Good day, ladies and gentlemen. Welcome to the Under Armour, Inc. third 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. Instructions will be given at that time. Should anyone require technical assistance during today's conference, please press star then zero on your touchtone telephone. A reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Tom Shaw, Director of Investor Relations. Please go ahead.
Thanks. Good morning to everyone joining us for today's third quarter 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 the statement is made or to reflect the occurrence of any unanticipated events.
Joining us on today's call will be Kevin Plank, Chairman, CEO, and President, followed by Brad Dickerson, our Chief Financial Officer, who will discuss the company's financial performance for the third quarter, provide an update to our 2012 outlook, and introduce our preliminary 2013 outlook. After the prepared remarks, Kevin and Brad will be available for a Q&A session that will end at approximately 9:30 A.M. Finally, a replay of the teleconference will be available on our website at approximately 11:00 A.M. Eastern Time today. With that, I'll turn it over to Kevin Plank.
Thank you, Tom. Good morning, everyone. Ten consecutive quarters of 20-plus % top-line growth. Twelve consecutive quarters of 20-plus % growth in apparel. Third quarter revenues up 24% and EPS up 23%. Inventories down 2% year-over-year. These numbers speak to the level of consistent execution that you have come to expect from an industry leader like Under Armour. We are a growth company, one that in seven years in the public markets has proven our ability to patiently unlock the power of the next great global athletic brand. While I will start with some commentary on how we achieved our strong third quarter results, I believe the most compelling piece of our growth story is our patience in developing our brand and the opportunity that provides us to continue to grow at this accelerated pace into 2013 and beyond. First, the scoreboards.
The external financial scoreboard is full of Ws, with balanced contributions on the revenue side from our three key apparel drivers of men's, women's, and kids. When we spoke after our first quarter results earlier this year, we talked about two key themes that were critical to our success in 2012 and beyond. First, when we innovate and add value for the athlete, we win. Second, our success in balancing the need to improve operationally in critical areas like supply chain, planning, and design, while executing to deliver that 20+% growth. Looking at our innovation and operational scoreboards, the results were equally strong. First, on innovation.
The strong acceptance we saw this past quarter for our Spine footwear technology and the fact the Cam Newton Highlight Cleat was the single most compelling on-field product at retail in 2012 is great evidence that our thought leadership has raised consumers' expectations for Under Armour footwear. What opportunities does this success provide us? We have talked extensively about getting the cadence right in our footwear business, these strong launches will be followed up with a UA Cam Highlight Trainer, a $150 training shoe inspired by the iconic look of the game shoe. Our Spine platform will expand with more accessible product that incorporates the same technology found in our premium running shoe. In our women's business, our key spring introductions of the ArmourBra and our Studio line continue to track very strong at retail.
Our Sweat Every Day I Will campaign, the latest incarnation in our What's Beautiful marketing efforts, and our team's heightened focus on fit and design is helping us bring new female consumers into the Under Armour brand every day and expand our addressable market. As part of that goal, we are adding to our strong leadership team in women's with the addition of Leanne Fremar, who is joining us as Senior Vice President, Executive Creative Director for Women's. Leanne comes to Under Armour from Theory, where for 10 years she served as creative director. Leanne will be spearheading our new presence in New York City, where we will be able to benefit from not only the cultural influence but also the great talent pool that exists there for both apparel and footwear.
With women's, much like footwear, our ability to innovate provides the opportunity to expand beyond our core athlete with relevant product for a slightly different consumer. She demands the same level of functionality as the elite athlete, our innovation agenda is focused on bringing that level of performance to a broader range of consumers. I mentioned our operational scoreboard earlier, I believe our results in this area speak to the tremendous focus and investments we put into our supply chain. Growing at a 20+% rate for the past 10 quarters has, of course, challenged us. We've had to grow with our existing suppliers while adding new ones and quickly become experts as we innovate our way into new product categories. Timely investments and strong leadership in our back end has helped us deliver this consistent growth.
We've added to our apparel sourcing base and are making strides in our ability to balance inventories with demand. Now in our seventh year in footwear, we've developed a solid footwear supply chain team in Asia and here in Baltimore that will allow us to keep up with the demand that we are generating. In addition, our growing presence in the category has enabled us to develop strong factory relationships critical to us reaching our long-term goals. Great quarterly and year-to-date results. Some big Ws on both the innovation and operational scoreboards. A lot for the Under Armour team to be proud of. What excites us as a team is the opportunity ahead. When we look at all the components of our business, whether it's a product category, geography, or point of distribution, we believe we are consistently in the early stages of growth.
That is the lens through which we view the opportunity and why we are confident about our ability to grow. I spoke earlier of our continued expansion in footwear, up almost 30% year-to-date. We are in our seventh year in the cleated business, and while our market share is very significant, it still continues to grow. Our share in running is in the low single digits, but we're in the early stage of growth and just now finding the right cadence in this $6 billion category in the U.S. alone. It's that opportunity, the chance to combine the power of the Under Armour brand with our endless pursuit of innovation, that drives us as a company. We are fortunate that those opportunities exist everywhere for us. They exist in nascent categories for our brand, like women's Studio, mountain, lacrosse, outdoor, and soccer.
We have the opportunity to be a meaningful brand in every sport category. While we don't discuss these businesses on these calls, you should know that there is a team at Under Armour living and breathing these opportunities, ensuring that we are authentic and focused on the Under Armour consumer in each of them. They exist in new geographies, in markets where consumers are not yet aware that they must protect their house. They exist in markets like the U.K., where we do a large percentage of a fairly small European business. We planted the seed with our new relationship with Tottenham Hotspur Football Club in London, and it's off to a great start as we again bring the Under Armour brand to a completely new range of consumers.
We have a wide path to develop the Under Armour brand outside of North America, we have the additional benefit of reaching these new consumers through not only a physical retail presence, but a digital one as well. Our challenge internationally will be setting the right priorities, determining which markets are the best fit for our brand, and investing to drive that growth. We are laying the foundation with steps like our Tottenham relationship and our first stores in China. Again, we are still in the early stage of growth outside of North America. Here in the U.S., we understand that a key element of our brand strength has come as a result of selling our products in authentic sports retail environments like Dick's Sporting Goods, The Sports Authority, Academy, and Hibbett.
As the breadth of our products expand and our distribution continues to evolve here in the U.S. and globally, we will always be rooted in this authentic sporting goods distribution where our brand has been built. Our existing team has much to be proud of. 10 consecutive quarters of 20-plus % revenue growth is a testament to their work. As we prioritize around all the opportunities facing us, we are supplementing this team with new leadership in some critical areas. These new leaders, Charlie Maurath in international, Jim Hardy in supply chain, and Leanne in women's, bring numerous years of industry experience to their new positions. Beyond that experience, they also bring new thinking and a new dimension to how we approach these opportunities. In summary, we remain a growth company. The right balance of aggressive execution and strategic patience has helped us deliver very strong financial results.
What brings all of us to work each and every day is the knowledge that that opportunity for our brand remains vast and that we are in the unique position of being the next great global athletic brand. With that, I'll turn it over to our CFO, Brad Dickerson. Brad?
Thanks, Kevin. I would now like to spend some time discussing our third quarter financial results, followed by our updated 2012 outlook. I will conclude with some initial thoughts on 2013. Our net revenues for the third quarter of 2012 increased 24% to $575 million. Apparel grew 22% to $445 million during the quarter, representing the 12th straight quarter of at least 20% growth for our largest product category. We continue to see strong results across our men's, women's, and youth categories. Men's was led by training, hunting, and underwear, with underwear driven by the category's introduction into over 500 department stores year-to-date. On the women's side, we are experiencing strong results in our Studio line and sports bras. We continue to deliver a better balance of performance and design.
In youth, we more than doubled our graphics business year-over-year, while also expanding into more than 250 department stores. Our direct-to-consumer net revenues increased 31% for the quarter, representing approximately 24% of net revenues, compared to 22% in the prior year period. In our retail business, we opened four new Factory House stores during the third quarter, increasing our Factory House store base to 96, up 26% from 76 locations at the end of the third quarter in 2011. We plan to open five additional Factory House stores in the fourth quarter, bringing our total Factory House store count by year-end to 101. In e-commerce, we have seen improvements in site speed and functionality in the last quarter, and the conversion gap year-over-year has narrowed. Third quarter footwear net revenues increased 21% to $63 million from $52 million in the prior year, representing approximately 11% of net revenues.
As you will recall, we shipped nearly 5 million introductory footwear product to our Japanese licensee, Dome, in last year's third quarter. Not counting this one-time shipment, our footwear growth was closer to 33% year-over-year. New 2012 running product, led by UA Spine, continues to be the largest contributor to category growth. Our accessories net revenues during the third quarter increased 37% to $54 million from $40 million in the prior year period, led by strong performance in headwear and bands. International net revenues were roughly flat in the third quarter at $32 million and represented approximately 6% of total net revenues. Adjusting for the previously mentioned footwear sales to Dome, international net revenues grew approximately 18%. Moving on to margins. Third quarter gross margins expanded to 48.7%, compared with 48.4% in the prior year's quarter. Three factors primarily drove this performance during the quarter.
First, as expected, we are starting to see some relief in input costs. Lower North American apparel product costs, partially offset by higher North American footwear product costs, positively impacted gross margins by approximately 30 basis points. Second, more favorable year-over-year sales discounts and allowances also benefited our gross margins by approximately 20 basis points. Finally, following some delivery challenges, we had to air freight some product to service demand, which negatively impacted gross margins by approximately 20 basis points. Selling, General, and Administrative Expenses as a percentage of net revenues deleveraged 60 basis points to 32.9% in the third quarter of 2012 from 32.3% in the prior year's period. Details around our 4 SG&A buckets are as follows. First, marketing costs increased to 11.4% of net revenues for the quarter from 10.4% in the prior year period.
Expense deleverage during the period was primarily a function of increased advertising in connection with our key media campaigns for footwear and Women's. Second, selling costs held steady at 7.9% of net revenues. Third, product innovation and supply chain costs decreased to 7.5% of net revenues from 7.7% in the prior year period, driven by an overall expense leverage in these areas given our top-line growth. Finally, corporate services decreased to 6.1% of net revenues for the quarter, from 6.3% in the prior year period. Operating income during the third quarter grew 21% to $91 million, compared with $75 million in the prior year period. Operating margin contracted 30 basis points during the quarter to 15.8%. Our third quarter tax rate of 36.1% was slightly favorable to the 36.3% rate in last year's period.
Our resulting net income in the third quarter increased 25% to $57 million, compared with $46 million in the prior year period. Third quarter diluted earnings per share grew 23% to $0.54 compared to $0.44 in the year-ago period. Moving over to the balance sheet. Total cash and cash equivalents at quarter end increased to $157 million, compared with $68 million at September 30th, 2011. We had no borrowings outstanding on our $300 million revolving credit facility at quarter end. Long-term debt, including current maturities, decreased to $72 million at quarter end from $80 million at September 30th, 2011. Inventory at quarter end decreased 2% year-over-year to $312 million, compared to $319 million at September 30th, 2011, driven by success around our inventory management initiatives, along with some supply chain challenges that delayed the receipt of some product.
Our invested in operating capital expenditures was approximately $16 million for the third quarter. We now plan for 2012 operating capital expenditures toward the higher end of our previously provided range of $60 million-$65 million. Moving on to our updated outlook for 2012. Our prior outlook called for 2012 net revenues of $1.8 billion-$1.82 billion, representing growth of 22%-24%, and operating income of $205 million-$207 million, representing growth of 26%-27%. Based on our current visibility, we are updating both our net revenues and operating income guidance to the high end of our prior guidance. Our updated net revenues outlook of $1.82 billion represents growth of approximately 24%, while our current operating income outlook of $207 million represents growth of 27%. With this updated outlook, I'd like to provide some additional color on several items. First, on net revenues.
The drivers of our net revenue guidance remain relatively unchanged from our prior guidance and assume similar winter weather patterns as last year and more moderate expectations within our e-commerce business. Moving on to gross margins, we now expect full-year gross margins to decline as much as 40 basis points off of last year's 48.4% level. This compares to our prior full-year outlook of flat to down slightly year-over-year. We continue to see similar dynamics as outlined last quarter. Improved North American apparel product margins primarily through easing product costs, offset by more aggressively moving through excess inventory at our Factory House stores and a less advantageous mix, given our footwear growth and e-commerce assumptions. Regarding the gross margin guidance change, we have talked in the past about finding the right balance between inventory management and servicing customer demand.
While demand for the Under Armour products remains strong, as demonstrated by our year-to-date 24% net revenue increase, we continue to have some supply chain challenges fulfilling this demand. The near-term impact will come in the form of incremental airfreight costs. Despite these costs, we believe core improvements continue to be made across our supply chain and see no change to our longer-term opportunities from a gross margin perspective. Shifting to SG&A, we continue to see a consistent year-over-year expense rate in marketing and the greatest expense leverage in corporate services. In aggregate for the year, we expect SG&A leverage will more than offset gross margin contraction and drive modest operating margin expansion off of last year's 11.1% rate.
Below the operating line, the only change to our prior guidance is the full-year effective tax rate, which we now see at approximately 37%, slightly down from our prior guidance at the lower end of a 37.5%-38% range. Finally, on the balance sheet, we continue to make positive strides with inventory management, including better aligning our buys with our forecast and reducing the creation of excess inventory. We expect inventory growth will remain below our net revenues growth during the fourth quarter. Before we turn it over for Q&A, we would also like to provide you with our preliminary outlook for 2013. Based on our current visibility, we anticipate 2013 net revenues to be at the lower end of our long-term growth target of 20%-25%, and operating income growth to be closer to the midpoint of our long-term growth target of 20%-25%.
We will provide additional details on our 2013 guidance in future calls after we gain a clear picture of full-year bookings, which to some degree are predicated on the consumer environment heading into the upcoming holidays. Several factors to consider for 2013 include the following. First, we anticipate opening approximately 10 Factory House stores in 2013, representing 10% door growth compared to 26% door growth expected through the close of 2012. Second, we expect higher growth margins given a continuation of a favorable product cost environment, particularly in the first half of the year. Third, we expect growth margin gains will be partially offset by continued SG&A investments in areas such as innovation and supply chain. Overall, we expect moderate full-year operating margin improvement. We would now like to open the call for your questions.
We ask that you limit your questions to two per person so we can get to as many of you as possible. Operator?
Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Omar Saad of the ISI Group. Please go ahead.
Morning. Good morning. Hey, Kevin. Two questions. You mentioned in some of your prepared remarks the importance of the authenticity of the sporting goods channel and how critical that has been for the brand and will continue to be for the brand. Can you talk about the channel distribution options for you guys as you think about some of the new areas where you want to grow international women's. Is that still the right channel? Especially internationally, are there authentic sporting goods retailers available that you guys can partner with? Also, how does that make you feel about own retail? Are you thinking about, to the extent there isn't a great sporting goods channel for some of these opportunities, are you guys revisiting the idea of maybe doing a little bit more own retail outside of the factory channel?
Well, I think it definitely forces our hands as we look outside the United States. Beginning here, I don't think we can reiterate enough, the strong partners that we have, the relationship and partnership we have with Dick's Sporting Goods, is clearly our largest customer and has been a real advocate for our brand from the beginning. You'll continue to see large investments in their doors and what we're doing on a partnership level at that level. It's not limited to just Dick's, though, either. Throughout sporting goods, there's a channel for us. We're very proud of our relationship there, and I think we're demonstrating with things like the 20-plus % apparel growth that we're still continuing to grow there, too.
More productive floor space, more compelling shops, and better stories, then we're continuing to come back and I think be a driver for those doors as well as demonstrating with innovation and winning. We're also leveraging, again, our core basics with the sporting goods guys with helping us with footwear and getting our market out there. We really reset in 2010 with the idea of selling product above $100. That's typically not where sporting goods is selling footwear either, so it's been a challenge. We found success beginning with our roots and things like the Highlight Cleat at $130 this past football season was something that was great, and that's leading over to the new Cam Highlight Trainer that we have coming out in a few weeks. We're continuing to set the mark of what we're doing at sporting goods.
At the same time, you're watching the brand evolve. Again, I'm speaking domestically, but many of the players I'm talking about can help us overseas as well, at least one in particular. As we move to the mall channel, that's been a new challenge for us as well on the footwear side, but really a big opportunity. I think the first thing you're seeing is the commitment that we have. One of the things we're looking with a partner like a Foot Locker, for instance, is somebody who gives us the ability to find distribution outside of the United States. We haven't found the right court. Again, speaking outside the U.S., I think you're finding consistency. Again, we're in about 250 Foot Lockers today with a similar number of Champs today. We're nowhere near the 4,000-plus stores that Foot Locker has capability to.
Again, that's opportunity as you watch us become more appropriate with the consumer who's shopping there. We're going to continue to make those kind of investments to find out how we can be important out of the United States also.
Distribution, what you're seeing, take a category like women's, where department stores have become important to us, we are expanding our distribution there. We're going into, we've added up, what, about 300 Macy's right now, as well as going into about 150 Dillard's, women's is important for us in those stores. Underwear is a huge leader and defining force in those stores as well. We're also doing footwear is important. The partnership that we have with Finish Line right now and what they're doing of taking over the Macy's format is something that's very exciting for us, where I think it's going to give us the ability to really story tell.
In short, where you have a very core company that began with roots in sporting goods, I think we're finding ways to translate our story beyond sporting goods, but using and leaning on that authentic base. I think we're doing a pretty good job of streaming out toward doing that. As far as it goes with our own retail from that standpoint, without question, in some of these markets, sporting goods, it doesn't really exist as a channel or it's completely polluted as a channel. It's really difficult in some of the places that we've looked at, the U.K. is probably a great example of that, with JJB recently going out of business also.
We have some ideas basically believe with, I don't know if there's one strategy or there's one channel we're looking at, as much as I believe that Under Armour should be everywhere. I'm not saying that discounting the brand and the other things that you've seen pervasive in some of these other markets, we need a strategy in every place where the consumer is shopping and thinking about sweating. That's how we're approaching it, I do believe that our own retail will play a role in that. What we haven't established yet is the flagship mentality or idea of going in and trying to buy our way into high street retail.
I do think there's a good compromise where we can create a physical presence in store, not unlike the way we've let ourselves into China, that we now have three stores in the Shanghai area. We have a couple more opening in Beijing, you're really seeing a nice base that begins with the performance, the consumer's beginning to get it. Probably the last thing I'd end with is why we need those physical presence. I think that we have the unique opportunity to redefining the way that we take our product abroad, that digital is going to play such a critical role, that being there and maxed out on the e-commerce side is something where we think we can really be important.
I think it's really fairly balanced, and if I tried to sum up my answer to you, Omar, I'd say it's going to begin with, first of all, we're going to protect, we're going to defend, we're going to attack in our core sporting goods distribution. We're going to use that here in the U.S., continue to double down on the plays we've made, expanding to the mall with key important partners like Foot and Finish and the things we're going to do there. Letting them, as you watch them expand to department stores and what, again, Finish is doing with a Macy's, as well as taking our own core products like underwear and some other things that we can do to expand the brand. I think that we've got a lot of cards out there. I don't feel like we're spread too thin, though.
I think our message is consistent, and I think that the chapters of our story make sense right now. I think we feel pretty good, and we have a lot of upside in the math as we look at the future right now.
Thanks, Kevin. Appreciate it.
Thanks, Omar.
Our next question comes from Kate McShane of Citi Research. Please go ahead.
Hi, thanks. Good morning.
Morning.
I was wondering if we could have a little bit more detail on inventories. Can you break out any areas in terms of what categories where inventories are maybe higher than the corporate average? What product are you finding you have to air freight, and how inventories are at your retail accounts?
Sure, Kate. I think the first and foremost, the message to get across is obviously demand for our brand is very strong. Obviously, 12%-20% growth in apparel kind of proves that out. With that growth, supply chain is always going to be challenging. Last few years, this year, even into next year, we know there's going to be challenges to support that strong demand for our brand. Our job is to execute and manage through these challenges, and our teams obviously have done that. The back half of this year, though, we do have a little bit of some challenges on the apparel side of the business, really relative to the onboarding of a couple new factories. It persisted in Q3. It'll persist a little bit in Q4.
Again, our team did a great job managing our way through some of those challenges to deliver to demand. One thing I think to note, though, is in prior years, we've had similar challenges to support the growth of our brand that we're having this year. However, the change probably being in prior years, we've had a lot more inventory as a backstop to offset some of those challenges. Obviously, we talked a lot about our inventory management initiatives over the last 12 to 18 months, and we've seen a lot of success in those initiatives. The one thing we've talked about is kind of the analogy of a pendulum, and that we know that when we manage inventory, that the pendulum will continue to swing. It's an imperfect science. Our job is to make sure that pendulum swings in a very narrow range.
Right now, when we look at our current inventory balance being down 2% year-over-year, a lot of that is due to some great successes we've had. An example of that is the creation of excess inventory, where year to date, we've created 9 million units less of excess inventory and sold 2 million units more. That's a great job by our teams in managing inventory. However, that does create some challenges when you have some delivery challenges on the supply chain side, where you don't have that backstop of inventory to help you out through that. Because of that, the balance of inventory management initiatives and some delivery challenges, really was more important for us to deliver the good we were manufacturing for the current demand.
That's what caused some air freight in Q3. It'll persist a little bit in Q4. That was kind of the call down of our gross margin a little bit. Our job is to manage our way through this. Our job is to meet demand, we'll have to pay a little bit of a price to do that. Overall, though, I think the big message, big takeaway is longer-term progress is still on track. Even though we'll take a few small steps forward and backwards in a short period of time, it's really important to note with the people we've brought on board, the leadership we've brought on board, the process improvements we're putting in place, the system enhancements we're putting in place, longer-term progress is still on track.
Okay, great. Thank you so much.
Our next question comes from Michael Binetti of UBS. Please go ahead.
Thanks for taking the question, guys. Brad, can you just help me really quickly walk through the math on how the supply chain challenges you pointed out in the third quarter resulted in higher air freight, but that you did see favorable impact from allowances and discounts year-over-year?
Yeah. Really liken it, Michael, to if you look at last year, if you remember what we were talking about last year, again, we've had supply chain challenges pretty much every year to support our growth. It's our team's job to manage through that. If you remember our conversations last year was, some of those conversations were, we were trying to sell some stuff to customers and get some customers to take some product. Sometimes it was a little bit late. Sometimes it was exchange-type product to deliver to them to keep the shelves full because of the demand for our brand. That cost us sometimes a little bit in the discount side, mostly around the areas where we weren't getting stuff maybe on time last year, and we had to give them something else in exchange for that.
We called out those sales discounts and allowances last year, again, to meet demand. This year, the change being a little bit is that we don't have that backstop of a lot of excess inventory, so it's really important that we're delivering exactly what we plan to sell on the retail floor. The need for sales and discounts is reduced this year because we're basically selling exactly what they wanted. The challenge for us, though, obviously, without that backstop of inventory, is to get that product there on time. Therefore, you're seeing more of an air freight pressure this year to get that product we're manufacturing on time. That's really the difference year-over-year if you look at sales discounts and allowances versus air freight.
Hey, Michael, too, I just want to give a call out to our team as well, is that good companies, even in tough quarters, they do what they said they're going to do. This is, I think, a really good case of really the way our team came together, is that when we do see challenges, is that we make things happen. More importantly, we do it the right way. We're very, very proud of that, and it always begins with leadership. This quarter, what Jim Hardy has done and meant to our supply chain and coming in now here and just under six months has really jumped in, first and foremost, bought into the Under Armour culture in a way that is unique and then more importantly, leading the team. We saw that.
That was evident this quarter and the things that our team did to ensure that we got the product to our customers that they were looking for. The good news is that they're still hungry for a lot more. We'll make that happen. The things we've done as well is just building out our supply chain from a systems standpoint. We continue to sophisticated there with a great partner like SAP and building that out in some of the systems we're adding to our ERP system and our planning systems as well. Physically, we've added a new warehouse in Rialto, California, that's just come online. It'll be a little more than 1 million sq ft. That'll give us more capability in servicing and getting our product from the Far East into the U.S. as well as we just continue to become more sophisticated there.
Our factory base, building new relationships. 2012, we found ourselves really in this kind of tweener phase where we're a good smaller company or becoming a bigger company and realizing that we frankly started outgrowing many of our suppliers. We initiated a lot of new relationships in the last 12 and 18 months, and frankly, those sometimes just take a little time. Factor that with a planning group that Brad has really championed in building out on our side with, again, good senior leadership that we brought from Black & Decker and some other companies that really understand and are best in class at doing this. It takes a little bit of time.
That mantra of seven years that I use, it's pretty defining for us celebrating our seventh year as a public company in November, seven years in footwear and a few other things that you see us just beginning to understand the cadence and becoming a little more professional. First and foremost, we're going to have adversity. We'll have things where we get challenged, but I think we're very proud of our team that 10 straight quarters of 20-plus % growth is demonstrative of the type of leadership we're putting in place and the fact that we're not declaring victory. We don't have everything solved yet, but we sure are getting a lot better.
Kevin, can I ask you a quick follow-up?
Sure.
Just on the 2013 initial guidance, you pointed to the retailers ordering now. We'll have a better look at how the year will go next year as you get through your bookings for next year. We've seen all year these guys went through a rough winter last year, the spring was warmer than expected early on. We've seen the retailers ordering pretty close to what they were actually seeing on the floor at this time. The weather's off to a slow start this fall. What's your sense as to how the early orders that you're seeing, how your strategic partners are feeling about the year ahead? Do you feel like they're still ordering, looking at right now in fall off to a slow start?
How much conservatism do you feel like there is out there in the early orders that you are seeing at this point?
Well, I think that begins with us being prudent the way that we approach the year, and the same approach we took is we weren't looking for any upside from a year ago. I walked outside this morning, it's 65 degrees, and you just watch people walking down the street in Bermuda shorts, and you're going, "What's going on? It's late October." The good news is we've had a couple cold pops, and when we see that, like traditionally we've seen over the last 17 years in business screams when it's 30 or 40 degrees outside and kids are running to the local sporting goods store and buying their ColdGear mock. Frankly, we've evolved as a company where we're not dependent on that anymore.
The way that we're approaching 2013 in general, again, I think when we started to see this last year, we made a decision. Actually, fortunate for us, a couple of years ago, we decided we no longer wanted to be weather dependent as a company, but we wanted to become innovation dependent, where we could control it, and we could define our space and not waiting for mother nature to get cold or anything else. Innovation for us is going to continue to be a focus, and I'll take a second and tell you about 2013. We're going to continue to grow in the core categories like men's, women's, youth apparel, and our direct consumer channel will continue to be a horse for us as well. You're also going to see a continued expansion of key platforms that we have. Things like Charged Cotton and Storm Cotton.
Giving the consumer a reason to buy is that, whether it's a long-sleeve shirt or a short-sleeve shirt, depending upon the weather, we've got an answer for them, which is a best-in-class product, whether it's a T-shirt that dries five times faster than any other T-shirt out there, or it's a sweatshirt that frankly, you can wear in a rainstorm. Those types of things where and again, the category of cotton as a whole, it'll be roughly a $200 million business for us as we look in 2013. It didn't exist in 2009 for us. We'll continue to do that. Take again, Storm, which is the Storm Cotton product as well. It's another franchise.
To be clear, there's some crossover between Storm Cotton and just Storm as a finish that'll be in much of our outerwear and a few other things, but that'll be nearly a $200 million franchise for us as well. Again, these are technologies that we didn't have in our vernacular as recent as 24 or 30 months ago. The good news is that we've got an innovation pipeline with these things that are filled. Our job as a brand is to edit, to make sure that we're picking the right technologies that are going to have the breadth and the bandwidth to be able to go and expand and scale with the size of the brand I think that we can become. We've got some great things coming with our base layer business.
Sonic HeatGear on the women's side is something that's going to be great for us. Again, I can't emphasize enough expanding these franchises. coldblack is in there as well, but Storm and Spine on the footwear side that you're seeing is something that began as a running shoe that this week we're launching Spine footwear and basketball that'll start hitting retail this week as well. Taking franchises that we have, like the Highlight and that aesthetic, which is something that's iconic again on the footwear side and translating that over into a training shoe. I think the heightened focus that we have on newness and innovation means that we're going to begin to exit. We have the ability to evolve and move on. 2013, we're going to continue to position footwear, with the results international for 2014 and beyond.
It's great having leadership here on that side. We're going to keep rolling.
Thanks, Kevin.
Thanks very much.
Our next question comes from Camilo Lyon of Canaccord Genuity. Please go ahead.
Thanks. Good morning, guys.
Hi there.
Just going back to the inventory question. Do you feel that you guys have enough, what's your ability to meet the auto-replenishment demand in the fourth quarter if weather does get colder, given that your inventories are now down 2% and you had some supply chain challenges?
Yeah, Camilo, obviously, again, we're going to see a little bit of those challenges into Q4 also, that's why, again, we're going to lean a little bit on air freight to make sure we can meet that demand. Especially around seasonal product, I think that's where the need will be to get that seasonal product in on time, specifically around some of the product that Kevin was talking about outside of maybe our ColdGear mock product. When you look at auto replenishment, we tend to lean a little bit heavier in Q4 on auto replenishment. Some of those areas that you do lean on are some of those areas that maybe are a little more weather dependent. Coming out of last year's warm winter, I think the retailers obviously had some stock of that very cold, weather dependent product, and we do too.
I see less risk in the auto replenishment side because I think we're well positioned from an inventory perspective to satisfy that demand, that need if the weather behaves for us.
That outlook on the source of upside from that part of the business doesn't sound like it changed. Is that correct?
Yeah. From an upside perspective, I think you look at the same thing, we talked about last quarter, in Q4, that one is weather, two is our e-commerce business. We talked about taking a more moderate approach to our e-commerce business last quarter. We've seen some positive trends in the third quarter, such a large volume of our e-commerce business is done in the last two months of the year that we want to be careful how much we guide and anticipate the benefit to be too much there in the last two months. We're still taking a moderate view towards our e-commerce the last two months.
Okay. Got it. Thanks and good luck with the rest of the year.
Thank you.
Our next question comes from Joseph Parkhill of Morgan Stanley. Please go ahead.
Wondering if you could talk about, given the lower levels of excess inventories, how you're thinking about your outlet business next year. Will that impact sales at all, or are you planning to supplement that with more made-for product? Then maybe how that impacts your margins within this retail segment.
Yeah, good question, Joseph. Obviously, the level of excess we have as a company, outlet's going to be a big part of the relief valve for that excess. We talked this year a lot about leaning on our outlet business this year and that having, obviously, a negative impact to our gross margins, because we're going to lean on them from an excess inventory perspective, especially in the back half of the year, which we're doing right now. Obviously, creating a lot less excess units this year, even more so than we had planned to create less. That does impact the business a little bit in outlet next year. We've had to look at next year's business and know that we're going to lean a little bit more on the made-for side to fill in the gaps on outlet. There's good and bad to that.
The good being obviously that gives us a good ability to control the product in the space and outlet. The challenge to that, obviously, is we have to go out and make more product versus having the product here in the warehouse. Our teams are working on that right now. To your point, the result of that should be trying to get the right balance of made for versus excess as we move throughout the year. The % of made for should be higher next year versus this year, and there should be a positive impact to gross margin next year on that also.
Great. Thanks. Then just big picture around footwear over the next several years. Do you think that footwear will outpace apparel growth in the next several years? Is there a market share that you look for targeting or think that's achievable within the subcategories that you compete? Thanks.
As Brad said, the first one was a good question. That was a great question. Let me take a minute and actually get into footwear for a second. Coming off of Spine, I think there's a lot of speculation of how do we feel about our Spine launch. We made a big deal about it, launch in New York City with Tom Brady and Lindsey Vonn and Kemba Walker. We had, I think, a lot of excitement going into it, but we learned a lot, too. This is really exciting for us because it's truly, it's our first really commercial midsole technology that gives us a platform to build on. We want to be clear that where we're starting with Spine is not exactly where we're going to end up.
This isn't a, we threw it against the wall and tried it, but we are going to come back, and we are going to commit, and we are going to market, and we are going to tell the story of what Spine is. Most importantly, you're going to watch the product evolve. You're going to watch it evolve and continue to get sleeker, continue to improve aesthetic, continue to become more conducive to what the athlete is looking for, and we're starting to see that. Spine 1 was a great learning experience for us, and what we have hitting retail so far is the update to that, which is actually Spine Storm, playing into that Storm technology of that water-resistant capability of, frankly, that makes any product Under Armour. That begins to hit retailers in December. It's something that's going to be really exciting for us.
You look at where we come from, going back to 2009, 2010, when we, quote unquote, said we were going to reset footwear. Our goal was to sell product above $100. With Spine at that $100 price point, we're finding out the consumer will pay for Under Armour footwear at $100. Coming back with Spine Storm, it'll be $110 shoe as well. It plays into the Charge RC franchise we really set the tone with at $120 shoes. Having what we have with Spine is something that gives us a great place to go. I want to reiterate that we are committed to the Spine platform. Again, what's exciting is that we also have Spine 2 is going to be coming in early spring of 2013 for us as well. There's an update to the upper.
You'll see just, again, a few things refined in the midsole as well, you'll see us continue to tell the story of giving the consumer something that they can expect in footwear from Under Armour to see on a consistent basis. I'm actually going to take liberty, and I'm going to go into a little couple more aspects of footwear as well. We're really pleased, I think, with where we are right now, particularly coming off of the cleated side. I don't think we get enough credit for our cleated business because everyone sort of relegates it to being a smaller category and not that large. The fact is, we're making great gains there.
The authenticity and credibility that we're building there is something that we believe we can prove will help take us off court and into the larger markets like running and training and other places where we can be successful. We had great success in 2012, in particular around football and baseball, the on-field, to the tune of roughly, depending on who you talk to, if you look back maybe 18 months, Under Armour was in the 20s to mid-20 range in terms of market share. Today, depending on who you look at, we're in the 25%-30% range. We've made gains and in a big way.
More importantly, we're just starting to hear it from our consumers, our athletes, is that the specificity they're looking for is our in-line product is something that is good and qualified enough to be on an NFL field to the likes of Tom Brady or any of the stars that we have playing for us right now. I'll take a minute for this, but I don't know if anybody watched the World Series last night, but we actually had eight players in the game between both sides playing last night. Most importantly, on the Giants side, behind home plate was Buster Posey, who was the Comeback Player of the Year in the National League. For a second, we also had the American League Comeback Player of the Year in Fernando Rodney of the Tampa Bay Rays.
Buster, I think, is one of the favorites for MVP. With the big Under Armour logo behind home plate, it's something that made us very proud. Probably last night, not as proud as Pablo Sandoval, The Big Panda, as they call him, who hit three home runs in the game in the World Series, which is a pretty extraordinary thing and something we're really excited about. On the football side, the Cam Highlight Cleat, I think it was the most exciting product at retail this year at $130, a look that no one has ever seen before. Really defining for us in a product, frankly, that sold basically out by the end of July. There was no product left in the market. We're coming back, and we're going to build on that in December with a couple key partners, with the Cam Highlight Trainer.
It's going to launch in December at $150. It's a product I think that, again, it's going to continue to add texture that will be one of those reach and statement products that, A, we think we can sell with the pairs we're going to put out there. More importantly, it's going to continue to help position Under Armour footwear for something bigger. Beyond that, innovation and newness, as we think about 2013, we're not done with Spine, we're not done with the Highlight. There's a pipeline of midsole technologies, innovation in footwear, and the committed team that we have working on it is pretty extraordinary. We have lots of athletes wearing and authenticating Under Armour right now. We have iconic-looking, premium price, performing product, i.e., things like Highlight, et cetera. We're committed to the franchises, things like Spine.
We're committed to it for the long haul. You'll continue to see us cross-pollinate with things like the Storm platform as well. Start of that Spine franchise is playing out in basketball, and of course, we continue to expand it in the $6 billion category of running. I'll tell you, there's more footwear innovation to come in 2013 as well. You walked into a loaded question with that one there, thank you for asking, Joe.
All right. Good luck.
Thanks very much.
Our next question comes from John Zolidis of Buckingham Research. Please go ahead.
Hi, good morning.
Morning.
I was wondering if I could ask a little bit more about the department store launches. Can you talk about what products you put in the department stores, how it's gone so far, and in particular, if you think there's been any impact on either the DTC business or the traditional distribution channels with the sporting goods partners, how you see that evolving over time? Thanks.
John, we've entered a little more than 500 new points of distribution year to date, so throughout all of 2012. We've been pretty thoughtful and strategic, as I mentioned, about 300 Macy's, about 150 Dillard's, and beyond that, there's a few other key partners that we've had in there. Really, the story that we've led with the majority of these has been our underwear story on the men's side. You've had a limited or maybe a little more than a limited display on our women's product, because again, just finding out the appropriate distribution for where women shop is part of what our goal is there. We're still in the introductory phase. Take Macy's, for instance. We learned that prints in colors perform better than basics in things like underwear for us there.
We're testing a few things like our tech fleece in November and a few of our basics. Golf, I think, is something that at least stylizes is something that gives us an opportunity there. Youth is something where, again, we're constantly struggling for youth distribution, and the department stores give us good access there. On the men's side, we are pretty limited, I think, with the display that we have in men's. For Dillard's as well, it's led by underwear and boys, much smaller assortment in girls, womens and mens. Really, I think we're biding our time. We're making sure that we have success and that we have wins. We're making sure that it's appropriate and that it works and that the brand is relevant there.
To the answer to the tune of how it affects any of our own stores or our own DTC, we haven't seen any cannibalization there. Our DTC today from a bricks and mortar standpoint is defined as the 196 outlet stores today. There's not a lot of crossover with that, and we haven't seen any cannibalization of our, more importantly, our existing core distribution. We feel very good about it. I think what you'll notice, with 38% growth in 2011, with 24% growth this quarter, and where we're trailing for the year, we feel like we've got the five growth engines we were talking about since our roadshow, men's apparel, women's apparel, footwear, international, direct consumer. We're very fortunate to have the ability to lean on any one of those when we need to.
To generate or drive more growth, we're not desperate for distribution, and it gives us the ability to be selective with not only the partners that we choose, but then the assortments that we actually put in those partners as well. We want to protect our current partners first and foremost.
Great. Thanks very much and good luck.
Our next question comes from Mitch Kummetz of Robert W. Baird. Please go ahead.
Brad, earlier you talked about how ColdGear replenishment is heavier in the fourth quarter, or replenishment in general is heavier in the fourth quarter. Can you give us some sense as to what that percentage is in terms of your overall apparel business in Q4, that ColdGear replenishment?
Yeah. Just to give you some context to that, overall for the year, it's probably in the 25%-30% range auto replenishment. When you get into the fourth quarter, you're probably more in the 35% range for auto replenishment. In general, it's definitely higher, but it's not significantly higher.
Can you remind us how that business performed last year in Q4? I assume it was not very strong.
There's a balance there in auto replenishment, it's not all cold weather dependent product. Obviously, our cold weather dependent product is going to be heavy in Q4 and also early Q1. There's also some more versatile products in auto replenishment also that wouldn't be as cold weather dependent. There's a little bit of a balance in those numbers. Obviously, when you look at last year's numbers in a warm weather environment, our versatile product, our fleece product did very well. While obviously our cold weather dependent product did not perform as well. Again, in this environment this year, kind of the same balance. We're kind of forecasting and planning our business in the same weather environment as last year.
We would expect our versatile product or our less weather dependent product to perform well, and our cold weather product would not perform well if the weather was warm.
Quickly, one last question. In terms of carryover inventory at retail, you alluded to it in your comments, you've talked about it before. Can you tell us what impact that's having in terms of how your deliveries are flowing in the back half of the year? Did that put a little pressure on Q3 that maybe helps you out a little bit in Q4, or how should we be thinking about that?
I think that's a good way to look at it, is obviously when you see that cold weather kind of replenishment cycle start, that'll usually start in September. From that perspective, if you carry inventory into this year from last year, you would expect the start of that cycle would be really servicing demand from that cycle would be from product you already have in stock. To your point, it definitely impacts the beginning of the cold weather auto-replenishment cycle, which that would be September, October timeframe, for the most part is I think where you would say the most impact from the last year's weather and the inventory stock.
Okay. That's helpful. Thanks. Goodbye.
Yep. Thank you.
Operator, we have time for one more question.
Our final question comes from John Kernan of Cowen. Please go ahead.
Hey, guys. Thanks for squeezing me in. I'm wondering what you're planning in terms of international growth into 2013, what's embedded in your assumptions, and what you're learning about that soccer and European consumer following the launch of the Hotspur partnership in the summer. Thanks.
On the international front, Charlie's just getting here. What he's doing is, of course, doing a deep dive on what Under Armour is and what it looks like. With 90+% of our business coming from North America today, first and foremost, we're going to protect that. We're going to drive against that as well. We see the opportunity abroad is extraordinary. It's led by the example of our business in Japan. First and foremost, those guys are going to do close to $200 million this year, and we're looking at a business that'll grow north of 30%-40% as well looking at 2013. We've got great upside and belief there. I talk about leadership because what we have in Japan is a guy named Shuichi Yasuda who runs Dome Corporation, our partner there, and he runs that company.
There's 300 people or 400 people that they have at Dome today. They work for Shu, they work for Under Armour, and they believe in their mission. We know how critical it is to get that right in the other regions that we have around the world. Finishing off Asia from what Shu's doing in Japan to appointing leadership in China as well will be the next thing, as we're building out our office in Shanghai and really getting things going. You'll see a little bit of a shift in taking some people that understand the DNA and the way that things work at Under Armour here in Baltimore, and how they can use that to their advantage of not feeling like just an office in another city and halfway across the world. We've done, frankly, the same things in Europe.
Charlie just got back and spent the last couple of weeks over in Europe, and I met them actually last week, and we went and saw the Spurs play Chelsea. It didn't work out as well as we thought with the game. I tell you, having that partnership and being in that league and playing probably the best team in the world in Chelsea is a really big deal. I think we enjoyed it. More importantly, they're good enough to win a game like that, which is kind of the view and I guess a way to think about the way we look at Europe, is that we believe we're good enough to win as well. It's just going to take a little bit of time, and it's going to mean having the right leadership there.
The strength that we have in our growth drivers here, it allows us to make these longer-term investments. The Tottenham deal is one that we are investing for the future, is that we're exposing the Under Armour brand to a consumer that hasn't had any impact or hasn't seen us before. Being and just watching the activation around that stadium and people really getting to know and see Under Armour is pretty cool to happen. More importantly, we realize it's still going to take a little bit of time. In Europe, we're still in investment mode. In Asia, like I said, the success that we have in Japan is something that's possible for us and working. In China, we're still in investment mode where we're building there.
Frankly, on a global stage, we've got a couple other places that are some really nice opportunities for us that are making a difference that you wouldn't think about, such as Latin America and places we've been investing for three or four and five years that are beginning to come back for us. We've always talked about international being more of a 2014, 2015 story for us. We feel really good about that. Bringing in a pro who's seen a big movie like Charlie before is really going to help us. Of course, it's not one person. Charlie's also brought a team with him, frankly, we're giving him some of the best assets that we have in the company that will help him round up what we're doing abroad as well.
I think it's going to start with logistically also is going to be important for us. We need supply chain and a few other things. We're going to use 2013 not as a reset, we're going to drive. We think we can make great strides there. We're going to put ourselves in a position to be, as we say, the world's number one athletic performance brand.
Sounds great. If you don't mind me squeezing one more question in. The cash flow performance this year is going to be up big, given the improvements in working capital. Brad, how are you thinking about capital allocation next year, CapEx, and maybe additional uses of that cash? Thanks.
We're still rolling some ideas up around that right now, so we'll give you some more guidance on that as we get into our January earnings call. Obviously, cash flow for us is tied to inventory and the management of inventory. When you see us be successful in managing inventory, the benefits of that flow to the free cash flow metric. When you see challenges in inventory, you see it as vice versa for us. Cash for us right now is all about inventory. Our job is to put ourselves in the position to have cash on the balance sheet. It's important for us. It's important for us from a competitive perspective to position ourselves to have that strength in our balance sheet. We want to manage inventory efficiently the best we can without the pendulum swinging too far.
That will benefit our cash, and we think at this point in time, it's important for us to keep that cash on the balance sheet and/or use it for appropriate investments to continue to drive growth in our long-term brand.
Great. Thanks, good luck.
Thanks very much. Thanks for joining us on the call today. We look forward to reporting you our fourth quarter fiscal 2012 results, which tentatively is scheduled for Thursday, January 31st at 8:30 A.M. Eastern Time. Thanks again. Goodbye.
Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a wonderful day.