Morning, give it some.
Good day, ladies and gentlemen, and welcome to the Under Armour Incorporated First Quarter Earnings Webcast and Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr.
Lance Olegos. Sir, you may begin.
Thank you, operator. Good morning, everyone. Thank you for joining us on today's call to discuss UnArmour's first quarter 2017 results. I'd like to remind everyone that participants on the 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. The company assumes no obligation to update forward looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Additionally, we may reference certain non GAAP financial information. We provide a reconciliation of non GAAP financial information in our earnings release and the electronic version of the portions of script today from today's call, which will be available at uabiz.com. Joining us on today's call will be Under Armour, Chairman and CEO, Kevin Plank and Dave Bergman, our CFO.
Following our prepared remarks, we'll open the call for questions. And with that, I'd like to turn over to Kevin.
Thanks, Lance. Good morning, everyone, and thank you for joining us today. 2017 is a year we're empowering Under Armour to become a single, more agile, stronger and smarter company. Our Q1 marks a good start to this journey. In January, we detailed some of the challenges we're facing in North America as well as what we feel are competitive advantages to manage through this rapidly changing environment.
We talked about the imbalance caused by extreme growth due to more than doubling our size over the past 3 years. We spoke to the unique strength of our brand, unparalleled ability to connect with global athletes and our tremendous portfolio of growth drivers. That said, our strategy is about more than this quarter or the next. And while parts of the broader environment remain uneven, we feel very good about the evolution of our brand strength, relationships with consumers around the world and our ability to gain share in key markets and categories. With analyzing the next 3, 5 or 10 years by product type, gender, category, channel or geography, we are under penetrated comparatively by any measure, market share, mind share and potential.
So now, as the 3rd largest athletic brand in the world with more than $15,000,000,000 ahead of us to 2nd place and another $15,000,000,000 ahead of that to 1st place, the fact remains that we have significant and scalable opportunities before us. To build on commentary from our last call, the road to the first $5,000,000,000 was much different than we expect the road to the next $5,000,000,000 to be. Yet we can't talk about results or opportunity without considering the need for balance. With the shifting terrain, we're hyper focused on balancing external marketplace growth with internal operational excellence, working both in concert to embolden the strength of our brand. By balancing investments in innovation, consumer connectivity and experiences with the appropriate operational discipline, we are on a long term path to ensure more consistent returns to shareholders.
The core of our strategy though remains aspirational great product with a relentless pursuit of innovation and the creation of compelling experiences for our consumers. We have one of the most unique brand communities on the planet, a relationship we cherish and never take for granted, particularly our relationship with kids, the youth of this generation. We aspire to be a brand that is both trusted and desired. This consumer led approach continues to take shape by the transformation toward category management. That said, I'd like to take a few minutes to highlight how we're progressing against that goal.
18 months ago, we made the decision to reset the company around key sport categories. This decision was driven by our extreme growth, changing consumer behavior and the immense opportunity to address the unmet needs of our consumers. From men's and women's training, running, basketball and global football to outdoor, team sports, youth and lifestyle sportswear. This evolution is well underway. 2016 2017 have a high focus on leveraging and empowering our team structurally.
With our move into category management, we're working to enhance our product creation, supply chain and speed to market processes and functionally how we will bring products to market in the future via merchandising, demand creation and our overall distribution strategy. By emphasizing a clear go to market capability, we'll take a better approach at driving the core basics that our business was built on, while also emphasizing elevated product across all categories with innovation and experiences that inspires consumers. The purpose of this structure is to drive authenticity within each sport category, getting us as close as possible to the consumer as efficiently and effectively as possible. So how is it working? So let's touch on a few highlights.
I'm going to go ahead and start with our smallest category, yet potentially one of our largest long term growth opportunities, our sportswear business. In only 24 months, we've gone from an idea to a fully dedicated team of product designers headquartered in New York City, who have set up the backbone of this key growth driver, Built on leadership. There's 2 ways we're approaching this. 1st, with the launch of our UAS collection last fall in the second line this past quarter, we began to interpret and authenticate the Under Armour brand within fashion. This top of the pyramid approach that is pinnacle premium product blends the intersection of our brand's core sport and performance elements with a unique personal style and creative expression.
Understanding this is a longer term strategic position, we are hitting the benchmarks we set for ourselves to make lifestyle a core competency of our brand and the halo impression that will have access across all categories that we do business in today. Secondly, it's emphasizing lifestyle throughout our product line and influencing styles, silhouettes and distribution we already serve. One example is we've taken lessons from UAS's quick to market strategy to create the unstoppable lifestyle collection, which is due out later this year. This will represent our first complete better level men's and women's sport fashion expression. Turning to basketball.
It's a global category that continues to post consistent growth as the brand gains more visibility, authenticity and performance around the world. Some of this hard work certainly paid off in the Q1, with 11 women's and 12 men's teams making the NCAA tournament for Under Armour, which is a record for the company. And most exciting, our brand's first ever NCAA National Championship in basketball as the University of South Carolina women's team took home the title, And the men's team made South Carolina's and Under Armour's 1st Final 4. Yet our success in basketball hasn't been without its learning. In spring 2015, we debuted our 1st signature basketball shoe with Stephen Curry, the Curry I, who has since become a 2 time NBA, MVP and global icon.
The limited launch of the Curry 1 was a strong success and set us up well to realize even greater growth with Curry 2, which includes a much broader spectrum of distribution, color and launches. Lockstep with other franchises like Drive, Lightning and Jet, our performance offering has continued to evolve nicely, mixing speed, support, balance and style with the NBA's run and gun positionless style of play. As we launched the Curry 3 late last year, our expectations continue to run high. And while the 3 plays very well on court for Stephen Curry and our athletes, a sluggish signature market and a warm consumer reception has led to softer than expected results. This has created an inventory imbalance that we're working through, One that yes, is baked into our full year outlook, which hasn't changed, and most importantly yielded lessons we're applying ahead with the Curry 4 and beyond.
Not only for the 4, but moving forward, we've retooled our test, learn, scale approach in this business to be sharper. Sharper with respect to the number of color offerings, scarcity, exclusives and cadence of launches to drive more consistent engagement and results. And sharper with our basketball portfolio composition to target balanced growth across all assortments to address players at all levels. One of the highlights for UA is the strong grassroots systems we've built across AAU and our high school teams where athletes are competing and winning championships. We're incredibly proud of our basketball business and see tremendous runway ahead as we continue to take market and mind share with this key consumer.
Another area we remain incredibly bullish on is our overall women's business. We reached $1,000,000,000 in revenue in 2016, a huge milestone for our brand and our confidence continues to build. And of course, it starts with great product. Our women's team has been working relentlessly, thinking differently to elevate style and performance as we continue to earn her trust and greater closet share beyond key core items. A great example is the Misty inspired collection that launched in the Q1, designed purposely to elevate style, silhouettes and layering pieces that can be worn anywhere.
We're seeing strong demand for the entire collection and have gained valuable insights into how we market these collections and engage HER into our brand even more deeply. Across our whole women's business, we're proud of the foundation we've laid, but really feel we're just getting started, identifying her unique UA voice. As we continue to learn, engage and drive insights, we see an incredible amount of runway for this business, but there's work to be done. In addition to success from moves toward category management, we made progress against operational goals as well. This quarter marked the completion and go live of our work with SAP to build what we call the single view of the consumer.
This system combines global point of sale, e commerce and transactional information with our connected fitness business. As we make the transition from data collection to data analytics and reporting, we are now equipped with real time information on over 200,000,000 users. This empowers our teams to leverage our speed to create, drive and accelerate value for our consumers through new personalized products, services and experiences. So it used to take weeks through even months for us to get information on new product performance, training workouts and demographics, now it takes seconds to speed and analytical horsepower provided by this incredible consumer insights engine. 2 1st quarter examples of utilizing single view of the consumer include our Athlete Recovery Sleepwear launch with Tom Brady and the Project Rock collection, a collaboration with Dwayne Johnson.
Two launches for us that drove incredible demand and we are currently working to replenish, except where we are building scarcity. Using UA's SVOC, we're able to instantaneously analyze consumer purchase behavior, including gender, ages and workout frequency among other attributes. These insights will now be integrated in a next gen product development, helping drive discussions around product planning, assortments, future marketing and ultimately a better and more premium experience for our consumers. Next up and only a few months out is an upgrade of our entire enterprise resource planning system that we've been investing heavily in since 2015, specifically SAP's FMS or Fashion Management solution. FMS will allow us to manage all of our processes across one data landscape with the ability to analyze large information volumes, ultimately ensuring greater operational efficiency, better inventory planning and greater speed to market.
This has been no easy effort and I take great pride in calling out and thanking the hundreds of global teammates that have been working tirelessly, living, breathing, testing and retesting again and again to ensure that we're optimally aligned for this game changing evolutionary step for Under Armour. Once combined, category management, connected fitness and our SAP capabilities will become a powerful instrument to further address the rapidly changing consumer environment. From insight driven product creation to purchase through end use, this data fueled ecosystem creates one of the most powerful and unique consumer connections in our industry. A true two way consumer led conversation that will directly integrate and strategically influence our go to market strategy. This highly sophisticated engine represents a critical asset and competitive advantage as we work toward becoming a $10,000,000,000 business.
So what does Q1 tell us about Under Armour? It tells us that we're stable and staying healthy even as segments of our wholesale business in North America fight through uneven terrain. It tells us that we are actively managing our growth, that our inventory levels are appropriate and that we have a strong innovation agenda. It demonstrates meaningful progress against our move toward category management, a structure strengthened by vital systems upgrades, and it confirms that we're in a good position to invest in growth opportunities both short and long term while driving to become even more efficient and effective across our business. With the start to the year where we did what we said we would do, we are tracking well against our targets.
As we look to the future, we will continue to make the best long term decisions for our brand, teammates, communities and of course, our shareholders. And we're going to do it while adding more than $500,000,000 in revenue in 2017. Implementing new SAP systems, standing up our category management structure and keeping an energized flow of exciting product and experiences coming for our consumers. We know we've got hard work ahead of us. And while we are certainly used to that, we respect the challenge and are pursuing it full force.
And that's what I'd leave you with. Our team is hungry and humble with our heads down, engaging, empowering, editing and executing. And with that, I'll turn the call over to Dave to take a deeper look at
our results. Thanks, Kevin. We are pleased with our Q1 results, which came in a little better than we expected due to some cadence and timing shifts, and we remain on track with our full year outlook. So let's take a look at how we did. Total revenue in the Q1 was up 7% to $1,100,000,000 By product type, apparel revenue increased 7% to $715,000,000 driven by strength in golf, team sports and training.
By continuing to focus on improved assortments, newness and innovation, including premium apparel platforms like Thredborne and Athlete Recovery Sleepwear, we feel well positioned to deliver a solid year. In line with our expectations, revenue for our footwear business was up 2% to $270,000,000 Recall that we're lapping 64% growth in last year's 1st quarter, which had significant strength in basketball sales. Some footwear standouts in the quarter included golf, women's training and running. Additionally, we had less liquidation in the quarter as we're working to ensure appropriate to channel inventory and driving our premium position in the category. Hitting $1,000,000,000 in revenue in 2016 was a great accomplishment, and we expect another year of growth that outpaces the overall company.
Revenue for accessories increased 12% to $89,000,000 in the quarter with solid results from men's training, youth and global football. Looking at revenue by channel. Our wholesale business was up 4% to $773,000,000 reflecting an uneven North American environment and a tough comp given the bankruptcies of several key partners in 2016. Direct to consumer revenue grew 13% to $302,000,000 representing 27% of global revenue in the quarter. This growth was balanced across all three concepts: factory and brand houses and e commerce.
Our licensing business grew 25 percent to $24,000,000 in the 1st quarter driven by strength in our socks business and our license partner in Japan. In addition, our Connected Fitness business was up 2% to $19,000,000 On a regional basis, in line with our expectations, our North American business was down 1% to $871,000,000 as the promotional environment we saw in the Q4 of last year carried into 2017. Accordingly, we continue to proactively manage our inventory, while still protecting brand health with meaningfully less liquidation product in this year's mix as previously noted. Also important to note is that growth from new wholesale distribution in the quarter was not enough to offset the bankruptcies of 2016. Our international business, which we define as everything outside the U.
S. And Canada, continues to deliver strong top line results, posting a 52% increase in revenue to reach $227,000,000 or 20% of total revenue in the quarter. Currency neutral revenue was up 57%. Looking down into geographies, EMEA revenues were up 55% to $103,000,000 driven by continued momentum in the UK and Germany with balanced strength across wholesale and DTC and increases in nearly every sport category. Asia Pacific revenues increased 60%, driven by strength in China and Australia as well as the 1st full quarter of contribution from South Korea, which is now direct versus previously being through a license.
And finally, our Latin American business was up 30% with broad based growth across distribution channels and categories. Turning to margins. 1st quarter gross margin was down 70 basis points to 45.2% due to continued inventory management efforts, a regional mix that skewed heavier toward international and foreign currency impacts. These headwinds were partially offset by channel mix, which included a lower mix of liquidations. SG and A expenses increased 12% to $498,000,000 driven by investments in our direct to consumer, international and footwear businesses.
This increase was slightly better than planned due in part to some timing shifts, including headcount additions and demand creation expenses, which have moved into future quarters based on execution needs. 1st quarter operating income was $8,000,000 Interest expense in the quarter was up 73% to $8,000,000 And our tax rate in the Q1 approached 200% compared to 42% last year due to discrete items taken in certain foreign markets and the implementation of new accounting rules related to the tax treatment of equity compensation. Combined, these were about $3,500,000 with the biggest portion driven by discrete international items, which are particularly impactful to our effective tax rate in periods such as the Q1 with lower consolidated pretax income levels. Taking all this to the bottom line, we had a net loss of $2,000,000 in the first quarter or a $0.01 loss of diluted earnings per share compared to a $0.04 gain in the prior year. Now turning to our balance sheet.
Cash and cash equivalents was up 10% to $172,000,000 Inventory was up 8% to $902,000,000 dollars while we focus on efforts to manage product flow with demand to ensure brand and channel health. Total debt was down 8% $861,000,000 And finally, CapEx was down 28% to $65,000,000 demonstrating our disciplined approach to infrastructure investments. With respect to our full year 2017 outlook, there are no changes from the prior targets we gave on January 31, which were included in our press release this morning. Next, I want to provide some color on the balance of the year. As we look to transition our new SAP platform early in Q3, we are proactively taking measures to ensure as little disruption as possible to our business operations and delivery of customer orders.
With some potential movement depending on how SAP timing flows through, we expect the revenue growth rate in the second quarter to be approximately 1 point higher than the Q1. And in the second half of the year, we expect revenue to be up at a mid teen percentage rate with by far the strongest comparison of 2017 being in the 4th quarter. We expect first half gross margin to be down approximately 120 basis points due to the impact of changes in foreign currency, efforts to manage inventory and higher air freight expense, which more than offset the benefits of channel mix. In line with revenue expectations, gross margin should also see its strongest comp in the Q4 of this year. Turning to SG and A.
The previously mentioned timing shifts of marketing and other expenses into future quarters, combined with ongoing investments in our DTC, international and footwear businesses, are expected to result in an operating loss of approximately $15,000,000 to 20,000,000 in the first half of twenty seventeen. And finally, we expect a mid teen effective tax rate in the second quarter due again to discrete international items. To close, I've been with Under Armour for 12 years, and I've seen a constantly changing map versus terrain and have the greatest confidence in the team we have in place to meet these opportunities as we continue to position ourselves for the future. We are focused on financial and operational discipline that drive efficiency across the organization. We are working collaboratively to determine the balance between growth, share and scale and the right return on investment necessary to deliver consistent and profitable long term growth.
We've already begun to identify specific opportunities to reduce complexity and drive towards a leaner and more responsive organization, and we look forward to sharing more details later this year. With that, I will turn it back to the operator for your questions. Operator?
Thank And our first question comes
from the line of Bob Erbil of Guggenheim. Your line is now open.
Hi. Good morning. Good morning. I guess the two questions that I have for you this morning. The first one is, on the footwear with the 2% number this quarter, what have you learned in sort of the optimism that you have going forward for a rebound in footwear?
And the second question is, you gave some detail on the expectation for the revenues to reaccelerate throughout the remainder of the year, especially the back half. Can you just discuss a little bit more of the confidence that you have in that forecast as well?
Bob, so number 1, let me just begin with as regards to footwear is that we don't like it and we don't accept it. We believe in footwear and we believe what we've built and the infrastructure that's now in place. And our footwear for the year is actually going to outpace the overall growth of the company for 2017. So we realized the base that we put in place going back to 2016 crossing $1,000,000,000 and that's given us scale and it's given us the ability to invest. So the infrastructure that we have from the global innovation centers that over the last 11 years we've been building locally where we manufacture, where it all comes together at the Under Armour Lighthouse as well as the new footwear building that we're putting up in Portland where our team can have a house that they can actually call home.
So we understand though as we look at what's happening in the marketplace, number 1, we're a performance brand and we continue to see momentum in some of our on field and on court categories, things like pleated and things like running as well as what we're seeing in basketball. There's other momentum that we have in the marketplace. But we see and we understand the shift of lifestyle. The one thing we think is important though is that all the lifestyle that we'll introduce, whether it's apparel, whether it's footwear, things that will build and the credibility we have because of our authentic athletic base. We've also seen some things in our lifestyle families like the 20 fourseven, our Encounter product and a new product we just unveiled called Threadborne Shift a couple of weeks ago.
It's also important to note that the international demand for our footwear is very, very strong right now. It's a competitive landscape here in the U. S. And that's nothing we shy away from. But we understand that we can win and we are doing that and it's and we're doing it at premium price points.
So there's 3 things we're really focused on for footwear right now. And 1st and foremost, it always comes back to product. Innovation building great, great product. And I want to tell you that our pipeline is full and we understand the need and the key for beautifully designed product that also raises our technical game. We also have some technical game that we can bring into that through beautiful delivered product, things like our new Connected Shoe, which we launched V2 of this year at CES.
And there's more innovation coming in the future where we believe leveraging the business that we have at Connected Fitness. We think that there's a real product opportunity there and we've seen some things that really give us encouragement. We're also doing some things from a personalization standpoint like UA Icon, which is going to be launching later this summer, which is a customization capability for consumers to go on to ua.com and be able to build their favorite UnArmour footwear and customize it to anything that they'd like on the shoe. So a couple of programs we really think are going to make the differentiators for us. But we understand that this comes from driving product 1st and foremost.
And for us that means building franchise. And this is sort of an ethos for the company this year is that Under Armour is officially out of acquisition mode and we're in the activation mode. We have franchises in footwear, things like Bandit and Gemini, Sling Flex, Highlight, Curry and many more in the pipeline, which has proven that we can sell product above $100 and that's a unique thing for any brand. So as we sit here as the 3rd largest brand in the world and we think about the competition we have in front as well as that behind us, we understand that that's the key. With running styles approaching nearly 20 running styles above $100 we need to make sure that they all sell through and that happens.
We also have to focus on the thirdly is our expanding access to consumers. And we're fortunate to be in that position that we have the distribution lever, to be able to utilize this year, because that is what helps give us the critical volume to compete with the 2 companies in front of us versus worrying about the multiple companies behind us. And again, just to remind you, when we say expanding distribution, we're not going to any new distribution other than what's been commented on out there. We said a couple of years ago that we had 11 points of distribution. We were targeting 13,000 points of distribution.
We feel good about where we are right now. And we feel that this is going to give us a distribution lever that allows us to continue to push the critical volumes that we can continue to build product at the premium end of our business as well. So Under Armour is focused on $100 plus footwear, and we feel like we're making great strides to get there. So, we again and I just want to reiterate again is that we do see the growth for the full year outpacing the overall company growth too. And Bob, this is Dave.
I'll jump in on the second part
of your question relative to back half and Q4. Q4 and back half confidence comes really from product, distribution and also pricing strategy. From a product perspective, we have new offerings, such as our unstoppable lifestyle product with new running technology. We also have a lot of confidence in reactor product, just as a few examples. And also, we learned a lot from last fall winter.
And so we broadened our fall winter assortment with more layers, such as lightweight fleece to be better prepared for any type of winter. We've revisited our auto replenishment program. We also have more price and distribution levers that we're pulling, as Kevin mentioned, along with a better strategy to refresh our product on the floor more quickly. So and you add it all up, we also have a smaller comp in Q4, and we're just definitely excited about what we can deliver in the back half in Q4 altogether.
Thank you very much.
Thanks, Bob.
Thank you. And our next question comes
from the line of Kate McShane of Citi Research. Your line is now open.
My first question is just on the North America market. I think there's been evidence of a high level promotions in this market. How are you feeling about North America over the next few quarters from a promotional standpoint? And do you think we can return to inflation and price increases after a prolonged period of promotion?
So Kate, this is Dave. I'll start off with that one. North America being down 1%, simply put, we don't like it and we don't really accept it. It was in line with our expectations, though. We expected the choppy promotional environment would carry over from Q4.
We did anticipate that our new distribution wasn't going to be enough to offset the prior year bankruptcies. But we are proactively managing our inventory and brand health in the marketplace, and that also included less liquidation this quarter. So in general, we did expect the lower growth in Q1 for North America, but it's not something that we're going to accept.
So Kate, let me start underscoring that from David. But more importantly, like the promotional environment that exists out there, it's pervasive, it's something that's very real and it's something that we need to be prepared for and I think I feel really good about it. In the back half of 'sixteen, it's something that we knew we could have done a better job with, and it's the lessons learned that we're applying going forward. So that being said, it's just understand the way that we've approached 2017 because when we look at growth overall for our company, it's been a heck of a 3 years of going and doubling the business over that period of time and has us looking forward about what's next. And so we really are focused this year on operational excellence and what we can do to being a better run company.
And again, we're going to do that while still adding more than $500,000,000 in revenue. So we're definitely not going to stand still. We certainly don't like going backwards. And so focusing on going forward is where we are. We have a lot of executional opportunities in the near term and also while building, I think, the bigger, better engine for the future.
And as we do that, I think there's a couple of ways that we're looking to make that happen. I mentioned in my script three real focuses we have at the company. 1st is structure. I think of having just the alignment of evolving from a small company to a mid company to getting to a bigger size business, category management, we believe, is going to be a big difference of keeping us close to the consumer as well as giving P and L responsibility in a matrix approach that allows and drives real accountability for us. Secondly, but probably it's the most important, it's absolutely the most important, it's just great product, Reinventing our core basics, that's one thing that I wanted people to know is that, that is where my focus has been.
As we've seen and looked at sort of where we are right now, when we made the calibration of saying 'seventeen for us is the year that we're going to change the growth outlook, it's so we have the ability to make the best decisions for our business. And making sure that there's 3 ways we want to look to do that is reinventing our core basics, which means being productive is that we lived on a legacy business for a long time where our product would just sell. And we had these big key item volumes. But now when you hear me emphasis the idea of go to market strategy, I think really being clear and deliberate about the products that we have in the marketplace with each and every product, not just selling because it's heritage, but selling it because it's the best product out there. And I feel like we've addressed that, and particularly in the back half of this year.
It also means getting behind some of the planned programs we have for energy and excitement this year, things like Project Rock and our new sleepwear line. And then also, I touched on this, but the new product that we're bringing to market and listen, we get it. We understand what lifestyle is about, and we have a new product line called Unstoppable that will be hitting in toward the end of Q3 and into Q4 of this year, too. So we're chasing the opportunities. And I think probably more importantly, a better way to say is we're attacking those opportunities.
And 3rd and finally is that we're editing. The reliance that we've had on that key item volume is something where we can't just put items into the marketplace and expect them to sell. The consumer expects more. But more importantly, our shift isn't about a new line or one collection or one drop. It's about truly evolving the entire company toward the space.
And so you'll see that reflected, and this is nothing new. We've been in the lifestyle business for over 2 years, building it out, starting at the premium and evolving that throughout our product line. As far as it goes with the promotional environment, that's the reality of where we are today. We don't feel like we control that. We feel like people are making decisions from all different angles, which are going to impact what's happening in the broader base.
So I think one thing that I just want to sort of underscore is, as you think about North America, maybe this is a broader statement on where the Unarmed is a performance company, and we don't want to shy away from that. We know our foundation, but we also know that, that foundation is what gives us the credibility because there's a lot of people that have now jumped into the athletic space in some way, shape or form. But as companies endure and as brands endures, UnArm is a great brand and we expect to endure through this. And so we're going to play offense this year, but we'll be prepared for whatever the market brings us and we feel pretty good about that.
Thank you. Kevin, if I could just follow-up with one quick question that I think kind of rolls into what you were saying. Could you comment at all about how you're thinking about segmentation, especially now that you're in Coles and how you're feeling about the differentiation of product between what you're selling there in the mid tier versus your premium end customers?
Yes. So as I mentioned a minute ago, we told you a while back that we had about 11,000 points of distribution. We were targeting roughly 13,000. So we've now hit that. As far as distribution goes, number 1, it was important to me that when we announced expanded distribution, that was the same day that we announced being on Fifth Avenue and committing to building the greatest retail store in the world that will open in the middle of 2019.
So our commitment to being premium brand has never wavered or changed, but to compete at the levels where we want to run, we feel that we need to be the best and we feel like we need coverage and coverage is about some of the volumes that we can drive. And again, when we talk about being in 13,000 points of distribution, it's important to remind people that some of our key competition has more than 23,000 points of distribution in North America alone. So apples to apples, we feel very good about where we are. Now that does lead to the question of segmentation strategy, which we told you at the beginning of 2016 was the first time that we really stood up merchandising for ourselves as a brand. And with that comes having clear segmentation between our product lines.
So I think that we're good today, but we understand that consumers are or what our customers want. They want differentiation and they expect it and they demand it. And frankly, that we have a brand that has the capability of doing it. And things like some of the investments we're making between systems and between some of the structural things in category management, we feel pretty good about our ability to do that. As far as additional distribution or anything there goes, we are completely, as I said, out of acquisition mode and in activation mode.
The goal that we have is making all of our existing partners better. And this means doing a better job in the stores where we are. And so you're not going to hear of any additional big box opening happening in the United States for a very long period of time. We like the team that we have on the court. We like our distribution, and we think that we have a great, great opportunity there.
As far as our relationship, the kickoff and launch that we've had at Kohl's has been it's exceeded our expectations to date, and they've been a very good partner. That being said, I want to reiterate that we have some amazing partners right now as well. And our goal that we have as a company is focusing that we don't have to I don't believe we have to open any new distribution. I don't think that we need new categories. I don't think that the platforms that we unveiled as a company, it doesn't mean we won't have any new ones, but I'm really giving my team the ability to just relax and just focus on what we have right now and becoming excellent in every category, every sports marketing asset and the pieces we have and using 2017 as a year to get better at doing that.
Thank you. Thank you. And our next question comes from
the line of Matt McClintock of Barclays. Your line is now open.
Hi, yes. Good morning, everyone. Kevin, the comment was made just a second ago about that you're proactively managing the brand health. And I thought it would be helpful if maybe high level we could just get your assessment of where the brand health stands today overall? And then as a follow-up, I was just wondering if you could elaborate a little bit more on the innovation.
You talked a lot about lifestyle and there's been a lot of discussion about that. But what changes to the innovation pipeline are you making? And maybe can you provide some visibility into innovation on the horizon in 2017 and maybe beyond? Thank you.
Yes. Thanks, Matt. So first of all, financially, we did exactly what we said we're going to do this quarter. So I think anything as it relates to brand health from that standpoint is that we had a pretty good idea of where we were. As far as our brand goes, and this is somebody with 21 years having been in this industry, I truthfully wouldn't change positions with anyone else in the world, with any other brand.
I believe that our brand is positioned. I believe that our brand is strong. I believe that our brand demonstrates that we can take punches. And I believe that our brand also demonstrates that it can throw them too. So you look at the bevy of assets that we've built and the things that we have as a company today.
We've got international business that's growing more than 50%, which remains one of our largest opportunities as a company. As far as the base of partnerships we have here in the U. S, we've got more than 40 all school collegiate deals where we outfit them head to toe. We're introducing ourselves to the state of California this year with the introduction of signings of Cal Berkeley and UCLA. We've added a new outfitting deal with Major League Baseball that goes through 2,030 and declaring to build the greatest retail store in the world on Fifth Avenue that opens in 2019.
This brand is looking forward and we expect to bring our consumers with us. And if you're starting a brand today or looking at who we had and the support that we had, I think a lot of these things have been misstated in terms of where and how people are aligned with our company. Tom Brady, Dwayne The Rock Johnson, Stephen Curry, Lindsey Vonn, Misty Copeland, Jordan Spieth, Anthony Joshua who will be fighting for the heavyweight championship of the world this weekend as well as some that you've never heard of like a boxer from Baltimore named Gervonta. There's more people buying Under Armour this year than they did last year. We're adding and putting standing up new systems, our category management structure and energized flow of exciting new product experiences from for our consumers and we're also adding $500,000,000 in revenue this year.
So I can't tell you exactly how other people feel, but I know how our athletes, our team, our partners, and I know how I feel about the future of the company. So I think we definitely have work to do. But I think the strength of the brand is something that's been built over the last 21 years. And I think as people continue to learn and hear our story, and as you start to hear our marketing and our voice tuned up throughout the balance of this year and amplified, we feel pretty good about where that would be. On innovation, if you want me to keep riffing, I can give you sort of where we are and how we see from a product standpoint is that anything that begins with brand health just comes back to product.
It's where we've been focused. It's where we are right now. So let me give you sort of innovation as we're seeing it in 3 buckets. The first should be apparel. So a big part of our marketing push this year has been around the platform of Threadborne.
So Threadborne is not going away and it's something we're going to continue to lean on. It is a ridiculously soft and beautiful performance fabric that fits into a number of different platforms for us, something that goes from apparel all the way through to footwear. You're also going to hear about something called Reactor, which is an exclusive down insulation that allows your body to heat up, cool down depending on what's happening from external temperature side. On the footwear side, I mentioned the connected shoe before, which is something that's pretty we believe in that market, and we think there's a story. We think we're the ones to tell the story because we don't think it's been told yet, And that's on the come.
And then we also I think we've got lifestyle and things like Sling Flex that's on Wellforce at $100 a new product again I mentioned the Threadborne Shift. And then it's also innovating around our core. Again, we've got this consumer with the youth of this country. We believe we have great positioning with things like the Hi Lite Cleat. We're looking forward to the Curry IV and building those franchises.
And the third thing I'd say from innovation standpoint, and this may not be innovation to others, but for us it's something that's a key growth driver where we're going. It's just the addition of lifestyle. Lifestyle and what makes us unique when we talk about innovation is ours won't just be product that just looks better. Everything does something. It will all fit the Under Armour DNA of being better, being best in class.
And so, you'll see that happen through, I mentioned Unstoppable, the Inspire collection by Misty. We've got The Rock, more launches dropping, SuperVent, a few surprises in store as well. So our differentiation, we believe, is something that's significant. And we think that our credibility as an authentic athletic brand is something that gives us the right to be here and play here. And we'll frankly, there'll be few standing as all these different trends comes and go.
Great color, Kevin. Thank you.
Thank you.
Thank you. And our next question comes from
the line of Michael Binetti of UBS. Your line is now open.
Hey, good morning. Congrats on a nice quarter. I know it's a tough macro out there guys. Just a quick modeling question and then maybe just a higher level for Kevin. Can you talk to us a little bit more about the puts and takes on the gross margin as we head into the Q2?
It looks like the first half guide implies 2Q will be down about 180 basis points, obviously worse than the Q1, but the compares get easier. I would think the currency you pointed out would start to diminish. Inventories look like they're in better shape. It seems like you took some pain in the Q1 there to clean it up. I know you said something about airfreight being a bit more of a headwind in 2Q, but maybe you could just give us a little bit more on the second quarter and what some of the headwinds are get to more significant 2Q compare versus 1Q?
Hey, Michael, this is Dave. I'll take that one. When you think about Q2 gross margin, some of the inventory management and promotional environment challenges we had in Q1, we're still expecting to persist into Q2. We also did mention that we're going to have a little bit higher airfreight. Some of that has to do with managing around our SAP go live.
We do expect some continued headwinds from the FX impacts. But also, our international business is actually growing a little bit faster than we even planned, even though we were excited about it to begin with. And as you know, that creates a little bit of a margin headwind also. So when you add all those up, it does make Q2's margin a little bit tougher. But then as you trend back into the back half of the year, we do expect and are planning on a little bit more of improved product costing benefit in the back half, which we're excited to see.
You'll have less year over year impacts to promotions and discounts when you're comping that. And also, we're expecting a beneficial mix of product or actually channel when you think about DTC going to be being up more and then also the fact that we talked about liquidation being a smaller mix of our business. So we've got some bigger favorability in the back half, which should be able to, for the most part, offset the continued pressure on FX headwinds along with the footwear and international pressures that we always have with their high growth rates. So we feel pretty good about the back half.
Okay. And then Kevin, just at a higher level, you mentioned sportswear, the very first category upfront there today. So maybe just tell us a little bit about, you're in the 2nd round there, maybe how you see the evolution of that sportswear business going over the next few years as far as maybe how you see it how you see distribution growing and when you think it could be a more meaningful contributor on the total company revenue line? And then same question for Connected Fitness.
Okay. So let me begin with sports for us. So there's 4 categories or ways that we think about our overall brand positioning with the different categories we have. The first would be on field and think about them left to right. On field would be completed.
Sport performance would be things like you could wear with a pair of jeans like basketball. All the way out to the right would be sportswear, which is what we launched this past fall with UAS. And sitting right in the middle, which is the meat of the business, which is more than onethree for our 2 largest competitors of their business, is what we call sports lifestyle. So today, we obviously want to get to the sports lifestyle category, but we thought we'd have a better opportunity of doing that by putting this flag all the way out there, which is UAS. And so having time for that to curate and position ourselves at the high end of fashion, giving us the ability to attack the massive market of sport lifestyle from the top versus trying to simply evolve it from the field.
So we believe that's important. So having that positioning is something that we're very bullish on. Sport lifestyle still remains, again, our largest opportunity and frankly by a mile. And we look at the different categories of where we can grow. And so everything we've been doing to authenticate ourselves has put us in a position for sport lifestyle.
It's not a new category for us, but I think I keep coming back to saying what's going to make us different and unique is that some brands rely on their logo being cool or a good line. What makes Thunder Army unique is that every product does something. And so that DNA is something that will carry through in every product we do. Again, where the emphasis is not just going to be on the fiber technology, like we get it. Like we're not just blind and saying we're just looking at product through a performance lens, but we think there's a much bigger opportunity.
We think authenticity and equity are really what drive us there. And again, it's not something which needs to be a new category for the business. It needs to be something that can really evolve into our overall total business. So look, we've got the cool people. We have access to all the same color agencies that the rest of them do.
We feel like we're driving there in a big way. So we understand the emphasis of getting the lifestyle, but it doesn't mean abandoning what we have in performance. So wrapping our arms around the fact that we are a deep performance company and getting ourselves to the next step. Connected fitness, Michael, your question there?
Yes. Just on the how you see the evolution from here, yes.
So I think it's a good opportunity for me just to sort of explain where we were when we made the acquisitions, the original vision that we had of becoming digital as a company and what we think that payoff is for us. So the Connected Fitness investments for us was always about having a better understanding of our consumer. And we view that through the lens though is that it would help us sell more shirts and shoes. To be clear, like that was the goal. And we believe that original vision is still very much intact.
The resources, community and team that Connected Fitness has given us has really it's opened the aperture of the way that we believe consumers are going to expect an athletic brand to deliver for them in the future, like helping them make better decisions about how to improve their lives. Like it's not just going to be a cool logo or a nice shoe. It will be all those things, of course, and it will be stylistically portrayed. But it also has to be in the context of how are you helping me live a healthier life. So today, just for perspective and a reminder, our connected fitness community, we have the number one app in the fitness store with just alone our MFP.
Across the 3 of the 4 different apps that we have, we have over 200,000,000 strong with more than 80,000 downloads occurring every single day, downloading 1 of our 4 apps and giving us the insight that we believe gets us much closer. Now, I mentioned we're just beginning to plug in some aspects of the SVOC program, the single view of the consumer through some of our SAP go lives. And we think the data that we'll have as a result of that is ultimately going to help us drive towards selling more shirts and shoes. The information that we have with the holistic experience from fitness to activity to sleep and nutrition, we think gives us a purview, number 1, that helps and is good for consumers and that we have great trust and respect of protecting that for them, but it also helps us be a better brand for them and help build better products that will get them closer. And as you look at things like standing up category management, it's pretty powerful.
We can see how many people went for a walk in Australia or how many people are running or what the average run trend was. The last part I want to say is we also recognize that monetizing this is very important. We've been doing that. And again, understanding this is less than 2% of our total as a company. It doesn't mean that we like small numbers or accept them.
So we recognize that we have today a pretty amazing ad platform in connected fitness and one that we want to drive forward. And so we're attacking that right now inside the existing business while utilizing this data. The last thing I'll say about Connected Fitness because when we get people looking at us asking what the big plan there is, speaking now as the 3rd largest brand in the world with the 2 in front of us that are a long ways away and the many behind us that are not too distant, we believe that connected fitness differentiation for potential quantum leap in our industry. And we think that's something that's only beginning to take hold and something that will play out over the next 6 months effectively, but through the next year and as we look to the future. And meanwhile, utilizing some of those resources just make us a better connected company.
So we are bullish about our investment in digital and what this means and how this combines into not only the direct benefits for our consumer, but also how it ties back into our .coms, our e commerce, giving us intelligence about our consumer and making us make better decisions, better products for them.
Thanks a lot, guys.
Thank you.
Thank you. And our next question comes from
the line of Randy Konik of Jefferies. Your line is now open.
Thanks a lot. I guess
a question for Kevin. I just wanted to kind of get some perspective on how you think your marketing strategies will continue to evolve or need to change or not change. We went from the football kids on the bus to now more athletes and you have Rock as well. So how do you think about you have this huge community of fitness people with the My Fitness Pallets that are how do you want to market digitally to them showing them specific product or not? And how do you think about the evolving message of the brand or to communicate some of the lifestyle offerings you plan to further bring to the market?
How do you kind of try to want to change the marketing tactics with the consumer?
Yes. The Kids on the Bus is a good walk down memory lane. It's a great spot, and it was a different time when people were just looking at the 30 or the 60 commercial that we ran during live broadcast. Today, it's changed very much. And I think that we've got some great amplifiers for us within the athletes that we have, the teams that we have, the partnerships that we signed recently.
And it's really all inclusive is that the understanding of what social means for us. And I don't think we've been a great social company to date. I don't think we've done a great job with our social media. And I think the understanding is that there's a couple of ways for us to leverage our social media. One is that we have an incredible athlete community that's creating authentic content for us every single day.
And simply as curators of our athlete community is something that I think that we can do to tell bigger, bolder brand stories that keep us out there in the marketplace. I think from a social media standpoint, you'll also see us get much better with what we do with telling product stories. The market is incredibly crowded now. The things that made unique, Under Armour unique 3 or 4 or 5 years ago, everyone has their version of athletic something. Every company has gotten to their version of jumping on athleisure or jumping and making their version of a tight.
And so moving beyond just yarn differentiation of what makes our fiber or fabric better is no place for us to live. And so I keep coming back and driving home this theme of when you think about companies that last, and there is a it's a difficult time for many retailers out there. As we look at it at Under Armour, like we understand the shifting landscape, we look at the investments that we've been making, we looked at 2017 and delivering what we said we were going to do. And we understand the focus that we have of making ourselves a better company by getting closer to category management and having the true insights that allow us to understand what that consumer wants in delivering for it, both especially beginning with the product that delivers for them and the way that we communicate them. Is that Under Armour product is it's complex and what we've always done a good job at is that Heat Gear was you wore for when it was hot and Cold Gear for when it's cold.
So we've got a lot more innovation. There's a lot much broader competitive set that we have now as well that we need to make sure we're explaining that product. When I talk about our positioning for lifestyle, I think it's one that no other brand can have is that it can be a beautiful sweater that's V neck and comfortable and something that you could wear to the office or out to the club. We want to make that sweater, but we also think it's important that the sweater performs and maintains the DNA that's under our. Now we're not going to be blind to this.
We just need to make beautiful products. We get it. But we also need to understand that the reason the consumer will buy our beautiful product is because of the DNA that makes us authentically Under Armour and authentically Sport. And so you'll continue to see us partner with whether it's the Sleepwear Align that we did with Tom Brady, the Project Rock collection that really begins to hit his consumer dead on and he's been a great partner for us and also the reach that they have. Dwayne The Rock Johnson has over 80,000,000 Instagram followers.
And so when he gets behind something, it can move the needle. And so we actually have between amongst all of our athletes, we have a pretty powerful channel that you'll continue to see us activate. And you'll also continue to see them bring lifestyle more into what they're doing. So that's a bit of a mixture question. Hopefully, you got a bit of a mixture answer there between we expect to tell great stories about the products that we build.
We expect them to be more relevant, more stylistic, more beautiful and still performing. And so I think we're just getting started in this journey, but we feel good about our basis and really where we're heading with directionally.
And can I just follow-up with one more item? I'm just intrigued by the amount of the systems implementation and it sounds pretty exciting. Can you just give us maybe some perspective on any type of measuring sticks or yardsticks you're trying to kind of work towards like we think the systems can help us reduce our inventory levels by some amount or the liquidation levels can continue to move lower. Our design to market cycles can be reduced by some level of X. And I'm just curious what your thoughts are there.
And then you said these systems are going to also help with things like the implementation of Curry IV. Are you going to kind of is the system going these systems going to allow you to use a different type of canning strategy and so forth? Just curious there. Thanks.
Randy, this is Dave. I'll take that. I mean we're not going to give you specific numbers or percentages. But as Kevin mentioned, we're definitely investing in the one global instance of SAP across our business. So it really does enable us to simplify and automate our process, enable a more transparent supply chain.
The largest part of that implementation goes live in early Q3, but there'll be stages after that as well. It'll definitely be creating capabilities to efficiently operate a value chain at scale. When you think about some of those future benefits you were mentioning, we'll definitely see some of that relative to revenue growth and speed to market, definitely around inventory optimization, also service level improvements because there's a big supply chain component to that, and all that comes through on effective margin management as well. So there's definitely a lot of exciting aspects that we'll see. I think you're going to see more of the meaningful improvements of that coming out in 2019 and beyond, but it's definitely a big play for us.
Thank you. And now we'll take our last question from the line of Andrew Burns of D. A. Davidson. Your line is now open.
Good morning. Thanks for all the details on the sportswear and lifestyle game plan, including the unstoppable collection. As a follow-up, I'm trying to better understand how quickly you can pivot the assortment to where you want it to be with your key wholesale partners as well as in DTC. From a consumer's point of view as they shop your key wholesale partners and DTC in the upcoming holiday season, how visible will this assortment shift be? And how do you expect to communicate the lifestyle and sportswear initiatives to consumers?
Thank you. So I believe in eightytwenty rules. And I still believe that the basis that we have is a foundation that people need. People need T shirts and people need golf polos and people need quarter zips. But beyond that, there's a lifestyle component that we think we can accelerate on to our brand.
The ability for us to affect that in Q1, Q2, we looked at where we were in the first half of the year. And frankly, the lessons learned coming out of the end of 2016, we said we think we can be better. And where we were able to affect once we had that information was really going after Q3 and Q4. And it doesn't mean there needs to be a seismic shift, but it means some of the key items were the Unstoppable Collection was something that we drove hard, really from December last year to be able to deliver this year. So it's great practice for us of learning just how fast we can be as a company from a supply chain standpoint and understanding why we're not that fast everywhere.
And so fast fashion and the way that they operate being close to consumer is something that we want to get a lot smarter about, and something that we're continuing to drive. We feel good about the collections that we have now. We feel good about the line that we have on the floor. We're just saying we can be better. And better means a real sense of focus.
And I guess if when I started to feel, and sort of look at the year and where we are, the one place that I've thrown myself into in the last several months and really look at this year where I want to be going forward, it's just in the product. Any issue that anyone has with any company, You can create the greatest commercial, you can do anything that you want, but it just comes down to product. And when we looked at 2017 and part of our alignment was how do we get our product in line with being the kind of growth company that the market has become accustomed to Under Armour being, we know how to do that. We haven't missed any trends in the marketplace. We could be faster, we could be better.
But again, this comes back to the foundations of what we're going to do going forward. And so I think that people walk out and they're not sure if we understand what cool looks like and we can't do style where the consumer wears. I believe in the sport authenticity that we have. I believe the consumer likes us. I believe the consumer loves us.
I believe we just have to tell them why they do. And most importantly, we need to show them products that inspires them to want to love us. And so it is a the consumer has a pretty short memory, and they also have a really long, I think, affinity though. So I think that we've established that to a point and where they might have gotten to know Under Armour as a tight shirt compression T shirt company, we also then evolved to a full scale athletic brand, where they might have noticed it's just a North American company. I think we're doing a pretty good job evolving to being a true global brand.
Where they might have noticed is just a performance company and just that tight T shirt, I think what you'll see is us continue to evolve moving into being a true company that can be worn and a lot more wearing occasions than just the gym, on the field, on the court or the pitch. So we're pretty far down that road and I think we feel pretty good about where we're going. We're not perfect. We don't think we're there yet. It all speaks into the guidance or the outlook that we provided for the year.
So we're using 2017 as a year really to get better. And I think we've got a lot of seismic internal things that we're doing, meaning just make us a better company that will position us because we haven't said the word being a $10,000,000,000 company in a while. I want you to hear that. You're not hearing people talk about that. But I want you to know our number is leaning forward, our number is moving forward and we're moving on and ready to run.
Thanks and good luck.
Thanks very much, Dan.
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.