Good morning, everyone. Thank you for standing by and welcome to the transition quarter ended March 31st conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, you may press star zero. I would now like to hand the conference over to your speaker today, Mr. Lance Allega, Senior Vice President, Investor Relations and Corporate Development.
Good morning, and thank you to everyone for joining us for Under Armour's transition quarter ended March 31st, 2022 earnings conference call. The information provided on today's call will include forward-looking statements that reflect Under Armour's view of its current business as of May 6th, 2022. Statements made are subject to risks and uncertainties detailed in documents regularly filed with the SEC and the safe harbor statement included in this morning's press release, both of which can be found on our website at about.underarmour.com. It's important to note that the ongoing uncertainty related to COVID-19 and its potential impact on the global retail environment could continue to impact our business results. We may reference non-GAAP financial information on today's call, including adjusted and currency-neutral terms, which are defined under SEC rules in this morning's press release. You may also hear us refer to amounts under U.S. GAAP.
Reconciliations of GAAP to non-GAAP measures can also be found in our press release, which identify and quantify all excluded items and provides our view about why we believe this information is helpful to investors. Joining us on today's call will be Under Armour President and CEO, Patrik Frisk, and CFO, David Bergman. Go ahead, Patrik.
Thanks, Lance, and good morning to everyone. On today's call, we'll review results from our transition quarter that ended March 31st, 2022, and provide our initial outlook for fiscal 2023. Having successfully executed a multi-year transformation after delivering the best year in Under Armour's history in 2021, results for our transition period came in lighter than we had expected due to ongoing supply challenges and emergent COVID-19 impacts on our Asia Pacific business. These trends, which we believe to be temporary, are also expected to impact how fiscal 2023 is shaping up. Dave will discuss these elements later in our call. Yet despite these near-term headwinds, I'd underscore the confidence we have in our long-term growth potential.
Over the past few years, following the completion of a multi-year transformation, including work to recenter our strategy, operations, and financial discipline, we've strengthened our brand, delivered higher quality revenue, and are managing our business for improved profitability, including improved margins, cash flow, and return on capital. The engine that makes this model work most efficiently is profitable top-line growth. This is my number one priority as CEO. We believe our direct consumer, footwear, women's, and international businesses will drive this growth over the long term. Across these drivers, our growth strategy is anchored in five platforms engineered to accelerate our ability to scale and grow the Under Armour brand. First is Consumer Centricity, which lies at the core of our reason for being.
To activate our purpose of empowering those who strive for more, we are committed to having a deep understanding of our athletes, their functional and emotional needs, and their behaviors and preferences as they complete their journey from discovery to purchase to advocacy. By incorporating insights, data, and analytics, we work to ensure we evolve as consumers evolve, creating repeatable connection points. Our second platform, Product Engine, is the creation of industry-leading innovations. These inventions, wrapped in art, enable athletes to train, compete, and recover at the highest level possible. Leveraging consumer insight ensures our product is optimized for performance, style, and cultural relevance. Through our train, compete, and recover architecture, our constant focus is on delivering tangible performance advantages to drive loyalty, always ensuring we deliver products that athletes didn't know they needed and now can't imagine living without.
Third is our Go-to-Market Platform, which is how we manage the marketplace, balancing product creation, storytelling, and experiences with strong commercial relationships among our wholesale partners. We've made considerable progress here by optimizing our work process calendar, delivering increasingly better segmentation, and ultimately ensuring that wherever and whenever we show up, consumers are engaging with us the brand right premium way. Fourth is End-to-End Planning, which is another Under Armour innovative product platform. As we work to solve complexity among our product creation and lifecycle management, sustainability, logistics, and financial forecasting, we're collaborating on ways to bring supply chain discipline, company functions, suppliers, and customers in sync to create the most optimal ecosystem possible. Having completed work on many of the individual components of this effort, we are now focused on connecting them to get even sharper and more efficient as we grow.
Finally is Omnichannel Excellence, which targets delivering a seamless premium experience across all brand touchpoints. By establishing a voice of the consumer capability, we're utilizing a channel-agnostic approach to map an athlete's purchase journey, identifying and reducing friction points along the way. Furthermore, harnessing the power of our e-commerce platform to improve performance and speed, along with endless aisle, buy online and pick up in store, and flex payment capabilities are driving a more enjoyable digital experience. Adding even more horsepower to this effort and taking lessons learned from a successful program implemented in China over the past year, we plan to launch a loyalty test pilot in North America by the end of 2022. This program will engage consumers more deeply with all facets of our human performance system via content, events, rewards, and community-based interactions, all to make the focused performer better.
Additionally, we continue to evolve our brand house and factory house store concept. Strengthening our ability to deliver an efficient and well-balanced multi-channel experience. When combined, these platforms activate a powerful ecosystem of how we show up to empower and deliver performance for Under Armour athletes. At the sweet spot of connectivity and inspiration, we lead with team sports and our incredible roster of sports assets. So far in 2022, we've seen incredible examples of Under Armour making this happen. Starting in basketball, we were thrilled to see 29 Under Armour NCAA teams qualify for this year's men's and women's March Madness tournament, and they left it all on the court, playing with the hunger, grit, and swagger that our athletes are known for.
By starting and ending the season in first place and playing in our women's- specific Flow Breakthru 2 shoes, the South Carolina women's basketball team brought their second National Championship home to Columbia. Built and designed for women, the Flow Breakthru 2 is optimized anatomically for the best fit, support, and grip on the court. Looking to this fall, we're excited to add number to this highly coveted franchise. In the NBA, Stephen Curry hit a record 16 three-pointers on his way to 50 points to win MVP in his eighth consecutive All-Star Game appearance in February, wearing his signature Curry 9 basketball shoe. Steph's impact off the court is equally impressive, and Under Armour is proud to stand with him, having donated to the Cleveland Metropolitan School District to support their basketball programming.
In the other conference, Joel Embiid is having his best year ever, becoming the first international player in history to win the NBA scoring title and is in the running for overall MVP for the current season. We are also honored that our partner, Dow, and Under Armour won gold at the 2022 Edison Awards in the performance-based design category. The Rubberless Unisole technology used in our UA Flow lightweight basketball and running shoes was designed to bring energy return, shock absorption, and traction to enhance field cushion and speed without sacrificing durability. We are proud of the work we've done together with Dow to bring this innovative technology to market that serves our purpose of making athletes better while improving manufacturing efficiency and reducing material usage. From a global football perspective, we recently announced our partnership with Aston Villa center back and captain Tyrone Mings.
In addition to our training product and his boot of choice, the UA Clone Magnetico, Mings cited our values as the significant factors in signing with us, which is well-aligned with his plan for community givebacks and empowering access to sport. This is an outstanding example of how Under Armour being purpose-led is attracting the talent we believe exemplifies the balance necessary to build an eternal brand. Next up, Major League Baseball is well underway, and we're excited to watch our athletes build on their momentum from last season. From Bryce Harper's 2021 National MVP and his signature UA Harper 6 cleat that delivers speed, traction, and power, to Freddie Freeman building off last year's World Series performance, there's another fantastic season of baseball ahead of us.
We'd be remiss not to call out Jordan Spieth for taking home his 30th PGA Tour victory with his RBC Heritage in Hilton Head, pulling out a win following a sudden-death playoff. Building on the excitement of this win, we're also incredibly proud to share that our 10-year partnership with Jordan has been extended by another four years through 2029. These are just a few examples of how we drive brand affinity utilizing the best athletes on the planet, a halo that manifests itself through our run, train, and recover products. In the second half of 2022, we have several exciting innovations coming. In our run business, we are driving loyalty through our innovation franchises, a strategy that hits two of our long-term growth drivers, footwear and women's.
Translating success from our basketball business, we are excited to launch our first ever women's specific running footwear with the UA Flow Synchronicity expected this fall. With the midsole optimized for ground feel and geometry engineered around her anatomical differences, we see this as a game changer in how Under Armour makes her better. Also launching this fall are reimagined versions of two of our most popular HOVR franchises. The UA HOVR Phantom 3 delivers improved step in comfort with newly developed knit advancements and for the very first time, a 100% full HOVR platform for even more advanced cushioning. The UA HOVR Infinite 4, a long-distance running shoe, features less rubber underfoot for a more flexible sensation balanced by a firmer carrier for a more efficient foot plant as the miles fly by. We are equally excited about upcoming apparel launches as well.
A few highlights in our train business include expanding our high-performance UA Rush technology this fall. Rush is designed with mineral lined fabrics to return infrared energy to your body, helping you work harder and recover. Combined with our seamless and SmartForm technologies, we're redefining fit, form, and function across performance tops, bottoms, and bras. Finally, when athletes recover consistently, they're able to push themselves to become better, enabling higher performance levels than ever thought possible. In this respect, it's time we reinvented a classic, and we're doing just that. This fall, we are launching our next evolution of fleece across all collections. This new incredibly warm and lightweight material will be featured in one of Under Armour's most popular franchises, Armour Fleece, with an improved athletic fit, premium finishing details, has the right amount of stretch.
Additionally, this fall's fleece uses over 80% sustainable recycled fibers on our way to targeting 100% recycled materials in 2023. Another highlight and in line with our core value of acting sustainably are our investments in amplifying our sustainability efforts, including building a new global headquarters here in Baltimore. This new brand center will help fuel our next chapter of growth and our goal of using 80% renewable energy by 2025 and a 30% reduction in greenhouse gas emissions by 2030. Within sustainability, we are focused on three main areas. First, from a materials perspective, we are working to redefine yarns to include fabrics that have improved stretch, dry faster, perform better, and most importantly, are 100% recyclable.
Second, from a chemistry standpoint, we are leveraging solutions and high-efficiency dyeing processes that yield improved colors while reducing water usage and improving wastewater quality. Finally, from a process viewpoint, as we continue to utilize even more recycled material in our own manufacturing methods, we are working hard to establish a circularity model to ensure we're leaving our home field cleaner and less depleted than before. More will come on this when we release our 2022 sustainability report, which is expected this fall. Turning to our longer-term view, I'd like to emphasize my confidence in the balance we've struck among our strategic, operational, and financial principles to fuel sustainable, profitable growth.
While the work we've done to grow the brand over the past few years has come to fruition, growth for the company, at least in fiscal 2023, will be tempered compared to how we see the trajectory developing in the years that follow. I'll close by underscoring that Under Armour is a growth company with an incredible opportunity ahead of us. Our fundamentals are strong, our underlying brand strength is improving, and our confidence remain unchanged. That said, it's essential to look past near-term pressures and focus on the long-standing influences. The price of freight, supply chain challenges, and COVID-19 are not as powerful as the global passion for sport. I'm confident that we are well-positioned to deliver on our promise of growth as we work through 2023 and beyond. Now I'll turn it over to Dave.
Thanks, Patrik. With that, let's review our results for the transition quarter that ended March 31st, 2022. Our revenue increased 3% to $1.3 billion in the quarter compared to the prior year. As a reminder, we mentioned on our last call that we expected transition quarter revenue to be up at a mid-single-digit rate. That expectation included an estimated 10 percentage points of revenue headwinds related to reductions in our Spring/Summer 2022 wholesale order book from supply constraints associated with ongoing COVID-19 pandemic impacts. Since providing that outlook, our APAC revenue has been affected by inbound shipping delays driven by COVID-19 disruptions. In addition, we encountered restricted store hours and store closures in China due to COVID-19, which caused significant reductions in retail traffic. Together, these developing challenges weighed on our transition quarter revenue by about 1.5 percentage points.
Revenue would have been in the middle of our expected range, excluding the impact of these events. Clicking into revenue by channel, wholesale was up 4% to $829 million, driven primarily by increases in our distributor and off-price businesses. Keep in mind, our off-price business was still within 3%-4% of our total revenue, where we expect it to remain for fiscal 2023. Our direct-to-consumer business was up 1%, with 2% growth in e-commerce sales and flat results in our owned and operated stores. Of this, e-commerce represented 45% of total DTC sales in the transition quarter. Our licensing revenue was up 23%, driven by a timing shift in APAC and solid growth in North America.
From a regional perspective, North America revenue was up 4% to $841 million, including growth in our wholesale and DTC businesses. EMEA saw strong results with revenue up 18%, driven by growth in our wholesale and DTC channels. Revenue in Asia Pacific was down 14% due to COVID-19-related inbound shipping delays and challenging market conditions amplified by retail store closures and restrictions in China. In Latin America, revenue was down 6%, impacted by shifts in our business towards a distributor model, which we completed in the third quarter of fiscal 2021. By product type, apparel revenue was up 8%, primarily due to strength in our training and team sports categories. Footwear was down 4%, primarily due to COVID-19-related supply constraints. Despite this, we saw growth in our training and outdoor categories.
Finally, our accessories business was down 18% due to expected lower sales of our sports masks compared to last year, which we anticipate normalizing by the second quarter of fiscal 2023. Our transition quarter gross margin fell 350 basis points year-over-year to 46.5%. This was driven by 330 basis points of COVID-related supply chain impacts, driven by elevated freight costs, particularly for ocean freight, which came in considerably higher than we had expected, along with increased air freight utilization. 80 basis points of unfavorable channel mix related to higher sales to the off-price and distributor channels, which carry a lower gross margin. 30 basis points of unfavorable regional mix and 20 basis points of negative impact from changes in foreign currency.
These headwinds were partially offset by 120 basis points of pricing improvements due to better pricing of sales to the off-price channel and lower promotional activity within our DTC business. SG&A expenses were up 16% to $594 million, primarily due to increased marketing investments, higher salaried and non-salaried workforce wages due to last year's compensation increases for our teammates, and higher consulting services. Related to our 2020 restructuring plan, we recorded $57 million in the transition quarter, bringing our plan total to $571 million of pre-tax restructuring and related charges. With this, I am pleased to announce that we do not anticipate any further charges under this plan, and thus our 2020 restructuring plan is now considered closed. Next, operating loss was $46 million in the quarter.
Excluding restructuring and other charges, adjusted operating income was $11 million, which was below our outlook due to lower than planned APAC revenue and higher freight costs. After tax, we realized a net loss of $60 million or $0.13 diluted loss per share in the quarter. Excluding restructuring charges of $57 million, our adjusted net loss was $3 million or $0.01 adjusted diluted loss per share. Moving to the balance sheet. At the end of the transition quarter, inventory was down 3% to $824 million, driven primarily by inbound shipping delays due to COVID-19-related supply chain pressures. Our cash and cash equivalents were $1 billion and we had no borrowings under our $1.1 billion revolving credit facility. We're putting that cash to work.
In February, we announced our share repurchase program, a two-year, $500 million authorization that helps create value for shareholders. Having already executed $300 million of this program, we're well underway. Next, let's dive into our fiscal 2023 outlook. Given our fiscal year change, please keep in mind that the comparable periods we are using are the corresponding quarters from the trailing twelve-month period from April 1, 2021 through March 31, 2022. Accordingly, we'll refer to this as our baseline period. With that, let's dive in. As supply challenges and COVID-19 related impacts in China conspire to impact fiscal 2023, we expect these headwinds to impact Under Armour in the near term, with more positive momentum developing as the year progresses and what we believe to be temporary issues normalize.
As a reminder, the achievement of our outlook is dependent on current macroeconomic factors, including supply challenges, COVID-19 impacts, inflationary pressures, and geopolitical risks not getting worse from what we are seeing today. With that, we expect revenue to be up 5%-7% in fiscal 2023 compared to the baseline period of $5.7 billion, reflecting mid-single-digit growth in North America and low-teens growth in our international business. This expectation includes approximately three percentage points of headwinds related to our strategic decision to work with our vendors and customers to cancel orders affected by capacity issues, supply chain delays, and emergent COVID-19 impacts in China. To drill down a bit more, we expect the first half of fiscal 2023 to be the most heavily impacted by order cancellations and supply chain delays.
We also expect the emergent COVID-19 impacts in China to lessen as the year progresses. As a result, we expect total company sales growth to gradually improve as the year develops with our highest year-over-year revenue increase expected to be in our fourth quarter. For gross margin, we expect the full year rate to be down 150-200 basis points from the baseline period rate of 49.6% due to expected inflationary pressures on freight and product costs, unfavorable channel mix, and changes in foreign currency. We anticipate our most significant declines in gross margin to be in the second quarter as elevated freight costs, particularly for ocean shipments, peak against our year-over-year comparisons.
As these costs find balance, we expect a smaller decline in the third quarter with year-over-year gross margin improvement anticipated in the fourth quarter as we finish out the year. From an SG&A perspective, we expect total spending growth to be slightly below our 5%-7% revenue growth rate in fiscal 2023 as compared to the baseline period. Considering these factors, we expect fiscal 2023 operating income to reach $375 million-$400 million compared to the baseline period of $424 million in adjusted operating income. As a percent of revenue, this represents an operating margin of approximately 6%-6.5%, which compares to a baseline period adjusted rate of 7.4%.
We expect diluted earnings per share for fiscal 2023 to be in the range of $0.79-$0.84 versus a comparable baseline of $0.47. This includes a $0.28 benefit from a favorable tax allowance release related to anticipated profitability in key tax jurisdictions we expect to realize in the fourth quarter. Of this $0.28 benefit, $0.16 of this amount is related to prior restructuring charges, and therefore our adjusted diluted earnings per share is expected to be between $0.63 and $0.68. This compares to adjusted diluted earnings per share for the baseline period of $0.68.
Next, I'd like to provide some color for the first quarter of fiscal 2023, where we expect revenue to be flat to down slightly versus the prior year quarter. This includes about 10 percentage points of headwinds from proactive reductions and cancellations to our order book due to COVID-19 related supply constraints previously discussed. Due to higher freight costs, we expect our first quarter gross margin to be down approximately 250 basis points compared to the prior year. Taking this to the bottom line, we expect a first quarter operating income of $25 million-$35 million. This should translate to $0.02-$0.03 of diluted earnings per share. In closing, we are on offense even amid this continued highly uncertain environment.
Though the year ahead faces temporary headwinds, we are confident that the work we have done to transform our business, along with the strength of the Under Armour brand, sets us up to grow more meaningfully, delivering sustainable, profitable growth over the long term. Now we'll turn it back to the operator for questions. Operator?
As a reminder, to ask a question, you will need to press star one on your telephone, and to withdraw your question, you may press the pound key. First question comes from the line of Jay Sole of UBS. Jay, your line is now open.
Great. Thank you so much. I guess I just wanna ask about the revenue guidance for the fiscal year, talking about mid-single-digit growth rate in North America. Can you just talk about where that growth is gonna come from, whether, you know, by channel or by product category? Thank you so much.
Yeah, Jay, this is Dave. You know, we haven't really broken it down too much yet in detail within the release, but in general, you know, we did say that for the full year, we expect North America to be mid-single- digit and for international growth to be low- teen. If you break that down a little bit further, you know, we definitely believe footwear will be growing much higher than our apparel growth. We think about, you know, some of the supply challenges we've been talking about, more affected footwear last year as well. Definitely expecting footwear to grow a fair amount faster than apparel in fiscal 2023, but we're not actually breaking down by channel at this point.
All right, if I could follow up then. Maybe, you know, Patrik, you talked about your confidence in the long-term outlook. Could you sort of maybe connect, you know, what fiscal 2023 is gonna look like versus your longer term view of what kind of sales growth you expect from Under Armour and what kind of margins you expect?
Sure. I think first of all, thanks for the question, Jay. I just wanted to make sure that I set the record straight a little bit here. You know, we came into our last call being very adamant that we saw, you know, some of these developments that currently are still with us here on the supply chain and logistics side. What we weren't seeing as visibly at that point in time was what happened towards the end of the last quarter, which was the developments in China and also the even further acceleration in freight costs, all of these things being what we believe are temporary.
Of course, there's somewhat of a frustration, I would say, in the team because we do feel that we have demand for the brand in the marketplace across the world. You know, the actions that we've taken both in the quarter that we just came out of, where we had also pulled back on our order stock simply to make sure that we could get things here on time. Again, staying disciplined, making sure that we're not getting ahead of our skis in terms of building too much inventory in an uncertain environment. The same thing plays into 2023, right? We, like Dave just said, you know, we have a 10-point headwind just in the first quarter in orders that we've canceled, that demand that was actually there.
There's certainly a bit of frustration, but at the same time, it's temporary. The underlying demand for the brand is there. The brand is getting stronger. The work we've done around transformation is working. Our operating model is foundational. The fundamentals are really good right now for us. We have to get through this temporary time that we're in right now, get out on the other side. Like Dave said, and I also said in my script, we feel good about growth going forward, and also we feel good about, you know, an ability to continue to grow our margins back again.
This is a temporary state for this brand, and there's certainly a bit of frustration in the teams because we had to make these decisions that if we hadn't made them, we would have been sitting most likely with inventory coming in late. We wanna continue to stay disciplined. We've done so much great work over the last few years here and making sure that we have the right level of inventories. You know, we came again into this quarter, I would say even lean, right, and with a -3 inventory. I like to have that a little bit higher probably right at this point.
The reality is also when I look at it longer term, we will start to build back, you know, inventory in the back half of the year, to Dave's earlier point, and we'll start to get healthier from a revenue growth perspective as well in the back half of the year as we accelerate out of this temporary situation. I just wanted to give a little bit more color for everyone on the call, in terms of how we see the situation right now.
Jay, maybe to take that a little bit further, this is Dave. You know, we talked about the three percentage points of headwinds in fiscal 2023. So if you kind of adjusted for that, you would point to an 8%-10% kinda underlying range for fiscal 2023. But based on, you know, where we are with our relationships and where we are with our long-term planning, we see fiscal 2024 with the ability to grow more than that. You know, we're excited about that. We're excited about, you know, continuing to improve gross margin after fiscal 2023, and then also even deeper leverage on the SG&A with all the cost structure work and finally bringing our restructuring plan to closure. Definitely excited about launching into fiscal 2024.
Got it. Very helpful. Thank you so much.
Next question comes from the line of Matthew Boss of JP Morgan. Matthew, your line is now open.
Great. Thanks. Patrik, to your comments there. A number of moving parts that are outside of your control. Is your overall assessment that you're getting at that underlying demand for the Under Armour brand today relative to three months ago unchanged? Then David, just on the 5%-7% revenue outlook for this year and your visibility, I guess, you know, what are you seeing in terms of the order book visibility and the supply situation as you see it today? Just trying to get a sense of your confidence in the 5%-7% today given the moving parts.
Sure, Matthew. I'll take the first part of that. Yes, the demand is there the same way it was on our last call. Again, I reiterate, remember we had to cancel product in the transition quarter. We talked about that already actually last fall in our earnings call last fall, the last one for the year. Again in February, we talked about it and we also then mentioned the visibility we had into the first part of 2023 that Dave now quantified for you today. The demand, the underlying demand is there.
Matthew, I guess, you know, further your question more towards my angle. I would say that, you know, from a revenue perspective, we've got on the wholesale side very good visibility for the first three quarters based on orders that we have, and we're comfortable with that. Q4 is something that we'll be kind of working through here in the coming weeks. So I would say that we have very good visibility so far on the wholesale side. DTC side, I think we're planning very appropriately based on traffic and what we're seeing and our ability to drive conversion.
You know, when you think about the supply chain side, we've talked a lot about this on the last few calls, about how the constraints with the factories created situations with the delays and the cancellations that we've had to proactively work through. Our supply chain team is not sleeping. They are pushing hard for us every day, and we believe that the availability is really gonna open up for us in the back half of this year, especially as we kind of go through and finish out Q3 and start running into Q4 more uninhibited by some of these issues. I think we'll see a more complete quarter for us in Q4, and you know, really driving without these headwinds per se in fiscal 2024.
Great. Then David, on the gross margin outlook for the down 150-200. If we think outside of freight, could you just help walk through the assumptions you're embedding on underlying merchandise margin, specifically promotions and pricing? I guess my point is, you know, what's the overall health of full price selling in the athletic channel? Again, a number of moving parts, but is the athletic inventory situation today any different than again, what it was three or six months ago as we think about pricing and promotion and the rational environment that I think we talked about on this call?
Yeah, I can start, Dave, by just giving a little bit of color around what I see in the market, and then you can dig into some of the more detailed nuances there. I would say that I think it's mixed at this point in terms of how I think about what's going on with inventory in the marketplace. One of the reasons why we have been so, let's say, considerate in terms of how we have approached, you know, the inventory in the transition quarter and also in the beginning of 2023, is that we did not want to be getting product in late that we would have to drive through a promotional liquidation.
To Dave's earlier point, I mean, we're still looking to keep our liquidation number in that 3%-4% range in 2023, and we see no reason why we couldn't do that. A lot of that is because we have been, you know, so diligent around this. How that plays out for other players in our space, I think will depend on, you know, where you are in the world in terms of geography, but also in terms of how much product you have ordered potentially that might come in late, et cetera. I think we'll see a mixed view here as we develop into the year a little bit more, because simply there's going to be pockets of inventory here and there that is going to have to be liquidated. That's not necessarily the case for Under Armour though. Dave, you wanna add some more color?
Yeah. I mean, I guess a little bit more detail kind of on the year-over-year gross margin walk. As far as the headwinds, the largest we see is the freight costs, mainly around ocean freight. We don't anticipate that to settle very much this fiscal year. The other piece of it is product costing. You know, it's when you think about the materials and the labor, and the impacts of inflation, so we're feeling some of that as well. Now we are working to counter that with some price increases, but that work and the actualization of that isn't gonna be until a little bit in Q3 and then more so in Q4, and then more of a full benefit of that in fiscal 2024.
Relative to region mix, not really much change or impact there on gross margin. As far as channel mix, there's a little bit of a headwind there with a little bit higher mix of distributor sales, which are a little bit lower gross margin. Then we do have a tiny bit of headwind relative to footwear growing faster than apparel and accessories. You know, obviously, you know, footwear for us, we've talked about is a little bit lower gross margin than our apparel. As far as a kind of promotional discounting aspect, you know, we are not intending and nor are we planning on a big difference from 2021 at this point. We wanna continue to hold premium and drive the brand.
Great color. Best of luck.
Thanks, Matthew.
Next question comes from the line of Paul Lejuez of Citi. Paul, your line is now open.
Hey guys, thanks. Curious if you can talk about are there any regions where you're seeing orders getting canceled for demand reasons rather than you guys working with your partners from a supply chain perspective? Or is it all with you guys working with those guys, I mean, with your partners to make sure inventories stay clean? Just wanna make sure I'm clear on whether or not you are seeing demand-driven cancellations at all. Just going back to the pricing question, how are you approaching pricing and trying to pass through higher prices on a regional basis? Where do you think you have more pricing power versus the regions where maybe you don't?
Hi, Paul. Yeah, I'll kick it off here. David, maybe you wanna add a little bit on the pricing at the end. I'll get some color on that too. No, we're not seeing cancellations because of demand not being there. That's number one. Two, in terms of pricing, you know, we're being careful in terms of how we think about pricing. It's not an across the board approach. We're being very thoughtful about how we do it in terms of our families and product categories, and the regionality of it all. But we see opportunity. We absolutely do. We have looked through, let's say, every single product that we make, and we're making the appropriate adjustments where we feel confident that we can drive them too and sustain them, right?
There's opportunity here, we think, to sustain, you know, price increases here on the back of also building a more premium brand again. That's really important, as part of this journey that we're on. We are making great progress there. To Dave's point, again, it's gonna be successively coming into play here throughout this year and then being fully implemented in 2024. Dave, I don't know if you have any more color you'd like to add there.
No. I mean, I think that pretty much sums it up. I mean, we've been able to do some pricing action for Fall/Winter 2022 product, and then a fair amount more that we're executing for Spring/Summer 2023 product. There's a little bit of tail out of things we still believe we have opportunity in Fall/Winter 2023. Again, it'll be a build of the benefit on that pricing. It's been very strategic. Not generally across the board increases, but in areas where we really feel, you know, from a price value and innovation perspective, we have some opportunities. We're excited to be able to drive that through and feel the benefit of that as we go further into the year.
Dave, what sort of range should we be thinking about in terms of what you've already taken and what you plan to take in terms of price increases?
Well, we're not getting into that much detail publicly, but, you know, I would say that the majority of the benefit we will see towards the very end of Q4 and then a full year run rate benefit in fiscal 2024. As far as the actual percentage increases, they vary depending on the product. You know, it's very specific and targeted. It's not a broad, you know, X% change.
All right. Thanks. Good luck.
Thank you.
Next question comes from the line of Sam Poser, of Williams Trading. Sam, your line is now open.
Williams Trading, thank you very much. Let me ask you this. I'm gonna go back onto the pricing. Is the pricing how much new product do you have as a percentage? On the new product, are you including that as price increases? You brought up the new fleece that you're bringing in for Fall. Is that something that is now 15% higher than it would have been a year ago because of all of this? Or do you have to cycle through new product to bring enough new product in to get the payoff for the price increases that you're planning into 2024?
Yeah. Hi, Sam. It's Patrik. Maybe I'll start, David, and you can take it from there. I just wanted to add some color there 'cause you were specific about some product. You know, I think it's a combination, Sam, because of course, a great opportunity to raise price is when you're actually introducing something new. To your point, we have great newness coming in in certain categories. When we do that's absolutely an opportunity for us that we're gonna take. That's correct. Dave, do you have something else you want?
Yeah. No, it's definitely both to your point, Sam. I think that, you know, there is definitely gonna be a lot of opportunity relative to carryover styles as we start to ship them back in for the coming seasons. What we have not been doing much of is going out onto the floor and reticketing what's out there. That has not been something that we've been pursuing a lot. It's more, as we've been shipping in the next season or to Patrik's point, as we're launching new product. It is a combination of both.
It just takes time to cycle through. Then secondly, Patrik, you've mentioned your confidence of the direction that you're going. We have a pause because of some external factors, you know, looking back, is there anything, any indicator you may have missed earlier that you sort of hit yourself in the head and said, if we had just responded to this three months earlier, we sort of saw it but didn't take it as seriously as we should have? Anything that you know you could. You know, would or could have kind of situation.
Well, I think it's a great question, Sam, and believe me, I've spent many a nights trying to pound that one through. But here's the reality. Could we have potentially, right? If you think about where we were in Fall, I'll just take everybody here back a little bit in time. If you think about where we were last Fall when we were starting to experiencing the shutdowns, in the factory base and some of the impact that had, it was all like a rubber band effect, right? It took some time. It kind of accelerated. Actually it didn't have a lot of effect in the back half of last year. Rather you had an effect coming into this year, and our sub-quarter.
When we saw that developing, first of all, we didn't know how long we were going to be constrained. We took the kinda high road of saying, "You know what? We're gonna make sure that we can make the things that we can deliver as much on time as possible, because we actually don't know. We don't have this ability right now to know how much of a delay it's going to be." We could have at that point said, "No. Let's make all of it and gamble and then maybe sell some of it in future season." I come back then to the discipline that we have been driving for the last three years.
Ever since 2018, if you remember, we've continued to wash through old inventory, get our inventory levels in check, improve our balance sheet to make sure that we're able to build a less promotional, more full price, more premium brand again. And I think we've been very successful with that, and that's what I mean in terms of the demand that we now see and also the premiumization that we're coming back to in the brand. We could have done some of that, but we chose not to. We took the same approach here early in 2023, where we also had the demand, too. Dave's earlier points, 3% for the whole year and 10% just in the first quarter of demand that was there.
You know, there are orders that we canceled because we knew that we were not gonna be able to make it in time. When I say in time, like way in time, right? This isn't like, you know, 15 days, 30 days. It's much more than that. It would have been high risk for us. In an environment where you have so much uncertainty, where COVID is still playing into things, where actually supply chain continues to play into things, we just did not wanna jeopardize future seasons for short term maybes at this point. Those were the decisions we made that were based on external circumstances. That's the kinda color I can give you on that, Sam.
I have one last thing. The average selling prices on your direct-to-consumer, in the quarter year-over-year, could you give us some color there?
Dave? Dave?
Yeah. We haven't normally given that level of detail at this point.
This isn't normal times, and it sort of talks to the health of the business. I think maybe you can make an exception for today if you have it on hand.
We can circle back with you.
All right. Thank you very much. Good luck.
Thank you. Thank you, Sam.
Thanks.
Next question comes from the line of Simeon Siegel of BMO Capital Markets. Simeon, your line is now open.
Thanks. Hey, guys. Morning. How are inventory units versus the reported dollar change on the balance sheet? And then maybe to follow up on that last one a little bit, within the 5%-7% revenue growth, can you tell us how you're thinking about AUR versus units? And then just with today's guidance bringing annual gross margin closer to the pre-pandemic levels, how are you thinking about the right long-term gross margin level? Thanks, guys.
A couple things. You know, relative to inventory, you know, obviously, we have seen the cost of our inventory go up a little bit. Relative to that, it is more of a units down than the actual inventory value or cost, and that's something that we would expect to as we continue through the year, we know that our costing on inventory will continue to go up a little bit as we've discussed in our gross margin outlook. Relative to kind of a price mix perspective, you know, we do see pricing continuing to be something that has been a little bit stronger for us and therefore the unit growth has been a little less than the pricing difference. That's something that we wanna continue driving.
Long-term gross margins.
Long-term gross margin, again, you know, this year is more of a temporary situation, we believe, which is a lot of it is dealing with the freight situation. Not just the ocean freight costs, but also air freight utilization. We believe that as we get into fiscal 2024, we'll see much more positive improvement relative to that front. Then as we go forward long term, we do believe that there is a lot of opportunity there to be able to, you know, get to that 50% plus gross margin when you think about the APAC growth and that being a higher gross margin region for us when you see the over-index growth that we're continuing to drive in the longer term relative to direct-to-consumer as a mix of business, and the gross margin benefits there as well.
We will continue to see a little bit of long-term gross margin headwind because of the footwear mix and intending to grow footwear faster than apparel. We believe that the other opportunities would more than offset that.
Great. Thanks. Just one quick one if I can. Just given where the shares are, you guys are obviously new to the repurchase game with the new authorization. Just any way to help us think about how you wanna approach repurchases?
Yeah, I mean, you know, right now, we executed the initial $300 million ASR of the $500 million commitment, and obviously, we'll be looking over the next year to two years at the right times to fulfill the remainder of that, you know, the remaining $200 million. Outside of that, you know, we continue to look at our long-term planning and our long-term capital and the uses of that capital. We're not right now at a point where we're going to, you know, give an indication of if we're gonna roll right into another program or not, but it's definitely something that we continue to look at.
Great. Thanks a lot. Best luck for the year, guys.
Thanks.
Thanks.
Next question comes from the line of Michael Binetti of Credit Suisse. Michael, your line is now open.
Hey, guys. Thanks for taking our questions here. I guess on SG&A, we're just looking at the math you guys laid out for the year versus the quarter. It looks like SG&A spend goes from like 9%-10% in the first quarter down to like 1%-4% rest of year. It's obviously below where it's been running the last few quarters. Is that a good run rate as you think out longer term? Maybe a little bit of color on what slows in the spending lines after the June quarter to help us think alongside you there. Then it was nice to see, I guess we're looking at things on a three-year basis to go back before COVID. It was nice to see the acceleration in D2C in the quarter in total versus December quarter.
I'm curious on wholesale though, you know, thoughts on wholesale inventories in the channel today, what you're seeing from competitors. I know you said you don't have as much inventory as you wanted, Patrik, but, you know, do your retailers in the U.S. have enough in general? Are they still hungry, or are you starting to see inventories build?
Yeah, I think I'll start there, Dave, and then you can dig into. I'll start at the end and maybe then hand it off to you. I think you know what's interesting right now is the fact that I think everybody's inventory is coming in in a somewhat disjointed fashion. What I mean by that is I think that you could say in general that it's been hard in our industry to get the right stuff, the right place, the right time. You might have stuff that you can get you know into the channel, but it's not necessarily always coordinated. I think we'll continue to see some of that play out here early in 2023.
I don't think that the inventory levels are extraordinarily high or anything like that at this point in time. It's the quality and, let's say, the consistency and the composition of it that might be a little bit out of sync and out of order, so to speak, here and there. That's why it's so hard to give an exact indicator of, you know, the health of every channel, because it is a little bit helter-skelter in terms of how things have come in. You know, better in some places and worse in others. Also the same could be said for categories, right? You're delivering some things better than other things. That's really what's going on right now. I think it's playing out, you know, across categories and across geographies and also across channels. Dave, you wanna dig in?
Yeah. Michael, relative to SG&A, you know, you're correct in that the transition quarter was a pretty high SG&A quarter, and that was planned that way. We actually closed the quarter pretty much right on where we had planned it to be. That was mainly, you know, a higher marketing investment that we had strategically decided to make in the transition quarter. But also the increased salary and non-salaried workforce wages that we had talked about previously and last year about the investments there. When you think about Q1 of 2023, we're kinda continuing that forward for one quarter. You do see a higher anticipated spend in the first quarter of the year.
Part of that is to continue those investments in brand marketing and give us a little bit of a tailwind from a brand perspective as we push into the back half of the year when we have more inventory availability, and more ability to kinda run there. We do anticipate leveraging SG&A and keeping it under that revenue growth rate that we mentioned of 5%-7%. I would say that the leveraging is not as significant as I would normally like, and that is because of the revenue headwinds that we're talking about that we believe are temporary. As we step into fiscal 2024, we would anticipate leveraging SG&A more so than what we're planning to do here in fiscal 2023. Hopefully that gives you some extra color.
Would you say, I mean, it looks like back half of the year, you've got revenues growing like 7%-9% and SG&A only 1%-4%. That's a considerable amount of leverage. I mean, is it, as you look to 2024, is that an appropriate framework, do you think?
That might be a little bit aggressive assumption as we think about 2024.
Okay.
Definitely leveraging better than what you would see full year 2023.
Okay. Thanks a lot, guys.
Thank you.
Next question comes from the line of John Kernan of Cowen. John, your line is now open.
Good morning. Thanks for taking our question, guys. Dave, maybe you can talk to how you're planning the balance sheet as we go through the remainder of the year. It looks like the stub quarter did see a fair amount of working capital volatility. I think the cash flow from operations earned a little over $300 million. How do we plan working capital, particularly inventory and the balance sheet, as we go through the remainder of the year?
Mm-hmm. Sure, John. A couple things to think about there. You know, as we go into the back half of the year and the supply chain challenges free up more and we're able to meet more demand, you know, we will be bringing in more inventory. You will see the inventory growth go up a little bit in the back half of the year as we buy into that and get ready for that demand that we can actually service better in the back half of the year, and then also going into a bigger growth in fiscal 2024. You will see that develop from an inventory perspective. Relative to the rest of working capital, we're continuing to run it very tight. We're in a very healthy AR position.
We're in some of the best AR aging positions around the world that we've been in now probably for the last six to nine months versus years back. Cash conversion cycle is still very tight. The other aspect would probably be from a CapEx perspective. You know, we are gonna be investing a little bit more in CapEx this year than we have in the last few years, which hopefully should make sense. You know, we scaled back during COVID and some of those challenges, and also during the restructuring periods, whereas, you know, we've talked publicly about, you know, being in that kinda 3%-5% range CapEx to revenue.
We were running more like 2% or less for a few years, whereas this year we'll probably run closer to the midpoint of that 3%-5% range. That is investing in, you know, retail store build-outs. That's investing in fixtures and shop-in-shops within wholesale partners around the world. That is investing in omni and digital. It also has to do with starting to build out our new long-term headquarters here in Baltimore as well, which we're super excited about for our teammates.
That's really helpful. Thank you. Just one final question from me. Just how do we think about China within Asia Pac? Asia Pac had been a region that,
Mm-hmm
A big growth region really during the pandemic and during your fiscal 2021. How do we think about Asia and China in fiscal 2023 and 2024?
I think. You know, if you think about APAC as a region, the area outside of China, and now I'm talking specifically about Southeast APAC, Australia, Singapore, Thailand, et cetera, and also I would say our market in South Korea is doing well. China is what China is right now, and we're affected like everybody else in that market. We'll continue to you know, monitor and manage according to how things develop. Dave, I don't know if you wanna give some color on the magnitude of what we see there right now.
Yeah. I mean, you know, again, you know, APAC as a region is a very strong area for us to continue to grow. China specifically, as we've talked about, is experiencing some headwinds. We don't see that as an Under Armour brand thing. It is more of a market challenge, and then obviously right now with the lockdowns and store restrictions that we're dealing with. I think the team is doing an excellent job, and we're ready to continue growing the brand there, but there are temporary challenges that we are absolutely experiencing there. It's a combination. It's the restrictions and the lockdowns. It's also the impact that that has on transportation and therefore our ability to be able to get product to the right place at the right time within China.
Then just, you know, a little bit of overall softness continuing in the market for many of the international brands that aren't based in China. A lot at play there, but we're continuing to move through, and we see that situation improving a little bit as we get into Q2, and then even more so as we get into Q3 and Q4.
Thanks, guys. Best of luck.
Thank you.
Next question comes from the line of Katy Fitzsimmons of Wells Fargo. Katy, your line is now open.
Yeah. Hi, good morning. Thanks for squeezing me in . Most of mine have been taken, but I was wondering if you could kind of expand maybe on some of the conversations with your wholesale partners, particularly here in North America looking to FY 2023. You know, can you just in terms of, like, the current health of the relationship? You know, Patrik, you've obviously spoken to, you know, a lot of progress there. But when we're thinking about fall, holiday, you know, have your partners booked earlier, you know, just given some of the supply chain constraints that they're seeing? And just, you know, how should we think about how some of those conversations are evolving looking to spring? And then David, real quick, just a modeling question, and thoughts on the tax rate here in 2023. Thank you.
Yeah, sure. Thank you, Kate. From a wholesale perspective with our wholesale partners in the U.S., you know, first of all, we're now through the exit of all the undifferentiated retail, so we're incredibly focused in the North American marketplace. Our relationships are great, I would say. I would categorize it as the best I've felt about that since I got here, and we continue to make great progress across the board, I would say. Excited about that. Some disappointment, of course, in terms of our ability to fulfill demand in this stub quarter to some extent, but also, you know, early in 2023. To Dave's earlier point, we'll see inventory start to build back towards the back half of the year and into our fourth quarter. I'm excited about the work that the teams are doing. Dave?
Yeah. Relative to the tax rate, you know, it's interesting. There's obviously a lot going on within our taxes right now. A couple things to consider. You know, when you think about the benefit that we expect in Q4, that is a valuation allowance that we're expecting to reverse based on you know, rebuilding profitability and kinda hitting that 36-month trailing profitability factor. So that is definitely a benefit. You know, we're looking at a tax rate that's probably gonna end up being in the high single- to low double-digit range when all things are considered.
Still there?
Yeah.
Yeah.
We're-
I think we lost Katie. Operator. Katie, are you there?
I'm sorry. I was on mute.
She was fading.
Sorry. If I could just one follow-up just on that inventory question. You guys are speaking.
Yep.
To a greater alignment of the supply and demand. How should we think about that prioritization maybe as we think about 3Q and into 4Q between wholesale and DTC, maybe just given some of the wholesale orders. You know, at least in the first half of the year, you guys haven't been able to, you know, meet that demand, I guess I should say, or, you know, meet the demand at wholesale as well as you would've liked.
Dave, do you wanna take it or?
Yeah. To be honest, Kate, I was having a little bit of a hard time hearing you.
Yeah.
I think you were talking about, is it inventory availability to service back half demand? Is that what you're getting at?
Where it's going. Is it, you know, how are we prioritizing it, is what I heard.
Yes, that's right.
Prioritizing between channel.
Yes.
Yeah, Dave, go ahead.
Yeah, I was gonna say, you know, again, we do see a lot more availability opening up in Q3 and Q4, especially Q4. You know, we are prioritizing our kind of key wholesale partners the most, and then also in conjunction with that, our brand house in e-com channel. I think as we get to Q4, you know, pretty much all of our retailers should be able to feel kind of the full open availability of getting product to them. It shouldn't have to be as much prioritization as we get into Q4.
Okay. That's helpful. Thank you.
Thank you.
You're welcome.
Next question comes from the line of Bob Drbul of Guggenheim. Bob, your line is now open.
Hi, good morning. Just a couple of quick questions from me. On the marketing, can you address a little bit sort of how you're planning the marketing spend and/or endorsements, you know, in fiscal 2023 and into 2024? I was just wondering if you can maybe just give us an update on your kids business, sort of where the trends are there and what you're seeing, you know, with that segment. Thanks.
Sure. I think in, you know, our general span of marketing in a normalized environment would be somewhere between 10%-11%. We've been spending a little bit higher, like Dave said, in the transition quarter. We're gonna spend a little higher here in the coming quarter, but should normalize towards the back half of the year. we kinda, you know, aim to stay in that kind of span in terms of marketing going forward between 10%-11%. of course, when it comes to the endorsements, we've been, you know, announcing some pretty exciting things here lately.
I talked about in my script around, you know, extending Jordan Spieth, for example, and Tyrone Mings, the center back for Aston Villa and others here in just lately. We'll continue to adjust our portfolio in the way that it makes sense for us as a brand as we go forward. The main thing for us when it comes to the relationships that we have is really our ability to activate them.
As we move into the future and we continue to get better and better in terms of understanding, first of all, what assets matter to us, and we do that through return on marketing investment modeling that we do and the mixed media approach that we have, where we now have these tools in place where we can understand what makes sense for the brand and also what makes sense for either the, you know, the partner in this case, and for us. We now feel very good about the mix that we have, and the rebalancing that we've done also through the restructuring over the last three to four years. That's really exciting for us because we're now able to activate more of our partnerships than we ever have been able to do before, which is really exciting.
How about the kids business? Sorry.
The kids business is healthy. Well, yeah, the youth business is healthy. Our youth business is healthy, and we saw an increase in both our team sports business and our youth business as we came into back to school in 2021, and that's started to normalize more. That trend for us in terms of the strength of our youth business has continued. We are very excited about how we think about that going forward as we see a normalized back to school season this year too, especially here in the U.S. in the back half of the year.
Thank you.
Thank you, Bob.
All right. Thanks, guys. That'll close us out for today. Appreciate you, participating and attending the call today, and I look forward to catching up with you. Thank you.
Thank you.
Thank you, everybody. Thank you.
Thank you so much to our presenters and to everyone who participated. This concludes today's conference call. You may now disconnect. Have a great day.