Ladies and gentlemen, thank you for standing by, and welcome to the Under Armour Inc. 3rd Quarter Earnings Webcast and Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr.
Lance Allega, Senior Vice President of Investor Relations. Thank you. Please go ahead, sir.
Thank you, and good morning, everyone. This is everyone joining us for Under Armour's Q3 2019 earnings call. On today's call, participants will make forward looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in this morning's press release and documents filed regularly with the SEC, all of which can be found on our website at aboutus.underarmour.com.
We may also reference certain non GAAP financial information, including adjusted and currency neutral terms, which are defined in this morning's release. We do use non GAAP amounts as the lead in some of our discussions because we feel that they more accurately represent the true operational performance underlying results for business. You may also hear us refer to amounts in accordance with U. S. GAAP.
Reconciliations of GAAP to non GAAP measures can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Joining us on today's call will be Under Armour's Chairman and CEO, Kevin Plank President and COO, Patrick Frist and Chief Financial Officer, Dave Berson. Throughout our prepared remarks, we will open the call to questions. With that, I'll turn it over to Kevin.
Thanks, Lance, and good morning, everyone. I'd like to start today's call by touching on the announcement we made a couple of weeks back that effective January 1, 2020, I will be transitioning to Under Armour's Executive Chairman and Brand Chief, and Patrick Frisk will become our Chief Executive Officer. This was my decision in the culmination of a rigorous approach to succession planning in partnership with our Board of Directors. Patrick's proven command of this business and the confidence we have about Under Armour's prospects as we shift from defense to offense. Inside the most transformative 3 year chapter in our history, as my direct partner, Patrick has helped strengthen the foundational elements of our current vision, mission and values and co architected the strategic playbook we are currently executing against.
His demonstrative, transparent style of leadership centered around a clear strategic vision, unparalleled discipline and an outright passion for our brand positions us smartly to reach our goal of making Under Armour the best athletic brand in the world. This transition will empower Patrick to have the freedom and oversight to holistically execute against our playbook. Now anchored by our strategic pillars of product, story, service and team, we have been decisive and proactively improving underperforming areas of our business while balancing the investments necessary to deliver sustainable profitable growth over the long term. And just like the athletes we serve, this journey is about getting better, better for our teammates, consumers, customers and our shareholders. At the center of this pursuit, the very reason we exist is our mission.
Under Armour makes you better, a humble passionate obsession that has fueled our company for nearly a quarter of a century. I am extremely proud of the powerful brand we have built, the global team that is our family and the athletes we continue to serve by equipping and inspiring them to push beyond the boundaries of what is possible. Being Under Armour means showing up with integrity every day, strapping on your HOVR infidence, putting in the work, recognizing the scars while learning from them, celebrating the wins and looking to tomorrow where the hard work helps you get a little bit stronger, faster and smarter. All of this, of course, centers around 3 critical aspects of the brand: making great product that is authenticated to the power of sport, magnified by incredible storytelling and delivered by a team that loves this brand. These three things define who we are, how we show up and ultimately how we will maximize our long term potential.
And moving forward in my new role as Brand Chief, these are the areas where I will be focused to help reignite our growth. Now looking at 2019, we continue to execute the play with patience and discipline. From a product perspective, with performance innovations like UA Hover, Rush and Recover, we know that when our product delivers SPF, that's Under Armour style, performance and fit, we win with athletes. Armed with a shortened go to market calendar, increasingly better segmented assortments and a clear pipeline of innovation to come, we are building an arsenal that will continue to demonstrate why Under Armour is a choice alternative in an otherwise commoditized marketplace. From a brand and storytelling perspective, where seamless physical and digital connectivity is table stakes for our consumer engagement, We have been working diligently to better activate our assets to drive the highest returns.
At the moments of training, competition and recovery, we continue to see great potential in our ability to better personalize consumer touch points through a sharper data driven point of view. And while we've certainly realized some success in product specific marketing efforts over the past couple of years, 2020 will be the 1st year since our transformation began that we will have the ability to put the right resources combined with the scale behind our brand marketing efforts. In 2020, you will see a more singular, powerful, rooted in performance brand voice that harmonizes with elevated product marketing, clearly and definitively telegraphing how Under Armour makes you better. Now, earlier this year on our Q1 call, I mentioned that if we were to see additional top line or gross margin expansion above our plan, we may choose to further invest in marketing and product initiatives to support building the brand against our long term goals. As we close out 2019, while there are some changes to the top line that Patrick and Dave will take you through, our gross margin is stronger than what we planned for just 90 days ago.
Along with ongoing cost efficiencies, we're taking this opportunity to proactively invest back into the brand through increased marketing spend, giving us a head start on 2020 and a deliberate shift from defense to offense for this brand. This optionality should be seen as a sign that our efforts are beginning to pay off and a demonstration that we are committed to our long term strategy. And in that respect, I will close by underscoring that we are on track with the plan and metrics that we set forth at our Investor Day in 2018. By staying disciplined and executing against this plan, we put ourselves in the best position to reignite growth to unlock the full potential of the Under Armour brand. We will.
With that, I'll turn it over to Patrick.
Thanks, Kevin. Good morning, everybody. I might have a little bit of a coarse voice this morning, but we had ourselves one heck of a football game here in Baltimore last night. So I'm going to power through this thing. So when I joined Under Armour in the summer of 2017, the one thing that struck me was a company wide relentless pursuit of innovation and attention to detail and the outright grit that goes into making all athletes better.
This obsession is omnipresent and infused into our culture, one that prides itself on serving athletes and an unmistakable desire to win. This same vigor has been applied in everything we've done over the past few years to continuously improve our operations and executional abilities. And I'm pleased with the progress we're making. And although we may see some puts and takes in the short term, there is no departure from our confidence in delivering on our long term plan. Our foundation continues to get stronger, our structure, process, systems and leadership are in place, and our discipline and patience are steadfast as we work to wrap up 2019.
With respect to the announcement that I'll be assuming the role of CEO January 1, I am humbled and honored by the trust that both Kevin and our Board of Directors has placed in me. Both professionally and personally, started. So now let's turn to our Q3 results. I'll start by addressing 3 areas of our business that I'd like to focus on given our results: direct to consumer footwear and Asia Pacific. Starting with direct to consumer, which came in slightly less than expected, 3rd quarter revenue was down 1%, driven primarily by results in North America.
The reasons for reduced volume are very similar to our 2nd quarter with our outlet stores experiencing lower traffic slightly higher conversion AUR. In our e commerce business, we continue to see higher traffic, but lower conversion with relatively flat AUR. Independent from general traffic challenges in North American outlets, our full price stores are showing encouraging signs from some of the reset work that we're doing, including new brand house concepts that have recently launched. For the full year, we now expect D2C to be up slightly. Turning to footwear.
Revenue in the Q3 was down 12%, slightly lower than what we had planned. As expected, this result was driven by softer demand, lower sales to the off price channel and improving service levels that are enabling us to meet customer demand in a timely manner. Related to service levels, footwear shipments are distributed differently in 2019 with increased amounts in this year's Q2 compared to 2018. As we think about our opportunity in footwear, our expectations have not changed. We are playing the long game, and the work we have done to recalibrate the business, reduce inefficient volume and improving segmentation across price points are enabling us to drive greater focus and prioritization into the categories where we believe we can win.
With a clear innovation pipeline delivered through a methodical launch cadence along with an aligned go to market process that includes amplified marketing initiatives, we are confident in our ability to create a sustainable runway of growth moving forward. The 3rd area I wanted to address is Asia Pacific, a region we remain incredibly excited and measured in our approach to growing the brand. In the quarter, revenue was up 4% and included continued growth in our D2C channel from both new door openings and e commerce. And as we laid out in our last call, improved service levels across our international business, particularly with distributors, have seen shipments distributed differently in 2019 with increased amounts in this year's 2nd and 4th quarters. Additionally, compared to 2018, new store openings are more heavily weighted toward the Q4, certainly a little bit clumpy, but in line with expectations.
Now moving on to the other regions. Revenue in North America was down 4% in the quarter, which was in line with the outlook we provided on our last call. As a reminder, the primary negative impact in the quarter was driven by lower sales to the off price channel relative to last year. On a positive note, within our wholesale business, excluding sales to the off price channel, year to date, we've seen a slight increase in full price revenue, a good sign that the underlying business is trending healthier. In EMEA, revenue was up 9%, driven by continued growth in our wholesale and direct to consumer businesses.
Within wholesale, our results were positively impacted by improved service levels and earlier than planned shipments related to Brexit. And finally, revenue in Latin America was down 4%, a result directly related to the change in our Brazilian business model. Excluding Brazil, Latin America revenue was up slightly in the 3rd quarter, driven by balanced growth in both wholesale and direct to consumer. As a reminder, the business model change in Brazil occurred in the Q4 of 2018. So moving forward, this change won't impact the year over year comparisons.
So before I wrap it up, I'd be remiss to not talk about the incredible progress we continue to make in inventory management. Coming in well ahead of our expectations, we posted a 23% decline in inventory, improving service levels and much tighter buys to customer demand, coupled with products selling through at a rate higher than we had anticipated, means we've had lower returns and therefore don't have as much excess product to sell in the off price channel. While Dave will provide more color on our full year outlook, it is important to note that this shortfall in sales to the off price channel is a contributing factor to our updated revenue outlook for the full year. So in closing, as we finish out 2019, I have never been more confident in the long term strength
of this brand, this team and our path forward. Dave? Thank you, Patrick. Let's dive right in. 3rd quarter revenue was down 1% to $1,400,000,000 or flat on a currency neutral basis.
Clicking down by channel, our wholesale business was down 2% to $892,000,000 driven by planned lower sales to the off price channel, timing shifts relative to distributor order flow and 3rd quarter impacts related to continued service level improvements, which shifted some sales into the 2nd and 4th quarters. Direct to consumer revenue was down 1% to 463,000,000 which was slightly lower than expected due to continued traffic and conversion challenges, primarily in our North American outlet and e commerce businesses. Licensing was down 6% to $30,000,000 a result driven by softer demand from our partners in North America. By product category, apparel revenue was up 1% to $986,000,000 Footwear revenue was down 12% to 251,000,000 dollars driven by the factors Patrick previously discussed. Accessories revenue was up 2% to 118,000,000 and our connected fitness business was up 22% to $39,000,000 primarily driven by higher subscription revenues and a one time development fee from a partner.
To give a little more color here, along with our connected products continuing to drive increased brand strength, newly launched training plans for gym workouts and nutrition plans for premium members add to our growing confidence that we are building more sustainable momentum in this business. From a regional perspective, North America was down 4% and our international business was up 5%, both in line with the outlook we provided on our last call. Turning to gross margin. We saw a 220 basis point improvement 48.3% in the quarter. Clicking into the positive factors, we realized approximately 90 basis points of channel mix benefits, primarily due to a lower mix of sales to the off price channel, 80 basis points from continued supply chain initiatives related to favorable product costs and lower air freight and 40 basis points related to prior year impacts from restructuring efforts.
SG and A expense increased 4% to $551,000,000 which was better than expected due to our continued cost management efforts as well as unrealized marketing spend that will be utilized in the Q4, coupled with lower than planned depreciation from timing of store openings and capital expenditures. 3rd quarter operating income was $139,000,000 Interest and other expense net was 6,000,000 dollars and our effective tax rate for the 3rd quarter was approximately 22%. Taking this to the bottom line, net income was $102,000,000 or $0.23 in diluted earnings per share. On our balance sheet, we continue to make great progress. Cash and cash equivalents were up 147 percent to $417,000,000 Total debt was down 26% to 592,000,000 dollars Capital expenditures were up 10% to $21,000,000 And as Patrick detailed, inventory was down 23% to $907,000,000
dollars which was better than expected.
Turning to our 2019 outlook, we now expect revenue to be up approximately 2% compared to our previous expectation of 3% to 4%, driven by lower than planned excess inventory to service the off price channel, ongoing traffic and conversion challenges in direct to consumer and continued negative impacts from changes in foreign currency. Relative to gross margin, we now expect improvement of approximately 90 basis points to 110 basis points compared to our prior expectation of 70 basis points to 90 basis points in improvement compared to 2018 adjusted gross margin due to ongoing supply chain initiatives, including more favorable product costs and lower air freight, coupled with additional channel mix benefits from lower off price sales. Lastly, recall that in 2018, we had approximately 40 basis points of negative gross margin impact due to our restructuring efforts. Therefore, on a GAAP basis, gross margin in 2019 should be up approximately 130 basis points to 150 basis points. As we noted earlier, we have made the strategic decision to reinvest a portion of this upward revision in gross margin along with underlying cost efficiencies together approaching 20,000,000 dollars to fund incremental digital and marketing investments in the Q4.
In this respect, we now anticipate holding SG and A flat as a percentage of revenue on a year over year basis. Even with this additional investment, we are updating our full year outlook for operating income to reach the high end of our previously given range of $230,000,000 to $235,000,000 Moving forward, our efforts to create greater efficiency, agility and leverage in our cost structure remains a key priority and focus for our company. In this respect, we will continue to balance key long term strategic investments with a disciplined commitment to driving operating margin rate improvement. Interest and other expense net is planned at approximately 30,000,000 dollars and our effective tax rate is unchanged at approximately 22%. We expect our diluted EPS to be at the high end of our previously given range of $0.33 to $0.34 which includes about $0.01 of negative impact related to the performance of our licensee in Japan.
To provide a little more color there, our Japanese licensee is currently working to address a number of strategic and operational challenges and building out and beginning to execute against the plan. And finally, given the continuing improvements and efficiencies we are experiencing within our supply chain, we now expect end of year inventory to be down at a low double digit rate. Now I would like to take a moment to provide color on a few of the main drivers of our 4th quarter revenue growth expectations. 1st, cleaner inventory positions and improving service levels around the world are enabling us to more efficiently meet our wholesale demand closer to need. As anticipated all year, more timely delivery should serve as an incremental benefit to Q4 as we begin to ship product for spring floor sets.
2nd is DTC, with assumptions based on measured improvements in traffic, conversion and new door openings, also supported by an easier prior year comparison in North America, we expect to see some Q4 improvement. And finally, we expect our licensing business to be up in Q4 due to contractual royalty minimums in addition to a settlement related to one of our North American partners. Before we turn it over the call to the operator for Q and A, I'd like to break from our typical company policy of not discussing any regulatory or litigation matters and briefly address an article published yesterday regarding an investigation by the SEC and the U. S. Department of Justice.
We have been fully cooperating with these inquiries for nearly two and a half years. To this effect, we began responding back in July of 2017 to their request for documents and information. We firmly believe that our accounting practices and disclosures were appropriate. Now back to the quarter at hand, I'd underscore that we are staying disciplined, focused and methodical in our tactics, which includes delivering innovative premium product, amplifying our brand to connect even more deeply with our consumers and strategically managing our business with an eye toward constant operational excellence. We have made great strides in our transformation, strides that are beginning to harness the energy, power and strength necessary to deliver prudently as we work to grow our brand over the long term.
With that, we'll open up the call for your questions. Operator?
Thank Our first question comes from Alex Walvis with Goldman Sachs. Your line is now open.
I wanted to start by digging into the change in revenue guidance a little bit. So you give three key reasons for the slightly lower revenue guide. Could you possibly help us to size each of those in terms of its magnitude on the change? And then perhaps more specifically on the North America backdrop as part of the driver of the lower guide. Can you perhaps explain what's changed since we spoke last quarter in terms of outlet traffic or in terms of that online conversion, which is weighing on sales growth a little bit?
Sure, Alex. This is Dave. First of all, relative to the updated guidance, we did talk about the 3 main drivers there. Availability of excess inventory for the off price channel is lower than we anticipated. Also the weaker expectations on DTC and also foreign exchange rates.
Quite frankly, all three of those are fairly similar in impact for us as we finished out the year. There's not one that's really driving larger than the other relative to the updated guidance in Q4. And when you think about North America, in Q3 with the down 4%, the largest driver was the decline in the lower sales to the off price channel. DTC was a little weaker than expected, but then on the flip side, we were able to over deliver a little bit on the wholesale side, some of that with the operational improvements we're driving. And when you think about Q4, obviously, we're applying a higher growth rate in Q4.
Some of that is the service level improvements that we mentioned and being able to ship more of that spring product earlier in Q4 than previous Q4 in 2018, but also some of the DTC improvements to a degree. The new commercial door concepts, which we're excited about, the amplified marketing that we've talked about, improved e comm fulfillment levels and then also just having an easier comp for Q4 for North America as well. So a lot of different factors going into that. Patrick, do you want to add some
more color?
Well, I think I said a little bit in my script, the plan is still the plan, right? We're at Q3 out of a 20 quarter plan. And what we feel really good about is the leadership that's now in place in North America. I think Stephanie has done a phenomenal job onboarding and is really hitting the ground running. The continued stabilization and strengthening of the foundation, which gives us an opportunity to reinvest into the brand earlier than we had originally planned, which is very exciting for us.
And we also feel very strongly about the actual content that we're going to deliver against that. And then there's some good news, like Dave said, right. We have full price trending better, which is great for us. We're winning with the winners, we believe, in the marketplace. We're growing where we need to grow.
And we feel good about how we have thought about Q4 in terms of being balanced there. So I hope that gives a little
bit more color adding to what Dave said.
That's helpful. Thanks so much for the color. And one follow-up, if I may, on the reduced sales to off price now planned for the year. Can you help us understand what's driving that? Is it better full price sell through perhaps in the wholesale channel?
Or is it kind of better supply chain operations than you had previously expected?
I think it's a hi Alex, it's Patrick again. It's a combination of both. So we're able to service the business better as we go into the season. In other words, delivering the right stuff to the right place at the right time. The product is also better.
So we believe that the type of product we're now putting into the marketplace, the fact that we have less old product on the shelves is helping drive the sales. And then ultimately, that then gives you less returns, right? So it's a combination of these three things that's really helping us now decrease the amount of inventory that we have for the off price channel quicker than we first had anticipated.
Fantastic. Thanks so much for the color.
Thank you, Alex.
Thank you. Our next question comes from Jonathan Komp with Baird. Your line is now open.
Yes. Hi. Thank you. I want to first just follow-up on the North America business. Could you just comment on where you expect that to fall for the full year 2019?
And then I think it's been 3 years of decline in top line for that business. Do you expect going forward that you'll be able to reverse that trend?
Hey, Jonathan, this is Dave. When you think about the full year, North America, we expect to be landing down slightly on the full year versus international, which should be up at a low double digit rate. Obviously, there's a lot of great things that we're working on. We're excited about 2020, but we'll be giving more color on that in early February.
Okay, great. And then, Dave, I wanted to just follow-up on your comment of the federal inquiries into the accounting practices. And really two questions.
I think first, wanted to
just ask maybe more insights on your view internally of materiality and any comments there relative to the presence of document requests for the last several years, but just hearing about it now. And then secondly, could you just give a little more insight internally kind of the degree of resources being applied and any sense of distraction from any of the requests involved?
Yes, Jonathan. We can certainly appreciate that you'd like us to provide more details regarding that matter. However, we are prohibited from doing so. That said, the most important message
I think to convey is
that we firmly believe that our past accounting practices and disclosures were entirely appropriate And we've been fully cooperating for the past two and a half years on this. So now we're focused on 2020 and beyond. We feel like our foundation is strong and we're looking forward to reigniting the Under Armour brand as we continue into the next chapter and we'll leave it at that for now.
Okay, understood.
Thank you, Jonathan. Thank you, Jonathan. Thanks. Thank
you. Our next question comes from Erinn Murphy with Piper Jaffray. Your line is now open.
Great. Thank you. Good morning. I guess first bigger picture question. If you guys round out year 3 of your initial turnaround plan, you guys have done a really nice job of keeping inventory lean, hitting your bottom line despite just broader macro noise.
But kind of to the point of the first question, sales have been a little bit light. So what reaccelerates sales from here? And are there any tweaks that you need to make to the 5 year plan you provided last year?
Hi, Ansh. This is Patrick. Thanks for the question. I love that question because I can answer it very confidently that the plan remains the plan. And if you remember, at Investor Day, we laid out that 20 quarter plan and the Texas House timeframe that we're currently in that we're turning the corner to in 2020.
Nothing has changed there. There are short term, a few puts and takes here and there, but ultimately, we're still confident in that plan. And when you do these kind of turnarounds, it takes time because you have to actually work through the calendar. Unfortunately, it's kind of the way it works, when you enter into a 22, 24 month calendar and you start to do the work, we feel really good about how we think about the future of this brand, all the work and the foundation that we've done. And we're going to continue to work through that plan.
And as we turn the corner now into the perform with balance chapter, which is the next chapter, we feel we have the product, we have the marketing, we have the team to be able to really drive the business more going forward. So we're happy about it.
And one of the things, Aaron,
that let me weigh in
on that as well that I covered in my script. First of all, big picture, we know that great brands endure. And so our job is continue to remind ourselves and demonstrating why the world should see Under Armour is that we are special and the reason that we exist. We have talked about the ability for us to start playing offense and I mentioned that in my prepared comments as well about moving and creating room that we can actually begin to invest here in the Q4 And especially as we turn the quarter into 2020, that we're going to be even more aggressive, where you'll finally get, I guess, get the ability to see the benefits of the true go to market with strategy, supply chain, product marketing, sales, all hitting and flying at the same time. So we know that we're not expecting perfection the first time that version 2 will always be better than version 1, but you're about to see a really harmonized play come from this company.
And something we'll be able to deliver on a consistent basis due to the culture and the process that we've been able to implement and put into this brand. So we are looking to light our brand up more effectively and holistically since our transformation began. And one of the new criteria that we have for that is using data really as a high accelerant into how we're making those decisions and really smart about the way that we're spending our money. So we are continuing to work on quieting our company and amplifying our brand and we really look forward to that happening in 2020.
Great. Thank you both for that response. And then just a follow-up, maybe Kevin for you, just kind of how you answered that last question. But can you just share a little bit more about the pace of innovation in 2020, both on the apparel and footwear side? Just anything you can share with us today on what some of those stories that we can be expecting?
Thank you so much.
Yes. Well, I think we've got so many franchises that we have as a company beginning with the fundamentals and the foundation of the basics, heat care and cold care. It's amazing how much smarter we get as the weather started to turn here in the last week or so, watching things begin to accelerate for us, that's such an anchor and aspect for our business. But I think it's really holistic. I think this is part of the process we've had in the go to market of truly setting up this funnel of technology and innovation that points toward a specific date where we can either, a, launch and announce building that franchise with things we've done like Curry, Rock, Rock Product, Hover, our overall training line, and then also being able to do it and talk about it through amplified moments of things like building spacesuits through the new Virgin Galactic program and taking 8 technologies we have in our in line commercial products that we're demonstrating are capable of going to space.
And so I think innovation is the heart and soul and I think it speaks to the focus and the commitment that we have to the athlete of us really narrowing the reins in the target that we have for our consumer of identifying it as this focused performer. And so building product for them that will help them train, compete and recover in it's going to really be our difference, I think. And I think you see it showing up. You see it showing up in sports marketing and whether it was, as Patrick mentioned, the Patriots and the Ravens going out at last night here in our backyard, and watching the excellence of a Tom Brady, who we continue to help drive and innovate with athletes like that in that perspective or if it's relative teenagers like So to for the nationals, winning the national championship or winning the World Series last week. I mean the innovation, I think the commitment of this brand is really consistent and one you'll continue to see come from us over and over.
So we've got platforms, we have franchises, we continue to have an innovation pipeline that we're really excited about and it only gets stronger and stronger going forward.
Thank you.
Thank you. Our next question comes from Randy Konik with Jefferies. Your line is now open.
Hey, thanks. I guess Patrick and Kevin, I agree, great brands in door. Just want to get your perspective and there's other lesser enduring brands that kind of can create some noise in the marketplace. One of those you see in the market in the youth market lower priced, gaining some had been gaining some traction for some time. How do you think about those lesser enduring brands that can come and go?
How are they impacting the market from a pricing perspective, a wholesale order perspective? Where are we in that kind of cycle from your perspective with these other or 1 or 2 lesser known brands that are kind of impacting the market, particularly on the apparel side right now? Just want to get your perspective there first. Thanks.
Hi, Randy. This is Patrick. I think I'll kick it off and I'll see if my partner here wants to chime in. What's interesting with our transformation has been this evolution in terms of how we think about creating product and services for a specific consumer mindset. It's really allowed us as an organization to become incredibly consumer centric.
And this has been an evolution over the last 2 years. It's not that the company wasn't consumer centric before. It's just that we're now able to use data much more like Kevin said, much more purposefully to actually understand what matters to this consumer. So when we think about other brands that are coming up or entering into the marketplace in a category or in a space, there is an opportunity today, of course, to do that more easily than ever before. But ability to innovate long term of sourcing and ability to innovate long term, where we believe that we now have set up an ability to understand what problems we're trying to solve for and how to actually make our focus performer better.
That is now taking on a whole new scientific level that I believe is going to be a game changer for the company going forward. But I don't believe that these smaller companies can sustain to the same degree that we can because size actually do does matter in this space, especially when the stakes are as high as they are for brands like us where we play on the national and international fields every day. So we feel very, very good about how we've transformed ourselves from just making great product to actually making great product for a specific consumer driven by data and an incredible attention to detail and process. I don't know, Kevin, you want to chime in because you got the history here.
Yes. Let me I'll take a step back maybe and sort of reflect on what it means of where we find success. Today marks the 56 earnings call that I participated on. And when I think of reflect on that, it's how much of the external noise that continues to come at a public company. Yet the ability of how we manage that and more importantly how we put the blinders on to focus on ourselves and not be concerned about the others, the outside and either who is above or who could be below.
But really with this relentless sort of energy and probably mild paranoia of always thinking about what's next and how we can obsess on the next great product and for us to be the 1st to deliver it for you. And I don't think that's changed at all. I think what we have now is where we were built by many forces of personality and forces of energy and forces of will to underlie and underpin that with really the world's most dedicated team and processes and systems that can keep up with it and do it on a repeatable basis is a position we're in now. And so whoever the competition is, be it above or be it below, we're prepared for it. But most importantly, we understand that our criticality towards success, the definition of what will actually get us there is our ability to focus on ourselves to block out the noise and to keep marching forward and always going through.
You'll see that and feel that from this brand. Today, you'll continue to see that through 2020 going forward, and I can't wait for the future. Great.
And then can I ask you just some clarity on footwear side of things? It sounds like the reduction of sales into the off price channel impacted the growth rate of that category. So how do you guys think about normalized growth rate of the footwear category going forward and discuss some of the wins and losses in the category? Obviously, HOVR seems like to be a nice win for you guys from a platform perspective. Just curious on how we can think about the long term growth algorithm of the footwear business going forward?
Thanks, guys.
Yes, Randy. I'll start off. Dave, maybe you want to chime in. But ultimately, for us, footwear is playing the long game. We talked a little bit about innovation here earlier today and how well we have been able to place the HOVR platform in the marketplace, the run performance disciplined play in the footwear space, which is very different than what it a orchestrated disciplined play in the footwear space, which is very different than what it is in the apparel space.
But we've also been reducing inefficient volumes throughout this year and especially in Q3, we're annualizing some off price coming out of 2018. There is some shift in timing between Q2 and Q4 this year. Ultimately, for our footwear this year, we're expecting to grow. We're flat year to date and we're expecting to grow in 2019 and we expect that to accelerate as we go into the out years. And we're very encouraged by what's happening in our performance run and also in our women's training footwear.
So you're seeing a bit of a shift in terms of the footwear portfolio, if you like, that we have this year. But we have, like Kevin alluded to earlier here, a very, very strong belief in our footwear innovation pipeline going forward. I don't know, Dave, do you want to add some color?
Yes, Irene, I guess I would a quick reminder, the Q3 growth rate down 12%. We had expected Q3 was going to be a lower growth rate for the reasons that we already mentioned. And as we think back to Investor Day and expecting that footwear growth from a CAGR perspective long term is going to be a fair amount higher than apparel, possibly double apparel. We still believe in that and we've got the momentum for that. So we're excited about talking about that further in early February.
Thanks guys.
Thank you.
Thank you. Our next question comes from Edward Yruma with KeyBanc Capital Markets. Your line is now open. Hey, good morning. Thanks for taking
the question. I guess just first kind of a housekeeping question. I know you're not guiding to 2020, but just maybe contextualize how much the improved service level is drawing into 4Q, so we could start to think about, I guess, our 1Q estimate correctly. And then second, bigger picture, Kevin, I know we've talked a little bit about footwear. How pleased have you been with the follow-up front HOVR?
And then I guess some of your competitors have multiple kind of cushioning lines. I guess when can we expect something similar from Under Armour? Thank you.
Yes, Will, this is Dave. We have talked a lot this year about the improving service levels, which we're really excited about.
And when you
think about shipments
towards the end of June and shipments anticipating for Q4. So And that's what we're anticipating for Q4. So it is something that we've been forecasting for quite a while at this point. We're expecting that continue when we think about Q4 of 2020. So from a full year perspective next year, that's all considered.
And although we're excited about 2020 and where we're going, where we're driving, we're going to hold further comment on that until the 1st week of December. But Patrick, if you want to add more into
Yes, Edward, let me address that because I think you bring up a good valid point of as starting as an apparel company, it had us adjusting to what does it mean to make footwear. And from the learning curve going back to 2,002, making my first trip to speaking to the right footwear factories of understanding how we can be there and be effective of knowing what that would mean and the time that it would take. So the investment we've made there is extraordinary and we're now set to run. And all the way down to the things that make it important from an innovation standpoint of having the right product and making sure that we're segmenting it correctly, the distribution, truly a holistic approach to how we're thinking about it. So today, we sit with roughly 4, we call midsole technologies for our footwear, Micro G, Charged, Hover and something we've just launched actually in a truly segmented manner, which is called Liquify.
So we are continuing to invest on this and you'll see more midsole technologies come to bear in 2020 as well going forward. And just watching the evolution, the sophistication really begin to build in our footwear capability is something that's frankly taken us 15 years to get to this point. But we're ready to run and we understand what it can mean as we continue to unlock footwear, having the right product, the right time, the right price. We believe that we are truly going to be a player there and take this $1,000,000,000 plus business and build something really important. Got you.
Yes.
It's a great question and it's a really important one in footwear. And to Kevin's point, we have 4 different technologies today, and it's really important to us in terms of how that has enabled us to think about segmentation as well. This year to some extent, but even more so going forward. We believe there is an opportunity for us to add some additional cushioning technology at the very high end of the spectrum. So we're going to be focused on doing that in the very near future.
But we believe that the unlock for footwear for any company is to be able to drive franchises on these platforms. We've demonstrated that we now are starting to understand how to do that and that is definitely to Kevin's point one of the unlocks for the company going forward.
Great. Thanks so much guys.
Thank you, Evan.
Thank you. Our next question comes from Bob Drbul with Guggenheim. Your line is now open.
Hey guys, good morning. Just two questions for me. I think the first one is, when you look at the North American market and your performance there, do you have a sight line on when you think you can return to positive growth in North America? And then the second question that I have is, can you just update us on the margin differential for or in apparel and if you've been able to really close the gap between the 2? Thanks.
Thanks, Paul. I'll start this off and I'll hand it off to Dave and he'll give you a little color on the margins. As we think about North America, we haven't changed our thoughts in any way compared to what we told you guys at the Investor Day in December last year. It's a there's a time horizon to how we think about those things. It's and a lot of that starts with leadership.
We now we have what we believe strong leadership in place. We have a strong go to market. We have started to really see the effects of cleansing ourselves in our wholesale channel. We've seen the early success of opening 3 new brand houses full price in North America in the last quarter. That's the first time we do that in a very, very long time.
All three of them are performing at or above plan, which gives us great encouragement for the additional ones we're going to open up next year. And it also shows that when we show up the right way as a brand to the end consumer in full price with the entire breadth of our innovation and our brand for them, they respond, which is very encouraging to us. So I think a combination of the work that we're doing in wholesale, the addition of a better work we're doing in our full price stores in North America, in combination with moving on to a new e com platform and new ecom site next year, that's going to greatly enhance our ability to service the customer and layering on top of that the additional marketing that we plan to do. So we're very excited about the fact that we're going to actually start doing that earlier at the back half of this year, which is a few months earlier than we would have hoped. And a lot of that comes on the back of the stable foundation, the hard work to make sure that we're really doing the work that needs to happen in terms of driving the business the right way.
And with that, I'll hand over to Dave, and he'll give you a little color on the margins.
Yes, Bob, relative to gross margin, we have been working hard driving footwear forward. Some of that is volume, some of that is the costing improvements we've been driving through with the supply chain efficiencies and the new go to market process. So over the last few years, we continue to drive forward and increase our footwear gross margin. So we are closing that gap versus apparel, but it is still a pretty substantial gap at this point. But we are definitely chipping away at it every single year.
We're gaining anywhere from 100 to 200 basis points each year on the gross margin increase for footwear. So we're going to keep driving that forward and continue to close that gap.
It's huge color. Thank you, Bob.
Thank you. Our next question comes from Jim Duffy with Stifel. Your line is now open.
Good morning. Thanks for taking my questions. First one for me. I wanted to ask about gross margin. You're tracking ahead of pace there.
To what extent guys do you view that as a pull forward of benefits versus reflective of a new foundation upon which you can continue to see improvement? And what are some of those key levers for improvement as we look around the corner to next year and beyond?
Yes, Jim, this is Dave. I mean, as you think about what we delivered in Q3, obviously, we mentioned the bigger ones with the lower off price sales in the quarter, and also the continued supply chain issues of product costs and airfreight. There were a couple of smaller puts and takes too. We saw some smaller benefits from higher connected fitness mix. And so if you think about what's driving in Q4, continued channel mix benefits with licensing and a higher DTC mix will help us out in Q4.
The supply chain initiatives are probably the biggest one that carry through the whole year, including Q4, and we expect we'll carry into 2020 as well with the product costs and lower airfreight. So we're continuing to drive on all of those. And then as we've mentioned on many of our previous calls, we continue to work towards stepping down our mix of off price channel, and that's something that we'll continue to do as we step into 2020. So a lot of the tailwinds that we're seeing this year with product costing, with air freight, with stepping off the off price channel, with higher DTC mix, all of those things should continue to drive forward as we go into 2020 beyond.
Okay, great. And then, you spoke to a planned step up in brand marketing turned from defense to offense. Can you guys maybe foreshadow some of the marketing initiatives we should be looking for in Q4 and into 2020? Is it going to be more brand specific or product specific? Are you planning to spend more digital or more through traditional marketing channels?
Any color there would be helpful. Thanks. Yes.
Thanks, Jim. This is Patrick. What's really exciting about what we're going to do here in Q4 is we're able to spend against more upper funnel brand marketing, which is helpful for us as we'll take learnings from that and enable more precise spend, if you like, in 2020. But in 2020, it's all going to be about a 3 60 degree approach to marketing. So over the last two and a half years, we've been building capabilities to be competing with other people in our space in terms of how to think about everything from digital to social media to out of home, whatever you want, and understanding that impact and effect it will have on the consumer that we're focused on.
We weren't able to do that necessarily 3 or 4 years ago because we didn't have the capabilities. We have diligently been putting those capabilities in place and we're now starting to understand much better how to unleash them. And that's truly what you'll see in 2020 is a coordinated play, like Kevin said, where we'll go and market ourselves across every channel that we need to market ourselves across to make sure that we're increasing consideration with the consumer. So it will be a holistic approach to both upper funnel marketing and also sports moments marketing, where you'll see Under Armour show up, where our athletes show up. So we're very excited about that.
So we're really starting the journey in terms of how to think about that a little earlier this year, taking the learnings to apply them to do an even better job for 2020.
And Jim, just a little perspective on that too. I'd say Patch Guy would probably be in alignment that we haven't done that type of top of funnel storytelling to our consumer in several years. And so bringing this back, getting this amplitude, when you're looking for the from to of what's different now versus what can we expect differently going forward is you're going to hear about this brand, you're going to hear us tell our story, that's for sure.
Yes.
That's a
great way to say it.
Great. Thank you. Thanks very much.
Thank you. Our next question comes from Paul Lejuez with TD Research. Your line is now open.
Hey, guys. Paul Lejuez.
Can you maybe give
a little bit more color on the deceleration in the APAC segment? Just the deceleration that you've seen since the first half of the year. Any color that you can add by country in terms of where you've seen the biggest drop off? How are you thinking about 4Q and into next year? And then second, curious what drove the CapEx guidance lower for the year?
Was there any of that that was a timing shift and just how you're thinking about CapEx for next year as well? Thanks.
Sure, Paul. This is Dave. Relative to APAC, the 4% growth in Q3, we had always planned that this was going to be our lowest quarter of the year for APAC. From a channel perspective, DTC does continue to drive growth in both retail and e commerce, which has been great. But timing of shipments have been a little bit more out of Q3 relative to flow with the distributor orders.
So it's more Q2 and Q4 heavy. And then also with the improved service levels, we're delivering more to the actual demand, which puts a little bit more in Q2 and Q4 as well. And you can kind of expect that going forward as you think about 2020 that the quarterly flow will be a little bit more normalized because those distributor revenues are going to be more heavily weighted in Q2 and Q4. We also have bigger e commerce events that are normally in Q2 and Q4 as well. When you think about kind of driving forward through Q4, international in general, we're continuing to see those improving service levels, which is great.
We have larger amount of door openings in Q4, both partner and owned doors. And then also, as Patrick mentioned, we finally normalized Latin America business with that Brazil model change that we've been discussing. So a lot of factors going into that and seeing that growth for Q4. When you think about CapEx, to your question there, a couple of things that we've changed a little bit. The full year, we're still driving hard as far as investments in DTC expansion, new APAC office investments, APAC and LatAm, SAP investments, all well within our Investor Day operating principle range of 3% to 5% of revs.
When you think about some of the things that brought down why we're guiding lower to the 180, some of that is around store build cost efficiencies, which have been great to drive through. Some of it's timing of digital initiatives, timing of office renovations and related efficiencies and then also some cost savings as we completed our new distribution center here in Baltimore, but some different puts and takes there.
Got you. And then just one follow-up on APAC. Anything you
can talk about on country, if you want to think about it in terms of point of sale, where are you seeing the strongest response to product, maybe talk China specifically, progress there, anything you can give on a country by country basis? Thanks.
Yes. Hi, Paul. This is Patrick. When we think about APAC, we're very happy with the performance across APAC actually. And I think the investments we've made that Dave alluded to, which has been expanding the China office and also putting our new Hong Kong head quarter in place has really enabled our leadership teams there to continue the work that we're doing to really penetrate the market through category and also distribution in terms of opening stores.
As we told you guys at Investor Day, we're on plan to do exactly that, but also working hard to protect the premium positioning of the brand. And we have been evolving the China business model over the past couple of years and we're now in a place where we believe we have a really strong foundation in terms of our distributors doing a great job for us there. The leadership team is in place. So we feel really good. And I think as an added thing too, I think as it relates to APAC, we are also very happy with our sourcing model that we have, only having about 10% of our product that comes into the U.
S. Being sourced out of China. So we're protected from that perspective as well. So I think both the front end and the back end is working incredibly well for us in APAC.
Thanks guys. Good luck.
Thank you. Thank
you.
Thank you. Our next question comes from Jay Sole with UBS. Your line is now open.
Great. Thank you so much. Kevin, just want to ask you about how your day to day will change now that your title has changed. What are really if you give us some more color on that? And then secondly, I know you guys didn't talk about weather's impact in 3Q, but it was like the warmest September.
I think Vogtle and they said that they said the day and I wondered if that has an impact on your business. And then Kevin, you did mention that you've seen the business accelerate in the last couple of weeks. I assume that's weather related. Can you just talk about what cold weather through November might mean to the business relative to the guidance that you gave in that quarter? Thank you.
Yes. Thank you, Jay. So let me just start by adding some clarity around the decision why, how I got here, 47 year old, what does that mean? My goal is to build our goal is to build an eternal brand. And we're not going to stop until that happens, which obviously that's a long that's a self fulfilling prophecy.
It's going to
keep going.
You don't want to forever, right?
You got
to get the flywheel going. And I believe that we've started that. But it's also thinking about something that we can do with a brand, as I say, great brands do endure, but setting this up truly for the long term. Patrick and my partnership has really grown over the last several years and having the ability to bring in and I'm really proud of being able to find someone like Patrick who had the perfect balance of industry experience and expertise with frankly just professional maturity, being able to come in and handle a situation where we had to lead into heavy transformation for ourselves as a business and as a brand. And going through the last 2 or 3 years of really rightsizing this business, getting ourselves in line and seeing some of those benefits come through as things as clear as whether it's inventory or gross margin improvement as reducing what we're doing or taking down as we're looking for off price of just getting our inventory levels clean and really getting ourselves structured.
And the professionalization of the company wasn't meaning that we weren't professional before. It's just take our company from $5,000,000,000 to $10,000,000,000 is really a different step. I want to be clear is that I love Under Armour and it is now, today, tomorrow will always remain my full time priority and job. I also want
to be clear that
this is my decision for all those reasons that I've just mentioned and gone through. And what I think what we have now is the strengths that Patrick and I have combined really creates a force that, I think it's unmatched in our industry, and I think it's really unique for business as a whole. And so the way that we balance that and that we work together tirelessly with each other on communication and making sure that we're aligned, but also making sure that Patrick has the freedom and the ability to lead and do the part that he can, running the day to day aspects of the business and really running and managing business. But it will be a partnership. It will continue to move forward.
But as I said, there's 3 places where I think I'm going to have the impact and it's not going to be from the sort of the I don't know, how do you say HR and legal and some of those things, with the ability for me to really focus on the elevating product, amplifying our story, really empowering our team and really simplifying my job description to that of just obsessing on product. I got to spend more than a dozen hours last week in a product line review, and it was just terrific. I brought home one of the shoes, the new product technologies have out, and I stared at this thing all weekend. And it's just the ability for us to think like that in that capacity, I think is one of the aspects you can be in unlock. And so we do pretty well and we put our backs to each other and face out and we're looking forward to that fist fight.
Great. And then if you could just talk about the question on the weather in 3Q and 4Q, what you've seen in terms of the acceleration in the last couple of weeks, that would be great.
Yes. So Jay, maybe I can add a little color to that. I think we've seen a gradual acceleration in the back half of this year as there is not just the weather, but actually our execution that's coming to play here too. And we believe that as we turn the corner into 2020, we're going to be even more well positioned to benefit from the executional aspect of putting the play together, now supporting and also with a little bit more purposeful and heavy up marketing effort.
Got it. Okay. Thank you so much.
Thank you, Jay. Thank you, Jay.
Thank you. Our next question comes from Omar Saad with Evercore ISI. Your line is now open.
Two questions. First one, I wanted to ask about, last quarter you'd mentioned weaning the consumer of some of the promotions had been a little bit of a challenge and a drag on the business a little bit. Can you give us
an update on where
we are in promotionality and getting the customer a little bit more used to the fact that Under Armour is not going to be as on sale as it has been the last couple of years? And then I have a follow-up for Kevin.
Yes, sure. Omar, this is Patrick. Yes, that is a balance as you go through the turnaround, if you like, or the transformation. And as you're trying to wash through some of the excess, that is a there's a time component to that, of course, and you're not immune, of course, to what's going on around you in the marketplace. And what we're trying to do as a company is really balancing the 2, and we'll continue to do so.
And it's a gradual process. We think we have a good plan for how to do that in beyond 2019, and it will be a gradual process for us. But ultimately, what we've been saying all along has been that we're going to drive this brand to a more premium positioning again, and we're absolutely determined to do that. So we'll add a little bit more color perhaps in the next call on that, but I think it's something that we're looking forward to. And depending on where you are in the world and what channel you're in, we're more or less successful with that, and it depends a lot on the type of inventory that we have in the channel.
Thanks. It's helpful. And then Kevin, if I could ask one last question of you. Congrats to you both, by the way.
Thanks, Tom. You talked a lot about product, and
it sounds like you're going to be a lot more focused, and that sounds where a lot of your passion lies. Maybe you could talk a little bit at a higher level how the Under Armour approach to building product, product lines and platforms has evolved from the earlier days and how your role will fit in? Thanks.
Thank you, Omar. I think just adding some holistic perspective to what's happened over the last several years here, when we use the word transformation, really repositioning our business, restructuring, reorganizing, recentering the processes so that we can be clear and make sure that there is not double work happening is that we just get as efficient and lean as possible. You can tell that my energy, of course, it sits within the dream and the vision that we have for product. But one of the best things we did is, we implemented a go to market process. We implemented a global operating model in creating the 4 regions with APAC, EMEA, Latin America and North America.
We also went to category management, which really allows us to put the consumer at the center of everything we do, both men's and women's, to allow us to really align ourselves. And this process is, I've mentioned before, I've heard people talk about sort of that growth of getting to $5,000,000,000 Getting to $5,000,000,000 was something that we roughly got close to it around 2016 and then we've been fighting. And since that time, since the end of 'sixteen, we're telling you that we're going to grow our revenues nearly $500,000,000 over that period of time. So through all this transformation and some of the things we've had to do with the restructuring charges, the pain that we had to go through with things like risks for our teammates, of just getting this business set up and organized and where I think we say really quieting the company and amplifying the brand, that is truly the goal that we have for this next chapter and I really feel like we're set up for it. We just need to start running the play and running the same play over and over, which is why decisions like that to be done eventually should be done immediately.
And even I'm thinking about Patrick and the ability that he's brought to our team and looking and saying that he can be a better CEO at this point in time than I could be. And being able to, I think, always put the brand first. And I think that's where we are right now from a structure standpoint. And it is something that we can look out several years and say there is no imminent change. Change.
As Patrick likes to say, the plan is still the plan. You see our management team, you see the structure we have
in place. We're calling the
play, now it's a matter of us executing. And the good thing about this, there isn't a massive change coming. It's a matter of us just putting our heads up. There isn't a massive change coming. It's a matter of us just putting our heads down and really going to work.
And that's what we look forward to doing, I think, in this next chapter as we head and move into the end of 'nineteen and really head forward into 2020. So Under Armour is ready to run. It's tough getting to $5,000,000,000 I'll tell you in this industry. It's a reason why there's only a couple 3 or 4 companies that have done it at this point. But we're looking forward to the next chapter and we are set up and we are ready to build and be that great brand that we talk about so often.
Thank you. Best of luck.
Thank you very much. Thanks, Omar.
Thank you. And our next question comes from John Kernan with Cowen. Your line is
now open.
Hi, thanks for taking my question. This is Jared Ward on for John. You gave some color surrounding the shifts out of Q3 into Q2 and Q4 based on the service improvements. I was wondering if you could either quantify that or talk about what products that is benefiting and what geographies?
Yes, Jared, this is Dave. We don't actually quantify that. We're just trying to give a little bit of extra color. The majority of that we've expected as we planned out the year. A fair amount of it is international with distributor flow and that being more heavily weighted to Q2 and Q4.
But then also again, those service level improvements, when you think about the product that we would be shipping in, in late June, early July and the product we ship in, in late December versus early January, those are the two phases where improving service levels can be most impactful in a good way, and it's the play we want to continue to run as we go into 2020. So those amounts are not dramatic, but there are enough that we want to note and give extra color around that. And we're going to continue to drive forward and hopefully we can continue to operationally improve each month as we move forward.
Thanks. And one quick follow-up. Are you guys taking any pricing, especially with the tariffs
coming forward? Right now, we're in a very good position. We've been very proactive starting years back in mitigating the amount that we import into the U. S. From China.
So we feel pretty good about that relative to all the enacted tariff policies that are out there with List 3 and List 4A and 4B, all of that's considered in our outlook and we feel like we're in a really good spot. So we're working with our vendors and continue to drive forward in our sourcing strategy, but we're well prepared for it.
Yes.
All right. Thank you. Thank you.
Thank you very much. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.