Good day, ladies and gentlemen, and welcome to the Under Armour, Inc. fourth quarter earnings webcast and conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Lance Allega, Vice President, Investor Relations for Under Armour. Sir, you may begin.
Thank you. Good morning to everyone joining us on today's call to discuss Under Armour's fourth quarter and year-end 2017 results. Participants on this call will make forward-looking statements. These statements are based on current expectations and are subject to certain 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 uabiz.com. During our call, we may reference certain non-GAAP financial information, including adjusted and currency-neutral terms, which are defined in this morning's release. We use non-GAAP amounts as the lead in some of our discussions because we feel they more accurately represent the true operational performance and underlying results of our 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 Chairman and CEO, Kevin Plank; President and COO, Patrik Frisk; and Chief Financial Officer, Dave Bergman. Following our prepared remarks, we'll open the call for questions. With that, I'll turn it over to Kevin Plank.
Thanks, Lance. Good morning, everyone. On our last call, we spoke at length about our strategy of getting big fast and the rapid expansion of our business to gain scale. Scale and innovation, product, sport categories, and global footprint, all geared at helping us become one of the world's largest athletic brands. We also detailed some of the operational inefficiencies as a direct result of this growth, including an inconsistent go-to-market process, change management related to shifting toward a category-based construct, and the mismatch in our cost structure that was built to support the expectation of being a much larger company by 2018. These issues, along with some macro challenges in the North American market, including retail consolidation, changes in consumer preference, and intensified competition, created a tough year for our company in 2017.
It was tough, but also an opportunity to begin the work to transform ourselves into an operationally disciplined organization capable of supporting the powerful global brand that is Under Armour. Over the past year, we've made strategic and proactive decisions to advance our systems, reset our structure, and recalibrate our leadership in an effort to simplify our go-to-market, address our inefficiencies, and utilize the scale and infrastructure we've built to better serve our consumers and retail customers. As we slow down to speed up and simplify everything we do to become smarter, faster, and stronger, our team is collaborative, humbled, and hungrier than ever. Today, we reported our fourth quarter and year-end 2017 results.
Relative to where we are in our journey in the offensive and defensive strategies we're employing, let's take a moment to review some full-year highlights, which were fairly in line, if not a little better than the outlook we gave on our last call. Revenue was up 3% to $5 billion. Our wholesale business was down 3%, and DTC revenue was up 14%, driven by low double-digit growth in our own stores and a high teen increase in our e-commerce business. In total, DTC represented 35% of our global revenue for the full year. By region, as expected, North American revenue was down 5%, and our international business was up 46%, driven by continued strong growth in EMEA, Asia Pacific, and Latin America.
Having crossed the $1 billion mark, quadrupling in the past three years at 22% of global revenue, the size and scale of our international business is on the precipice of being able to deliver more meaningful return on the large investments we've made over the past several years. By product type, full-year results for apparel, footwear, and accessories were also in line with our outlook, up two, three, and 10% respectively. Full-year gross margin was down 140 basis points to 45%, a decline due primarily to inventory management initiatives in the heavily promotional environment that we operated in North America throughout much of the year. Looking at SG&A, we continue to be challenged by a highly committed cost structure and asset build over the past few years, one that levers mathematically even higher due to the change in our top-line trajectory.
In 2017, our SG&A spend was up 14%, which was 41.9% of total revenue. The fact that there's a four in front of this ratio is unacceptable to us, and we are working to address it as quickly, efficiently, and as brand right as possible. In this respect, we're making progress. SG&A dollars were up 22% in 2016. They're up 14% last year. We expect it to be up at a mid-single digit rate in 2018. Over the three-year stack, we'll basically have the growth rate percentage each year. In short, it's very difficult to unpack five years of investing to scale in just five quarters, but we are completely committed to improving this ratio toward industry best practices. In addition to SG&A, across the whole business, we are working to engineer additional areas for longer-term leverage.
Last year, we announced a $140 million-$150 million restructuring plan intended to help better align our resources against our biggest long-term growth drivers. For the full year, we recognized $129 million of pre-tax charges under that plan. After going deeper, broadening our scope, and recalibrating our leadership with even greater financial discipline, we've identified additional opportunities to improve our operations. Our board approved expanding our restructuring efforts to include approximately $110 million-$130 million of additional charges expected to be recorded in 2018. Dave will provide more details on the 2018 plan later. To finish out our 2017 results, adjusted operating income of $157 million and adjusted EPS of $0.19 were also in line with our outlook. In summary, 2017 was a year we reset and reorganized our business at a level and pace unlike anything we've ever executed.
To finish out the year in line with the outlook we provided in October should be taken as an indicator that our actions have begun to take hold, and our efforts are putting the brand in a much healthier position to move forward. In 2018, we are anticipating a more stable operating environment for Under Armour, a year that should financially prove to be similar to 2017. That's perhaps where the similarities end, because within the context of further strengthening our foundation during this fiscal year, we are constructing our long-term operating model, cauterizing the strategies to support it, and architecting precisely how we will ensure a more consistent, predictable path to deliver long-term value to our shareholders. To capstone these efforts, we're working toward an investor day in the second half of 2018 that we'll be announcing soon.
At this inflection point, there are two simultaneous connected efforts that we're working on, an operational transformation and our long-term strategy. Patrik will get into more detail about our operational transformation, but at the highest level, there are currently several major initiatives that we are tackling with the goal of putting the consumer first, simplifying our operations, and driving sustainable, profitable growth. With respect to our long-term strategy, the position, strength, and creativity of our brand is job one. To support this, there are four foundational pillars that have served and will continue to serve to fuel the brand through Under Armour's unique personality and performance-based point of view: product, story, service, and team. Let me start with product. In 2017, we moved to a category management structure to ensure that our understanding of athlete needs is central to everything that we do.
We take deep athlete consumer insights and innovate to solve their problems and inspire them to push the boundaries of what is possible. In order to do this consistently, to elevate innovation and be a product machine, we are completely re-engineering our go-to-market by focusing on our design approach, revamping the process, calendar, and structure, and prioritizing being premium at every price point, all within a consistent margin structure. Much of this process began in the first half of last year, and with a 12-18-month lead time, we've already begun to see some success with products like our ColdGear Reactor and Unstoppable apparel collections and the Curry 4, Speed two, and UA HOVR Phantom and UA HOVR Sonic running shoes that we just launched just a couple of weeks ago.
Second is all about bringing product to life, telling globally relevant stories, and connecting through social platforms supported by a go-to-market approach that promotes growth and scale. In 2017, we were a loud company and a quiet brand. In 2018, our plan is to be a quiet company and a loud brand. Getting to that point is our HOVR launch. Starting with strategic seeding last fall through the release this month and the ongoing effort throughout this year, you'll see and hear a lot about HOVR. From marketing, PR, and social to athlete, tastemaker, and consumer touchpoints, the saturation of this effort has created a significant amount of buzz for our third cushioning platform, which joins Charged and Micro G. Through a combined product and story lens, HOVR is a fantastic example of Under Armour firing on all cylinders.
As a product, HOVR's an Under Armour DNA trifecta of style, performance, and fit. From a story perspective, without comparison, the storytelling and support around UA HOVR is the largest, most comprehensive campaign that we've ever done on a global basis. This is just the beginning of some of the amplified storytelling you'll hear from us in 2018. Next up is service and putting our consumer athletes at the center of everything we do, always, from start to finish and back again, no exceptions. Constantly serving our consumer athletes whenever and wherever they choose to engage our brand. As we elevate our game and validate some of our assumptions along the way while digging even deeper to truly understand the consumer decision journey, I believe that our perceived short-term weakness, our focus on athletic performance, will ultimately prove to be our greatest long-term strength.
Our product must, of course, drive style, but we will continue to invest in being an authentic athletic performance brand. That's us. This focus, along with global operational discipline, will ultimately ensure we are able to deliver a seamless consumer and customer experience time and time again. Finally, our team. The DNA that fuels the bones, muscle, and blood of Under Armour is our people. It's been a tough year, and this team, our team, is resilient and ready to win. The best part of my day is walking the halls and connecting with the teammates that are building this company. From the rookie call center teammate to the seasoned industry veteran. From Portland, Austin, San Francisco, and Hong Kong to Amsterdam, New York, and Baltimore. We are single-minded in our passion, purpose, and commitment that articulates through our new mission statement, which is, Under Armour makes you better.
That means in every way we connect, through the products we create, the experiences we deliver, and the inspiration we provide, we simply make you better. In summary, we see you and we hear you. Know that we're heads down stabilizing, prioritizing, executing, and making measured incremental progress toward the company we know we can be. It takes time, which can certainly be challenging on both sides, externally and internally. Yet we have the patience, plan, and fortitude to see this through methodically and successfully. With that, I'll turn it over to Patrik.
Thanks, Kevin. On our last call, I spoke about operate, fuel, innovate as the central construct of how we're strengthening our underlying business. Staying anchored in product story service team, today, I'd like to detail some of the major initiatives we're working on within our operational transformation. This transformation has three main objectives. Put the consumer first, simplify our operations, and drive sustainable, profitable growth. At its core, it starts with the consumer. As we work to significantly sharpen our knowledge and connection with our consumer athletes, it's critical that research and design, innovation, engagement, and thus our overall go-to-market are based in consumer insights to create a demand-centric growth model. To base this work, we've finished our global segmentation study targeting more than 20,000 people and gained an even deeper understanding of how consumers engage our brand, use our product, and when and why they shop Under Armour.
Within this consumer decision journey, we are using both quantitative and qualitative attributes to further strengthen our ability to analyze existing market spaces and identify unique areas of white space where we might play. Part of every season's consideration, this data and analytics set serves to inform and support the tough decisions we have to make with respect to resource allocation and the financial discipline necessary to provide high returns. High returns provide more agility for our business. Playing an essential part of the strategic planning process, this enables us to refine our positioning, prioritize product, pricing, and segmentation, and ultimately unlock additional value drivers and growth levers. Second, following many years of rapid growth and infrastructure build, we are in the process of simplifying our operations. To restate what was said earlier, it's challenging to unpack five years in five quarters, but we are making progress.
As we work through this transformation, we're focused on keeping structure, process, and go-to-market continuously aligned to ensure repeatable outcomes. A lot of the foundational work and tough decisions the team has implemented, along with the expansion of our restructuring plan that we announced this morning, are a direct result of our team digging in deeper and narrowing our focus even more directly to ensure we have greater operational agility. It is this agility that allows us to align against the largest opportunity for growth and profitable returns. At the highest level, what does this look like? Well, from a channel perspective, it's optimizing our direct-to-consumer business, amplifying e-commerce, and demonstrating firsthand that this is an amazing experience for consumers to engage Under Armour and for us to tell our brand story.
From a category perspective, we're placing a high level of focus on men's training, running, and women's training, the areas with brand strength, the largest market opportunity, and most consistent growth. It's also about being a product machine and turning out consistent innovation to delight the consumer, from sketch, materials, and production, to discovery, purchase, and the entire life cycle of the product. We are 100% focused on the consumer and creating the world's best performance products. With this respect to geography, it's strategically managing our business in North America through better segmentation, aligning inventory to ensure brand health, and continuing to evolve our distribution relative to the quickly changing market. Internationally, it's continuing to build our footprint and scale, leveraging the investments we have already made, and distorting toward more profitable hyper-growth markets like China and the Greater Asia Pacific business, as an example.
As we continue to transform toward a more efficient global operating model, we are also evaluating opportunities to redesign key processes and simplify the ways of working to optimize work streams and productivity, assessing organizational responsibilities, and designing key functional and cross-functional processes to drive faster decision-making, and in very tight partnership with Dave, emphasizing and driving accountability and financial discipline throughout the organization. With our operating structure and processes in alignment, the go-to-market now falls into place, allowing us to make great strides in several areas, such as shortening the current go-to-market calendar and moving from biannual to quarterly cadence that will see continuous improvement going forward and will reach its full effect by early 2020.
From an innovation perspective, it enables us to redefine the criteria for innovation platforms to transition from concept to inline, empowering the development of season-less innovation, which is central toward driving the shortened go-to-market calendar, and SKU optimization, which is really about doing more with less. With greater structure and process and alignment, we anticipate that our fall 2019 product will have 30%-40% less SKUs than our 2017 assortment. We're also getting much sharper with demand creation, storytelling, and our overall ability to connect even more deeply with consumers. We want to be a loud brand and a quiet company in 2018, like Kevin said. To support this, we're simplifying and focusing our marketing, PR, and social elements to better leverage the brand equity that has already been built while creating strategies to drive high returns for our efforts.
A few of the things that we're working on include significantly evolving our marketing return on investment to determine exactly what the best mix of sport, social, traditional, and digital best supports our ability for Under Armour to make you better. Next is an absolute acceleration and amplification of digital. How the intersection of product, Connected Fitness, and experience interfaces with the ultimate goal of getting the world's best performance products to our consumers. Having assessed our digital capabilities, we're executing pilots and constructing a repeatable, quantitative and qualitative playbook, which is a significant improvement for the brand. In this respect, moving from seasonal and one-time brand moments to a continuous, always-on conversation with our consumers telegraphs the same passion we live and breathe inside these walls.
To close it out, we're making measurable progress against our transformation by putting the consumer at the core of everything we do, having a more frequent innovation cycle, increasing our speed to market, executing holistic launches, and better segmenting our product at the channel and store level, we're setting up to be a loud brand and operationally disciplined company in 2018 and beyond. Now I'll turn it over to Dave.
Thanks, Patrik. Before we get into our fourth quarter results and our outlook for 2018, I'd like to provide some more context around the 2017 restructuring plan and one-time items that impacted our quarter, as well as the 2018 restructuring plan that we announced this morning. On our last call, we provided an update to our restructuring plan that we expected to incur approximately $140 million-$150 million of pre-tax restructuring and related charges in 2017. For the year, we recognized a total of $129 million in charges against that plan, including $37 million in the fourth quarter. As we move into 2018, we have uncovered additional opportunities to more closely align our financial resources to drive operational discipline and effectiveness. To that effect, we approved a new 2018 restructuring plan, which is expected to include $110 million-$130 million of pre-tax restructuring and other related charges.
This plan anticipates up to $105 million in cash-related charges, consisting of up to $55 million in facility and lease terminations and up to $50 million in contract termination and other restructuring charges, as well as up to $25 million in non-cash charges, comprised of up to $10 million of inventory-related charges and up to $15 million of asset-related impairments. In 2017, we made several strategic decisions to drive toward a more efficient and effectively operated company. We are proud of the work we have done thus far, and we'll use 2018 to further drive efficiencies and streamline our business to become more profitable. Based on our restructuring efforts in 2017 and 2018, we anticipate a minimum of $75 million in savings annually from these efforts as we move into 2019 and beyond.
We already reviewed some of the full-year highlights, so let's take a few minutes to review our fourth quarter results before turning to our 2018 outlook. Revenue was up 5% to $1.4 billion. Clicking down, let's start with revenue by channel. Our wholesale business was down 1% to $733 million in the quarter, reflecting lower demand in our North American business, particularly within the sports specialty channel. Direct to consumer revenue grew 11% to $575 million, driven by continued strong results in our international businesses. DTC, in total, was 42% of global revenue in the quarter. Licensing was up 10% to $33 million, primarily driven by strength in our Japanese business. By region, revenue in our largest market, North America, was down 4% to $1 billion, which was in line with our expectations.
Outside North America, our international business continued its strong momentum, posting a 47% increase in revenue to reach $317 million or 23% of total revenue in the fourth quarter. On a currency-neutral basis, international revenue was up 43%. Clicking down into the international regions, EMEA revenue was up 46%, driven by growth across our wholesale and DTC channels. One highlight in the quarter was the opening of our first brand house in Europe, which is very exciting for the team and the future of DTC in this region. Revenue in Asia-Pacific increased 56%, driven by strong growth in our DTC as we continue to drive both digital and physical touchpoints with the consumer. Our Latin American business was up 36%, led by balanced growth in DTC and wholesale across the key markets of Mexico, Brazil, and Chile, as well as our recent entrance into Argentina.
Finally, our Connected Fitness business was up 31%, driven primarily by new partner relationships. Turning to gross margin, we saw a 150-basis-point decline to 43.2% in the fourth quarter. Excluding the restructuring, which contained about 10 basis points of inventory impacts, adjusted gross margin was 43.3%. To walk through the components of the decline, the negative drivers included approximately 160 basis points from certain inventory management efforts, including promotions and air freight, and 60 basis points of channel and product mix due to a higher composition of off-price and footwear sales. These pressures were partially offset by 50 basis points of tailwinds from changes in foreign currency and 40 basis points of product costing improvements. SG&A expense increased 41% to $591 million.
Driven primarily by timing shifts and demand creation from the third quarter, lower incentive compensation in the prior period, and continued investments in our DTC footwear and international businesses. With respect to incentive compensation, recall that in the fourth quarter of 2016, we reversed a substantial amount of full-year incentive compensation, that impacts the year-over-year comparison. Fourth quarter operating loss was $37 million. Excluding the restructuring, adjusted operating income broke even. Interest and other expense was $12 million. Turning to taxes, our fourth quarter and full-year tax expense included $39 million of expense related to the December 2017 U.S. Tax Act. This included $14 million for tax on indefinitely reinvested foreign earnings, as well as a $25 million non-cash charge to reduce our deferred tax assets to reflect the change in U.S. corporate tax rate from 35% to 21%.
There were no cash impacts in the fourth quarter related to these charges. However, the charge associated with indefinitely reinvested foreign earnings will have a minor impact on future cash flow. All in, the impacts of tax reform made for an effective tax rate of negative 80.8% in the quarter. On an adjusted basis, which would exclude the impact of one-time charges and changes due to tax reform, the quarterly tax rate was 94.8%. Taking all this to the bottom line, net loss was $88 million, or a $0.20 loss in diluted earnings per share for the fourth quarter. Excluding restructuring and one-time tax reform impacts, adjusted net loss was $1 million and adjusted diluted EPS broke even. Turning to our balance sheet. Cash and cash equivalents were up 25% to $312 million. Inventory was up 26% to $1.2 billion.
Important to the inventory story is the split between North America and our international businesses. In North America, inventory was up at a mid-teen percentage rate, while our international inventory was up nearly 50%, supporting the strength of this business. Total debt was up 12% to $917 million. Finally, capital expenditures were down 20% to $74 million. Let's now move to our initial outlook for 2018, which we believe will end up looking similar to 2017. For the full-year, we expect revenue to be up at a low single-digit percentage rate, anticipating a mid-single-digit decline in North America, where we believe strength in our DTC business will be more than offset by wholesale contraction. Building on the strong momentum in our international business, which passed the $1 billion mark, we're expecting growth to be north of 25%.
Many of the macro factors that we experienced in 2017, we expect to carry over into 2018. For the full year, we expect apparel, footwear, and accessories revenue to each grow at a low single-digit rate. DTC revenue should be up at a mid to high single-digit rate, in contrast to our wholesale business, which should be down slightly to flat. Moving to gross margin. For the full year, we currently anticipate about 50 basis points of improvement compared to 45% in 2017, primarily due to a higher percentage of DTC in the channel mix, changes in foreign currency, and lower product costs. We are expecting meaningfully lower promotional activity in the back half of the year of 2018 compared to the back half of 2017.
As discussed earlier, we are currently executing against several initiatives that address our overall operating structure, many of which are geared specifically at getting SG&A into better alignment over the long term. In 2018, we're expecting our SG&A to grow at a mid-single-digit rate with higher growth rates in the first half, primarily due to the timing of marketing support for our HOVR and training campaigns. SG&A to revenue percentage is not where we want it to be in 2018. Following the step-down from 22% to 14% over the past two years, and given the magnitude of committed and fixed costs within this line item, we believe we are making meaningful progress. Keep in mind that concurrently, it remains a priority to support our growth in our DTC and international businesses, which require continued investments, so we're balancing that in the mix appropriately.
I want to emphasize this is not just a cost-cutting, right-sizing only exercise. Kevin, Patrik, and myself, along with the entirety of Under Armour, are aligned that this is about running a smarter, leaner, and more efficient organization that gives us constant agility and ability to generate sustainable returns to invest in our brand and drive shareholder value. Back to our P&L and taking this through to operating income, we're expecting to generate about $20 million to $30 million in 2018. Excluding the restructuring, adjusted operating income should be approximately $130 million to $160 million. Interest expense and other expense combined is expected to be approximately $45 million for the full year.
With respect to tax, while corporate reform in the U.S. will provide a benefit over the long term, in 2018, due to our challenged U.S. results, we do not foresee benefits from the rate reduction and will instead see some unfavorable tax impacts due to new base broadening provisions and limitations on certain deductions, coupled with unfavorable tax impacts due to our stock performance over the past year. These negative impacts will be primarily offset by the beneficial comping of larger valuation reserves recorded in 2017. Longer term, as we execute on our operational initiatives and U.S. income grows, our effective tax rate will benefit from the lower U.S. corporate rate. Excluding the impacts of one-time restructuring charges, we expect our 2018 adjusted effective tax rate to be in the 25%-27% range.
Taking this to the bottom line, we're expecting full year adjusted diluted earnings per share of $0.14-$0.19. Turning to a few items on our balance sheet. Due to the revision of our North American revenue trajectory in the second half of 2017, we anticipate that our inventory growth rates will be fairly consistent with our year-end growth rate through the first half of 2018, then should move more in line with revenue. Demonstrating our focused capital strategy, we expect full year CapEx to be down more than 20% to approximately $225 million, compared with $275 million in 2017. Finally, with respect to leverage for the year, we are expecting some quarter-over-quarter fluctuations that, combined with the cash impacts of our restructuring plans on our trailing 12-month EBITDA, will cause our leverage ratio to flex above historical levels during parts of 2018.
Accordingly, we are in the process of seeking an amendment to our credit agreement to address this short-term issue. Lastly, to give a little more color on our outlook, we're expecting our second quarter revenue growth rate to be the highest of the year as we work through elevated inventory in North America. With respect to the first quarter, we currently anticipate revenue to be flat to slightly down versus the prior year. First quarter adjusted gross margin is expected to be relatively flat, and adjusted operating income is expected to be a loss of approximately $15 million, which puts adjusted EPS at a loss of $0.06-$0.07. Also important to note that we anticipate the majority of our restructuring to be completed in the first half of 2018, with the second quarter being higher than the first quarter.
To close out our call today, we remain committed to driving a more efficient and effective company throughout 2018. As we continue to optimize our North American business and our operating model, our resolve remains unwavering, and we believe our long-term goal of creating a more profitable and predictable growth trajectory is intact. We're confident in the work we've done, in the work ahead, and our ability to build, fuel, and feed Under Armour into emerging as a stronger and better company for our consumers, customers, and shareholders. With that, I will turn it back to the operator for your questions. Operator?
Ladies and gentlemen, if you have a question at this time, please press the star and the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Thank you. Our first question comes from the line of Randy Konik with Jefferies. Your line is open.
Yeah, thanks a lot. I guess I have two questions. First question is for Dave. Dave, there's a lot of moving pieces to the gross margin. I think the good news here is the gross margin's moving up in 2018. Can you give us some perspective on some of the tailwinds that would be more sustainable to the gross margin beyond 2018, such as you mentioned some improvements in costing that you guys are seeing, as well as you mentioned that the promotional environment should be better in the back half of 2018, so I'm assuming that impacts the gross margin in the front half of 2018. Just want to get some perspective on how we should be thinking about long-term gross margin opportunity.
Not maybe get the number, but some of the factors that you're looking at to drive improved gross margin on a more than 12-month basis as we look out into the medium term. Thanks.
Sure. We definitely feel good about the 50 basis point increase. I think to start, and maybe it's just understanding that some of the past headwinds are definitely diminishing. We're assuming less promotions in the back half of 2018 versus 2017. That's a plan perspective, a brand protection perspective, and we feel pretty good about that. You will see a little bit better basis point improvement in the back half versus the front half. As far as some of those headwinds that are diminishing, international is no longer a headwind for us. That's trending favorably, especially when you think about Asia-Pac being our highest growth region, and also it's our now highest gross margin region as well. That's helping. We also expect less air freight as we're not maneuvering through a major ERP system implementation this year, which created some elevated air freight last year.
When you think about FX, after years of headwinds, this has now shifted to a slight tailwind. We're also, as you mentioned, seeing some early success from some of the sourcing initiatives. Colin Browne and supply chain are working really well with our vendor base, working on various initiatives there relative to visibility, negotiation, consolidation, et cetera. We're seeing some benefits of that in the back half of this year, but full-year benefits in 2019 and beyond. I think, as some of the past headwinds are diminishing, some of the past tailwinds are continuing. If you think about channel mix, we should continue to see positive impact there, primarily driven by the higher DTC growth. In summary, we feel pretty good about the 50 basis points and what that could mean for 2019 and beyond.
Yeah, it's really helpful. Kevin, congratulations on this HOVR technology. I guess what I wanted to ask around that is, since it looks like it's selling really well on the website, in your stores, what have you learned from not just the technology but the aesthetic of what the product actually looks like, especially the Phantom, and success you've had on the design improvements? What can we take away that you guys will learn and bring forth either in continued in the footwear category or even in the apparel category, whether it be on product design or marketing around these products in 2018 and beyond? Thanks.
Yeah. Thanks, Randy. I think one of the best things about our industry, how simple it is at the end of the day. When it comes down to it, the consumer has a very basic expectation, we've defined that, we call the trifecta at Under Armour, it's style, performance, and fit. That's what makes us unique as a brand, and I think what really makes our product differentiated is that when we deliver on those three things, first and foremost, it looks great. Number two, it's got performance or has technology in it, which is what makes it Under Armour and has a reason and a purpose for being. Also just the comfort and the fit that goes into the product. I think that's one thing that HOVR really exemplifies for us and our brand. It's a simple story.
I think it falls under what we call a franchise, is that the consumer can look for it. They know what it is. It was a program that we were able to execute globally, all around the world, including we have one of our UA HOVR House, which will be kicking off in L.A. this weekend around NBA All-Star Game. We've been in Munich, we've been in Shanghai. The team has really done a great job as our first true global launch. I think it's very telling, is that the consumer comes to Under Armour for, first and foremost, great product that's delivered in the design right way. They also want it easily communicated through a story.
We believe we have massive opportunity, I think, in footwear for us as a brand when we think about footwear, women's, and international being our three big growth drivers, all that are now above $1 billion for us, give us the ability to look to lean on. It really comes back, I think, to just making sure that the product is right. We've learned a lot of lessons in 2016 and 2017. There's nothing that says, I think, for any brand to be able to show up, put a logo on a product, assume it will sell. It's got to hit that trifecta, we feel pretty good about what we're doing. Beyond the fact is, probably the best thing about HOVR is just the discovery factor. A, it looks great.
Number two, it's probably one of, if not the most comfortable shoe you've ever put on your foot. I'd vote for the latter. Number three, it's also a connected shoe. There's a technology in it that allows you to have this community clock that you can run with yourself and against friends, and against seeing how many people have and how many miles have been logged on in that as well. It really is the first product that I think really drives the manifestation between the digital and the physical of what we've been doing with our Connected Fitness business and our teams in Copenhagen, San Francisco, and Austin. Like I said, that product is just a home run, and I think you can look to see more of those type of franchise types approach on a clearly communicated way going forward from this as well.
Very helpful. Thank you.
Thank you.
Thank you. Our next question comes from the line of Jonathan Komp with Baird. Your line is open.
Yeah. Hi, thank you. Kevin, you've done a good job of really summarizing a lot of what's going on currently to address some of the issues. I want to take a step back. I know you've talked about the recovery as being really a two-year journey for the company, and I'd love it if you could maybe take some time to talk about specific examples that have given you more or less confident in that view.
Yeah, I think I'll take this one. This is Patrik here. I think some of the things that are giving us real confidence, Kevin touched on the HOVR story here, I think it's the way we're now approaching everything that we're doing, we're putting the consumer at the center of what we do. We've just completed, as I said, a major global consumer segmentation study, as well as some other interesting work in the space where we compete, which is giving us more insight into understanding where we can be competitive in the space. We're coupling that together with the process improvements that we've made around our go-to-market, are driving now a much more coherent calendar, if you like, which is also giving us line of sight into improvements in the calendar as it relates to speed to market.
The teams are really starting to work much better together, the reason we're referring so much to HOVR is because it was the first time we were able to execute a 360-degree campaign a few weeks ago across the world simultaneously at the same time. We clearly see that when we do that, the consumer responds. For us, it's kind of the first showing, if you like, inside of the new go-to-market. That's one of the big things for us as we look into 2018 and beyond, which gives us a lot of confidence. The second thing is also as you think about efficiencies inside of the work we're doing around SKU optimization, for example.
The fact that we're driving 40% less SKUs, more or less, over a two-year period and 25% just in 2018 to 2019 alone, also shows that when we put our mind to it, and when we really understand the consumer and the space, we're able to make those difficult decisions of what not to do as well. That's giving us a lot of confidence in our team's ability to execute in this new environment that we're in. Kevin, I don't know if you want to add something to that, maybe.
I think it's important.
As a company, we've really focused on scale over the last several years. I think it's probably one of the most debated topics of, is it right? Is it wrong? Is it here? Is it there? It's a decision that we made. Frankly, we're really glad that we're able to go through, I think, what many companies are facing, especially what we're seeing right now as a $5 billion brand. Having built that, one thing we know is that building a brand is frankly much more difficult than becoming streamlined in the way we want to be in operations. We feel like we've done one. What you're hearing from us is that we have a heavy focus to what we're going to build into. We've done in 2017 and what we're building into 2018.
We're not done, we're not going to probably take either one easy. We're going to focus on continuing to be a great brand, of course, getting operationally excellent. The good news about this, as Patrik said, is this journey began back in 2017. We made a lot of really hard, difficult decisions, from modifying our structure of going from a head of apparel, footwear, and accessories to category management with distinct categories that really like running and soccer and golf, and training, et cetera. We also upgraded our ERP systems with SAP and something that we're continuing to see the fruits of what that's going to mean for us going forward. Of course, bringing in the leadership with Patrik joining our team. What we have to say is all three of these things are about seven months into it right now.
'17 was about us getting started, '18 is about us really optimizing, I think you'll see us do that. We want to be clear, there's a lot of work for us to do in '18. As I think hopefully you're hearing from us is that we feel very confident in the strategy and the plan that we have in place. We'll keep running on that.
Great. If I could follow up specifically on the cost efficiencies and SG&A reductions, I'm curious if you could share a little bit more on the pacing of some of the benefits you expect. I know the guidance is for at least $75 million of savings by 2019. Will you be getting some of that this year? Also, longer term, when you look to get the G&A ratio back below 40%, is that like a one-year or a three-year or a five-year type aspiration? Just curious how you think about the duration of the path to get there.
Jonathan, this is Dave. I'll give you a little bit of feedback on this year and what we're driving through. I think we'll hold future years to our investor day, which we'll be excited to talk about later in the fall. Relative to what we're doing now, first it's really just driving through. A lot of it is the fixed cost and the committed cost that we're working on. If you think about it, North America is de-leveraging due to the top line, that really distorts and imbalances the SG&A even more. Within the fixed cost area, we've got global distribution center, 3PL expansion. We've got offices, facility rent around the world, the FMS and IT systems. We've got pretty significant depreciation expense from previously higher CapEx years, just to name some of those larger areas.
It's not easy to slow down or turn off quickly, but we've made meaningful progress in 2017 going into 2018. When you think about those fixed costs, they were growing well ahead of revenue in 2016 and in 2017, we're getting them much closer in line with revenue growth in 2018, which is great. When you look at the variable expenses, we've got to continue to prioritize there because we want to be able to support the growth in our DTC and international, which are SG&A intensive. It's definitely something that we're balancing in the mix appropriately. It's all about running smarter, leaner, and more efficient. When you think about the benefits from the 2017 restructuring, they're definitely benefits that we're already seeing in 2018. The benefits will be bigger in 2019 and beyond.
You're not really maybe seeing externally those benefits from the 2017 plan as well, mainly because they're partially masked by those higher fixed costs and also the SG&A intensive international expansion and DTC growth that we're going through. It's a little difficult to unpack the five years in five quarters, but we're driving hard, we're excited about what it means for 2019 and beyond.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Edward Yruma with KeyBanc. Your line is open.
Hey, good morning. Thanks for taking my question.
Hey, Ed.
It seems like some real strong enthusiasm around international results this year and your guidance for next year. You also talked about improving profitability there. Could you help quantify how we should think about international profitability and the trajectory? As a follow-up, there's been a little bit of noise around covenants, comfort around your debt and the covenants that you have. Thank you.
Sure, Ed. This is Dave. From an international perspective, you're right. I mean, we've been doing extremely well there. The teams in these international regions are simply amazing. I honestly, I hope they're listening to this call, and I'm sure they are because they've just been doing a phenomenal job growing in each of those regions and doing it in a brand-right way. We've been exceeding 40% growth in the international regions for the last three years. When you look at Asia Pacific, we're very bullish, especially in China and Korea, where we have the highest growth. Also with the sport and performance becoming more important culturally there. We're uniquely positioned, I think, to capture and gain that momentum.
Also in EMEA, there's great strides and traction there with some of our larger wholesale partners, along with accelerating DTC growth and helping to drive improved profitability there. Latin America, which is our most recent and the smallest international market right now, but quickly becoming a significant contributor to the international portfolio. They have balanced growth in DTC and wholesale. To your point around profitability, that's probably just as exciting or if not more exciting from my position, is that after years and years of investment in these international areas, they are really turning the corner at this point, and becoming profitable and, take an example like Asia Pacific, becoming very profitable and really starting to contribute back to the consolidated pre-tax income of the company, which is great to see, which we're also excited about what that means for future tax rates as well.
Again, international up and down doing very, very well for us. Those teams have been amazing. We continue to drive on that together. On your other comment relative to leverage and the debt covenant. This is really a short-term issue. Partially it's the math with the 12-month trailing EBITDA. Due to the combined impact of two-year pivot period that we've talked about with a little bit lower profitability and roughly two years or in total, $250 million in potential restructuring charges. However, we do anticipate having over 50% available within our revolver, even at our peak leverage points in Q2 and Q3. We have line of sight to being free cash flow positive by year-end. We're in good shape, but we do have some short-term pressure on the leverage ratio, driven by that forecast at EBITDA.
We've been in discussions with our banks, and we're in the process of obtaining an amendment to alleviate those short-term pressures, and we expect to execute quickly. We feel like we're in a good spot to work through that.
Great. Thanks so much.
Thanks, Ed.
Thank you. Our next question comes from the line of Jim Duffy with Stifel. Your line is open.
Thanks. Good morning.
Good morning.
My question's on inventory management. What are the key steps to bring inventory growth more in line with revenue growth, and what are the expected consequences to the margin in doing so? Is there a lot more clearance and discounting that you'll need to see before the back half of the year? Building on that, what are the plans to improve inventory turns to more industry appropriate levels in the future and some of the steps necessary to get there?
Jim, this is Dave. I'll start, and then I'll probably let Patrik chime in as well. I think first, just making sure we have the context around the fact that if you step back to October 31, we took over $300 million out of our top-line plan for 2017. Obviously at that point, a lot of that inventory had already been produced, was either on its way to us or was already within our distribution facility. There's definitely some overhang coming into 2018 that we're dealing with. We're going to be actively moving through that in a brand right way, through our own outlet stores, but also through our third party, off-price partners, which have been great as well. We're going to get after that pretty hard in the first half of the year.
We expect to be much more in line towards revenue growth in the back half of the year. That's part of the reason why you'll see gross margin improvements a little bit more in the back half versus the front half. As far as a lot of the different levers, I can turn it over to Patrik who can give a little more color on that as well.
I think it's for us, very much also planning the business correctly, right? For us, going into 2018, especially the back half, we've thought about our planning differently. We talked a little bit about the SKU optimization that we're implementing and how we're now thinking more holistically around our inventory levels across our distribution, across our segmentation. That's going to continue into 2019 as well. We feel that we're more in control, if you like, in terms of how we think about inventory across the world, across our channels of distribution. We feel that we're planning our business much better, and that will accelerate through the back half of 2018.
Thank you.
Thank you.
Thanks, Jim.
Our next question comes from the line of Bob Drbul with Guggenheim Securities. Your line is open.
Hi. Good morning. The questions I have are around just the different segments in the business. Can you talk about where you think you are in women's and in the youth businesses, and how they trended in the fourth quarter and the expectation for 2018?
Yeah, I'll take that on here. This is Patrik. I think in terms of how we think about our opportunities for growth going forward, we still believe that women's is a tremendous growth opportunity for us across the world, together with, of course, footwear, and we talked also about our international business. We believe youth continues to be a very, very important part of our business and an area where we want to actually increase our market share going forward. We have a lot of engagement, especially in North America, with youth and travel and club organizations. We have contracts with over 400 of those organizations across our business. We currently deal with about 1,000 high schools directly with contracts out of the 16,000 that exist, and we sell to another 1,000.
As we think about our youth business, it's currently in a state where we feel that we're going to be really having an opportunity to grow that also as we expand our direct consumer and our e-commerce and digital business going forward. We feel very good about our youth business. Our women's business, we continue to invest into this. Remember, we're about seven months into our category management, where we really stood up our women's business in a stronger way. As we're coming out of 2017 and heading into 2018, we feel that our assortment and our distribution is now much more put together and getting sharper. It's what Kevin said before, the SPF factor, the style, performance, and fit factor, is getting that specific Under Armour point of view across much, much better in the back half of 2018.
We believe that as we look into 2018 and beyond, with the category management that we put into place, with the deeper understanding of the consumer, with the deeper understanding of the segments where we're competing into, we're gonna get a stronger and stronger business for women as we move forward across the world.
if
If I could too, Bob. If there's one thing about this brand, is that kids love this brand. This brand was built because of the aspiration that made little boys and little girls put on our products, apparel or footwear, and make them feel like they could jump a little higher, be a little stronger, run a little faster. That's something you'll continue to see us double down on. As far as the women's space, again, to echo what Patrik just said, we can just be better. We're invested there, we're positioned there, but what you'll see from us is a brand that gets and understands that what we need to do for her is simply deliver on fit, style, and color.
I think you'll see that coming out from us in a progressive way as we continue to get better and better in our women's business. We believe in it, we're focused, and we think that she likes us. We just have to do a better job of giving her more reasons to buy Under Armour, and that's a head-to-toe statement as well.
Great. I guess the second question that I have is, you talked about, I think it's 30%-40% reduction in SKUs in the fall of 2019. Can you talk about your segmentation of product by channel with a lower number of SKUs and sort of where you think you are from that perspective?
Well, I think, it's really thinking through our distribution across the world, right? Every channel, and understanding our positioning in each segment. As we stood up category management about seven months ago, as we've said here today, we've coupled that now also with a deeper understanding of the consumer as well as our channels. We're getting just more pointed, we're getting a stronger point of view. We're taking out the noise, if you like, in terms of the SKUs that we believe should be driving our business going forward, ensuring that every product that we put into every channel has the right price value equation, has the right SPF, style, performance, and fit equation.
We just looked honestly at ourselves and said, "Listen, what do we really need to drive the business in the brand-appropriate way for each channel?" We made those hard decisions, and that's what you're going to start seeing from Under Armour going forward, us making those really hard decisions.
Great. Thank you very much. Good luck.
Thanks, Bob.
Thank you. Our next question comes from the line of John Kernan with Cowen. Your line is open.
Morning, everybody. Thanks for taking my question.
Thanks, John.
International seems to be obviously a real point of strength. Asia Pac was up over 60% in 2017. What are you learning about China, the size of that market? We can all see the popularity of Steph Curry in China. Two of your biggest competitors generate operating margins north of 30% in that region. Just want to know what you're learning about that market and how big you think it can be for Under Armour.
Yeah, I'll go. Okay. I think what's interesting for us in China is that if you compare us to most of our competitors, we're still relatively small, and we're very premium. We've definitely come in at the upper end of the marketplace. Most of our distribution right now in terms of the direct-to-consumer business that we have there is positioned in the tier 1 and into the tier 2 cities. We believe we have an enormous amount of opportunity to continue to grow our brick-and-mortar business there. What we also see is an expanding digital e-commerce business that is really resonating with the consumer. We believe, like Dave said earlier, that our teams have done an incredible job in terms of positioning the brand in that marketplace.
We're fortunate to also have some of the best athletes on the planet to support that business, especially inside of the basketball category. For us, that's of course a great asset. I don't know, Dave, if you want to expand on the gross margins.
I guess just adding a little bit to that. The Asia Pac region is definitely going to be or continue, at least in the near term, to be one of our highest growth areas, but it also is becoming one of our most profitable. Their gross margins are strong, and now that we've actually, over the past year, been building up the distribution structure that we need, the office structure that we need, a lot of the foundation's been laid. Now Erick Haskell and his team in Asia Pac are really driving forward hard. Now that we've got some scale, we can really start returning some of that profit to the bottom line. We might not be driving right away to the profitability that some of our competitors have in the region.
I think we're trying to make sure that we go at the right pace to stay in line with the brand and make sure that we're working with the best partners out there, and we're going at a good, steady pace that's right for Under Armour, and we'll continue doing that. Just, again, to pile on sort of the energy and excitement we have around Asia as a whole, that started with Japan, a relationship that goes back nearly 20 years now for the brand. We've been there for a long time. China since 2010, but really amplified in the last couple of years due to the leadership that Dave mentions. We have a terrific team on the ground. Hundreds of doors opened in China last year. We'll repeat that again this year. There's a tremendous amount of capacity.
We're in over 60 cities right now across China, and we see the ability for us to begin to backfill, and obviously there's many more cities that we have the opportunity to go to as well. We just opened our largest store in Asia, over 20,000 square feet in Beijing. We feel like we're in a really good position and really proud, I think, of what this team has put together and I think the opportunity that we have. Great things, but international, again, we talked about going for scale in the last several years. Really doubling down and getting behind our international business is something that is paying dividends for us today as we are able to manage through North America right now and being able to lean on what we have coming in from the international markets.
Okay, thanks. If I can just ask a quick follow-up on the North American wholesale market. Dave, what's embedded in your guidance for North America wholesale as we go into the back half of the year when compares obviously ease?
Yeah, I guess a couple things. We mentioned a lot of the same factors that drove business in North America in 2017 are going to carry into 2018. I do think that we're going to be challenging ourselves to make sure that we're brand right and potentially tempering some of the promotional activity in the back half of the year, and we've planned for that accordingly. We expect there's going to be a little bit of additional contraction in the U.S. market as we continue to optimize our distribution there. There is a little bit weaker consumer demand driven by a variety of factors there that are impacting us, that we've talked about over the past. We're not expecting a miraculous turnaround in North America.
Again, that's why we've been talking about 2018 being fairly similar to 2017, and we're continuing to maneuver through that in the most strategic way.
Okay, thank you.
Thanks, John.
Thanks, John.
Thank you. Our next question is from the line of Omar Saad with Evercore. Your line is open.
Good morning, guys. Thanks for taking my question. I actually wanted to ask about the comments you made early on about evolving the creative process, the product design and development process. Maybe if you guys could elaborate on that and what your aim is and what you think the outcome will be in terms of elevating the company's ability to produce better products that are more relevant. Thanks.
Well, hi, Omar. This is Patrik. I think, what we're referring to there is the entirety of the process. We're now starting out with the consumer first, and that goes for all of the teams that we have engaged. The idea is that they're not just starting out with the consumer first, they're starting out with the consumer first inside of the space where we're competing. It's about purpose ultimately and making sure that, to Kevin's earlier point, the SPF factor, the style, performance, fit, is part of that equation all the way through. It's being more purposeful. In other words, we're cutting SKUs, we're being focused on the consumer, we understand the space that we're going to be competing in, and as a consequence, the design teams and the product development teams are being more focused around their execution.
We believe that this will ultimately drive better product from us in both the short term and the long term. If you couple that with a great go-to-market process where actually both marketing and product start out together, we're having the teams joined at the hip as they go through the process. That enables us to better build out our 360-degree approach to the consumer, truly understanding the consumer journey as the consumer moves through the purchase journey, and understanding each touch point for the consumer, what they're expecting from us at each touch point, and then understanding what we are best delivering against that expectation for each touch point consistently, time and time again.
A lot of it is about consistency, and a lot of it is about the process itself, enabling our teams, both from a design, product development, and marketing perspective, to learn and have a bit of kaizen, in terms of incremental improvement for each season that goes by. That gives us a lot of confidence going forward. I don't know, Kevin, if you want to add on to that something maybe.
Yeah. Omar, I've got a pretty unique perspective of 21 years in this company, 13 now nearly as a public company. Sort of the difference in the ability to be an entrepreneur, to be able to move from when there's a problem, you go sit on the problem for a day, a week, a month until it's fixed. The size and scale that we've been able to get to as a company, I think it's a real testament to the team and the hard work that we put in, but it also requires the process that we need.
Why Patrik was such a great fit to be able to come and help our organization is the industry experience and just the understanding really in the go-to-market process of being able to drive that all the way through, to drive the calendar discipline and to put the things in place that as a growth company that could build and just maybe make a few SKUs and put it in aisles and have stack it high and let it fly. That's not the case. Our competitors are very good, and the expectation, the shopping experience is incredibly competitive and something that we've got to be great at. That means we need to be great with the product that we put into the existing distribution. We need to make sure and ensure that that distribution is segmented.
Now, because it translates and crosses over so many different languages, we've got to be simple in that messaging too. It really is a bit of a process that really has us rethinking the way that we bring product to market as a company. Again, it's not to be overcomplicated. Our job is to delight consumers with product that exceeds their expectations. We got to be able to tell it in a really simple way. One thing we know is that when we innovate, we win. I want to be clear, too, for the call, is that while you'll see us talk about how we're incorporating style and of course, to be Under Armour must have performance and the fit and comfort must be great, but we do believe in our performance heritage.
We do believe that the current perceived weakness of performance is something that's going to prove to be our long-term greatest strength. We are not going to back off of that. You'll continue to see us double down, but I'd probably use, again, HOVR as the archetype for as we make this definition of what is our brand. Our job is to make you better, and that's frankly what our new mission statement says. Every time you interact with us, we're just going to make you a little bit better.
Kevin, I was going to say, it feels a little bit like as I listen to you guys talk about the brand and where its core competencies are, and you mentioned, I think, focusing on running and men's training and women's training. Is it fair to interpret from you guys that there's a little bit, and I don't want to say back to basics, but back to the core and origins of what the Under Armour brand has stood for, albeit on a global scale and in a much bigger platform? Is that the right way to think about it? Especially in the construct of the market seems to be moving so much towards lifestyle and sport fashion. Are you really just carving out the Under Armour positioning in the marketplace as a performance leader? Is that fair to interpret it that way?
Look, we're not ignoring the market, I want to make sure people understand. We're not tone deaf. We just understand who we are. Who we are is what's built this company that we have today. I think what's exciting for everyone here, and the reason that our team came to work in this brand to begin with, is because of belief that they had that we could make athletes just a little bit better. There's a lot of people that are running the play right now of what it means to turn strictly to lifestyle and frankly ignoring performance at some level.
What we're saying is that we get it, we believe that every product that we make, yeah, it has to look great, it has to be stylish, it has to have the DNA that makes it Under Armour. Again, when you see it, you should start with, wow, what an amazing looking product. B, wow, is that Under Armour? C is, wow, if it's Under Armour, well, what's it do? That's the thing that makes it the DNA for our brand, and we want to be able to answer that with, it's not just a normal sweatshirt, but you can wear this thing in a rainstorm.
We want to be able to say that it's not just a pant, but it's a golf pant with super stretch, and you can spill on it or it can take mud or dirt and wash in the wash and not have to go to the dry cleaner. The things that make the DNA, the amount of science and technology and time that goes into the products that we build, I don't think we've got enough credit for. I think other people are trying to enter our categories and not probably do the homework that we do in order to put the products out in the marketplace that we do. Under Armour's special. When you see an Under Armour logo, it means that the product does something, it's doing something to make you better.
We're going to make sure, A, that that comes through in every product that we have. We're going to make sure, because I don't think we've been as emphasized on design as we can be to take credit because all of the cost and the structure has been in the fabrications. We're going to make sure that we're not going to back off on the fabrics, but you're going to see a bit more thought and a bit more finish in things that are completely relevant to what we do. It'll be market and trend right and something that you'll continue to see us evolve into.
Thank you. That's helpful to hear.
Thank you.
Thanks so much.
Ladies and gentlemen, this concludes today's question and answer session. Thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.