Good day, ladies and gentlemen, and welcome
to the Under Armour, Inc. 4th 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 be given at that time. As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Tom Shaw, Director of Investor Relations. Please go ahead, sir.
Thanks, and good morning to everyone joining us on today's Q4 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 date on which a statement is made or to reflect the occurrence of unanticipated events.
Joining us on 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 Q4 and full year 2012, followed by an update to our 2013 outlook. After the prepared remarks, Kevin and Brad
will be available for a
Q and A session that will end at approximately 9:30 am. Finally, a replay of the teleconference will be available at our website at approximately 11 a. M. Eastern Time today. And with that, I'll turn it over to Kevin Plank.
Thank you, Tom, and good morning, everyone. 2012 was another outstanding year for Under Armour. And as we enter the new year, 2013 holds great promise, because Under Armour has always been about a promise. What is it that we can do as a team to empower athletes to reach their full potential? How do we help make athletes perform better, stay warmer, stay cooler, stay drier and stay lighter?
This morning, I want to talk about the promise of Under Armour, both the one we share with our consumers and the one we have with our shareholders. Those promises have been connected since our inception and we believe that both our revenue and EPS CAGRs of 30 plus percent since our IPO in 2,005 is a great measure of our success. 19 months ago, we hosted Investor Day here on our campus in Baltimore and promised that we would double our revenues to $2,130,000,000 by 2013. Given some of the noise that was going on around about the appetite of the U. S.
Consumer, we understood that was an aggressive number, but we had a vision and an executional plan to get there. In our release this morning, we issued revenue guidance for 2011. Our ability to provide that guidance tells me 2 things. 1st, we've become a much better company operationally. While our business has become more complex and multilevel as we've grown, our operational and financial planning teams have met the challenge.
Secondly, not only have we kept our promise to the athletes who helped us reach our 1st $1,000,000,000 in revenue, but our growth is a measure of how we've been able to reach out to a new consumer, one who understands the promise of what Under Armour brings. Our growth has come through diversity of product as well. We've taken a number of logical next steps moving into product categories like Charged Cotton and Storm Fleece that were adjacent to our core base layer of businesses. Developing these large scale apparel platforms has not only enabled us to take a bigger share of Closet with our core men's consumer, but it has helped us grow at an even faster rate in women's and youth. The results of this diversification are quite clear.
In our IPO year of 2,005 compression represented 64% of our apparel mix. This past year, that compression number was down to just 14%. But our diversification extends beyond apparel. In footwear, we've achieved meaningful market share in just one category to date, cleated. However, when we look at categories like run and basketball, which are significantly larger markets included, it's clear that the footwear opportunity for Under Armour extends well beyond the near $250,000,000 in revenue we saw in 2012.
The path for our continued growth in footwear is clear. Over the past 3 years, we've aggressively built a team of designers and developers who can execute against the promise of Under Armour footwear. Under our new leadership with Kip Folks, my original partner and a person who has overseen all of our product development and innovation for the past 2 years, we are building a UA footwear culture that will ensure we are positioned to fight for market leadership in every athletic footwear category. Kipp's primary focus in footwear will be to lead and continue to bring new talent into the team. Our success included is a great indicator of what happens when we execute with footwear as effectively as we do in apparel.
Kipp's proven leadership skills will ensure our culture of innovation and anticipating the needs of the asset as part of our footwear DNA for the long term. By continually flowing new technologies to market and growing our business, our existing distribution in key retailers like Foot Locker and Finish Line, we believe the future of Under Armour footwear holds great promise. The diversification of Under Armour extends beyond product categories though. Through the growth of our direct to consumer channel, we've learned much about how our consumer likes to shop. Our direct to consumer business accounted for 29% of our revenues in 2012 compared to just 21% in 2010.
We've also diversified our leadership, bringing experience from outside of Under Armour to lead our apparel, supply chain, women's and international teams. And we are focused on our growth outside the U. S. In 2013, prioritizing the key markets where our brand is best suited for growth and building the teams and infrastructure to execute. But our focus not only as a brand, but also as a public company is on next.
What does the Under Armour promise hold in 13 and what are we doing executionally to make that happen? Our growth drivers have not changed since our IPO in 2,005. Men's, Women's, Footwear, Direct to Consumer and International have been critical to achieving our promise and remain our focus in 2013. More importantly, the aggressive diversification of our business will continue. In fact, we will be even more aggressive in 2013.
We will bring more innovation to our consumer. We will redefine the pinnacle of how we present our brand at retail. We will elevate the presentation of our brand in our wholesale distribution. And most importantly, we will speak with a louder brand voice than at any point in our history. So first, on bringing more innovation to our consumer.
At the NFL Combine in 2011, future NFL stars like Cam Newton and Julio Jones were the first to wear a performance monitoring system now known as ARMOUR 39. Next month, that same state of the art technology will be available to the high school freshman in Florida who is looking to improve enough to make his varsity baseball team this spring and a college lacrosse player who wants to make her all conference team in her senior year. The ARMOUR 39 is the first of its kind performance monitoring system for athletes that measures what matters most, Willpower. Willpower is a score that tells you exactly how hard you've worked during a training session. Willpower combines a range of dynamic inputs including body position, user profile and key heart rate measures.
With willpower, athletes can for the first time objectively measure a hard day and a light day to ensure their training effectively to meet their goals. ARMOUR 39 is the first system that detects and responds to every move athletes make, any direction, any speed, any position. The ARMOUR 39 wearable on body strap works with an accompanying watch or on your phone through a mobile app. So on to how we look at retail. In 2 weeks, we will debut our new specialty retail concept across the harbor from our campus here in Baltimore.
It will be over 8,000 square feet of the ultimate expression of the Under Armour brand, delivering an unrivaled retail experience through specialization, localization and of course innovation. From a merchandising perspective, our new store will have 2 clear distinctions from how we look at wholesale. First, the footwear presentation will be a primary focus of the store, enabling us to tell our technology story across multiple categories. Secondly, the new store will carry as much women's apparel as men's, allowing us to tell a focused story on fit and style with products like the Armor Raw and the latest from our UA Studio line. We believe that when our consumer sees the cohesive story of our product, merchandise the full power of our brand, we will be positioned to take our growth in both footwear and women's to the next level.
Elevating our retail presentation will be a focus for us in 2013 and not just in our own store. While we look to expand upon the learnings we gain from our Baltimore store, we're focused on improving how our brand is presented across our wholesale distribution. Within DICK'S Sporting Goods, we are adding 50 new all American and 20 blue chip shop in shops, including our new prototype in Cranberry, Pennsylvania, which is the most complete presentation of Under Armour apparel at wholesale today. In addition, we are significantly expanding our Women's and Youth assortments across key accounts like Academy and Hibbett Sports. Our focus on how our brand is presented at retail extends beyond our sporting goods partners.
Within our growing department store distribution, we are gaining new doors and growing existing floor space with key partners like Macy's, Dillard's and VELT department stores with our key initiatives in women's, youth and underwear driving most of that growth. With all this happening, it's clear that we need to speak with a louder voice to our consumer because our product innovation demands it. We believe we have some of the most compelling product that has ever come from our design team and we plan to let people know about it starting this quarter. Our revenue growth in 2012 was strong, yet we believe there's a consumer who wants more from Under Armour, more Storm Fleece, more innovation like the Armor Bra, more thought leadership from footwear like the Hi Lite Cleat. Our plan to talk to that consumer will be different this year and we will do so in multiple ways.
We will show them who we are as both a women's and footwear brand in our new store here in Baltimore. From a media perspective, we will go harder and we will talk to them in a concentrated and focused way. We will consolidate our spend into a tighter but louder message and ensure that we continue to reach that new consumer who has helped drive our $1,000,000,000 of growth over the past 3 years. We will tell the Under Armour innovation story this quarter with the first of several planned campaigns or what we are calling holidays. We will create several brand holidays throughout this year creating a call to action for our consumers to stand up and get the latest innovation from Under Armour.
You'll be hearing the Under Armour brand voice in 2013 louder and better than ever. And the first of those holidays will happen in just the next few weeks. In summary, I want to remind you of the Under Armour promise. We have lived it and delivered it for our shareholders since our IPO more than 7 years ago. And we of course do it by understanding our consumer and bringing them new products that they didn't realize they wanted or needed.
We will do that even more aggressively in 2013, bringing new dimension to our brand than what the world has seen in the 1st 17 years of our journey. With that, I'll turn it over to Brad Dickerson, our CFO. Brad? Thanks, Kevin. I would now like to spend some time discussing our 4th quarter and full year 2012 financial results and our updated 2013 outlook.
Our net revenues for the Q4 of 2012 increased 25% to $506,000,000 For the full year, net revenues also increased 25 percent to 1,835,000,000 which compares to our most recent full year guidance of $1,820,000,000 Apparel grew 25 percent to $405,000,000 during the quarter, representing the 13th straight quarter of at least 20% growth for our largest product category. Our big story is driving growth across genders for Fleet and Storm. We were able to significantly expand the Storm platform beyond just the charged Cotton line last year to now encompass the broader armor placed line. Adding value to this product to the consumer was key as consumers look for more versatility from our assortments. In Women's, we continue to raise our consumers' expectations with new product categories like studio and armor bra.
Used product led the way from a growth rate perspective in Q4 as we gained shelf space of both existing and new distribution and continue to broaden into areas like graphics, which more than tripled during the quarter. Our direct to consumer net revenues increased 29% for the quarter representing approximately 39% of net revenues compared to approximately 38% in the prior year period. For the full year, direct to consumer net revenues increased 34% representing 29% of net revenues compared to 27% in 2011. In our retail business, we opened 5 new factory house stores during the Q4 increasing our domestic factory house store base to 101, up 26% from 80 locations at the end of 2011. In e commerce, we achieved a growth rate in line with our overall net revenues growth during the Q4.
4th quarter footwear net revenues increased 43% to $45,000,000 from $31,000,000 in the prior year, representing approximately 9% of net revenues. New running products led by the UA Spine platform continues to be the largest contributor to category growth. We also experienced a strong initial sell in of our 2013 line of baseball cleats. Our accessories net revenues during the Q4 increased 16% to $43,000,000 from $37,000,000 in the prior year period. International net revenues increased 30 percent to $34,000,000 in the 4th quarter and represented approximately 7% of total net revenues highlighted by solid growth in Latin America, Asia and our Europe regions.
Moving on to margins. 4th quarter gross margins contracted to 50.3% compared with 51.6% in the prior year's quarter. The 3 primary factors driving this performance were consistent with our expectations outlined last quarter. First, our sales was adversely impacted by moving through a higher rate of excess inventory at our factory house stores as well as a higher mix of footwear, which carries lower margins than other product categories. Combining these factors negatively impacted gross margins by approximately 80 basis points.
2nd, given our previously outlined supply chain challenges, we had to air freight some product, which negatively impacted gross margins by approximately 50 basis points. 3rd, we realized lower North American apparel product costs, partially offset by higher North American footwear product costs, which benefited gross margins by approximately 35 basis points. Selling, general and administrative expenses as a percentage of net revenues leveraged 370 basis points to 34.2 percent in the Q4 of 2012 from 37.9% in the prior year's period. Details around our 4 SG and A buckets are as follows. 1st, marketing costs decreased to 9 0.7% of net revenues for the quarter from 10.9% in the prior year period.
As we have previously outlined, our 2012 marketing budget was more weighted to the 2nd and third quarters to better align with brand initiatives. 2nd, selling costs decreased to 10.7% of net revenues for the quarter from 10.9% in the prior period. 3rd, product innovation and supply chain costs decreased to 7.6% of net revenues from 8.2% in the prior year period driven by overall expense leverage in these areas given our top line growth. Finally, corporate services decreased to 6.2 percent of net revenues for the quarter from 7.9% of net revenues primarily driven by leverage in corporate personnel, incentive compensation and administrative costs. Operating income during the Q4 grew 48% to $82,000,000 compared with $55,000,000 in the prior year period.
For the full year, operating income increased 28% to $209,000,000 compared to our most recent full year guidance of $207,000,000 Operating margin expanded 240 basis points during the quarter to 16.1% and 30 basis points for the full year to 11.4%. Our 4th quarter tax rate of 37.1 percent was favorable to the 39.6% rate in last year's period, our full year effective tax rate of 36.7% was below the 38.2% effective tax rate for 2011, primarily due to state tax credits received in 2012. Our resulting net income in the 4th quarter increased 54% to $50,000,000 compared with $33,000,000 in the prior year period. 4th quarter diluted earnings per share grew 51% to $0.47 compared to $0.31 in the year ago period. Full year diluted earnings per share increased 31% to $1.21 compared to $0.92 in 2011.
Now moving over to the balance sheet. Total cash and cash equivalents at quarter end increased 95 percent to $342,000,000 compared with $175,000,000 at December 31, 20 11. Long term debt including current maturities decreased to $62,000,000 at quarter end from $78,000,000 at the end of 2011. Inventory at quarter end decreased 2% year over year to $319,000,000 compared to $324,000,000 at December 31, 2011. The modest decrease of our inventory levels relative to our 25% top line growth during the quarter was primarily driven by the ongoing success of our inventory management initiatives.
Our investment in capital expenditures was approximately $23,000,000 for the 4th quarter and approximately $63,000,000 for 2012. We are currently planning 2013 capital expenditures in the range of $80,000,000 to 85,000,000 dollars Now moving on to our updated outlook for 2013. Based on current visibility, we expect 2013 net revenues of $2,200,000,000 to $2,220,000,000 representing growth of 20 percent to 21% and 2013 operating income of $255,000,000 to $257,000,000 representing growth of 22% to 23%. Below operating results, we anticipate a comparable level of total interest and other expense in 2013, a full year effective tax rate of 39% to 39.5 percent and fully diluted weighted average shares outstanding in the range of 108,000,000 to 109,000,000. Of note, on the expected tax rate in 2013, we have not assumed a benefit from any state tax credit, which we anticipate pursuing.
Looking further into our operating expectations for 2013, I'd like to provide additional color on expected quarterly timing throughout the year. 1st on net revenues. As Kevin mentioned, our growth drivers in 2013 are consistent with recent years. We anticipate that most of our dollar growth for the year will continue to come from apparel with strong growth across men's, women's and youth. Looking at footwear, the growth is expected to be slightly above our overall net revenues growth for the year.
In direct to consumer, we expect these channels to grow modestly higher than our overall business as we open 10 factory house doors and up to 2 specialty doors, focus on larger footprints within our existing factory house fleet and invest in more targeted traffic drivers and e commerce. Finally, we expect our international businesses to outpace overall growth, so still off a small base. Moving on to gross margin. We continue to anticipate stronger gross margin expansion in the first half of the year relative to the second half, primarily driven by favorable year over year product costs expected during the first half. However, we expect several factors to limit the overall progress in the Q1 relative to the Q2.
First, as we continue to work through recent supply chain challenges, we expect to incur higher year over year airfreight costs during the Q1. 2nd, we expect strong quarterly growth in our Latin American region, which is currently distributor based business carrying a lower gross margin. 3rd, the mix of excess and Mayport products in our factory house outlet channel is expected to remain relatively consistent year over year during the Q1. We anticipate a shift back towards more profitable Mayfield products commencing in the 2nd quarter. Given these factors, we foresee year over year gross margin rates as relatively unchanged in the Q1 followed by over 100 basis point expansion during the Q2.
In the second half of this year, we will be lapping last year's excess disposition strategy at our outlet stores and incremental airfreight. These positive factors are expected to be partially offset by certain changes to our supply base, especially in fleece. While these changes give us better confidence in measures such as delivery performance and future capacity, the moves will ultimately result in higher North American apparel product costs. As a result, for the full year, we expect modest gross margin expansion from 47.9 percent level in 2012, primarily driven by the first half of the year. Next on SG and A.
As Kevin outlined, we are planning to be more targeted in some of our marketing expenses this year, which we anticipate will create some significant year over year timing shifts. The Q1 in particular is expected to see nearly 3.50 basis points of deleverage, primarily as we launch a major brand campaign focusing on innovation and incur costs around our Tottenham sponsorship, which commenced in July of 2012. We also expect meaningful leverage of marketing expenses in both the second and third quarter, followed by a more consistent year over year rate of spending in the 4th quarter. Despite these expected shifts, we plan to hold total 2013 marketing spending relatively flat as a percentage of revenues compared to 201211.2 percent level. Beyond marketing, we expect heightened deleverage in our other 3 SG and A buckets in the Q1, driven in part by incremental expenses tied to the expansion of our California distribution center, the opening of our Harbor East specialty door in Baltimore and higher year over year incentive compensation expense.
These combined factors are expected to drive the total SG and A expense rate for the Q1 to a range of 44% to 45% of net revenues. During the remainder of the year, we expect meaningful SG and A leverage in the 2nd and third quarters and a relatively consistent rate of spending in the 4th quarter. With our overall focus on investments in product creation, international and innovation, we expect a relatively consistent rate of overall SG and A spending for the full year. In summary, we anticipate the strategic marketing decisions planned will result in some significant quarter to quarter shift in SG and A. With these shifts, we expect year over year operating income growth to be slightly higher in the second half of the year compared to the first half, yielding modest full year operating margin expansion 11.4% achieved in 2012.
Before Q and A, I would also like to provide some details around our inventory position. We made some solid strides in our inventory management efforts in 2012 with inventory below our plan the past 3 quarters. During 2013, we expect the inventory growth rate will remain below net revenues growth rate in the Q1 and then be generally in line with our top line trends for the duration of the year. We would 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? Our first question comes from the line of Robbie Ohmes from Bank of America Merrill Lynch. Your question please.
Good morning.
Hi, Robbie.
Hey, two questions. The first question would be, Kevin, can you give us a little more detail on exactly what a louder brand voice means, maybe paint more of a picture for us what the big change could be in the approach to marketing for 2013? And then just the second question would just be on international. You're talking a lot more about Latin America and maybe Asia. And I'm just curious where Europe fits into the international growth strategy going forward?
Thanks.
Thanks, Ravi. So let me take a second and tell you about what we want to do from a marketing standpoint. What we did in I guess starting, so 17 years in the business now, it gives us a tremendous amount of perspective. And looking over the areas in the years where we've been really effective and the years that we still move forward, but maybe we haven't been just quite as loud. So what we want to do is we want to go back to this concept around cluster marketing.
And the idea there is to create holidays. So holidays are places where basically the entire brand meets at once. What we want to do is consolidate our spend to tighter but louder messaging. And so we're planning on several brand holidays this year. So to give you probably the best descriptive idea of what we're doing, it's about to happen in a few weeks here and within the span of about 4 or 5 days, you'll see several things coming from the brand.
First of all, we're going to kick off a PR event in New York in the 2nd week of February that will be announcing some of the innovations we're bringing to market. Things like our new SpineVenom running shoe that's coming out, we're very excited about on the footwear side, as well as probably the marquee product that we have, which is our armor 39, our biometric measurement device that I wouldn't do a bit of detail in my script on. So, this is something we think is going to finally apply some data and take away the subjective into the type of workout I had by that was typically judged by the size of the sweat stain in my gray T shirt to actually giving some hard facts as to how did I work out and giving you a score around this thing called willpower. In addition to that, we're opening a brand new retail down here in Baltimore that again the primary focus of that store is giving us the ability to showcase things that maybe you don't get the opportunity to see as big or as loud and proud as we believe where we are as a brand in some of our wholesale distribution.
And it's things like what we're doing with footwear. And when people walk into our store, they'll say, my gosh, I had no idea you made all these styles and colors and you were so broad, is because a lot of this has been people living with the footwear brand we were maybe 2 or 3 or 4 years ago. And so, we see the ability to really accelerate that as well as to our consumers and frankly to our wholesale partners as well and demonstrate to them what our brand has the ability to look like at retail. And then captioning and sort of tying the whole thing together, we've got this new I Will campaign that we'll be kicking off, which is our brand new creative. You'll see it in 30, 60 and long form 90 and 2 minute versions of it.
But it's effectively telling you what our brand is. It's explaining to what does the idea of I will. And this is not just a local or domestic because as I get into the answer to your next question around international, we're pleased with the strides that we're making and the foundation that we're building in global, but it's important that we begin to tie the success we have here in the States around the world. And so, I Will will be a global campaign. It will be something and a voice that will be heard in all 61 countries that we currently do business in today.
So, when you hear from us, you may see us quiet at points during the year, but when we're loud, you're going to really hear us. And so, I guess that's where you'll see from what in the past and maybe helping Brad out with this answer has been a more smoothed out approach the way that we approach marketing. We're going to take those dollars over what was 12 weeks and you'll probably see them condensed in about 2 or 3 weeks. As I take on international, we continue to believe it's a true opportunity for us and still thinking about our business as a global business. Global companies define their growth by or their success by where more than half of our revenue should come from outside of our home country.
That still remains to be the way that we think about our international opportunity. But when we think about where we'll start seeing meaningful impacts that maybe you guys would see in a bigger way is 2015 2016. Now along the way, we're not asking you to wait that long either because we're laying additional foundation and resources and putting points on the Board. So just a couple of things. Of Europe, you heard us talk about Europe and we've been there since 2006.
I we generally believe that we are close to the tipping point of what's happening in Europe. We're doing more than $60,000,000 today and it's taken us a while to get to that number, but we feel very good about it. We're leveraging things of what you see like our relationship with Tottenham, who's currently sitting in 4th place in the English premiership right now. We've got new distribution. We just opened up a new concept shop inside of Harrods that is doing terrific to date.
And so it's establishing that presence of people ask the question of how can we be successful and we're saying that the consumer wants us. It's just a matter of us really meeting that demand with appropriate distribution, of course, with the right product mix. Looking at around the world and shifting over to Japan for a second, it's our oldest market, our most mature market, and frankly it's our most successful market as well. We've been in Japan for nearly 13 years now and we did nearly US200 $1,000,000 in 2012. Now they continue to be on a growth trajectory that is in excess of what we are even doing here in the States.
So the limit or the size of how big that market can be, I think we're still waiting to see. But they're growing and again our partner there, Dome Corporation, Shuichi Yasuda, are doing an unbelievable job for us. And it is truly it's not a company doing business in Japan. It is Under Armour of Japan. They've got 23 doors open in Japan right now, fully owned stores because they have such a large wholesale business, 18 of which are out and they have 5 specialty stores as well and you'll see them increasing the number of specialty stores that are there.
Probably most importantly when I talk about international is leadership. Bringing Charlie Maraff onto our organization and again it's we're still inside of 6 months, but his impact has been extraordinary. Charlie joined us in September 2012 from Adi Dossler. He'd been for 22 years and ran nearly took a business of running all of Latin America for them from just under $300,000,000 in 2,003 to more than $1,700,000,000 for them. Charlie is in the process of building out his teams in key markets in Europe and Latin America and China, and we're leveraging his expertise in Latin America and prioritizing the strategies that we have in each of those markets.
And so there's a lot of things where we're coming in and a lot of the things that Charlie learned from past experience that are really going to pay dividends and save us a lot of time. So within that, some of the early moves that Charlie made was taking somebody from our outdoor business and Kevin Eskridge was a guy who was a real killer for us here and took our outdoor business from under $30,000,000 to more than $150,000,000 and Kevin and his family moved over to China this year. And so getting on the ground and more importantly getting local with the team that we're building underneath the Kevin as someone who understands the UA DNA and understands our culture, as well as combining that with local knowledge is something that's been a real opportunity. We've got 4 stores open in China right now, 2 of which are Under Armour owned, the other 2 of which are a partner that we have in Beijing and our e commerce site just launched in December. So we feel pretty good about it.
As I mentioned, I think global for us is we're very fortunate to have the 20 plus percent growth numbers we're putting up in our apparel business, moving our DTC to nearly third of our total business as well. And so between those two markets, it allows us to make these longer term investments of things like where you're seeing the progress coming in footwear and more importantly, what you see in the international. So I use that 2015, 2016 as a bogey and it's pretty consistent where we talked about international will come on in a meaningful way. But I'd tell you, with leadership like Charlie and some of the team he has from the leadership and Matt Sheer that we have in Europe and what we have in China, we feel very good about that.
Thanks, Kevin. That sounds great.
Thanks very much, Robbie. Thank you. Our next question comes from the line of Omar Saad from ISI Group. Your question please.
Hi, good morning guys. Nice work. Hi, Omar. Wanted to follow-up on the specialty store you're opening up in Baltimore. Can you talk about how and I think Brad alluded to there might be 2 openings this year.
Can you talk about how that's different from your last efforts in the specialty retail department, obviously in a more of an urban location as opposed to a mall? But can you talk about the product mix and merchandising strategy for the store and what you hope to accomplish with it?
Yes, Omar. Well, I think we want to learn. We went at when we looked at specialty retail 3 or 4 years ago, I don't think I think we still had a long way to go in terms of putting our infrastructure in place. And more importantly, we had so much work to do in our wholesale distribution. Now, I tell you there's still a tremendous amount of work with our wholesale partners because 1st and foremost, we love our wholesale distribution.
Hopefully, I think you see from some of the presence we have there that they feel pretty good about us as well. We're going to start testing with February 16th, we opened our new Harbor East store and most importantly, we're going to learn a lot and we're going to learn a lot about the consumer and I think as we grow as a brand, it's important that we have this closer relationship with the consumer. The same way that we've learned in our e commerce channel is the way that we can learn watching a consumer walk in and seeing what products are compelling. The primary goal here is for us to get closer to that consumer and again a place that we can tell the full Under Armour story in this environment. I mentioned those 2 product categories of AR women's and having a larger and a more important presence because I don't believe that our Women's gets enough credit for the size of the company that we built there.
We're nearly $400,000,000 Women's in 2012 and it's still on an amazing trajectory of growth right now. And that's $400,000,000 at wholesale, mind you, and close to $800,000,000 at retail. And we think that the idea of how we can show products and showcase products like Armorball, but more importantly, our new studio line is having rave reviews and something that's coming across very, very well. So, what we've done and our team has done to build out our women's team is paying great dividends for us. I mentioned women's and footwear because that will be the focus and what will be unique about the store also is that footwear will actually be in the center of the store.
And so, it will be a real primary focus when the consumer walks in of not people walking and saying, oh my gosh, you sell shoes too versus wow, this is a footwear brand because we believe that we're the ones that need to take the lead in making that bold statement about our being a footwear brand. You're also going to have an innovation area, can have clear messaging of features and benefits, layout flexibility, and there'll be this real simplicity. It'll almost be like a personal shopper for the consumer. So, it will be a way to really make buying Under Armour easy and get us away from being so item driven where it's a cold gear mock or maybe a heat gear key and a very much more collection driven. And again, if we had a goal from this store, it's saying that as we evolve and you heard me talk about in my script too, the emphasis we have in our wholesale presentation of moving us away from being frankly just quite so item driven to do adding and driving more collections there.
So, we want to be prescriptive in how we teach athletes how to dress and we'll have people in our store that are specialists and experts and allows us to showcase new products like ARMOUR 39 where you can really get the product and the explanation out there. So, again, this is a store in our backyard. We're very conservative with declaring what this is going to be other than we think it's going to help us learn a lot. It will be a place that I can stop on my way home from work and we can see how consumers are shopping and really get a sense of understanding retail.
Okay. It sounds like it's a brand messaging store, but it's also aimed to be with the hopes of being profitable and replicable on a larger scale. Is that correct?
Yes. 1st and foremost, we specifically did not use the word flagship and I don't believe in the idea of leading with marketing or flagship or, oh, it's a loss leader for us. We should make money in everything that we do. And so, our approach to the store is no different than that and that's why we say 8,000 square feet is maybe bigger than you'd say a 5,000 or 6,000 may feel right. So we want enough room to tell a brand presence, but 100% we believe that our intent is to make money in the store.
Thanks. And then real quick on the ARMOUR 39, is that an offshoot of the Under Armour E39 product innovation that you guys had on some of your athletes last year? Is it embedded in the apparel? Is it some sort of armband or wristband or is it related to the footwear? Any insights you can give there?
Yes. It's the evolution of the same product and this is me. There's attorneys in the room, but I'm going to tell you the attorneys got the better me and we had to come down to the naming of this thing. But it's a perfect product, the same product and again we've had this product in the market for 2.5 years and so we've been testing it, refining it, now we're finally ready to go to retail with this product. And so it's something that what you saw again Cam Newton and Julio Jones to the stars of the NFL that you'll see today when they went through the NFL combine more than 2 years ago, it's the same product they were wearing.
And so we've evolved that into something that has commercial application. And as I said, it will give the consumer at home the ability to finally measure themselves beyond being on a elliptical or treadmill, but what happens from the full time that you're in the gym, the full time that you're exercising and taking the subjective away, as I said earlier, the size of the sweat stain on your T shirt into actually what is my willpower score and that's something given on a 1 to 10 basis and allows an athlete to measure and say, well, today I was a little better than yesterday and tomorrow I'm going to be a little better than today.
Thanks, Kevin.
Thank you. Thank you. Our next question comes from the line of Michael Binetti from UBS. Your question, please. Hey, guys.
Good morning. Congrats on a nice quarter there.
Thanks Michael.
So thanks for all the help today on the components that are going to be contributing to the revenue growth in 2013. And so I think about that with the kind of detail you gave to us, it seems like it might be a good time to ask about how you think about in the long term gross margin potential of the business. Back in 2011, I think you were targeting 50% gross margins. Kevin, as
you look at the places you're going to
be taking the brand over the next few years, how are you thinking about gross margins today?
Michael, I can jump on that one just to start with here. I mean, our vision of long term gross margin hasn't changed. We do believe that over the long run that our gross margins should start with a 5%. That's being driven by continued innovations in the marketplace, which would justify the price points and justify the margins for the product to get there, 1st of all. 2nd of all, obviously direct to consumer is a help in the mix equation for gross margins also.
So nothing has changed relative to our vision of over the long run getting up to that kind of 50% plus gross margin goal.
Okay. And then this might be for Kevin. Kevin, with footwear, there's obviously been some changes on the team there. So do you think as new leadership moves in, we'll see the footwear program take a change of direction over the next year or 2 as you or your approach to that market? Or do you look at the platforms you have now like spine and the new basketball shoes and will be more
of an evolution of those platforms you've already launched? I think we look, we're very pleased I think with the direction and how we've been moving as a footwear organization And we're especially pleased with the team that we have in place in footwear. The thing is that since we've added $1,000,000,000 in revenues in the last 3 years, we've added new skill sets and the evolution of the team of what makes the most sense with us. At the end of the day, we've had to make a lot of these decisions over the last 7 years since being public, but it's also come out to netting a 31% CAGR top and bottom line in that same period of time. So as our business evolves, so does the need to consistently build and recalibrate our leadership.
And so what we're doing is we're taking my original partner, Kip Folks, who is a guy who first and foremost is a product guy. And I want to make sure the assumption that people understand and know about Kipp is he ran supply chain because he's a great leader. He's running footwear because he's a great leader, but he also understands product at the same time and will again, his primary focus is to get him to help us continue to build out our footwear team because even where we are crossing the $250,000,000 mark, we feel there's a tremendous opportunity in front of and a long way to go. When I say a product guy, I mean footwear has reported to KIPP for the past 2 years in addition to innovation. So, he understands the things that are in the pipeline and really the way that we're going to pull the trigger there.
And the reason we're able to do that is because we've done such a good job hiring within KIPP between Jim Hardy coming on board on the supply chain side who's doing an excellent job for us and what Henry Stafford has been able to do on the product side for us, we're able to focus Kipp more on the footwear side. With shoes as a whole though, I don't want to stop the message at sort of where we've been as much as where we're going. First of all, with some of our track record, we've been in shoes for 7 years and our first category there was football cleats. But frankly, it took us 7 years to get to this place where we are now where we're making telling product from the consumer, things like that highlight cleat that we point out at $130 price point, the perish wasn't a ton of perish, but it was the fastest selling speed shoe that you saw at sporting goods this year to our retailers who carry the product. And more importantly, the Evoloa, the lift that that provided us was we went from a market share of a that started with a 2 to a market share that started with a 3.
So, it comes back and driving home the point when we innovate, we will win beyond just one particular product, but we sold more $50 to $100 product because we were selling that $130 product as well. So you'll see us continue to push there and things like running. Our pipeline is full. SpineVenom, as I mentioned, kicks off in the middle of February. Our new Charge 2 product, we've got a new product called the Toxic 6, which is launching.
We've also got another you'll see another running concept from us this year. In basketball, we've had success on court with many of our players are playing very well from Brandon Jennings and the Bucks and Kemba Walker and the Bobcats and Grievous Vasquez and Ray Felton from the Knicks as well, Deandre Jordan with the Clippers, plus we've got another 8 or so players that are also wearing our brand that aren't being paid money. They're wearing it because it's good product. So many of these things just take a little bit of time and the good news is that we have a very young athlete base including people like if you saw any of the Australian Open, you watch Sloane Stephens who is definitely one of our next athletes at 19 years old, who was the 1st teenager to ever beat Serena and move on to the semifinals at the Australian. And her first comment I think from the announcements was how cute her shoes were, but more important than being cute was the fact that they actually worked.
So, we're very proud of that and we're also moving to a place where yes, it does matter if the shoes look great too. So, we feel like we're making great progress and we feel very comfortable that Kipp's going to do a great job for us and we'll continue to build out and evolve that team.
Okay. Thanks a lot guys.
Thanks, Michael. Thank you. Our next question comes from the line of Eric Tracy from Jenny Capital. Your question please. Hi, guys.
Good morning. I guess if I could Brad for you focus a little bit more on supply chain, perhaps the learnings since Jim Hardy and his team have come on. I understand the cadence still sort of be a little bit of a constraint in the Q1. But maybe just talk about sort of the upside opportunities in the back half and as we enter into 'fourteen, sort of what those opportunities to drive further gross margin expansion from the supply chain? Yes, Eric.
We've talked a lot about some of the supply chain challenges over the last few quarters and the impact to our results in the back half of twenty twelve relative to having to air freight some product in to get product in on time to meet demand. Some of that some of those challenges are going to be consistent as we get into the front half of this year, especially in Q1, some more heightened airfreight than usual, again, just to kind of make sure we're meeting demand on time. It's the same type of issues we had from last year. It's relative to a few factories that we onboarded during the course of last year and some challenges around the onboarding of a few factories. So that will be consistent to the front half of the year.
As we start moving through the year, the thought there on the supply chain side in the short run here is to move some of the supply especially around the fleece categories where we had some of most of our challenges last year to move that to more consistent historically reliable suppliers of ours. That will help with obviously delivering on time, but in the short run that will come at a little bit of a cost, especially in the back half of the year when some of that movement of product starts to hit the market. Lessons learned really as you get into 20 14 and forward and Jim has done a really good job looking at this and his team is capacity in general, planning longer term capacity and where we need to be not just in the next year or 2, but farther out years 34 and making sure that we can onboard factories in the right at the right pace and at the right time. And that will be the important part of our long term strategy in the supply chain. So we do kind of see this kind of airfreight issue back half of last year, 1st part of this year and then kind of the switching of the factory base to back half of the issue to be more of a short term need to meet demand, longer term doing a much better job of planning out capacity and onboarding new factories at the right pace.
Okay. And then maybe Kevin for you. Again, apparel is holding up really, really well. I think there's probably misinterpretation of being saturated domestically. That goes without saying.
In terms
of the
distribution expansion beyond the core, particularly on the men's side of the business, How do you balance continuing that expansion, supportive of the apparel growth without potentially sort of diluting or getting maybe cannibalization within that core channel? I think it begins by having and continue to drive great growth within our existing base. So if you did your checks, I think the expectation that we believe our existing distribution has from us is that we're the company that continues to deliver double digit comp growth in your stores. And so finding ways to do that, it is putting the same things in there, but finding newness, frankly showcasing innovation. And it's not always and it can be simple innovation too.
It's the Charge and the Storm platforms that will each be $200,000,000 businesses for us this year that effectively didn't exist in 2010. When you look at, again, some of the simpler innovations, it's things like fleece. Our fleece business this year was on fire, not literally, but up 50% for us. So you imagine taking a simple category like fleece and driving that kind of growth that is a wheelhouse product, our charged cotton business plus 90%, our storm platform plus 300%. So when you look at apparel, we're still not servicing the appetite of our consumer within and through our core base.
So, when I mentioned that we like our distribution, they like us very much, we understand where our bread is buttered and we'll continue to make sure we take care and that we build out things and taking time as you heard me hopefully very thoughtfully talk about the retail presentation expansion we'll have in our wholesale distribution. Now at the same time, we do see opportunity. So you'll continue to see more and we could spend a lot of time talking about Dick's and I think some of the headway that we have there is they continue to be a headline for our brand as we are presented in the marketplace. But you also have great things happening with Academy and Hibbett. There's over 30% growth there driven by space expansion in women's and youth that we have there.
Our youth business is unbelievably healthy, particularly as we move into things. Sports Authority has done very well. The new management team is really getting settled in there and we're cleaning up the business. It's Sports Authority in 2013 as well. So, we've we've we've got a lot of Sports Authority in 2013 as well.
So as you look at sort of where you'd expect to see us to some of the new places you are seeing us. Last year we told you that we are going to spend 2012 and we were going to be exploring the department store channel. So picking up some best in class partners that we have there, Macy's, Dillard's, Nordstrom, Belk, Lord and Taylor, Bloomingdale's, and Von Maur, it was a business that we primarily focused on underwear and youth and we put that in about 700 doors throughout 2012. We like the doors win. We think there's about another 200 doors potentially we could go in 2013 as well as we look.
But we're going to start doubling down and better in the stores that we're already doing business in. For instance, with Macy's, we're doing shop in shops and some of the obvious places, places you'd expect like Herald Square, Union Square, State Street in Chicago. So we'll be we want to increase that presence and we want to make sure most importantly that it's not just a couple of shirts hanging on a rack, but that our presentation is important. I think that's one thing you'll hear from us. So what we want to demonstrate again going back for a second to what we're looking to come from the specialty store model is that when you walk in that store, you'll see that the Under Armour brand is important, our products are important, our innovation is important, that the presentation is important.
And we want people to walk in and we want them to say, wow, I see what the vision can look like of how you could look in my store. And I want them to think like that as well is that our goal for that is not cannibalizing existing stores or distribution. Our goal for that is the ability to be strategic because we still believe there's a large need for or want or desire for Under Armour that is currently going unmet. And so, we'll continue to find distribution that fits that idea and that fits our brand and you'll continue to see frankly our brand open the aperture of where the consumer has come to expect us as well, but we're not going to jump from Chapter 1 to Chapter 30. So hopefully you see this patient growth and I think we're demonstrating that growth the whole time while continuing to put points on the board.
That statistic of 31 percent CAGR top and bottom line since our IPO is something we're very proud of and especially doing it again in 2012 where there's a lot of wind or noise out there about difficulties, we still put 25% on the board. So I think that's what frankly you've come to expect from us and we're very proud of that type of performance. Okay, great. I really appreciate it. Thank you.
And we do have time for one more question. Our final question comes from the line of Kate McShane from Citigroup. Your question please.
Hi, thanks. Good morning. With regards to the warm weather, which has been on everyone's mind the last two winters, I wondered if there was any insight into any possible strategy change with regards to change in flow of product or the change in mix for next winter or subsequent winters?
Yes, Kate, let me jump on that first. First of all, our inventory is in really good shape right now. We've had some great cold weather, obviously, as you felt the last several weeks and that's really had things moving at retail. It doesn't have a big effect to us. It's been helping our partners out and getting things cleaned out as they start looking forward to 2013.
We've been doing several things from repositioning. I mentioned that growth that we had in base layer. We made a decision, I think we were in this position in the Q4 particularly and we all had our fingers crossed sitting around waiting for it to get cold and we realized that that probably wasn't the best model or way for us to be thinking about our business. We made a conscious decision to stop being so weather reliant And for a company whose 2 basic categories of business were something called the Heat Gear and something called Cold Gear, that was a pretty big shift. So keeping that DNA and that explanation to our consumer of how they shop our brand intact, we started adding things like a lighter fleece product, something that isn't just as much about keeping warm as much as it has more style and has more relevance to it.
So I think you've seen us take that. Our apparel business in the Q4 was up 25%, but moving away from weather reliant is something that allowed us to keep that in what was probably the most challenging Q4 that anyone has seen in a very long time. We are more and I think that's hopefully what comes across, we are more than just, if you go on the apparel side, a cold weather compression brand. Compression, as I mentioned that stat in my script and think about that, in 7 years when we went public, compression was 64% of our business to being just 14% today. So we continue to ebb and flow with the market as it makes its demands of us.
And I think more importantly, we continue to tell the market what we think with our point of view. When we add newness and innovation in the assortment, we're going to win. Again, as I mentioned about not just being a cold year mock $50 company, we have that and we've enhanced it and we've come to our EVO cold year, but that's not a product that's in high demand when it is 65 degrees outside in December. So that's where the storm cotton and the charge cotton platforms have really been helpful for us. And again, a continuous flow where what we've done I think on our merchandising side and Henry and his teams and up and down the line have really done a great job is getting to where we've got more product flow.
That's not 2 shipments a year, but we're really answering the needs of the consumer as the weather change. So, with that, we'll continue to emphasize more versatility in our assortment with weatherproof items like fleece, which again I'd say grew 50% in 2012, and you'll see us continue to push that. But our partners are doing a great job for us, I think, anticipating the market and product. And I think we feel pretty good about the flow that we have from an innovation standpoint in apparel. And I can tell you, we did good things, but between Sonic base layer and we've got a new technology people have been talking about at the outdoor show we unveiled last week as well that we'll be unveiling a little soon.
We've got a lot of great things in the pipeline and it's a competition. It's a competition to be a featured product from Under Armour. So it's our job to edit, it's our job to make those decisions for the consumer and hopefully we're building continue to build that trust to consumer that it's great product and a fair value, more importantly it's something that works. And Kate, just relative to on the dollar side of how we're planning to flow through the year and it kind of ties into what Kevin is talking about here. If you look at kind of the quarterly revenue growth, relatively consistent across the quarters as far as revenue growth, but a little bit more heightened growth in Q2 and Q3 versus Q1 and Q4.
Again, not a significant difference, but just how we're planning the business right now, a little bit of a timing difference. Q1, Q2 was just more timing in general. Q4 is kind of going to your point of coming out of 2 warm winters, still trying to get our arms around what that means. As Kevin mentioned, obviously, our product has expanded and it's much more versatile right now even with warm winters, but still trying to get our arms around what these 2 warm winters mean. Also have not had bookings for Q4 come in yet.
So that's kind of the timing difference there in Q3 and Q4 relative to revenue growth.
Okay, that's great. And if I could just sneak in one more question. I think you mentioned Brad the incremental cost of footwear during the quarter. I just wondered what that was from and how many more quarters we can expect to see that pressure?
Well, as we've talked historically, Kate, footwear's gross margins are well below our apparel margins right now. And as footwear grows quarter by quarter, that could have an impact to our gross margins. In Q4, technically Q4 really isn't a big footwear quarter for us in general, but we do see in the Q4 sometimes is the sell in of some of the spring product for the next year. Specifically, this Q4 was around our baseball cleats. If you remember last year, we had a very, very strong baseball season.
And had very strong selling and sell through baseball cleats. A lot of our customers on the wholesale side wanted to make sure we got product on the floor in time and set coming off that success last year. So we had some shipments of baseball fleets in December.
Okay. Thank you. Thank you.
All right. Thanks everyone for joining us on the call today. We look forward to reporting you our Q1 of 2013 results, with tentatively have been scheduled for Friday, April 19 at 8:30 am Eastern Time.
Wait, Raven's 3533, final prediction. Go Raven. There you go. Thanks. Bye, everybody.
Bye bye. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program.