester to focus on the U.
K. Specifically. Our business with Tottenham Hotspur is something that I think it demonstrates our commitment to being a global brand and obviously showing up in the global stage of EPL something that's been doing very well and our kit is doing extremely well in that market also. That being said, we still have we have work to do in Europe. We're still resonating with that consumer and we believe we like our leadership, we like our team.
We have good momentum, but we need to capitalize on it. We need to make Europe an absolute win and a positive for the company and we see it. We believe that that tipping point as we sit here and hear 7 or 8 of our existence there is something that is very, very close for us. Moving to the other side of the globe to Asia, beginning in China, I talked about last week having been over there and Benator from visiting our partners in Japan who are doing extremely well, growing close to 30% on a meaningful business there. Again, they nearly crossed US200 $1,000,000 last year and continuing to grow.
China for us, where I've spent time, we've got 6 stores open right now, 3 of them are exclusively Under Armour stores. The Under Armour experience that we opened in Shanghai is just a really cool environment. And again, I believe the first thing that we need to convince the consumer in any market, but particularly in China is why walk by, how do I compel you to walk by the 4 or 5 global brands you've heard of and the 7 or 8 local brands convince you to walk into an Under Armour store or participate with our brand. And we believe that we're doing that with this new retail experience. So, something very exciting and we think there's a lot more things to come.
In other places, Taiwan and Hong Kong, opened our first store with a new partner in Taiwan recently. In Hong Kong, we opened with a distributor there called Giga Sports, a retail chain there. And again, the product is doing extremely well. We just launched both websites recently. So we're balanced.
It sounds like we're doing a lot and we really are, but we believe we have it in control. I think part of our shift is again this reorganization we just announced has as much to do with Under Armour transforming from being a North American company selling stuff in other parts of the world to truly being a global brand that's doing business in North America and Latin America and Asia and in Europe. And so we're very focused on making that happen and I think we're taking really good positive steps toward that direction. And Michael, just on
the magnitude of the investment, although we're growing SG and A in Europe, to Kevin's point, I think most of the additional investment we're looking at from 2013 to 2014 and even starting in 2013 is just building up the foundation of the international business globally. So, making sure that we have the right people, processes, systems from an information technology perspective, supply chain and leadership, as Kevin mentioned, is part of the additional investment this year and into next year. And then probably the other big piece of the additional investment is going to be in that Latin America region as we bring kind of you're looking at kind of year over year incremental investments, it's that international corporate group and it's Latin America that are really driving the investment in international for the most part. Okay. Thanks a lot guys.
Thank you.
Thank you. And the next question is from Kimberly Greenberger of Morgan Stanley. Your line is open. Great. Thank you.
I'm wondering if you can just help us with the preliminary 2014 outlook. I know that on your Q4 call, you'll have a lot more detail. But what is it that you're seeing happening in the environment that would suggest that the lower end of your targets are the right place to be for next year? And if there's any additional color you could offer on that, that would be fantastic. Thanks.
Sure. I think if you just kind of look where we're guiding this year compared to our guidance next year relative to revenue growth rate. The 2 things that we did call out, international and footwear being accelerated growth next year. So you would look at those two things seeing positives from a growth rate perspective. But the one thing I think that clearly we look at year over year where we are this year versus next year, The largest piece of our direct to consumer business is our outlet business.
And we have talked about slower growth in doors, new doors the outlet side, although we are focusing on growing and expanding some existing doors. Our outlet business will grow at a slower pace than this year as we start to transition also into putting more effort into the brand house side of our business on top of the outlet business. So that DTC business is obviously a much bigger business than international footwear combined. And again, outlet is the biggest part of that DTC business. So, you have 2 businesses growing at a faster pace that are off a smaller base than the outlet business, which will grow at a little bit slower pace.
Okay. That's really helpful. And then in terms of your wholesale, should we assume that wholesale will also be near the lower end of that range as well?
Yes. Usually, since wholesale is the biggest part of our business, you would expect it to be pretty much close to the range that we're guiding to for the most part.
Great. Thanks.
Operator, we have time for one more question.
Okay. And then the last question is from Sam Poser of Cern AG. Your line is open.
Thanks for taking my question. Brad, I was just wondering, can you give us some detail on how you're thinking about the SG and A next year? Will it be this constant reinvestment? Or do you expect that to open up a little bit towards the back of the year if sales come in above where you're going?
Sure, Sam. A couple of things just to call out on SG and A for year. We do see some items like marketing as an instance that I probably would if I was looking at it directionally for marketing right now, I'd say it's probably going to be a little bit of a deleverage for us next year based on where we're going to end up this year. Again, we haven't really figured out the exact timing of that yet, so we'll give more information on timing in the next earnings call. And something we're calling out this year will also be a little bit of an investment overall for the company next year and that's in incentive compensation next year which is kind of across all four of our SG and A buckets that will be a deleverage item next year.
Consistent stories relative to again some of the investment needs both in innovation is an area that directionally we would look to be increasing our investments. On the product side specifically in innovation. Supply chain is an area again of investment for us as we are looking to expand our capabilities globally and obviously a continued expansion of our global business itself as we just talked about specifically in Latin America would all be investment areas for us. Relative to your question about how the investments play out versus our top line and performance, and I think the one thing that we're going to constantly balance is we are focused on driving operating income dollars and operating income dollar growth, just like we talked about in our Investor Day over the long term. We will always look for opportunities to help ensure successful business in a subsequent year or do things in the current year that could benefit the current year also from an SG and A or investment perspective.
So if numbers would come in better than we are planning for 2014 or the timing of that would happen differently, We would definitely look to where we reinvest those dollars and be opportunistic to benefit 2014 or probably more specifically as we get towards the end of 2014, what can we do to accelerate or ensure our success for 2015.
Okay. Thanks very much. And then you talked about the mix in the Q4 you talked about gross margin being down, but the mix of retail is going up and the mix footwear is going down in the Q4. So why would that drive lower gross margins?
Probably the only there's a couple of things that are going to be happening in Q4 that maybe were a little bit more impactful than Q3. 1st and foremost, if you remember the Canadian duty issue we called out in the last call, we talked about some uncertainty around the impact of margins for that in the back half of the year. That's still an ongoing issue. We have not resolved that issue. It's still in the kind of the audit mode right now.
So we didn't really have an impact in the 3rd quarter relative to that issue. We do fully anticipate that that issue is going to be resolved in the very, very near term here. So, there will be a 4th quarter impact to that issue as we finish up this year. So, that will be a little bit of a difference from Q3 to Q4. And also on the FX side, our business in Japan where this really impacts us, the change in the yen rate year over year will be a little more elevated in the Q4 versus the Q3 also.
So, those are 2 unique things I think they're going to be more elevated in the Q4 versus the Q3 specifically.
Okay. Thanks. And just any word on tax rate for next year and that's it?
Tax rate for next year, again that's something we have to really kind of roll together with all the numbers and especially the back half of the year. But I would anticipate the 2 big drivers of tax rate for us right now is our ability to have comparable tax credits year over year would be one thing. So if we were able to get tax credits next year that we would have this year would be one way to look at the direction of our tax rate. And the second thing would be obviously reporting to incremental international investments and we need international profits to drive a lower tax rate and when we're in investment mode that will work against us from a tax rate perspective. So my sense would be our tax rate last next year would probably be a little bit higher than this year, but as we get more information we'll guide to that obviously in January.
Thanks very much. Good luck.
Thanks, Dan.
All right. Thanks everyone for joining us on our call today. We look forward to reporting you our Q4 2013 results with Synovia having scheduled for Thursday, January 30 at 8:30 am Eastern Time. Thanks again and goodbye.
Ladies and gentlemen, this concludes today's program. You may now disconnect.