Good day, ladies and gentlemen, and welcome to the Under Armour Inc. Third Quarter Earnings Webcast Conference Call. At this time, all participants' lines are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded.
I would now like to turn the conference over to Mr. Tom Shaw. Please go ahead.
Thanks, and good morning to everyone participating on this morning's conference call. During the course of this conference 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 and CEO, who will address the drivers of our Q3 results and our strategy for continued growth in 2010 and beyond. Brad Dickerson, our Chief Financial Officer, will then discuss the company's financial performance for the Q3, provide an updated outlook for 20 10 introduce our preliminary outlook for 2011. After the prepared remarks, Kevin, Brad and Wayne Marino, our Chief Operating Officer, will be available for a Q and A session that will end by 9:30 a. M. And with that, I'll turn it over to Kevin Plank.
Thank you, Tom, and good morning, everyone. At Under Armour, measuring success has always started with the scoreboard, and I'm going to get to that in just a moment. But as we complete year 5 as a public company, the measure of our success of the brand gets a little more complex. So in addition to our quarterly numbers, I want to talk this morning about 4 benchmarks by which we measure ourselves to ensure we are building our platform for long term brand strength and long term return to shareholders: product, story, service and team. But first to our scoreboard.
Our apparel net revenues are up 30% year to date. We think that number speaks volumes, not only in our ability to continue resonating with our core consumer, but to the strength and validity of our strategy. We believe that 30% year to date apparel net revenue growth is great evidence that there's still tremendous opportunity for us in the U. S. Apparel business as we continue to lead in our core sporting goods accounts and gain traction outside of our core distribution.
For the quarter, our apparel net revenue growth was extremely balanced with Men's, Women's and Youth all growing at least 25%. In addition, our growth being broad based, we continue to see our market share of dollars run ahead of market share of units, which we believe is a great indicator that our consumer remains willing to pay a premium for Under Armour apparel. We have consistently talked about building our women's business to be larger than our men's. This past quarter, the dollar growth in wholesale women's training apparel, our largest category in women's, was equal to the dollar growth we saw in men's training apparel. While that is just a snapshot, we think it's a great sign that we have established the right cadence to build the same level of equity and loyalty among our female consumers as we know exists with our core male consumer.
So as we become strong in areas like women's and direct to consumer, we are also able to invest in areas where the opportunity is even larger. First, there is footwear. In this past weekend, consumers got their first taste of Under Armour Basketball Footwear. And while a few days of sell through aren't an accurate measure of how well we've been received, we are much more confident about our entry into this important category because of the approach we've taken and because of what we have learned and now applied to basketball with the experience of the past 5 years of building footwear. By the time our first basketball footwear arrived in stores last week, literally 100 of the country's best players have tried our product and given us feedback.
That process has helped us deliver a basketball shoe that works for the player and gives us confidence that we will see a return to growth in our footwear business in 2011. Outside the U. S, the Under Armour brand continues to gain traction and build the base for long term growth. Our international business grew 60% in the quarter with both Europe and Japan showing very strong growth. In Europe, our base layer continues to lead the way, but we are making strides toward diversifying our apparel mix as our fitted product grows as a percentage of our business moving into 2011.
We're also bringing grassroots marketing to our European business as this past quarter we brought hundreds of young athletes to the Under Armour rugby combines in the UK. Our business in Japan continues to perform exceptionally well, where our partners, Dome Corporation, will pass US100 $1,000,000 in sales in 2010 as they continue to push forward, including the launch of the first non cleated footwear for the Japanese consumer this quarter. We also saw the 1st UA branded full price retail store open outside the U. S. As Dome opened the UA Clubhouse in Tokyo.
Our success in Japan and the traction we are gaining in the U. K. Are great indicators of our ability to speak to athletes who play something other than American football and better position us to succeed in new categories to help drive our growth. We've talked about developing the Under Armour brand like chapters in a book, with each chapter connecting to both the previous and following ones. As our brand continues to reach new consumers, both here in the U.
S. And internationally, we will be bringing the next chapter of Under Armour innovation to the athletic apparel market next spring. When we first brought the idea of moisture wicking compression apparel to the market, our goal was to make athletes rethink expectations for their apparel. Our history is built on our ability to trade consumers up when we deliver true unexpected innovation. And it is with this spirit that in 2011, we will bring to market the world's first true performance cotton t shirt.
This evolution will introduce Under Armour to a whole new audience of consumers while bringing a new level of performance to a category where expectations for it have been low. You'll be hearing a lot more about the next chapter in Under Armour's performance apparel platform in the coming months, and we're confident this innovation will expand both the reach and equity of our brand. I talked on our last call about investing to build the UA team. That's an ongoing part of my job and one where we continue to make great strides. I'd like to focus on another area where our apparel net revenue growth is enabling us to invest and that's on the field of play.
Our strong apparel engine is fueling our ability to invest not just in new categories and geographies, but in marketing as well. Under Armour was born on the football field, and our business there remains very strong. To help ensure that brand strength going forward, we continue to activate and invest in sports marketing assets. On the college field, we continue to generate great visibility for the brand with our great collegiate teams. And this week, we are very proud that the Auburn Tigers, an Under Armour school for more than 5 years, who exclusively wear our uniforms and cleated product, has just moved to number 1 in the VCS college football standings, War Eagle.
On the pro side, we recently signed on to not just maintain but expand our relationship with the NFL. So in addition to teaming with the league to maximize our involvement at the NFL Combine in the spring, we are adding Pro Bowl players like Myles Austin and Anquan Bolden to the roster of UA athletes wearing Under Armour cleats that you will continue to see on field. So while we're investing to help us grow our share in a core category like football, we are also positioned to invest in assets that we believe will help us accelerate our growth in categories where we're just establishing ourselves. We're confident these coming investments will enable us to quickly build the UA identity in these new categories and bring increased focus to the global opportunities for our brand. I talked at the opening about setting additional benchmarks to help guide us toward the multibillion dollar platform.
Going forward, our focus is very clear. There are 4 areas where we need to win as we continue to drive value for our shareholders: product, story, service and team. 1st and always foremost at Under Armour, it's product. Our apparel engine is strong as we continue to create the best solutions for the athlete. We will continue to demonstrate our apparel thought leadership in 2011 with our next generation of apparel innovation involving the brand new category for Under Armour and cotton.
We promise to make it exciting and the market opportunity is very large. 2011 will mark our 5th year of making footwear and we believe that the opportunity in footwear can someday be greater than apparel for us. We have built up our equity with athletes over the years, and they have embraced our footwear product on the football and baseball fields. Our challenge is to invest and win outside the cleated business because while our core consumers found the football turf and baseball diamond, the bigger dollar opportunity remains in growth categories such as running and basketball. Our second focus for growth is around telling the Under Armour brand story globally.
We have begun to lay the foundation for this storytelling like the U. K. And Japan and have now taken our first step in the world's largest market in China. Our challenge will be to assemble the pieces in each of those markets, retail presence, sports marketing assets and grassroots storytelling that will position us to win. We've established our priorities in our key markets, are investing to grow globally, and we're confident that you'll see these pieces start coming together over the next several months.
3rd is our ability to service the business. We look at 30% growth in our apparel net revenues year to date, and it looks like we're checking that box pretty well. But we are not satisfied with our consistency in servicing consumer demand for UA product. We've made servicing the business a top priority in 2011 and are committed to making it a competency that will help drive long term operating leverage. The 4th and final piece of our plan is building the team.
I've spoken to this consistently on these earnings calls as I believe it's the number one priority for the CEO of any growth company. Our results this past quarter give me confidence that progress is being made. Our retail team continues to drive net revenues exceeding our wholesale growth and bringing in new consumers to the UA brand. Our web business continues to deliver strong numbers while building the next evolution of what UA needs to be online for our core consumer. And the continued strength in our core apparel business is fueling our growth and enabling us to invest across growth categories and geographies.
All three of these areas are run by experienced leaders we have brought to Under Armour within just the past 12 months. Building the team will continue to be my primary focus as we build out the infrastructure of a multibillion dollar global brand. Our revenue growth and the opportunities ahead means we continue to attract the best and the brightest. We will continue to bring in experienced industry to help us navigate these new categories and geographies and complement the homegrown UA team who has built our business and brand equity to date. Making great product, telling a great brand story, servicing our business and building a great team of people that are going to help us do that.
Our goal is to continue to win in each of these areas, ensuring that our core consumers maintain his and her loyalty to the Under Armour brand in 2011 and beyond. With that, I'll pass it over to Brad Dickerson, our CFO. Brad? Thanks, Kevin. With Kevin having taken you through some highlights and strategies for our business, I would now like to spend some time discussing our Q3 financial results.
Our net revenues from the Q3 of 2010 increased 22% to $329,000,000 Year to date, net revenues are up 20 percent to $763,000,000 This strong growth was largely driven by apparel, which was up 28% to $277,000,000 during the quarter and up 30% to $600,000,000 year to date. Apparel strength was broad based during the quarter with each of our men's, women's and nutes apparel businesses growing at least 25% year over year. Our direct to consumer net revenues increased 47% for the quarter and 58% year to date, representing approximately 18.1% and 19 percent of net revenues, respectively. Similar to last quarter, 3rd quarter net revenue growth was driven by a combination of new factory house stores, strong same store sales growth and the web business. We opened 5 new factory house stores during the quarter, increasing our Factory House store base to 50.
We expect to end 2010 with approximately 54 total Factory House stores, up from 35 locations at the end of 2,009. Footwear net revenues declined 20% to $26,000,000 in the 3rd quarter, in line with our previous indication that running and training footwear revenues were expected to decline in 2010 compared with 2,009. International net revenues increased 60% to $21,000,000 in the 3rd quarter and represented approximately 6% of revenues, up from roughly 5% of revenues in last year's quarter. 3rd quarter gross margins were 50.9% compared with 49.5% in the prior year's quarter. Several factors contributed to the 140 basis point gross margin expansion.
1st, we incurred lower sales returns and markdowns contributing approximately 60 basis points. 2nd, we experienced a favorable impact year over year from liquidations and inventory reserves contributing approximately 50 basis points. And finally, we continue to see a higher percentage of net revenues from our higher margin direct to consumer business contributing approximately 45 basis points. Selling, general and administrative expenses as a percentage of net revenues increased to 33.6% in the Q3 of 2010 compared with 32% in the prior year's period. Let me take you through the 4 major components of SG and A, many of which are consistent with our story throughout 2010.
First, marketing costs increased to 10.9 percent of net revenues for the quarter from 10.5% in the prior year period, primarily driven by increased sponsorships and higher marketing costs for specific customers. It is important to note that 3rd quarter marketing cost reflect an approximate $2,000,000 shift of certain media costs to the 4th quarter. Given our updated full year plan, we now expect 20 10 marketing costs as a percentage of net revenues at approximately 12% compared to our previously indicated range of 12% to 13%. 2nd, selling costs increased to 7.1% of net revenues for the quarter from 6.6% in the prior year period, primarily driven by the continued expansion of our factory house stores, which carry better gross margins, but also incur higher SG and A expense as a percentage of revenue. 3rd, product innovation and supply chain costs represented 7.7% of net revenues for the quarter compared to 7.3% in the prior year period.
This increase is primarily a function of increased investments in personnel associated with the design and sourcing of our expanding apparel, accessories and footwear lines. Finally, Corporate Services increased to 7.9% of net revenues for the quarter compared to 7.6% in the prior year period as we invested in additional corporate personnel, facility expenses and information technology initiatives needed to support our growth. Operating income during the Q3 grew nearly 21% to $56,700,000 compared with $47,100,000 in the prior year. Operating margin was 17.3% compared to 17.5% in the prior year quarter. In other expense, we experienced a net loss of 180 $1,000 related to foreign currency during the quarter and a net loss of $1,000,000 year to date.
Looking at our tax rate, several factors positively impacted our 3rd quarter rate. First, we received a state tax credit similar to one previously received by us in 2002,006 along with a federal research and development tax credit. 2nd, we continue to develop and implement our tax planning strategies. These efforts reduced our effective income tax rate in the Q3 to 37.7% compared with 43.9% in the Q3 of 2,009 and are expected to result in a full year tax rate of approximately 39.2%. Our resulting net income in the 3rd quarter increased 33 percent to $34,900,000 compared with $26,200,000 in the prior year period.
3rd quarter diluted earnings per share increased 31 percent to $0.68 compared with $0.52 in the prior year. While our operations remained strong during the quarter, we did experience approximately a $0.05 favorable impact from the lower than expected effective tax rate during the period and approximately a $0.02 benefit from the shift of marketing spend from the Q3 to the Q4. Now moving over to the balance sheet. Total cash and cash equivalents at quarter end increased 43% to $134,000,000 compared with 93,000,000 at September 30, 2009. Cash, net of debt, increased $40,000,000 at quarter end to $115,000,000 compared with 75,000,000 dollars at September 30, 2009.
We continue to have no borrowings outstanding on our $200,000,000 credit facility. Inventory at quarter end increased 28% year over year to $196,000,000 compared to $153,000,000 at September 30, 2000 and 9. In line with previous guidance, inventory growth outpaced net revenue growth as we increased our safety stock around core programs to better meet consumer demand and increased our made for strategy across our Factory House store base. Our investment in capital expenditures was approximately $9,000,000 for the 3rd quarter and approximately $25,000,000 year to date. We now anticipate capital expenditures in 2010 will come in toward the lower end of our previously indicated $35,000,000 to $40,000,000 range.
Now moving on to our updated outlook for the remainder of 20 10. Previously, we provided an outlook for 20.10 net revenues in the range of $990,000,000 to $1,010,000,000 an increase of 16% to 18% over 2,009 and 2010 diluted earnings per share of $1.11 to $1.13 an increase of 21% to 23%. Given the sustained strength in our apparel and direct to consumer channel, our improved visibility for the remainder of the year and a lower effective tax rate, we are raising our full year outlook. We now expect 20.10 annual net revenues in the range of $1,030,000,000 to $1,035,000,000 an increase of 20% to 21% over 2,009. We also expect 20.10 diluted earnings per share in the range of $1.23 to $1.24 an increase of 34% to 35% over 2,009.
Similar to last quarter, we want to elaborate on 3 areas of our updated 2010 guidance: SG and A, taxes and inventory. For SG and A, we see year over year dollar growth in the 4th quarter approaching 30%. We continue to make the right investments to support our growth platforms. This includes footwear, which was planned down this year, and hats and bags, which are not generating revenue until 2011. It also includes higher personnel costs at our Factory House channel.
But we plan to end the year with 54 stores, up from 35 stores at the end of 2,009. Now looking at our tax rate. Our effective tax rate in the 3rd quarter benefited from one time state and federal tax credits along with an improved outlook relative to long term tax planning strategies. As we stated earlier, these items will drive our effective tax rate for the full year in 2010 to 39.2%, down from our previous outlook of 42%. As we move into 2011, we anticipate our effective tax rate will increase to a range of 40.5% to 41% due to the one time nature of the tax credits received in 2010.
However, this increase will be partially offset from the permanent impact relative to our continued long term tax strategies. Finally, on inventory. We continue to see the same factors from the 3rd quarter driving 4th quarter inventory growth ahead of sales growth. This includes an increase in our safety stock and continued investments around made for product for our factory house outlet channel. It also includes new product categories for 2011, including hats and bags coming in house and the introduction of our new cotton product.
Before we turn it over for Q and A, we'd also like to provide you a preliminary view for 2011. Based on current visibility, we anticipate both 2011 net revenues and 2011 EPS growth to be at the higher end of our longer term growth target of 20% to 25%. We intend to give more details on our 2011 guidance in the coming months. With that, we would now like to open the call for your questions. We ask that you limit your questions to 1 per person, so we can get to as many of you as possible.
Operator?
Thank Our Our first question is from Michael Binetti with UBS. Your question please.
Hey guys, congrats on a nice quarter. If you could maybe help us out a little bit with some more detail on the gross margin. I'm just wondering, I mean, I see what you guys talked about as being year over year lifts to the gross margin. What were maybe 1 or 2 of the biggest offsets to that in the quarter, please?
Hey, Michael, this is Brad. I think when you look at a lot of positive things on the gross margin side, as far as negatives maybe offsets, we did have a little bit more apparel liquidations year over year. But I think that really is more a function of just keeping our inventory clean. And actually, you're seeing some of the benefit of that in what I called out as lower returns and markdowns. So even though we had a little bit more volume on the apparel liquidation side, which had a little bit of a drag on margins, very small, that was more than offset by the fact that our inventory is very clean now and we're seeing less returns and markdowns.
Okay. And then just a quick follow-up. As I
look through
the initial statements on 2011, how should we think about, I guess, the growth algorithm in our models for 2011? Should we think about it seems like there's been a quite a bit of preloaded costs this year as you guys bring in hats and bags and you build out for footwear to be getting bigger. Should we think about EPS start levering revenues next year? As we think about this 20% to 25% target, should EPS be growing ahead of revenues as you guys start leveraging some of those costs? And maybe to what extent we should be thinking about that at this point?
Yes. We'll give a lot more detail around 2011 on the next earnings call, but I think as we kind of sit here targeting that higher end of 20% to 25% both for top line and bottom line, we are going to target a modest SG and A leverage in 2011. We need to continue to invest in our businesses, but with hats and bags coming in house, to your point, also with footwear returning to growth, we are targeting a modest leverage in SG and A. Did talk about the tax rate. So year over year, the tax rate will be going back up again a little bit because of the one time nature of some of those tax credits.
And on the margin side, right now, we're still working through a lot of the margin details. Although we've been seeing some of the challenges that the industry has been seeing relative to some margin pressures out there. We're working through that right now, specifically around the back half of twenty eleven.
That's a gross margin comment, Brad?
Right.
Okay. So at this point, we shouldn't expect a huge amount of leverage on the growth. There's quite a bit of noise in that gross margin outlook for you guys next year. So I'm just trying to think how we should maybe think about that number heading into next year even though it's early for you guys.
Yes. I think you got some puts and takes there with SG and A with the tax rate and also with right now, we have more detail on gross margin later in the next earnings call. So I think for now, look at that 20% to 25 percent both top line and EPS line. Thanks. Yes, higher end of that.
Thank you. Our next question is from Robbie Ohmes with Bank of America Merrill Lynch. Go ahead, please.
Thanks. Just a few quick questions. The first, I apologize if I missed it, but were any basketball shoes shipped in the Q3 or does that shipment all fall in the Q4? And then related to that, can you talk about the sort of the inventory investment there and the allocation strategy for basketball shoes? And then my follow-up question would be for the Performance Cotton business launching next year, maybe a similar sort of discussion.
Is this a allocated launch or could this be pretty broad? And does it encompass any new distribution channels? Thanks.
Robbie, this is Brad. On the Q3 shipments for basketball, no, there was not any Q3 shipments for basketball. That's a Q4 entry into that marketplace. And as Kevin mentioned, we're really talking about a taste here. So from an inventory perspective, don't really anticipate any significant movements in inventory relative to the basketball footwear.
As far as allocation, yes, that's an allocated program this year and as we head into next year also for basketball. On the cotton side also, for the most part, an allocated program. We'll have a little bit of a replenishment on the cotton side too going forward. From a distribution perspective, no significant changes in distribution in 2011 for us and that includes our cotton product.
And just a quick follow-up on footwear. If you look at the shipments for the Q4, I know that sorry, for the Q3, it looks like your revenues were down 20%, if I think I have the right number in there. Was there were there some wholesale accounts where your footwear business was actually up in the 3rd quarter? And or were you doing footwear in your outlet stores? I would have thought you would have planned that footwear business down more significantly versus the numbers last year.
Thanks. Any comment on that?
Yes, Robbie. I think when you look at year over year in the Q3, obviously, Q3 last year was a pretty big quarter for us with the back to school program around run. So obviously, it makes sense that year over year, we called out running and training to be down this year that Q3 would be down. We have seen some pretty good success in our outlet channel with our footwear. So that's helped a little bit offset some of that.
But again, as we saw the as we called out consistent with prior quarters, our footwear is down overall.
Got it. Thank you very much.
Thank you. Our next question is from Omar Saad with Credit Suisse. Your question please.
Thanks. Good morning. Kevin, I wanted you to elaborate on a comment you made at the beginning on the basketball launch. Under Armour's greater level of confidence given the experience and key learnings over the last 5 years in footwear. Could you elaborate and maybe give some examples of things that you've learned in the footwear business that make you more confident on the basketball side?
Yes. I actually wanted to give a little more color around footwear in general. So, let me take a minute to do that. And if I could, drop it into 3 buckets, which the first bucket's reality, the second is what we've learned and the third being what we're doing about it. So, first of all, I want to set expectations for people and when we talk about what we believe our opportunity in basketball is.
We've been pretty clear about saying our goal is to be the number 2 player in basketball in the next several years. Now, keep in mind, it's about a $1,300,000,000 market opportunity in the U. S. Alone that's currently dominated by 1 company through 3 different brands controlling 90 plus percent of the market. So as we say targeting number 2, you're looking for about mid single digits would accomplish that goal for us.
That being said, our long term goal like it is in every category we enter is to someday be the number one player, but that of course is going to take time. But as you can tell for our brand, we are thinking more about Under Armour 2020 than we are even about Under Armour 2011. So, we've absolutely had a great education in footwear since 2,006. And 1st and foremost, we have listened and I think hopefully applied most of those learnings to what we're doing through our basketball introduction. 1st and foremost, the emphasis on youth.
Winning brand fans over at inception versus at age 25. A great example is when we launched running shoes, even after training shoes, 1 in every 2 pairs of shoes sold in training in 2,008 were to youth. When we came back in 2,009, we didn't sell youth product in the initial launch. So lesson learned, narrow distribution for the introduction and limited amount of pairs. We've put out to the market a fraction of what we've done with other introductions from a total number of pairs in the market.
And most importantly, we've built around our key sporting goods partners that have been great and terrific with us through this past weekend as well as incredible support from the mall with both Foot Locker and Finish Line really doing a great job for us. And then most importantly, the acceptance that we had from some of the top specialty doors and some of the top urban doors around the country. And so there's a lot lessons to be learned here. And again, it's very early, but the indications are that we're going to get started. And again, the one certain thing that we can tell you is that day 365 will be better than day 1.
And that comes back where I think one of the places where we've been pretty critical of ourselves is what we've done when we introduced a product versus what we do in season 2 and season 3. And what I can tell you with confidence is that season 2 and season 3 will be greater again than we were on day 1. And most importantly, we've core tested and approved the product. We'll have 20 Division 1 teams wearing them this fall and throughout the last several years, 12 men's, 8 women's teams, 10 AU programs, 30 high school teams, Brandon Jennings in the NBA. I mean, we've really taken the time to build a good product and more importantly, a great product that is a foundation that will something to build on.
And then finally, what are we doing about it? I think the culture of being a basketball company is one of the most important things that we've really been able to evolve into, not just talking about being a basketball brand, but really walking about being a basketball brand. And a large part of that, and you're not allowed to call in sick for earnings calls, but I just got back from a week in China visiting our factories and visiting our office in Guangzhou in Hong Kong. So, I'm fighting between costs here, but bear with me. But you have to go there and you have to see it.
And I can tell you that the partner base, the distribution base, the manufacturing base that we have today, the office, the more than 40 people that we have in Asia, the nearly 100 people that we have here, the open requisitions and the culture of building a footwear business and particularly a pretty successful sport and basketball business is something we're pretty proud of.
Thanks. That's really helpful, Kevin. As a follow-up, talking about things that you've learned in the past, with this kind of new cotton product launch, you also alluded to some new channels or new consumer new markets that's opening up. So, can you be more specific in that?
Well, I think that, obviously, the addressable market of what cotton product will be for in large form is a big opportunity. We looked in our athletes' store And in Find the Avenue Store, you'd find 30 T shirts, 4 of which were Performance, 26 of which were Cotton. Of the 4, we had 3 of which were Under Armour and 1 was another brand. And so, we were fighting ourselves to try to get and capture that 4th T shirt when we realized looking at the other 26 shirts was a greater opportunity. And so, we never had issue or we never had problems with, when you think about Under Armour getting into cotton with, frankly, cotton T shirts as much as we had issue with nonperformance.
So, the ability for us to make a product that performs is something that we think, A, speaks to our existing consumer as well as opens us up to a new consumer who always just said, I'm a cotton person. I don't like Under Armour, which is that synthetic goods. So, we think that there is a much larger market opportunity there, again, for consumers that are walking into existing distribution. And then, of course, I think there's probably a bigger opportunity as we think about where can we go where we haven't been able to go before because we didn't make cotton
products. Thanks. Nice work. Feel better.
Yes. Thanks so much.
Thank you. Our next question is from Tapush Bari with Jefferies. Your question please.
Good job. So Kevin, you talked about in your prepared remarks about service and brand experience. Maybe give us an update on your latest thoughts on your retail strategy. Obviously, your outlet stores are doing very well. Any update on where you stand on full price retail?
Thanks.
Yes, we have no plans to open any additional specialty stores in 2011, but you're going to continue to see us test the market as well. For instance, we've got a great pop up store that you'll be seeing in New York City in November, right around the marathon and right around our ability to find out what we can do at Holiday. As we look at distribution in the U. S. And where we're underpenetrated as a brand, one of the vehicles we consider is our direct to consumer business as a whole, and that includes both retail as well as our web business.
Our goal with owned retail is to supplement our existing distribution to get to that consumer because we think there's a lot of places where still, frankly, we're underpenetrated. And so by offsetting or, frankly, augmenting our existing distribution base with the appropriate full price strategy is something that may make sense in the future, but we have a long way to go and we have a lot of work to do with our existing account base. But you look at where the most comprehensive branded story is told for the Under Armour brand, and we have some great distribution partners that make that happen. But in a lot of cases, it's an outlet store. It's Branson, Missouri, where we open up our first outlet.
And on day 1 of we'll have outlets by year end. But a place like Branson, Missouri, on day 1, we sold nearly $60,000 out of a 5000 or 6000 square foot store in the opening day. And you think about what that opportunity means of from us from having the ability to continue to find pockets where the Unimer brand and, frankly, the
seems like there are seems like there are some exciting new product launches scheduled for next year. Can you maybe give us an update or some kind of idea of timing for this new cotton fabric and also, I guess, running 2.0?
Well, as we mentioned, there's we haven't we basically I haven't told you anything about cotton yet, so just giving you indications. So there's a lot more information to come on that, and you'll see that around the Q1 of 2011. We have a lot of great products out right now, probably some things in just some one offs that we're really excited about that's out in the marketplace right now is our new EVO cold gear, which in the past, if you've ever said, tried an underarm or compression cold weather shirt, We used to say that 2 best times of the day are the minute you put it on and the minute that you take it off. And so imagine putting an Under Armour shirt not being a full contact sport, something we're excited about, this new fitted product. So, we think this opens us up again to a much wider, more addressable market as well for people that aren't looking for super compression.
So, it's a little more of a relaxed fit and I think with all the benefits and properties of Under Armour. So, a lot of not a new product categories like that. But I think the performance that you're seeing with 30 plus percent net revenue growth in apparel, it speaks to, I think, the trust that we have for the consumer and the fact that we have a pretty good thought leadership position when it comes to apparel.
Indication on when the new when jeans new running products should be expected at retail next year?
Well, it's consistent. You're not going to see one big, great new launch. What you're going to see is consistently better product in the marketplace. And again, we feel very good about the product that we have there now. We feel very good about the product we have in 2011, which is why we've taken some of the steps backwards to reset in 2010 that sets us up for a position to have clean inventory and go attack the business in 2011 and especially heading into 2012.
So, what you're not hearing us say right now are any major predictions. What you are hearing us say is that 2011 will be bigger than 2010, that basketball will be an important part of what we're doing, and that we have great confidence that for long term, both running and training are going to be important categories for our brand.
Great. Thanks a lot. Best of luck.
Okay. Thanks very much.
Thank you. Our next question is from Kate McShane with Citi Investment. Go ahead please.
Hi. It's Oliver Chen for Kate McShane. We had a question related to gross margin and looking for in relation to product costs. Do you feel that your business model has sensitivity to any of the recent escalation in cotton prices? And if so, kind of what is the base case assume for that outlook?
And secondly, for modeling purposes, what kind of should we be projecting an inflection towards positive footwear growth as soon as Q1 2011? Is there any kind of feedback about how to think about that? Thank you.
Sure. This is Brad. As far as gross margin goes, I think the important thing to note that still for us is consistent with what we said in the past that the biggest drivers of gross margin for us will continue to be the growth in 2 businesses for us. 1, our direct to consumer business, which positively impacts gross margins. And 2, the growth in our footwear business, which we've called out right now, impacts our margins negatively from a gross margin perspective.
So those 2 really will still continue to be the biggest drivers of our gross margin story going forward. To your point around some of the pricing issues, we are kind of rolling up our prices right now for the back half of twenty eleven. Still have some work to do on that. So we'll give some more details around gross margin in the next earnings call. I think the important thing to point out though is that we don't anticipate cotton as a percentage of our overall business to be a significant driver of our costs.
So from that 2011. But again, we'll give more detail around margins in the next earnings call. As far as footwear growth and timing of footwear growth, I think what you should anticipate is probably Q2 and Q3 kind of being the quarters that have the best footwear growth and that really is more around the back to school season. So to Kevin's point before about talking about some of the categories of footwear, I you're going to see the most impact overall for footwear on Q2 and Q3.
Thank you.
Thank you.
Our next question
is from Michelle Tan with Goldman Sachs. Your question please. Michelle Tan, your line is open. I'm sorry, I'm getting no response. Our next question is from Eric Tracy with FBR Capital.
Your question please.
Yes, good morning. Maybe if I could just follow-up a little bit more on the footwear side and basketball in particular. I know you don't give specifics next year, but just in terms of is there sort of a goal or market share grab you expect or what's embedded in that top line guidance for next year?
I mean, in that, Paul, like I said, I think we've got a few years to start really showing up in terms of absolute market share. So our number one goal right now is just is learning the cadence of how to work within that category, getting the consumer acceptance from the athletes on court and then of course building up a little bit of excitement around some very key and limited doors. So, there's nothing from a basketball specific. In terms of footwear overall market share, we're thinking more about how that compares to ourselves, what are we doing to ensure that footwear in 2011 again is greater than it is in 2010.
Okay. And then just on the footwear margin side, as we think about next year, again from a gross margin, it sounds like it still is a little bit of a pressure, but sort of where we are in the stages of scaling that business up to sort of leverage the costs that we've already put in? Are we at that inflection point next year? Or are we still working through that?
Yes. Eric, this is Brad. Yes, I think from the margin side, we still we've been calling out about 1,000 basis point plus opportunity in margins in footwear longer term. We continue to see that opportunity longer term. In 2011, I think from a margin perspective, you'll probably see something similar to what we've seen in 2010, some puts and takes to get to that, but we'll give a little bit more detail on that in the next earnings call.
Okay. And then just lastly, again, I know
you don't want to get too specific on the gross margin side, but certainly you got the pieces of direct to consumer helping. But in terms of some of the takes again around these product cost inflation, not just cotton, but be it labor, freight, even polys continue to escalate. Is that obviously, as we think about the back half of the input costs there embedded within this sort of guidance already? Or is it still you're working through relative to the sort of price increases you think you can take to offset?
Yes. Our guidance take into account the visibility we have today, which is pretty good on springsummer. On fallwinter, we're still kind of working through that, so that's why we're not going to be able to give too much detail until the next earnings call. But just to kind of reiterate again, from an apparel perspective, when you talk about labor costs, less than 10% of our apparel is manufactured in China. So China labor is less of an impact to our apparel.
It's a little bit more of an impact to our footwear margins, which is a small percentage of our business, obviously. Like I said before, cotton, although incremental top line for us in 2011, still relatively small percentage of our overall business. So we're kind of working through all those margins and give you more detail on the next call.
Okay. Thanks guys.
Thank you. Our next question is from Michelle Tan with Goldman Sachs. Your question please. Hi, it's Nicole filling in for Michelle. Thanks for taking our questions.
We wanted to see if you could give us an update on your international efforts and if there are any new initiatives that are driving the strength in that market. Thanks.
Yes. Hi, it's Kevin. So, I think, first of all, our goal is to be a global brand, which we define that as being more than half of our revenue should come from outside of our home country. And so, in doing that, we've got a long we have a long road in front of us with 90% of 90 plus percent of our business coming from within North America today. That being said, we've got great confidence of what global can mean.
And so, as we think about global, there's 3 regions that we consider that: the Americas, Asia and Europe. In Asia, I think that we've laid some great groundwork, again, with Dome Corporation in demonstrating that our brand A does translate and the success that we've seen with Dome Corporation passing $100,000,000 it's been 10 years to get to that point, but I think that they are really positioned for to start scaling and start levering their business as well. And so, again, it took 7 years to get to the first $35,000,000 and just 3 to get over $100,000,000 since then. So, we feel like that tipping point effect is something that's taken place there. And again, it helps lay a little bit of a model as we think about entering other, particularly Asian countries.
So, China is the next one that we have on the map. And as we think about entering China, we're going to do it very conservatively. And within the next several months, we expect to have a shop in shop up in China at some point, and we're opening our 1st full price store in 2011 as well. So again, all of that has been around putting to work all the studies and all the market research that we've done to date, putting ourselves in a position to enter that market. But again, as we see or what we've found with entering other countries is that the first five years are about understanding culture and understanding and building your team.
And so we've got a very long term plan with that, and we're very fortunate to have an apparel and a direct to consumer business that allow us to make these kind of investments. Europe for us is a place that we continue to believe in. And again, passing that 5 year mark, we're at a point where we think that Europe is something that's poised for growth for us as well. As we said, our international business is up over 60% in the quarter, 59% year to date. So, we feel very good about and encouraged by what we're seeing internationally.
But it's all off of a small base and something that we think over time, again, our goal is to build out that global base where half our revs are coming from outside of America.
Great. Thanks.
Thanks a lot, Nicole.
Thank you. Our next question is from Sam Poser with Stern AG. Go ahead please.
Good morning. A lot of my questions have been answered. But can you talk about how many stores do you have right now? And what is your store growth plan into next year?
Yes, Sam. Right now at the end of the Q3, we have 50 Factory House stores. And obviously, we still have the 4 full price specialty stores on top of that. We anticipate opening another 4 factory house stores in the Q4. So we'll end the year with up 54 stores.
And next year, right now anticipate building approximately 20 new stores factory house stores in 2011. There'll be a little bit more front end loaded too as far as openings than we've seen in previous years too.
And then the big basketball launch that's going to happen next year, The big basketball launch that you're going to do next year when it's no longer just an eyedropper, that's going to be a more of a back to school event rather than Q3 based on what you said?
Yes. No, I think, Sam, is that we haven't said anything about any major launches next year. I think one of the lessons learned that we have figured out of being in footwear for the last 5 years for us is not putting that big bull's eye on any particular date. And so, what you see now is, I would I'd call it a little more than a slow roll, but we're looking to basically create some market want and desire and need from the consumer. And we now have that platform from a distribution standpoint.
I think we like the partners that we have selected right now. I think we have a great balance between our core sporting goods guys, mall channel as well as some of the specialty urban doors. So, we're going to basically go where we find heat, And we see that with a product standpoint. And as I mentioned in my comments, and I don't want to make sure it doesn't get lost, is that we will when I say we'll be greater on day 365 than we will be on day 1 is that we feel great confidence in the product that we have out there when we start looking at future seasons to come, what we have coming in the spring, what we have coming next summer, and what we look at what we have coming next fall. And so there's no big surprises that we're waiting for what that product is going to look like.
But it's been tested. We're working with that and our teams right now. And I think we feel very good about the progression and the journey that's going to be basketball footwear for the Under Armour brand.
Okay. I have one last thing, I'm sorry. The comp how did you comp in your retail stores? And what is the breakout between made for goods right now and selling markdown product just all
the products that we just start products?
Yes. Okay, Sam.
So I think we really don't talk about comp percentages at our retail stores, but what I will say is that that's probably the benefit we've been seeing from our Made For strategy to some degree is better comp year over year. That's helped obviously with our product assortment. It's been a better consumer experience within our outlet stores themselves that helped our comps more than anything. As far as made for itself, I think the industry range out there right now is about 75% to 95% made for in the factory store base. We're well below that as a brand right now.
And year over year, we're probably even though we're below that year over year, probably about double our May 4th than we were last year at this time.
Thank you very much. Success.
Thanks.
Thank you. Our next question is from Jim Duffy with Stifel Nicolaus. Your question please.
Thanks. Good morning. Good morning.
Couple of questions around footwear sourcing.
Can you speak to the progress you're making on costs there and what are some of the keys to getting better leverage on the footwear gross margins? Is it really just a volume thing? Or are there some other aspects of it that should represent inflection points for you? Yes. Jim, I think volume definitely plays a part.
Obviously, when you look from a tooling perspective, the more volume you can have in your footwear side, it helps to offset some of those upfront tooling costs. So that would always help. Our footwear team and specifically our sourcing team within footwear has been doing a lot of work around short term and long term strategies of sourcing to be able to be more flexible going forward with our source base and really put us in a position just from a product category perspective to improve margins across the board pretty much in all categories longer term. So as I spoke about before, we think there's a lot of opportunity on the footwear side margins, 1,000 plus basis points, we think. It's going to take some time.
But right now, they're kind of working through that strategy, and we anticipate seeing some benefits from that in future years. And Jim, just coming back from Asia and spending time in our factories with our key partners too, is part of that learning progression over the last 5 years has been us becoming a better customer to the vendors we do business with as well. And so, erratic buys and some of those things when you just don't know the size of the business and you're learning and getting your molds and your lats and all the amortization that you're going through. So, there's some significant start up costs. When we opened footwear 5 years ago, we started getting into that category, we had one partner.
We had 13 people on our team. Today, we have we had outsourced development, outsourced design. Today, we have 5 or 6 key partners that we're working with. We have an office in Guangzhou. We've got 40 people in Asia.
We have 100 people here. We have 30 open requisitions for new people joining the team. So, we've become a lot smarter. Well, we've become a lot bigger, but I think we have become a lot smarter about this. And a lot of the infrastructure build that you've had, even with categories that we haven't been in yet, like basketball, we're now, a, starting to see some revenue come in there.
It's also beginning to apply a little bit of consistency with some of our factory base because when we started as a football company, that was seasonal. And with factories like anybody wants is they want the ability for 12 months of production that can smooth it out and some of those other things. So we're becoming a better customer, which are allowing us to be more strategic and thoughtful about, A, where we're manufacturing and we can take advantage of appropriate local conditions to take advantage of costs and some of the other things. But I think that's giving us we're again much more mature as a footwear business today than we were obviously 5 years ago. So, Kevin, are you working with fewer factories and trying to concentrate your sourcing through factories just to get some captive capacity?
Capacity? Or help me understand the dynamic there as to how you're securing capacity and how that's helping you from a cost standpoint? Yes. Well, not unlike our apparel business is that we want to have a few key strategic partners. And so, I went and saw 3 partners on this last visit in 6 or 7 different factory locations.
And so, where we can minimize sort of geographic risk and geopolitical risk and some of those things, and I think that the world of footwear manufacturing is going to move very quickly beyond just China. And so, that's one of the things we have to be thoughtful with. And again, we're working with very large scale partners who have that ability because we want to be very important to a few partners versus trying to have a lot of those relationships. Okay. Thanks so much.
Feel better. We're doing good. Thanks, Jim.
Thank you. Our next question is from Matt McClintock with Barclays Capital.
With all the focus on basketball, I just wondered if we could get an update on the cleat business. What trends have you been seeing in market share in this category? Is the company still building on its position? And granted that there won't be any major launches next year, but should we see anything exciting in this category next year along with training and running?
Yes. Well, one thing that's exciting, I mentioned just some of the authenticity that we have with some of our collegiate properties that we'll have wearing our footwear from both baseball and national champion baseball winner, University of South Carolina, to the number one team in the country on the collegiate level and Auburn University to just re upping our deal and, more importantly, expanding our deal with the NFL by taking over Combine, but ensuring that our athletes will be wearing on our football cleats and football gloves beginning in 2011 as well. Market share on the cleated categories continues to grow and expand for us. And so, we see continue to take market share in 2011 in both football and baseball cleats. And so, again, while they're very small categories, they're also very strategic and very important categories for us and we think give us a great foundation and a great base to continue to build on things like our trading footwear as well as give us the credibility of going after categories like running and some bigger platforms like basketball as well.
Thanks.
Operator, we have time for one more question.
Thank you. Our next question is from Chai Lee with Morgan Stanley. Your question please.
Hey, good morning guys. Kevin, can you just talk about, have you guys been able to manipulate the supply chain so
that you'll be able to read and react
on basketball to what you're seeing at retail versus what you guys were able to do with running or training?
To read it, number 1 is that we're not looking to be reactive with any of the categories that we're running right now. And so I think we're putting a pretty firm plan in place and the ability for us to chase something we can think about long term. But we've got to frankly, we don't need the revenues. And so, we're not we've got we're very fortunate to have the strong apparel business that we do that allows us to be thoughtful and strategic. And so, when we say we've issued a taste of basketball footwear, there is a much more demand than what we're putting into the market.
And again, we're selling at about a fraction of what we've done with other categories that we've entered. And so we're positioning this as this is a long term 3 to 5 to 10 year plan for us to look to become the dominant and leading player in every category where we're participating.
I guess my question wasn't so much on the quantities and being able to actually chase quantities, but being able to manipulate either design or actual qualitative aspects about the product.
Yes. I think that we stay very close to consumer. Today alone, I mentioned the 12 men's and 8 women's Division 1 teams that we have, the more than 10 AAU programs, the 30 high school teams. So, hopefully, we're doing a lot of that work upfront, and we're finding out what the consumer wants. But shortening and staying closer to the consumer, shortening those lead times and staying closer to market, I think that's everyone's goals.
But we're in footwear, we want to be careful before we try to reinvent the wheel. We want to understand the way that we can deliver great product to consumer. And that, unfortunately, today is working with an 18 month calendar. So, that creates its own limitations, but we're trying to shorten that any way that we can. But right now, again, I think most importantly, the one thing you'll find about our basketball is that some people will like it, some people will not like it, but it definitely has a point of view.
And it's something that I think we're very proud of and we feel very good about the way that we're coming to market with that product.
And if I can just squeeze in one last one. Just Brad, follow-up on the gross margin. Can you talk about what categories saw the higher liquidation sales year over year in 3Q? And as I look at your Q4 guidance, it seems to imply some acceleration in the gross margin trend 4Q from what we saw in 3Q. Is that just an expectation that those liquidation sales will go away?
Thanks.
Yes. I think on the liquidation side, yes, I wouldn't get too caught up on the components of that. I mean, as a percentage of revenues, although on the apparel side, it's a little bit higher as a percentage of revenues in Q3 this year versus last year, it's still a very, very small part of our revenue base. And usually right now on the liquidation side, we've obviously seen a lot of success in our outlet channel liquidating apparel. So from a 3rd party liquidation perspective, it's more kind of the one off things that are a little bit more difficult to liquidate that we look to do that with.
As far as I'm sorry, what was your second question again?
Just in terms of what I think the implied 4th quarter gross margin seems to imply something like 170 bps or so improvement year on year. Is that just really driven by lower liquidation sales visavis3q? Just help us understand the drivers.
Yes. Yes. I think I would anticipate your 4th quarter margins to be relatively similar improvement as your 3rd quarter margins. Again, strong direct to consumer quarter as it historically has been for us. And also on the footwear side with the taste of basketball, I think you'll see a positive impact on the top line from footwear also.
Although it's a small quarter for us, there'll be a little bit of a positive impact there. So that may offset some of that direct to consumer benefit.
Got it. Okay. Thank you very much.
Operator, we're done.
Yes, sir. Thank you. Ladies and gentlemen, thank you for your participation. That concludes