Good day, ladies and gentlemen, and welcome to the Under Armour, Inc. second quarter earnings webcast and conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require operator assistance, please press star then the zero key on your touchtone telephone. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Tom Shaw. Sir, you may begin.
Thanks, and good morning to everyone joining us on today's second 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 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 second quarter, followed by an update to our 2012 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 this 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.
Thanks, Tom, and good morning, everyone. The U.S. athletic business is in a very strong upcycle, and our second quarter results speak to Under Armour's contribution to that growth. With revenues up 27% in the quarter, it's clear that our growing capacity to innovate and add value for the athlete is working. Equally important, our results to date in 2012 are strong evidence that when we add that value for the athlete, we do not see consumer resistance to price. Our innovation agenda, combined with our improved ability to sequence product, is enabling us to broaden both our distribution and our share of closet while maintaining our premium brand position. We are growing on multiple fronts. We're growing our core categories like base layer and women's. We're seeing strong results in kids, golf, and outdoor.
We're expanding our distribution in categories like underwear, where we believe we're just scratching the surface of this major growth opportunity for the brand. We're getting meaningful traction in footwear as we launch UA Spine this last month. While it's always easier to look for one single piece of compelling news on these conference calls, for Under Armour, the reality is that the whole is greater than the sum of its parts. That has been a hallmark of our 20-plus% top-line growth over the past nine quarters. We don't talk about it as maturing because we know we are still in the early stages of where our brand can go. We've built a product engine that is starting to take full advantage of the strong equity we have built over the years in the Under Armour brand.
I do want to talk a bit this morning about some of the parts that are working particularly well. I'll start, as I did last quarter, by talking about the strength in our women's business. The momentum from the strong first quarter launch of our Armour Bra and Studio product continued in Q2. We also saw great growth in women's running apparel. While we've always had a loyal consumer who understood the performance benefits of our women's products, our team's commitment and focus has enabled us to deliver a more Under Armour-specific design language that is clearly connecting with our consumer across multiple categories. In men's, core categories like training and base layer remain absolute strengths while we continue to see solid growth in golf, where we are speaking to a different demographic than our core younger athlete. In short, we're growing on the field and off.
Our core team sport athlete remains a loyal Under Armour fan while we add both revenues and a dimension to our brand in categories like golf, outdoor, and underwear. As I said earlier, the whole is greater than the parts. One of the drivers of our growth has been our ability to create a steady cadence around our innovation and product sequence. While we're bringing new technology like coldblack to market this year, we are expanding our year two assortments and distribution for key products such as Charged Cotton and Storm. This cadence lets us broaden the end use of our apparel while continuing to drive an innovation agenda that addresses the highest performance needs of athletes. This focus comes from our taking a much more strategic approach to product development and assortment and better utilization of our wholesale distribution.
We're now able to take initiatives like Charged Cotton and Storm Cotton and build platforms with hundreds of millions of dollars in revenues. Today, where just a few years ago, that revenue channel did not exist for the brand. Our growth in footwear is also a function of better understanding the need for that proper cadence. We're starting to have a lot to talk about in footwear, whether it's the strong performance at retail of our football and baseball cleats or our new $100 UA Spine footwear that is just now hitting store shelves. As I said on our Q1 call, we've been very patient internally on our footwear business, and some of you know how hard a word that is for me to use.
Our 44% growth in Q2 and the excitement that is building around Spine are great examples of creating the proper cadence within our footwear business. Our cleats business is performing exceptionally well. We are gaining market share, driving higher ASPs, and just as importantly, leading on-field innovation with products like the $130 Highlight football cleat. With the most unique silhouette on the football field, the Highlight cleat that NFL Rookie of the Year, Cam Newton, wore exclusively last season is both highly technical and iconic. It is driving our strong sell-through at retail as athletes in football hotbeds like Florida, California, and Texas are embracing this next generation of cleats. Much like we are doing now in football, we saw strong market share gains in baseball cleats as well.
Not only does our product continue to drive the loyal UA consumer back into the store, but we are benefiting from our great presence in Major League Baseball with stars like Buster Posey and Bryce Harper. Some of you may remember we talked about Bryce at our investor day 2 years ago, in part to illustrate how our brand is focused on the next generation of athletes. While we were very proud to have 12 players wearing UA cleats in the Major League Baseball All-Star Game, you should know that in the All-Star Futures Game, where the next Bryce Harper and Buster Posey were on display, we had 24 of the 50 players there wearing Under Armour cleats.
For us, that is great evidence that we are not only getting our footwear on the next generation of best athletes, but that they are embracing our product and outperforming their competition as well. In addition to football and baseball, we launched the UA brand firmly onto the soccer pitch earlier this month with the introduction of our kit for Tottenham Hotspur of the English Premier League. The new uniform will be on display in the U.S. tonight for the first time when the Spurs start their U.S. tour against the L.A. Galaxy of Major League Soccer. The tour then brings them to Baltimore Saturday against Liverpool and New York next Tuesday against the Red Bulls. They will also be on the Premier League season opener on ESPN next month when they play Newcastle. We are building our business outside the U.S. much as we did here.
We have always taken a grassroots approach to building our brand, and we are intently focused on being authentic to the sport and relevant to the local consumer in every market. With our Tottenham relationship, we are introducing ourselves to a much wider audience, bringing the Under Armour performance story to soccer fans, not only in the U.K., but also in markets all over the world where the Premiership dominates the sports landscape. In summary, there are many parts of our business that are doing well. As our portfolio continues to widen, we are getting better at establishing the proper cadence in each of our categories, bringing new initiatives to market while ensuring that in year 2, we are capitalizing on the broader opportunity through expanded assortments and distribution.
Most importantly, our innovation agenda enables us to continue to deliver against the most demanding expectations of the world's top athletes like Michael Phelps, Tom Brady, Cam Newton, and Tottenham Football Club. These and the other athletes and teams with which we have built relationships will always be our most discerning consumer, and our ability to meet and exceed their needs ensures we will bring that same level of performance to all our consumers. I'm proud of the 27% growth we put on the board this quarter. We need to constantly evolve, and there are always areas where we can get better. Our operational execution and our ability to plan around our business continue to improve. We are building out our supply chain team while remaining intently focused on improving how we present the brand to our consumer at retail.
With inventory growth below revenue growth for the first time in eight quarters and our consumer base continuing to expand, we are well positioned for the balance of 2012 and building a sound foundation for growth well beyond that. With that, I'll turn it over to our CFO, Brad Dickerson. Brad?
Thanks, Kevin. I'd now like to spend some time discussing our second quarter financial results, followed by our updated 2012 outlook. Our net revenues for the second quarter of 2012 increased 27% to $369 million. Apparel grew 23% to $253 million during the quarter, and we experienced relatively balanced growth across our men's, women's, and youth categories. Training and base layer continued to drive our men's business, but we also saw strength in golf and underwear, with underwear introduced to 250 Macy's stores earlier this spring. In women's, we are seeing strong traction in our Studio line and a successful Armour Bra launch that's helping drive our overall sports bra category. Our direct-to-consumer net revenues increased 35% for the quarter, representing approximately 29% of net revenues, compared to 27% in the prior year period.
In our retail business, we opened eight new Factory House stores during the second quarter, increasing our Factory House store base to 92, up 28% from 72 locations at the end of the second quarter in 2011. While we are still experiencing solid growth on the e-commerce side, we are working through some conversion challenges to our new platform that we launched last November. I'll provide additional color in our guidance. Second quarter footwear net revenues increased 44% to $67 million from $47 million in the prior year, representing nearly 18% of net revenues. Growth during the period was driven by new introductions in performance running footwear, including the initial sell-in of our new UA Spine platform, as well as strong performance with our football cleats, led by the $130 Highlight cleat.
Our accessories net revenues during the second quarter increased 21% to $39 million from $32 million in the prior year period, led by strong performance across our bags business. International net revenues increased 48% to $21 million in the second quarter and represented approximately 6% of total net revenues. International growth includes a strong rebound with our licensing partner in Japan following the impact of last year's tsunami. Now, looking at margins. Second quarter gross margins contracted 40 basis points to 45.9%, compared with 46.3% in the prior year's quarter. Three factors primarily drove this performance during the quarter. As expected, higher input costs for North American apparel and accessories products negatively impacted gross margins by approximately 70 basis points. Our sales mix negatively impacted gross margins by approximately 50 basis points, primarily driven by growth in footwear.
Partially offsetting these factors, lower year-over-year apparel sales discounts and sales allowances positively impacted gross margins by approximately 50 basis points, as we continue to improve our processes around planning and supply chain. Selling, general and administrative expenses as a percentage of net revenues de-leveraged 30 basis points to 42.7% in the second quarter of 2012 from 42.4% in the prior year's period. Details around our four SG&A buckets are as follows. First, marketing costs increased to 12.6% of net revenues for the quarter from 11.7% in the prior year period. Expense de-leveraged during the period was a function of our previously announced strategic decision to move certain media costs into the second and third quarters. Second, selling costs held steady at 10.5% of net revenues.
Third, product innovation and supply chain costs also held steady at 10.7% of net revenues, as increased investments in our distribution facilities were offset by overall expense leverage in other areas, given our top-line growth. Finally, corporate services decreased to 8.9% of net revenues for the quarter from 9.5% in the prior year period, driven by decreased corporate facilities costs. Notably, the three non-marketing SG&A buckets each showed a sequential deceleration in growth rates, which is in line with our prior guidance. Operating income during the second quarter grew 3% to $12 million compared to $11 million in the prior year period. Operating margin contracted 70 basis points during the quarter to 3.2%.
Our second quarter tax rate of 38.9% was favorable to the 41.7% rate in last year's period, primarily due to a state tax credit received in the first quarter, which benefits the full year effective tax rate. Our resulting net income in the second quarter increased 7% to $7 million, compared with $6 million in the prior year period. Second quarter diluted earnings per share held steady with the prior year at $0.06. The EPS calculations for both periods reflect a two-for-one split, which was effective on July 10th. Now, switching over to the balance sheet. Total cash and cash equivalents at quarter-end increased 19% to $143 million, compared with $120 million at June 30th, 2011. We had no borrowings outstanding on our $300 million revolving credit facility at quarter-end.
Long-term debt increased to $74 million at quarter-end from $37 million at June 30th, 2011, reflecting the acquisition of our corporate headquarters. Inventory at quarter-end increased 22% year-over-year to $381 million, compared to $311 million at June 30th, 2011. Inventory growth came in below our net revenues growth of 27% due to less creation of excess inventory and successful liquidations primarily through our Factory House channel. Our investment in capital expenditures was approximately $15 million for the second quarter. We continue to plan for 2012 operating capital expenditures in the range of $60 to $65 million. Moving on to our updated outlook for 2012. Our prior outlook called for 2012 net revenues of $1.78 to $1.8 billion, representing growth of 21% to 22%, and operating income of $203 to $205 million, representing growth of 25% to 26%.
Based on our current visibility, we are raising our net revenues outlook to a range of $1.8 to $1.82 billion, representing growth of 22% to 24%. Elements of our increased net revenues guidance include continued strength in our North American wholesale apparel and Factory House businesses, higher growth expectations in footwear, given additional orders in running and training, partially offset by lower growth expectations in e-commerce, given challenges with conversion. In addition to net revenues, we are raising our operating income outlook to a range of $205 to $207 million, representing growth of 26% to 27%. With this updated outlook, I'd like to provide some additional color on several items for the year. First, on gross margin. We now expect full-year growth margins flat to down slightly from last year's 48.4% level. This compares to our prior full-year outlook of relatively flat year-over-year levels.
Relative to the back half of the year, here's what has not changed from our prior guidance. We see improvements to growth margin through easing product costs and early-stage supply chain efficiencies. These benefits are being somewhat offset by our strategy to more aggressively utilize our outlet channel to work through excess inventory, resulting in lower growth margins within this channel. We see more of this impact in the fourth quarter when our Factory House business typically represents a significant percentage of our total net revenue. What has changed in the back half of the year from our prior guidance is the incremental near-term pressure from our expected sales mix, which includes higher footwear and lower e-commerce net revenue expectations. We anticipate the impact of this sales mix change to be magnified in the fourth quarter. I would like to add a little more color on e-commerce.
We continue to grow the business at a healthy pace, we have had some challenges converting traffic to sales since our new site launched last November. Our team continues to work through some of the technical issues with the site, including speed and ease of shopping experience. As we work through these issues, we believe it's prudent to take a more conservative view of e-commerce's contribution to our business for the duration of the year. Shifting to SG&A, our story remains relatively consistent as we see the opportunity for moderate full-year leverage balanced by sustained investments to support our future growth. In marketing, we continue to expect full-year spending rate of approximately 11.4% of net revenues, similar to the spending rate last year.
From a timing perspective, we now see approximately 150 basis points of deleverage during the third quarter compared to our prior guidance of approximately 200 basis points of deleverage. While we will continue to focus on telling our big brand stories like UA Spine and Women's during the third quarter, we are reallocating some dollars to the fourth quarter to better support our holiday efforts. Looking at our other SG&A buckets in aggregate, which combines selling, product innovation and supply chain, and corporate services, we expect the second half of the year will show considerable more leverage than the first half of the year, the vast majority of this improvement will be experienced in the fourth quarter. This late-year leverage largely reflects the lapping of incremental investments incurred during 2011 in areas such as e-commerce, sourcing, and planning.
Shifting to components below our operating results, our current outlook includes higher year-over-year interest expense given the full year of the additional long-term debt for our headquarters acquisition, a full-year effective tax rate at the lower end of our previous guidance range of 37.5%-38%, and fully diluted weighted average shares outstanding in the range of 106 million to 107 million. Finally, on the balance sheet, we are proud to reach our target inventory growth below sales growth one quarter earlier than planned and see no change to our previous guidance of the inventory growth rate coming in below the net revenues growth rate in the back half of the year. We will continue to balance these inventory management efforts with our ability to service our customers and drive improved fill rates. 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?
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the one key 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 Eric Tracy of Janney Capital. Your line is now open.
Thanks, guys. Good morning.
Hi, Eric.
I guess maybe we could start with the footwear. Obviously came in sort of ahead of plan. I think it was really supposed to kick in in FY 2013. Maybe talk about, obviously, the contributions from Charge RC, Highlight, and obviously the launch of Spine. Does that give you greater comfort to accelerate that business a little bit faster and the opportunities to capitalize on that relative to clearly a little bit of dilution on the margin side? Maybe, Brad, for you, how we should think about that relative to what's going on in e-commerce. On the positive side, the supply chain, just thinking about the margin dynamics with those businesses.
Yeah, I'll take the first part then. Innovation is the name of the game, and that's what's really coming true, and that's when we're looking to see we're going to win. You'll hear a theme coming from me that basically says, when we innovate, we win. I think that's what's happening in footwear right now and what we're beginning to see. First off, around Spine, we're very excited about the launch that we had. We had a great event up in New York, and the product's hitting retail shelves right now. I wouldn't say it's as much of a launch as much as it's rolling in. We're tempering expectations as we're looking at that.
More importantly, I think demonstrating some of the maturity of the brand is reach with recognizing that the definition of success is not going to come in the first day or weeks or even months. What you'll see from us is a much more comfortable brand with the ability to show the consistency and the continuity of our belief in this product. This is a three, six, 12, really 24 months that we believe getting behind this technology, not only putting great product in the market, but great marketing and storytelling to tell the consumer about it.
We're pretty pleased, I think, with how we're positioned there, and especially, how many of our partners are supporting that program as well and not saying, "Is this something, is it in, and how do we see success?" At the same time, some of the early reads, some anecdotal things, great feedback on the product, a lot of big excitement around it, and we'll let ourselves define and see how that goes. As far as just holistically about Under Armour footwear, we feel very good about where we are. You think about just the timing. I recently did a talk up at for Footwear News at one of their conferences, and the title of the speech that I gave was called "Seven Years." You think about it, is that we've been in footwear for seven years, and you look how long that has taken.
There's lots of signs that have demonstrated that the market is ready for a new player, I think we really exploited that this year with football cleats. I think a lot of times we get sort of brushed off of big deal, small category, what you're doing. Effectively, what we've done this past year with the Highlight cleat, it demonstrates, number one, there is room for a new player, and probably even more significant, is the fact that that new player can win. If it bleeds, we can kill it. I say that with the easiest way that I can. After seven years, we spent our first few years, several years to acclimate our factories, our team, product, and establishing our point of view. Just take football cleats, and again, a small category, but I think it's been happening with our brand.
Years four, five, and six, we spent really becoming as good as anybody else in the market and creating a product out there with consumer expectation that no one was sacrificing anything by putting our shoes on their feet as our team continued to build and evolve. In year seven, where we've broken out with, frankly, brand-defining innovation in the Highlight cleat. It's a $130 football cleat that looks unlike anything else, delivering an innovation to the consumer with not having to tape, greater support, a terrific aesthetic. Beyond that, it's a product that flat out works. Of course, having probably the most exciting player in football right now in Cam Newton wearing that product is something that's really going to help us.
As we sit and we look at year six in baseball, year five in training, year four in running, year three in basketball, I don't think we have to declare that we're going to need to wait seven years for each one of those categories as sort of our learning curve has really accelerated. Our innovation pipeline is full, and we anticipate being important in each one of these categories. Our confidence in building brand-defining product lets us believe that footwear can be a global platform for our company. I think you've just seen us scratch the surface, but what I promise you is there's much more coming. We did say 2013 was going to be important, so we're pleased with the results, but I want to be clear, we're not declaring victory by any stretch.
We've got very good competitors out there that are very good at what they're doing, and they're keen on. We're pretty keen on it, too. As we said, we think there's plenty of room, and you're going to see a lot more exciting things from us, and whether it's on the football field, the baseball field, the pitch, or what we're putting in two of our key specialty doors in running and other categories like that. Brad.
Eric, on the economics between footwear and e-commerce. If you take a look at our baseline gross margins last year, about 48.4%, and use that as a baseline, footwear's gross margins are probably about the same distance below that as e-commerce margins are above that relative to the economic model. When you look at gross margins and then all the way down to operating margin, the model changes a little bit where our footwear SG&A costs are relatively fixed. Additional revenues in footwear in the back half of the year, although they will impact gross margins, there's not a lot more SG&A that goes into delivering those additional footwear revenues. On the e-commerce side, however, though, the SG&A model is a lot more variable, especially around the demand drivers that point us to sales on the e-commerce side.
Even though gross margins are much higher, the SG&A model on e-commerce is much higher also because of that. When we look at the back half of the year from a growth margin perspective and the obvious impact to gross margins with footwear increasing and e-commerce decreasing relative to our expectations, we were able to call up the operating profit for the year because of the way those economic models work between the fixed part of footwear and SG&A and the variable part of e-commerce and SG&A.
Okay, great. Thank you. That was really helpful. Kevin, for you, a little bit bigger picture question. Obviously, you've been very tactical about the investments made around the London Olympics. As we think forward to the 2014 World Cup and 2016 Olympics in Brazil, maybe talk about sort of how you feel like you guys are positioned. Is there an opportunity to sort of more fully capitalize and make some investments around those big platforms? Obviously now making an investment in Tottenham from a soccer perspective as you look to penetrate Latin America and specifically Brazil, how you think about that business over the next few years.
I think one of the worst things we can do is get caught up with a game of keeping up with the Joneses. We're very clear, I think, on the brand of, A, who we are, and probably just as importantly, where we are in time. With 27% growth in the quarter, I think we're doing the things that we need to do to protect our business, and more importantly, to really innovate and grow our business. We feel good about where we are right now. That being said, there's opportunity for us as we continue to look and build out the global stage. I've said many times that our expectation is to be a global brand, and we define that where more than half of our revenues will come from outside of our home country.
Sitting here with roughly 90% of our revenues coming from the U.S., it obviously plays well in times like now with a growing U.S. market and frankly not only exposure of overseas, but we've been investing there for a while, and we think we're going to have the ability to really start picking up some of the investments that we've made in places like Asia and places like Europe. It's going to be a matter of time. I think all these things are cyclical with any of these other markets. They're great sport markets, and they're great opportunities for us. I can tell you, we've got a team of committed people outside of the United States that are working like crazy to make Under Armour important and relevant to those consumers outside of the U.S.
That being said, we've got great assets with the Olympics, and we've got Michael Phelps, and we've got many members of the U.S. women's soccer team, Lauren Cheney and Heather Mitts and Becky Sauerbrunn. You'll see us continue to add to that roster of Olympic athletes, and frankly, not just U.S. Olympic athletes either. We expect to play, and we're not going to wait all the way until 2016 either to Brazil, but you'll see us in Sochi, you'll see us around World Cups, and you'll see us start picking up these other assets as it makes sense to us. I've got to tell you, we have a pretty good disciplined approach with how we're going to spend money. I think we've been very disciplined around 11%-12%. Brad won't let me spend any more money, we have that arm wrestling competition.
He still beats me, and I think it's the right thing that he does. We'll be prudent and thoughtful, I think, about the investments that we make. I tell you, we're having a lot of fun, and hopefully, that comes across and with the way our team's working right now, and I think a lot of the opportunity that we see and the ability for us to become global and build something a little bigger.
Okay, thanks. That's all, guys.
Thank you. Our next question comes from Sharon Zackfia of William Blair. Your line is now open.
Hi. Good morning. I was hoping you could provide some additional information on e-commerce. I don't recall you talking about some challenges with the new launch previously. I might have just forgotten. If you could help us understand where the conversion is now on the traffic you're getting to the website and where it maybe was pre-launch and the challenges and kind of fixing what seems to be a speed issue on the website.
Yeah, Sharon, this is Brad. Just to start that conversation. Really, we were working through this as we went through the holiday season last year into the first quarter or so. Not really understanding how long it would take to work through these issues. It really didn't become apparent to us until the last few months as we started getting into the back half of the year that this continues to be a little bit of an issue. Obviously, the difference in volume of e-commerce in the back half of the year versus the front half of the year is vastly different. Really, the issue has been conversion. We have not seen as much of an issue in traffic at all, really. The people are coming to the site. The growth in traffic is healthy. It really has been around conversion.
A lot of that we thought and are looking at relative to issues we had with speed and just the ease or shopability of the site. We made some changes relative to speed recently in the last three weeks or so. We've seen some positive improvements so far based on that. Again, I think it's too early to tell until we see a little bit more of a trend over the next few weeks, whether we think that's going to point in the right direction for us relative to conversion going forward. Also, we made some minor changes around the ease of shopping of the site too, just to make it easier to get through the site. I think in general, we've made some pretty good changes during the course of Q2.
We've seen some positive impact to those in the short term, but we need to see a few more weeks of that to really make it look like a trend going forward that we can have some higher expectations in the back half of the year.
Okay.
Let me just underscore for that, too. This is not a brand issue either. We're getting plenty of traffic, increased traffic, and frankly, exceeding what we thought we would be seeing. We've been struggling a little bit on the conversion side, and that's where just getting a little better on the functionality. Brad brought up many of the things that our team's doing. We've got people working really very hard. This is not the hard stuff either. It's easier said than done. It's just a matter of applying the right technical. We've got a great number of people internally, externally on it. We expect to see the great growth that we've seen from our DTC channel very quickly. Go to the web and buy something.
Just to be really clear, because the fourth quarter obviously is so important for e-commerce, are you modeling in that you see an improvement in that conversion by the holiday season, or are you modeling in somewhere in between historical conversion and where you're running now? Just help us understand where the risk or opportunity might lie for the fourth quarter on that.
Sharon, what we have done is we've modeled in basically what we saw in Q1 and Q2 in the back half of the year. We have not anticipated any improvements in conversion. Again, although we made some changes recently and saw some slight improvements, we did not build that into our outlook going forward because I think we need to see five or six weeks of that versus a couple weeks of that. The back half of the year right now, our expectation is similar to what we saw in the front half of the year.
Perfect. Thank you.
Thank you. Our next question comes from Omar Saad of ISI Group. Your line is now open.
Yes, good morning, guys. This is Sam Lee in for Omar Saad. Congrats on a good quarter.
Thank you, Sam.
Hi. Our first question was just on the apparel strength. It seems like, obviously, footwear is very strong, but the apparel is still going strong as well, and it seems to be coming as you're reducing the SKUs. I guess our question is, what does this mean for the supply chain leverage and the margin outlook for the rest of the year? Is there an opportunity to reduce SKUs further?
Yeah, Sam, on the supply chain leverage and SKU productivity, we talked about this on last quarter's call, too. The numbers have stayed relatively the same. We see about a 20% reduction in SKUs by the end of this year compared to the beginning of 2011. That's right in line with what we've been talking about over the last few quarters. A lot of that benefit, if you have to think about especially on the apparel side, the fact that we can move and liquidate apparel through our outlet channel very profitably. The impact to gross margin, although there is a little bit of a benefit there, isn't as big of an impact as what you see in relative just to inventory management. I would look at SKU productivity.
We call it reducing noise in the supply chain of bringing productive SKUs into the supply chain versus non-productive SKUs. It just helps our focus around productivity. It also helps our focus around inventory management and creating less excess inventory, more so than it has a positive impact to gross margin. Look at SKU productivity as a benefit to inventory management more so than margins. A lot of the other factors we're working on will help gross margins.
Also, I think you're seeing us double down on technology as well. We've built a pretty good portfolio of big products and big SKU runs and things like our HeatGear T-shirts and ColdGear mocks. What we've been doing to add to that is things like game-changing pricing with our ArmourBra up in the nearly $60. coldblack's a new technology we just launched. I mentioned in my script about what we've done with the whole cotton line. Again, Charged Cotton, Storm Cotton didn't exist with this company just two and a half years ago. Adding categories like that with hundreds of millions of dollars that we can bring into our existing distribution and really things that make sense for our brand without taking us to a different place from a perception standpoint. I think that's what makes us pretty excited.
Tackle on that, we're talking about apparel, looking at the upside that we see is available, the opportunity and things like footwear and accessories as we just become frankly more experienced and a little better at it. Sometimes these things take time, and I think that's what you're starting to see from our company is that, I'm not saying we have all the answers, but we're starting to figure some things out.
Great. Speaking of the Armour Bra, it looks like the women's growth in the second quarter was driven by Armour Bra and Studio Line. Are you seeing an inflection in that business? Can you share with us some of your learnings and sort of where you see the opportunities in the back half of the year and then as well as going into 2013?
When we went public in 2005, women's was less than 20% of our total business, today, it's nearly 30%. At the same time, we've also added close to a billion and a half dollars in revenues. Hats off, I think, to our team that's been working there and just committed over and over. We've had lots of people tell us what we can and what we can't be. It's good to see it just come through. Again, I think in any of these categories, and I want to be clear, we're a long way from declaring victory. We're doing better, I think you're seeing in items, there's a lot of work for us to do in terms of tightening up our presentation, how we're telling the stories at retail, how we're really selling the product.
You're seeing a full force effort, first and foremost in our existing retail partners. Places like Dick's and Sports Authority and Finish Line and Foot Locker, where they've got a real heavy apparel focus for us, and they're really giving us the ability to tell our women's story. I don't think that we're showing up great yet. I think we have a lot of work to do there. We're also going to places where, frankly, women have shopped traditionally in places like into some of the department stores where we've been of trying to really soften our brand and put product in a place that's prudent and appropriate for the consumer who's shopping there. A lot of times I think we're driving traffic to some of our existing partners and other places.
We're helping to fill out, I think, the perception of the women's brand by showing up in partners like Bloomingdale's and showing up in partners like Nordstrom and many other key mall partners that we have as well.
Great. Thanks, guys.
Thank you.
Thank you. Our next question comes from Jim Duffy of Stifel Nicolaus. Your line is now open.
Thanks. Good morning.
Morning, Jim.
Kevin, as you move beyond the spring sales meetings, what are some of the key stories you expect to be drivers for the apparel business as you look out to 2013?
Yeah, I think a lot of what we've talked about. As I mentioned, our innovation pipeline is full, but we've got enough. You can get caught up with newness. We've got some pretty great stories in some of our heritage product that we have. As I mentioned, some of the reinvention you'll see coming into through fall, and especially as we're looking at 2013. Some of the reinvention you'll see around many of our base layer categories. We just spent a little time talking on the women's side about ArmourBra, but what Studio will mean for us is we started this product line off when we launched Studio, for instance.
I think we've learned a thing or two where we made the first products prototypes, and they looked good, and we tested them, and we tested them again, and then we put our first plans together, and the last thing we did is we cut our plans in half. We said, "Let's make sure we get it right. Let's deal in scarcity." You've seen us build on that because frankly, the good news about our platform, and not unlike, I think, the general theme of my script was that the whole is much greater than the sum of its parts right now. That we're able to put that together, I think especially on women's, where we don't have to take one swing for the fences shot at anything, but we can build ourselves up the right way.
coldblack's a very cool technology that we just got the thing going, I think we're just beginning to tell that story. It's a T-shirt that can keep you or finish on a T-shirt for running or golf or you name the category that can keep you effectively 10 degrees cooler than the person you're playing next to. Any of those kind of innovations. A lot of the simple stuff, too. Our ColdGear mocks. Tech tee, that we just had a reinvention of our new UA Tech, and these are million units programs where we took the price up from $20 to $22 in that product, and we're giving the consumer a better product that frankly works better. I think you'll see this constant reinvention.
The good news, or the best thing for us is that we still have 30 or 40 key styles that are driving, I'd guess on the math, I'd probably say 30% or 40% of our business too. By staying pretty focused on not as many of having to look across the entire spectrum, but staying focused on key big programs, I think that we can touch and affect the consumer. At the same time, we do see the ability to let us dream a little bit and go into a little more specialty product. That's where, as I was talking about sort of the expansion of the breadth of the brand from being sort of a one-trick pony with, okay, I get it, you're the compression shirt and compression short company. I think you're seeing and we're demonstrating we're a lot more than that.
New categories as we go to outdoor and as we look at what hunt and fish, and frankly, we look at what underwear can mean to us and not sock depth, but things like golf, is that there's a ton of opportunity for us to grow, and we need to stay within ourselves and frankly, keep doing a lot of what we demonstrated this quarter.
Okay, that's helpful. Thanks. Brad, nice progress on the inventory. With respect to the gross margin and the factory stores, where are you on the mix of clearance versus made for product, and how do you see that progressing?
We'll be more heavy in the back half of the year than we're in the front half of the year. We think we'll probably be somewhere in the 55%-60% of units will be made for in the back half of the year. That compares to a number that was probably above 70% last year. Again, as we've been calling out, that's going to be a big part of the liquidation of excess inventory during the back half of the year as part of the Factory House. Yeah, on the inventory side, I think we're really proud of where we got so far this year. Really, the drivers of that, for the most part, have been creation of less excess than we had last year. We actually created about 50% less units of excess than we did last year in the front half of the year.
We sold about 30% more units of excess in the front half of the year than we did last year. That's a big driver of where we're at with inventory right now. We've always said there's a balance there of making sure that as we improve inventory and we focus on inventory management, we also have to focus on the flip side of still rates and customer service too. We'll constantly be balancing that out going forward. Proud of where we're at. We still have some work to do. Really proud again of where we're at with current at Q2.
Very good. Thank you.
Thanks, Jim.
Thank you. Our next question comes from Sam Poser of Sterne Agee. Your line is now open.
Good morning. Thank you for taking my question. A couple things. Number one, on the gross margin, you gave some guidance by quarter on the SG&A. Can you give us some idea of how you see the gross margin playing out by quarter? Brad?
Really, yeah. If you look at the guidance we gave, you can see that most of the back half of the year pressure will be in the fourth quarter, and there's a couple reasons for that. One, the fact that we are lowering our expectation around e-commerce. From the change of guidance there, you would see that impact the fourth quarter more than anything. In addition, just year-over-year comps, it's a little tougher comp in Q4 than it is in Q3 versus last year. That's part of the driver, too. Obviously, again, Under Armour Factory House, big equation there. If we're gonna lean heavily on Under Armour Factory House in moving excess inventory in the back half of the year. Again, if you look at Q3 versus Q4, their Q4 business is larger than their Q3 business.
When you look at the back half of the year, anticipate more pressure on Q4 than Q3.
You would expect gross margin likely to be down in the fourth quarter and up significantly in Q3, just based on the comparison.
Yeah, directionally, you're probably pretty close there, yeah.
Okay. Thank you. You talk about the rolling out of these many different programs and so on, especially with the innovations that you're speaking of. You talked about the Tech Tee and the innovation and raising it $2 and updating the product. Do you have other things of that nature in the hopper right now, looking ahead into next year, which could both potentially help gross margins and give you an extra push on revenue without getting pushback from the customer because you're improving the product?
Well, I think it's doubling down in the categories that we've already demonstrated that we can lead. The entire cotton platform is a huge one for us, where we launched cotton because for us, it was a whole new manufacturing base. It was a whole new lead time supply chain. It was new everything for us. As we're sitting here in year two and working on year seasons three and four, we can be a lot more aggressive with how we can open those silhouettes up. The consumer has really voted for it. You'll see, in addition from just having a $25 T-shirt and a $60 hooded fleece, to saying, okay, now we can have a $35 and a $40 version. You'll see the V-necks. I mean, this is not like huge innovation either.
We were a crew neck T-shirt at $25, we had a V-neck at $30, and the thing blows out. The consumer's looking for us to push and innovate a bit more. Our product team is highly focused on that as we continue to introduce more and more style as the consumer's looking to take on their off of the field and really, I think, showcase our brand a little more. At the same time, we're not going to show up at Fashion Week next year, it doesn't mean style and design. It's an aspiration. You'll see it come through from our company more and more. We're very relevant and very aware of where we are, we're very aware, I think, of the cadence as to where and how fast we will go.
This is a long road that we have in front of us, the consumer's going to take us to some great places. I think it's the places that are appropriate for us. I think the cotton story and the same thing on the high end, on the Storm Cotton side, where not only what you're seeing us do on the fleece, but as we push and look at things like outerwear, we think there's an enormous opportunity for us there, too. We've pressure tested a lot of these categories that we're looking to enter. Again, as I mentioned before, I don't think we have to take a lot of huge chances.
Based on the learnings that we've had over the last few years and based on some really low-hanging fruit and whether it's Charged Cotton, ArmourBall, doubling down on women's and some of these other places, we can really stay within ourselves and we can continue to find meaningful growth. Again, that I think is demonstrated in what we put up in Q2.
Thank you. Just one follow-up. You talked about looking for the places to go. You've been good in sporting goods. I think you're working on athletic specialty. One of the concerns that some people have cited to me personally is that they're concerned about how sustainable is the apparel growth in the U.S. given your current distribution and so on. Can you talk a little bit about new doors versus additional assortments in existing and how you foresee the growth over time in that regard?
I think our apparel growth is up 20%+ for the past seven or 8+ quarters, and that's on us. When we think about new distribution and these other things that we've contemplated as well, or that we're executing on, the idea here isn't relegating anything to our sporting goods customers. First and foremost, what's happening within our existing consumer base, we are very proud, I think, of the close, if not consistent, double-digit comp growth that we're driving and delivering for these, and that's how we measure ourselves. We're not looking to cannibalize or take anything away from that. They're almost strategies that are mutually exclusive of one another, where we feel an obligation to deliver that type of double-digit growth for our existing account base, first and foremost.
As we can complement that, where the consumer isn't having the ability of finding the Under Armour brand, that's where you'll see us open up new distribution where, frankly, they're not shopping in sporting goods, and it's another way for us to get our brand to them. We'll be very careful with that, too.
Thank you. Continued success.
Thanks very much, Sam.
Thank you. We have time for one more question from Camilo Lyon of Canaccord Genuity. Your line is now open.
I'm amazed I got through.
Hey, guys. Thanks for taking my question and congrats on a good quarter. Kevin, I was hoping you could give us some early indications on how your experience has been with the department store channel. What's worked for you, what's not working, what changes can we expect to see in the back half?
They've been great. I think the partnerships are very new, and so we don't know a lot yet. At the same time, we've had things like opening up our underwear program at 250 Macy's stores. The early reads that we have on that, frankly, are it's where you think it would be. We've got a brand called Under Armour who's housed in base layer and understanding compression and what that means, and we should be the number one player there, and that's the expectation. We've had a modest underwear business that's been successful, I think, in sporting goods, where typically underwear has not been purchased, and I'm speaking on the men's side, and then we introduced it on the women's side as well, and not typically the place where women like to go buy intimates either.
As we expand ourselves and look at getting to more appropriate distribution, number 1, we want to drive within our existing account base, first and foremost, but we see a huge opportunity to take over things like Herald Square in New York. We should be the number 1 underwear brand, period. That's how we're thinking about it. Again, the number 1 player today is hundreds of millions of dollars, and I can tell you our underwear business is not there yet, but based on some of the signs that we're seeing, as we become more sophisticated, as we continue to expand our breadth, as we get into the right and appropriate doors, we believe with every bit of confidence that we can be that number 1 player.
Again, I think the story that we have goes beyond underwear, but it's giving us a great ability to really find and test and say, "How is this distribution channel appropriate for the Under Armour brand? Does the consumer get it?" Again, I want to reiterate is that the partners we've been dealing with at the underwear level from the highest executives at Macy's across the board is everyone has been very open, very welcoming, and really doing things and been a great partner to us. I think we're excited about what that means. Some of the other department stores in Nordstrom, they've been consistently, we've had our women's assortment in there, and I think you'll see us open up with some men's golf and some other things that make sense for their consumer.
Again, underscoring all this about is about coming back and making sure, I wouldn't say protecting, but continuing to drive our existing account base. We're not looking to give in anywhere or concede anything. We think we can win in a lot of different places, but it means doing it the right way and doing it a prudent way and doing it with the right patience of cadence.
Great. Can you tell us about how the receptivity of some of the apparel in the Macy's stores has been? I know the underwear has been pretty successful, as you said, but how is the receptivity of the apparel done in those stores?
Look, I'm not sure we have much. We have some women's product in there, a little bit, frankly, it's not really hitting our radar yet. I think that there's a plan, I think we want to find the right assortments and the right other right things like that. There's no massive plans for us to expand on the apparel side. In saying that, I want to hedge that with you will see an apparel presence, it's not really making our radar that we're bringing up and saying this is a huge growth opportunity for us today. We're not prepared to talk about that. I think that, again, what you've seen is we're finding success with where we're going.
Before we try to unload and say we need to put X amount of product in X number of doors, we're going to learn, I think we like where we are.
Just my final question, Brad, could you just remind us how you're positioning the back half sales guidance relative to weather and where upside can come from if weather remotely normalizes?
Sure. Consistent with what we've talked about before, we're looking at the back half of the year weather relatively consistent to last year. That was built into our original guidance. We took a conservative view to winter 2012 based on winter 2011. We haven't changed that outlook at all. The increase in our guidance is not being driven by any expectation around weather whatsoever. Where the upside could be, obviously, is in our auto replenishment product, where we have safety stock. If the weather does get cold, we have safety stock levels on the end-use product for cold weather products, we'd be able to see some upside there. We've had the inventory for that.
Great. Thank you so much, and good luck for the balance of the year.
Thanks, Camilo.
Operator, we can take one more question.
Certainly. Our next question comes from Robert Ohmes of Bank of America, Merrill Lynch. Your line is now open.
Oh, thanks. Just two really quick ones. The marketing shift to the fourth quarter for, I guess you guys said increased holiday efforts. Can you give us any insight, what you're specifically thinking there that drove that shift? The other quick question was international ex-Japan. It sounds like Japan really supported international this quarter. Can you remind us how you're thinking about international for the next two quarters and what could be driving it or not driving it the next six months? Thanks.
Yeah, Robbie, the marketing shift was pretty straightforward. We weren't happy with the amount of funds we had last year in the fourth quarter on holiday to support our business. It was, again, more around making sure we had some funds there, especially around key selling time frames around Black Friday and so forth, that we had some funds to make sure that we get our brand message out there for Q4. That's all it was.
Robbie, on the international front, yeah, our partners in Japan are just terrific. We got that right now as we're sitting here in year 12 or 13 of that relationship. It just goes to show you, it takes time. I think there's a much broader message here that you see a lot of brands, particularly in the consumer space, that come and go, and those that demonstrate they have the ability to run for the longer haul typically win, just because you've been doing it and you have the ability to gain experience and knowing a little bit more about what you're doing and where you're heading. We're still in the early learning phases of many of the markets that we're entering on a global basis.
Obviously, I think when you look at the five growth drivers and the same message that we've been telling since we went public, grow men's apparel. Someday make women's apparel larger than men's apparel. Footwear, make footwear someday larger than our apparel businesses combined. Taking those product stories country by country around the globe and where we don't find the appropriate distribution, augmenting that with our own direct-to-consumer channel. International probably is one as we'll look at. We're doing business in 61 countries today, and I'm not sure we're doing as much business as we could. We're very excited about the addition of Karl-Heinz Maurath, who will join us in September of this year to head up our international efforts. Charlie's a pro.
He comes with 20-plus years of industry experience and having done it, built big businesses in our space and in our sector from a few hundred million dollars to several billion dollars. That's what we're looking at when we look at the different markets between Asia, Europe, and the Americas. We want to be patient. What you've seen from us is the continual execution of the teams that we've had in place. We're expecting that we're going to keep bringing on expertise, and this isn't a one-person hire, that we're constantly building the teams that we have working in our Amsterdam office and the teams that we have in our office in Shanghai that was recently opened and the several stores that we now have open and some of the new stores that we're building in China.
We've got our first prototype we put up a little more than a year ago, and it's a store that's getting us very excited on a dollars per square foot basis. Without giving all the math away, we're leading there. We're convincing consumers to walk by four or five, what they've known as the global brands, seven or eight local brands, and walk into an Under Armour store and say, "What is this company? I get it." That's the first and the most difficult message that we're going to have is convincing consumers as to why they need to walk by these other brands they've known of for years and to explain the story as to why Under Armour is relevant to them.
I think you're seeing us do that on a country-by-country basis, and more importantly, to show you and demonstrate the ability that we are here for the long haul. We're going to be here, and we're going to be working, and we're going to be fighting, and we're going to be scratching and clawing and doing anything we can because we believe in this brand, and I think we believe in our opportunity. Global will be a big part and a big play for us, and we're excited about bringing somebody like Charlie on in addition to augment the existing team that's working their tails off as we speak.
Great. Thanks so much, and thanks for squeezing me in there in the Q&A.
Thanks, Robbie. All right. Thanks, everyone, for joining us on the call today. We look forward to reporting to you our third quarter 2012 results, which tentatively have been scheduled for Thursday, October 25th at 8:30 A.M. Eastern Time. Thanks again, and goodbye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.