Good day, ladies and gentlemen, and welcome to the Under Armour Inc. 3rd Quarter Earnings Webcast and Conference Call. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Tom Shaw, Director of Investor Relations.
Please go ahead, sir.
Great. Thanks, and good morning to everyone joining us for today's Q3 conference call. During the course of this call, we'll be making projections or other forward looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. These risks and uncertainties are described in our press release and in the Risk Factors section of our filings with the SEC.
The company assumes no obligation to update forward looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, as required by Regulation G, we need to make sure you are aware that during the call, we will reference certain non GAAP financial information, specifically currency neutral net revenue growth. We provide a reconciliation of this non GAAP financial information in our earnings release, a copy of which is available on our website atuabiz.com. Joining us on today's call will be Kevin Plank, Chairman and CEO followed by Brad Dickerson, our Chief Operating Officer and CFO, who will discuss the company's financial performance for the Q3, provide an update to our 2015 outlook and introduce our preliminary 2016 outlook. After the prepared remarks, Kevin and Brad will be available for a Q and A session that will end at approximately 9:30 a.
M. Finally, a replay of this teleconference will be available at our website at approximately 11 a. M. Eastern Time today. And with that, I'll turn it over to Kevin Plank.
Thank you, Tom, and good morning, everyone. In 3 weeks, Under Armour will be celebrating our 10 year anniversary as a public company. Back in 2,005, we were a $281,000,000 company. Compression apparel made up 2 thirds of our business. The phrase connected fitness had not yet been coined.
The day when we would feature a ballerina in a commercial seemed unlikely. And Jordan Spieth had only just begun his journey to greatness by taking golf lessons at Brook Hollow Golf Club in Dallas at the tender age of 12 from pro Cameron McCormick. What I knew back then and still believe today is that anything is possible because of the ever evolving power of sports. In just the last few months, I've seen firsthand the value to advertisers who understand that sports is the only thing left that viewers insist on watching and His Royal Highness, Prince Harry of Wales on a fall Saturday in London, and His Royal Highness, Prince Harry of Wales on a fall Saturday in London to watch England take on Wales in the Rugby World Cup. While 4,000 miles away, another 80,000 were watching Notre Dame Football in South Bend.
More than 10,000 fans lining up in Manila to get a glimpse of the NBA's most valuable player, Stephen Curry. The power of sports and its ability to transcend generations, technologies and trends is what makes other industries envious of the business that we are in. The power of sports is the engine that has fueled our growth from day 1 and the reason for our confidence in the future. It is the foundation behind our doing business in just 4 countries in 2,005 to now more than 60 today growing our retail footprint from a single UA website and 4 domestic factory house outlet stores in 2,005 to now 24 globalecommerce sites and more than 300 UA owned retail destinations and partner doors around the world. Building our team from around 600 employees in 2,005 to more than 11,000 today.
Going from not producing a single shoe in 2,005 to approximately 30,000,000 pairs in 2015, recording 22 consecutive quarters of 20 plus percent revenue growth and 24 straight quarters of 20 plus percent revenue growth in our largest category, apparel, achieving our first $1,000,000,000 revenue quarter, saying confidently we're going to double our revenues to $7,500,000,000 by 2018 and our stock price appreciating more than 2,800 percent from our IPO price compared to roughly 60% for the S and P 500. It has been a great 10 years as a public company, and we've learned a lot during this time. But our focus remains the same, and that is unlocking the equity we have created to continue to build the world's most important sports and fitness brand. To do that, we will continue to invest. And we will do so in a prudent way that has driven our results over these past 10 years.
At our Investor Day here in Baltimore last month, we spoke to the diversity of these investments. We are focused on 3 key areas where we are confident the return on our investment will be increasingly evident as our business continues to grow globally. The first area is our core business, including sports marketing assets, brand marketing, supply chain and investing in inventory to help us meet the unparalleled demand for the Under Armour brand. The second area is our growth drivers like international, where we grew the business 69% year to date and footwear, where we posted a 3rd quarter growth rate of 61% and continue to invest in world class talent. And finally, are the new opportunities like local manufacturing, sportswear and connected fitness that may not meaningfully impact our top line results in the short term, but will bring a new dimension to our model and create new competencies within our organization in the years to come.
Starting with our core business. We continue to find assets that are fit with our brand. The most recent example being 2 weeks ago, we announced a new long term partnership with the University of Wisconsin. It takes one trip to Madison, Wisconsin on a football Saturday to understand the value of college assets in the marketing landscape, where more than 80,000 people show up to cheer on the team wearing our brand, where once loyalty is literally worn on their sleeve. Take for example, 2 historic rivals finding common ground through their outfitter and donning the same base layer T shirt for a football game, as our two partners, Notre Dame and the United States Naval Academy did just 2 weeks ago in the name of respect for one another.
We are not just clothing athletes, we are telling stories. We are tapping into the emotion that is tied to the power of sport, and we are giving them an authentic way to display their passion. We also talked at our Investor Day about our ongoing work with SAP. The vision here is a single user database that combines the traditional consumer purchasing habit information with Under Armour's additional insights gained through our connected fitness platform. This work can be categorized into 2 main areas: architecting the future to create a business platform that will scale our organization and sustain our global growth and developing the consumer insight engine that will use data to drive this business to $7,500,000,000 and beyond.
Our increased insights into the consumer will empower us with better information to make better business decisions, to build better products while helping athletes make better choices in their own personal health and fitness and ultimately enriching their lives. 2nd big area of investment is in our growth drivers. They are the same 5 that we've talked about since our IPO: men's apparel, women's apparel, footwear, international and direct to consumer. And our strategy, which also remains the same today, is simply to make women's larger than men's, to make footwear larger than apparel as a whole, then sell that product country by country around the globe. And where we don't find appropriate retail distribution, augment that with our own direct to consumer e commerce and retail channels.
And the one thing we will never forget to do and is written on the whiteboards in my office is don't forget to sell shirts and shoes. So let's start talking about footwear. The momentum that you see and read about around our footwear business is a result of the investments we've made starting back even before our IPO. But as we often say around here, we are just getting started. To give some perspective, we will produce 30,000,000 pairs of shoes this year compared to our competition that produces around 500,000,000 pairs each year.
This demonstrates the miles of runway in front of us for growth in this one category alone. We already have seen a return on our investments in footwear to the 90% plus sell throughs for the Curry Signature footwear line. We are incredibly excited for the Curry 2, which becomes globally available at retail this Saturday and was first unveiled by Stephen Curry during the roadshow tour of Asia last month. To support this launch, Stephen and Jamie Fox have teamed up once again in a new digital campaign titled Flash, which is created by award winning agency Droga5 and is available now for viewing across all our social platforms. Additional returns have come from the SpeedForm platform, more than tripling in revenue year to date.
Our highlight football cleats earning the number one spot in the marketplace for the 3rd straight year. And new breakthrough innovations like the Fat Tire shoe, which launched in May and continues to disrupt the market and earn high praise, including gear of the show at the 2015 Winter Outdoor Retailer Trade Show. Looking ahead to 2016. We plan to leverage our relationship with Jordan Spieth, the recently crowned PGA Tour Player of the Year, by introducing our golf footwear brand, much like we did with our basketball footwear brand through NBA MVP, Stephen Curry. You also will see a much deeper concerted effort to put resources into women's footwear as we brought in a depth of talent to help support this growing area of our business.
As I said earlier, the 3rd area of investment for us to unlock the power of sports in new parts of our business like local manufacturing, sportswear and connected fitness. We unveiled our plans for Project Glory, our local for local manufacturing at Investor Day. But let me refresh you on how this investment will change the game for us and for the world. State of the art footwear and apparel manufacturing facilities have it modernized like other industries, with end to end upwards of 150 people being needed to build a single product like a shoe. We know there's a better way.
And through our SpeedForm footwear platform and the innovative manufacturing approach that we took there, we've been able to reduce the number of human touches up to 30%, and we believe there is plenty of runway left. So we see an opportunity to innovate the process, increasing our speed to market by introducing local for local manufacturing that will produce better product globally, product as great as our brand in the most efficient way possible. In 2016, we'll open our physical space for Project Glory, which we will call our lighthouse. The lighthouse will be an advanced manufacturing innovation hub located right here in Baltimore. It will commercialize new enabling technologies and processes that will first be integrated into our existing supply chain by our current partners before ultimately being rolled out by those same partners in new facilities around the world, changing the dynamics of speed to market, pricing, costing and labor.
Made in the U. S. For the U. S. Market, Made in Brazil for the Brazilian market and so on.
Being an innovative company means not only bringing innovation into everything we make, but also into how we create better products more efficiently. Also at Investor Day, we revealed our plans for a new category for Under Armour, sportswear. We will answer the call from our consumer for product that can be worn outside of the gym, court, pitch or field, delivering the same promise of functionality in form, fit and performance that they have come to expect from Under Armour. This category expands our vision of empowering all athletes on and off the sporting field. Our gateway to an engaged consumer, which will allow us to enter into new categories such as sportswear is connected fitness.
As we move from changing the way athletes dress to changing the way they live, we are becoming part of the athletes' life 20 fourseven. From sleep and activity to fitness and nutrition, we are directly interacting with our consumer, turning their data into a call to action in support of our mission to make all athletes better. This type of insight we've come to rely on in other areas of our lives, such as our personal finances or the performances of our cars, is now finally available for our own health. I look forward to sharing with you more on how we will leverage this opportunity with some very exciting announcements to come at CES in early January 2016. We believe Connected Fitness will enrich the lives of our consumer, and we also believe it will help inform us to make better decisions on behalf of our consumer.
The information derived from our Connected Fitness platform delivers deep algorithmic capabilities that create a highly interactive relationship with our consumers, making it possible to engage with them in a more personal and relevant way as individuals. World renowned advisor and best selling author, Ram Charan, believes companies with these mathematical capabilities for personalization, companies he calls math houses, possess a huge advantage over companies that don't have these capabilities, even if they've been highly successful in the past. Companies that will experience difficulty keeping up with a math house are referred to as a legacy company. A legacy company still lives in the era of mass production and mass markets with a customer experience and delivered second or third hand. A math house uses data to shorten the distance between a brand and the consumer.
Today, the information we gain to the more than 150,000,000 connected fitness registered users, including now updated from Investor Day, 6,500,000,000 Foods logged and over 1,500,000,000 workouts logged just year to date across our 4 platforms. Combined with the global point of sale, e commerce and transactional data from our partners has firmly secured our status as the math house of the health, fitness and nutrition industry. And we believe, as Ram has said, any organization that is not a math house now or is unable to become one soon is already a legacy company. The hidden benefit in entering these new spaces like Connected Fitness and Sportswear are the organizational competencies that we gain as we build up these businesses. We are a team that adapts well, whether it's moving from U.
S. To global, apparel to footwear, men's to women's or wholesale to direct to consumer. The theme of my presentation at Investor Day was based around a piece of advice given to me by former Navy SEAL and Under Armour Director, Admiral Eric Olson. His advice was simply that when the map differs from the terrain, I would always tell my soldiers to go with the terrain. Led by our world class leadership team, we continue to demonstrate our deep expertise in going with the terrain to evolve with the upwards and downwards trends we will inevitably see through any business cycle.
Our 10 years now of both 30% top and equally 30% bottom line growth established since our IPO and our healthy, strong shirts and shoes business gives us great confidence for the future. And our Connected Fitness Math House, which will empower us to understand the consumer at a higher level to help shape our cultural approach to continue to innovate and tap into the power of sports for the next 10 years and beyond. We are just getting started.
Brad? Thanks, Kevin. I'd now like to spend some time reviewing our Q3 results followed by our updated outlook for 2015 and our preliminary thoughts on 2016. Our net revenues for the Q3 of 2015 increased 28% to 1,200,000,000 dollars On a currency neutral basis, net revenues increased 31% for the period. Within our product categories, we grew apparel net revenues 23% to $866,000,000 compared to $705,000,000 in the prior year's quarter.
From a product perspective, our new armor base layer expanded innovation platforms like storm and cold air infrared were key stories during the Q3. On sport categories, we saw significant growth in golf and outdoor. 3rd quarter footwear net revenues increased 61 percent to $196,000,000 from $122,000,000 in the prior year. Our strength in footwear remains broad based, including our largest categories of running and basketball and extending to some of our newer categories such as hiking and global football. Key products included our latest addition to the SpeedForm platform with the SpeedForm Fortis running shoe as well additional Curry 1 basketball styles ahead of the Curry 2 launch this weekend.
Our accessories net revenues during the Q3 increased 22% to $104,000,000 from $85,000,000 last year, primarily driven by strong consumer demand for our line of bags. Our global direct to consumer net revenues increased 28% for the quarter, representing approximately 26% of net revenues. We continue to be encouraged by the success we are seeing with our 2015 Brand House openings. From a global standpoint, we ended the 3rd quarter with 173 owned stores, bringing our total to 24 global sites. We continue to utilize more targeted effective communication to our consumers and traffic remains strong benefiting from the remarkable 2015 success of our sports marketing assets.
While very early in its evolution, we are also encouraged by some of our efforts to generate traffic to our e commerce sites from our connected fitness community. Looking at our regions, North America net revenues increased 25 percent to $1,100,000,000 in the 3rd quarter compared to $848,000,000 in the prior year's quarter. On a currency neutral basis, North America net revenues increased 26% based primarily on the drivers I just highlighted. International net revenues increased 52 percent to $130,000,000 in the 3rd quarter and represent 11% of total net revenues. On a currency neutral basis, international net revenues increased 68% for the period.
In the EMEA region, we remain focused on core markets with our largest two countries, the UK and Germany, contribute the strongest growth during the period. Our e commerce strategy has also played a key role in broadening our reach and awareness in the region as we've launched 9 new local sites year to date. Pacific, the growth of our own DTC combined with partner store expansion continues to drive our business. The recent Stephen Curry tour and opening of our largest international brand house in Shanghai have helped drive strong demand for our brand. And in Latin America, we continue to see balanced growth throughout the region following our market entry into many of these countries during 2014.
Moving on to margins. 3rd quarter gross margins contracted 80 basis points to 48.8% compared to 49.6% in the prior year's period. The following factors were the primary drivers during the quarter. First, the continued strength of the U. S.
Dollar negatively impacted gross margins by approximately 90 basis points versus the prior year. 2nd, sales mix negatively impacted gross margin by approximately 50 basis points in the Q3 versus the primary prior year, primarily driven by the continued strong performance of our footwear business. Also, on our ongoing focus to better flow our product to service our business resulted in higher freight expenses, which negatively impacted gross margin by approximately 20 basis points in the quarter versus the prior year. Partially offsetting these margin pressures, we continue to see favorable product margins in both our North America and international businesses, which benefited gross margin by approximately 90 basis points in the 3rd quarter. Selling, general and administrative expenses as a percentage of net revenues delevered 60 basis points to 34.6% in the Q3 of 2015 from 34% in the prior year's period.
SG and A details for the Q3 are as follows. Marketing costs increased to 10.7% of net revenues for the quarter from 10.6% in the prior year period, reflecting higher marketing associated with our connected fitness business and our most recent global marketing campaigns for training and global football. Other SG and A costs increased to 23.9% of net revenues for the quarter from 23.4% in the prior year, driven primarily by our connected fitness business and investments in our global brand house strategy. Operating income for the Q3 increased 17 percent to $171,000,000 compared with $146,000,000 in
the prior year period.
Interest and other expense for the Q3 increased to $7,000,000 compared with $5,000,000 in the prior year period, primarily reflecting increased interest expense associated with the financing of our Connected Fitness acquisitions. Our 3rd quarter tax rate of 38.8 percent was unfavorable to the 36.9 percent rate last year, primarily driven by non deductible costs associated with our Connected Fitness acquisitions as well as increased losses in our newer Latin American businesses, partially driven by the strengthening of the U. S. Dollar. Our 3rd quarter net income increased 13% to $100,000,000 compared to $89,000,000 in the prior year period, while our diluted earnings per share increased to $0.45 from $0.41 in the prior year's period.
On the balance sheet, total cash and cash equivalents for the quarter decreased 36 percent to 159,000,000 compared to $249,000,000 at September 30, 2014. Inventory for the quarter increased 36 percent to 867,000,000 dollars compared to $637,000,000 at September 30, 2014. Total debt increased to $905,000,000 as compared to $192,000,000 September 30, 2014, primarily reflecting the financing of our Connected Fitness acquisitions. Looking at our cash flows, our investment in capital expenditures $71,000,000 for the Q3 compared to $26,000,000 in the prior year's period, driven primarily by our investments in our global headquarters in Baltimore and our global retail strategy. Now moving on to our updated 2015 guidance.
Based on current visibility, we expect 2015 net revenues of approximately $3,910,000,000 representing growth of 27% and 2015 operating income of approximately 408,000,000 dollars representing growth of 15%. As we have highlighted on our last earnings call in July and during our recent Investor Day, we believe the decisions we make on where, when and how much we invest are a key driver of our success to date and it is our job to deliver both near and long term value, while simultaneously investing in our growth. In a year, we have seen unprecedented success from our athletes on a global scale. We believe the investments we are making today will help fuel our growth for years to come. Earlier, we have abundant opportunities that we are investing in to drive our long term top line growth.
With so many areas that require investment, we continue to be focused on driving operating income dollars and not necessarily operating margin. This is why we have now raised our 2015 net revenues guidance by a cumulative $150,000,000 since January, while at the same time maintaining the high end of our operating income target at 4 0 $8,000,000 We are committed to a certain level of investment back into our business and we will continue to be opportunistic if and when possible during the Q4. As a reminder, our operating income guidance continues to include the dilutive impact of the Connected Fitness acquisitions consisting of one time transaction costs in the Q1, operating losses from these businesses and non cash amortization charges of the intangible assets generated from the acquisitions. Below operating results, we continue to expect a full year effective tax rate of approximately 41% compared to 39.2% in the prior year, primarily given the strengthening of the U. S.
Dollar, which continues to negatively impact our international profitability. Now I'd like to add some additional color on several items pertaining to the Q4. Starting with revenues. We believe we are well positioned to execute heading into the holidays as our investments in service are paying off in fresher, cleaner assortments across our distribution. As we expand our innovation stories like cold gear infrared and storm across our sports categories, we also believe we are more diversified in our solutions for the athlete.
Supported by the launch of Curry 2 Basketball Shoes, we expect footwear growth will to decline approximately 100 basis points during the Q4. Some of the same themes impacting our business the past few quarters will extend into the 4th quarter, including pressure from the continued strength of the U. S. Dollar, higher freight costs and a higher mix of footwear revenues. While higher than planned, the latter two factors are also key in our increased top line guidance for the year.
In addition to these factors, driven by the recent higher growth rates in our footwear business, we are now planning higher excess footwear liquidation sales as part of our normal inventory management process, which will negatively impact gross margins in the Q4. Partially offsetting these factors, we anticipate that we will continue to see improvements in our product margins. In SG and A, we expect a lower rate of spend for the Q4 due to the timing of marketing spend, while other SG and A is expected to grow approximately in line with our net revenues growth as we continue with our planned investments in areas to support our long term growth, including Connected Fitness, International and footwear. Also, as I mentioned earlier, we will remain opportunistic in investing incremental dollars during Q4 in the event of more favorable and planned net revenues or gross margin rate. Switching over to inventory.
As we outlined at our Investor Day, over the next few quarters, we are focused on delivering our products to our consumers more timely, specifically on key seasonal floor set dates. We anticipate this will result in elevated inventory growth rates over this period to flow product earlier. Finally, on capital expenditures. Based on our current visibility, we are now planning capital expenditures in the range of $350,000,000 to $360,000,000 for 2015, including approximately $140,000,000 allocated across 3 areas to support long term growth with our new domestic distribution center, the expansion of our corporate headquarters in Baltimore and initial investments in our new and expanded SAP platform. In addition, we have accelerated investments in key areas to drive revenue growth, including the rollout of our global retail strategy and new e commerce sites.
Before we turn it over to Q and A, I would also like to provide you with our preliminary outlook for 2016. Based on our current visibility, we are planning 20 16 net revenues to grow at approximately 25% and 20 16 operating income to grow at approximately 23%. Both of these measures are in line with our long term growth targets we established at our Investor Day last month. Provide further color on 2016 during our earnings call in January. With that, let's turn it over to questions.
Operator?
Thank And our first question comes from Robbie Ohmes of Bank of America Merrill Lynch. Your line is now open.
Good morning. Great quarter, guys.
Thanks, Robbie.
Thanks. Kevin, actually, two questions. The first, can you talk a little bit more on the international side, specifically about China? And was China a big contributor this quarter and is expected to be big this year? Or is it maybe some help on the timing of when China could really ramp up as a market for you?
And the second question, I know on your Investor Day and then today again, you've mentioned the sportswear opportunity. Could you just give us a little more color on how Under Armour thinks about that huge opportunity in terms of partners and product categories or any insight you could give us?
Great. So first of all, internationally, we're really excited. We've crossed 11% of the total mix for the company, which is a big deal for us. It's been a long time coming. And becoming global is something you can't just say it, you actually have to act on it.
And so I think it was really 2,006, we launched our first office in Europe. 2010 we opened our first brand house with a 1,000 square foot store in Shanghai. And it has been a lot of learnings and a lot of adjustment. It's not as easy as just opening stores, but it's into the product, into the localized fit, it's in the localized merchandising, it's into the execution, the distribution, the manufacturing. So there are a lot of pieces.
And China is a great lesson for that. I haven't given these numbers publicly, but I think it's instructive of just sort of what our growth has been in China. So in 2012, for instance, I said we launched our first store at 1,000 square feet and it was incredibly successful. We were doing over $1,000,000 of 1,000 square feet at 1 store in Shanghai. We didn't have the right leadership when we went in there and we sort of toiled around for the next couple of years.
By the end of 2012, we were doing $3,000,000 in sales in China. We took somebody who was one of our I introduced you a guy named Kevin Eskridge, who's now running global merchandising for us, but I pulled him out of our outdoor group and sent him and his family to Shanghai. And the results that we had were the business went from $3,000,000 in $12,000,000 to $7,000,000 in dollars to $30,000,000 roughly $30,000,000 in 2014. The current plan this year is just over $75,000,000 for 2015. And as we look forward to 2016, that number is north of $150,000,000 today.
So we're incredibly bullish that the hockey stick approach has really begun to lay in for us. We're excited about what that's going to mean. In China though, one thing we did I think is a nod to the market was our the visit that I did with the Curry, with the Stephen Curry tour of 5 Cities in 5 Days. We actually launched the shoe that we're launching this Saturday globally. We launched it exclusively in China back at that tour.
So China, it's very important to make sure that you show and demonstrate great respect, I think, for the market. And hopefully, it's just another sign of the things we're doing there. In addition to opening our largest international brand house store, 15,000 Square Feet on Waihai Lu Road in one of the great shopping districts in downtown Shanghai. So we see great growth coming from there. And it speaks to some of one of the numbers that I mentioned was we'll have more than 300 stores globally.
I think it's close to 100 stores or so we'll be opening this year. Roughly 3 quarters of those stores are actually going to be in China. So we see great opportunity there. It's going to be our 2nd largest controlled market and growing exponentially. The 30 stores that we opened in the Q3, including 18 in September alone, including the Waihai Liu Road.
And then e commerce revenues in the Q3 nearly equaled the total number of 2014 business that we had China. So a lot of big things and exciting things happening for us there. Let me jump on sports categories for you for a second, because I think it's important and it's a good barometer I think on how our business is moving. As we outlined at Investor Day, we expect to move to 9 specific sport categories: men's training, women's training, studio running, outdoor golf, basketball, team sports, global football and sportswear. Sportswear is one of those quiet discussions that we have.
And we outlined at Investor Day the size and importance that sportswear represents for our current competitors. So collectively, our competition has roughly $50,000,000,000 in revenues, 25% of which they claim publicly derived specifically from sportswear. That's basically a $12,500,000,000 opportunity as we look at it. Today, we're competing with effectively 0. We feel like we've got the right leader in someone who came from this industry, worked for one of our chief competitors and responsible for helping to build out their sportswear category, Ben Proust.
And Ben is someone who is a process. I want to set people's expectations on sportswear at the same time. We issued $7,500,000,000 as our Investor Day goal for 2018. Sportswear isn't heavily considered in that. It's going to take time.
It's going to take build. And I think that understanding what we're going to need to do from an investment standpoint, which is why I think we've been so specific as Brad and I have been really hammering down the fact that while we expect to we can really grow and amp up our top line revenue, we want to be prudent with what we're doing on the bottom line. But this growth, this 25% CAGR that we've committed to, it will come at a price and that price is continuing investment. And I think it's measured investment at the same time. And our 10 year track record of I think making appropriate the right investments is something that gives us great confidence that these are categories going to pay dividends for investors in the future, but it's the right thing for us to do at the time.
And it's certainly our moment in time to make that happen.
Sounds great. Thanks, Kevin.
Thanks very much, Robbie.
Thank you. And our next question comes from Camilo Lyons of Canaccord Genuity. Your line is now open.
Thanks. Great job on the quarter guys. Brett, I
was hoping you could give
a little bit more detail the inventory composition. I think you mentioned a couple of things. So a little bit more footwear inventory as well as a little bit more build to improve the service levels. Could you maybe quantify the mix between those two and how we should think about the growth rate of footwear relative to the increase of the inventory in footwear?
Yes. So I think you're hitting on a couple of things. With footwear growing at the rate it's growing and obviously, ASPs in footwear are much higher than apparel. That's part of the driver behind inventory growth. But probably the bigger driver of what we're doing right now year over year, specifically in Q3 and as we look into Q4, is more engaged around just the flow of inventory.
So if you recall, looking back a year ago or so or maybe a little more than a year ago, we talked about some of the challenges that we had in flowing product on time for things like back to school and holiday. And we've really got focused this year as we came into 2015 on making sure to some degree at all costs almost that we're going to flow product on time and we called out freight costs, specifically air freight as an impact to gross margins this year to do that. So that's probably the bigger driver what you're seeing in inventory growth rate is we're really focused on hitting key floor set dates. So when you look at things like getting into the holidays of this year, making sure that product is flowing and ready to go is increasing our Q3 inventory levels. When you look at starting to set the floors right at the beginning of next year in spring 2016, what you're going to see is earlier flow of product in the back half of this year, specifically as you get close to the end of this year.
So as I talked about at Investor Day, when you kind of look at year over year growth rates in inventory, that's the bigger driver of this is the flow of product. Obviously, we grew a little bit higher than revenue here in Q3. And I think what you'll see is even a little bit more so in Q4 as we're really focused on getting product on the floor on time for our spring floor sets. That should start to normalize a little bit as we work through 20 16 because we start to get into a comparison of that focus we had in 2015, the flow product better, too. So as you start working through Q1 and Q2 of 'sixteen, you should start to normalize that and get back more in line with revenue growth.
Perfect. Very helpful. Thanks. And then, Kevin, there seemed to be an endless amount of growth opportunities that you're pursuing. How do you think about the needs around your organizational structure?
Specifically, do you think you've invested enough on the talent side, on your bench to make future transitions, more seamless?
I'm really proud. We used that theme at Investor Day about the map and the terrain. And I think we've demonstrated really great expertise and be able to adjust with the differing terrain. There's going to be many trends. We saw a lot of them in the last 10 years.
We're anticipating probably something similar in the decade or more importantly anticipating what we haven't even thought about yet. But I think investments are important, a great way to talk about our team. Our core pillars we talk about is product, story, service and team and team obviously being the most important thing. There's a couple of places Women's footwear is something Women's footwear is something that as recent as a year ago, we had just a handful of people or less than that, really people treating women's footwear as a part time job. And it's where if you compare that to others in our industry, there's not dozens, there's hundreds of people working on these teams.
And so the investments that we're making from a few different sides are really important. I speak about being opportunistic with our investment in general and there's a few places that we think that we need to invest. First of all, our core business, investing in areas like marketing, supply chain and technology. And again, along with this Camilo is all comes down to team and people. But we do see that we are at this unique moment in time and it's the right time for us because of the year we have with some of our assets and athletes is things like what should we be doing from a marketing and our storytelling standpoint, from a supply chain about being a better customer and having the right team because right now we're okay, but we're still not level loading our factories the way that we could with the volumes that we're driving and being better with the best factories.
And then when we're in the best factories, driving the A teams in those factories and having the best people in the factories working on our business. And technology is things like laying out the vision, as I mentioned earlier with SAP, about the single view of the consumer. Growth drivers for us are existing growth drivers. I mentioned they're the same as they were the 5 growth drivers, the same as they were in our IPO men's, women's footwear international and direct to consumer. I mean footwear international are a place where I think we've done a great job as you look at the growth we have in footwear, we had a 61% growth quarter.
In the international, we had a 60% to 69% growth quarter and 85% in constant currency basis. And there are things that we weren't getting a lot of credit for a few years ago and we told you we were spending money in these categories. So I think you're starting to see them really come to life. We're also investing in talent and people where again I think making sure that A, there's a broad canvas, but the canvas isn't too wide either. We feel comfortable about the investments we're making because beyond our own growth drivers, there's a new areas for you like connected fitness, sportswear, which I just spoke about, and again doubling down on some of the infrastructure we have.
But connected fitness is one of those things that we're proud and I think we're bullish on the returns that we're beginning to see come back from it. And as we gave that bogey of $200,000,000 we put out there for 2018, the real upside of something like Connected Fitness is the collective dollars that will help grow across all of our existing growth drivers as well as the new ones that we're investing in the dollars to come. But I feel we've done a good job. I just believe that there is we are in the process of hiring. I think on our website right now there's over 3 50 jobs or something to that effect that we're looking for.
There's obviously there's a few key executive we expect to have an A player and someone we expect to have an A player and someone that's been there, done that and really has seen what it's like as we look to cross the $7,500,000,000 in $1,000,000,000 plus range. So we're looking to bring experts and I think that's the unique thing about where we are today versus where we were even just a couple years ago. We have a great attraction. I think this company is custom fit for some real professionals that would be excited by growth.
That's great. Thanks for the color. If I could sneak one more in. Brad, could you just remind us how what your exposure to weather is in the 4th and how we should be thinking about it relative to your guidance?
Yes. Pretty consistent the last couple of years. Weather has become less and less of an impact to us as our product has diversified around the fleece products and specifically as we start to set floors a little bit earlier for next year also around the holidays. So last couple of years, it has been we've called out like a 1% to 2% growth rate potential in weather. I think every year probably becomes less impactful to us because of the diversification of our product, not in an also in our regions too from international basis.
So yes, I mean, there's a little bit of an impact there, but it's not tremendously significant. And obviously, as we look at our guidance for the Q4, we're not anticipating any dramatic change in weather year over year either way in our guidance.
And Camilo, let me jump on the end of that as well with Brad. Look, it's the 2nd warm of September, I think, on record that came out recently. And I think there's a lot of conversation around it, but we're incredibly proud of the ability to still post a 28% growth rate in the quarter. And one thing we focused on really is going back 4 or 5 years, where we realized how weather dependent we were as a company with a pretty classic sixty-forty split front half versus forty-sixty split with front half versus back half of the year. I think we've done a good job in planning things like 5th quarter, not being so reliant on heavyweight fleece, but focusing more on sort of stylish lightweight fleeces.
And we've really worked closely with our partners to create offerings that aren't just relying on big puffer jackets that are sitting in retail stores and if it doesn't snow aren't going to sell. So it's definitely it's a work in process, but weatherproofing our business has been a real focus for our company. And I think we're pretty proud of how we position versus maybe other people in our world.
Perfect. All the best guys.
Thank you.
Thank you. And our next question comes from Michael Binetti of UBS. Your line is now open.
Hey, guys. Good morning. Congrats on a great quarter.
Thanks, Michael.
Sure. And I apologize, I have a couple of near term questions. I know you guys are gearing up to celebrate 10 years as a phenomenal public company. So I apologize for focusing on the near term here a little bit. But can we just talk about the comments on footwear liquidation in the Q4?
I'm assuming that that happens at the factory houses. And can we maybe you could just help us think is that I know you pointed out as gross margin drag, but as you work through some lower ASPs, will we hear about a little bit of a slower comp sales drag in the outlook as well as that happened?
Yes. On the footwear liquidation, it's really kind of a victim of our success to some degree. It's like we've had some tremendous growth rates in footwear the last few quarters in the 40s, 50s and now 61% this quarter. So this is just the normal process of managing inventory that as you work through selling in and selling through, which both have been very positive for us in the footwear side, you're ultimately always going to be left with some excess inventory in footwear. We become in over the course of the last few years and this year too very focused on getting into the next season very clean on the footwear side.
So in looking at the excess footwear we had again, which is really just being generated from the tremendous growth and success we've had in footwear in general, we really got focused on getting through some of the footwear liquidation in Q4 and making sure that we were very clean getting into next year. So obviously, as you talk about footwear gross margins, just the regular gross margins of footwear being well below our apparel gross margins, that's also the case on the liquidation side where your footwear liquidation margins are going to be much less than your apparel liquidation side. As far as the avenues and vehicles to liquidate, Factory House obviously is one of them. And we have talked about 3rd party in the past also of moving some of our excess inventory through a 3rd party also. Although small in revenue volume, obviously, does impact gross margin.
Got it. And then, Brad, I know it's one of the tougher metrics to kind of look out on, but the currency impact on gross margin is fairly large for your international mix. As I look at companies across the space have much bigger international components to their overall business. Is there can you help us that 4th quarter 100 basis points you talked to, is there can you help us like you dimensionalize that? What is causing that much pressure?
And maybe is there anything you guys can look at down the road to help yourselves offset that a little bit more that you may not be doing at this point?
Yes. So that's a good question. So when you look at the Q4 specifically, we anticipate 100 basis point decline. FX could be will be a big part of that year over year decline. If you remember, we came into this year talking about FX impacting our margins by about 50 basis points.
Now we're up to about an 80 basis points full year impact. So obviously, the FX has worsened during the course of the year. So that's a big driver of it. Again, 4th quarter margins, airfreight, as we really get focused on flowing inventory, that's a little bit of a driver too. And that's kind of increased during the course of the year as we've got kind of laser focused on better deliveries and better flow of product.
Those will be the big, big drivers. We talked about the footwear liquidation being a driver in Q4. We came into this year on the FX side, probably less prepared than we're coming out of the year relative to how we hedge currencies going forward. So we've done a better job during the course of this year offsetting some of the increased pressures on FX. We've built some better competencies in house from a talent perspective and some better strategies around hedging that will continue to increase going forward.
So I would expect that in the future, we're more prepared to offset some of those impacts that you're seeing right now. And obviously, as you get into 2016, we're going to start to compare to 2015 FX rates. So you would imagine that there'd be a much more favorable comparison unless something drastically changes in the FX front.
Okay. And if I could just sneak in one last one on the Q4. You guys have done a great job exceeding your plan on revenues for a long time. Comparison to couple of the big growth drivers like international get tougher in the Q4. Specifically, as you look through the plan, your inventories look like you're ready to chase if you need to.
If you do see an opportunity in the Q4, where do you think we'll hear from you in the Q4 that there could be any upside to opportunity as the plan?
Yes. Michael, very consistent direct to consumer. It's the area we can obviously impact the quickest. We control the whole value chain there. So our ability to react and turn product is the most quickest in DTC.
So that's where you probably would expect upside the most. That doesn't mean you couldn't see it in wholesale also, but we can obviously react much quicker on the DTC side.
Thanks a lot guys.
Thanks, Michael.
Thank you. And our next question comes from Matthew Boss of JPMorgan. Your line is now open.
Hey, guys. Congrats on a great quarter. So with the footwear acceleration you're seeing, still early innings, but can you talk about any examples that you've seen so far of a more head to toe hookup for the brand? Meaning, as it becomes a larger piece of the pie, do you think footwear can drive incremental apparel and just ways that you can even take advantage of this more?
Yes. I think classically is that people typically get dressed. It's foot to head, it's not head to toe. And it's one thing where I think we've probably been dragging a little bit. The women's example that I gave earlier, that's something which was glaring and really obvious.
But look, we've got growth coming from a lot of places. And so until you really turn attention and can focus on it, you're probably a bit vulnerable. So we've made, I think, 6 or 7 hires just in the last 45 days on our women's footwear team, really looking to become robust and build that out. And there's places where we're basically definitely taking an ROI approach to it, where we're going to have the biggest impact. But at the same time, we don't want to apologize for footwear.
It's a relatively small number. But and we've also put a 60% number up this quarter, committing to a 40% CAGR through 2018. We think there's great growth there, and we're going to be the beneficiaries of that. But one thing I want to emphasize to people is that it is 10 years in making shoes for us, but it absolutely takes time. The first category we got into was American Football Cleats.
And that was 2,006 and it was a big breakthrough and we had high teens, low 20s market share. And since that time, we're now pushing close to 40% market share in football cleats with our sights set on being number 1. And I say only because it's a category we've been in the longest. And for 10 years in football cleats and 5 years in running shoes, imagine what we're going to look like in running shoes in another 5 years there. So but what I guess the thing to say is, making a great shoe is not as or be winning in footwear is not about making one great shoe.
There's so many factors that are combined. And just like used football cleats, when we were successful with the 20% market share, we were basically making shoes for a particular type of athlete. And the speed guys and the guys on the edges of a team weren't the guys that were wearing our product. And the reason we couldn't figure out is why won't they buy our speed shoes? Our speed shoes are not good.
And the fact is, is that the kid who wear basketball is really important to him. And he liked wearing the shoe on the football field that he wore on the basketball court. And until we launched a basketball shoe, we couldn't even become relevant there. And until we became relevant in basketball, he wasn't even going to consider us. And so it was about the aesthetic of the shoe, but it's so many factors more than just do you make a good speed cleat as to are you in basketball?
Do you have an asset like a Stephen Curry that gives the credibility of the one to wear the shoe? And then beyond that, it's when we go to being in the biggest factories, it's not only being in the biggest or the best factories, but it's not having the B, C or D teams in the factories, but getting to a point where you have the A teams in the factories. And you're not going to get to that point where I mentioned 30,000,000 pairs of shoes versus $500,000,000 to our competition until we have the ability to truly level load and give them the things that they need. And so as we sit here 10 years in and football cleats in 2006, baseball in 2007, training shoes in 2008, running shoes in 2009, basketball shoes in 2010, then we stopped launching new categories. We're getting there.
We're evolving. It just takes a little more time. So we absolutely believe in sort of the head to toe hooks that we're heading to. But I'll tell you, at our bones, we believe that we're as entitled as anyone else to be number 1 in footwear. And the challenge just goes to what I spoke about, about local for local manufacturing.
We talk about innovation in something like footwear. I don't think our industry has been incredibly innovative at all. When you look and you compare the fact that 20 years ago, the technology that can fit on my fingernail today or in my iPhone or Samsung device, it took a mainframe the size of a Greyhound bus just 20 years ago. And today, it's absolutely evolved. In footwear, we make shoes, we make apparel the exact same way we did 80 years ago.
So I think finding innovation and finding ways to win is that there's not an individual shoe technology that makes someone innovative. So I think the approach that we have is holistic and it will pay absolute dividends. But we are challenging our team to think much bigger. But a few, I think, highlights we have on the footwear side is that, obviously, basketball is something with Steph. I mean our basketball business up over in triple digits, bringing our SpeedForm technology to what that's going to mean for us in basketball as well.
Signing additional athletes, the number 7 pick in this year's draft, Emmanuel Moutier, who's one of the breakout young stars this year as well. So doubling down there. Women's, we covered that. Our running business, we've got a great product in SpeedForm, but we're also bringing 6 new running models to market in 2016, dollars and doing really well as well as another new first all knit upper offering in a product called Slingshot, which is doing really well. But across the board, outdoor with the fat tire shoe I mentioned in my notes earlier, football cleats having the number one shoe in the market with the highlight cleat, Soccer, our new Slay Your Next Giant campaign and our asset Memphis Depay, the striker for Manchester United, who's 22 years old and again another next big star.
Jordan Spieth launching golf footwear. Our youth footwear continues to be on fire as well. So there's a lot of sort of individual stories, I think, that are drawing to the bigger narrative. And we haven't connected all the dots I think for the consumer yet. When I mean the consumer, I also mean our customers where we can be a great footwear brand when you walk into a store with an A to Z footwear experience.
But I can tell you is that we know what that movie looks like. We've seen it before and we're bringing pros who've seen it before as well. And it's just a matter of time for us to draw that. But I want to emphasize, we think we can be the number one brand in footwear. And what our team is preparing for isn't what's the next shoe coming from one of our current competitors.
What we're thinking about is what are we going to do if Apple or Samsung decide to make a shoe? How are we going to answer that? So that's the type of, I think, leapfrog mentality and that moonshot thinking that we're challenging our team with is not let's not fight with where people are today. Let's think about where they're going in future and what we can do to be great.
Great. And then just a quick follow-up to switch gears. On Connected Stidness and the math out, can you just touch on the integration, any learning and really the opportunities to change the game as you think about next year and beyond?
Yes. Since Investor Day is when I had that time actually with Ram and he took us through the idea of Math House, which I guess we knew it all along, but it was great. It was a great way to articulate it. But if I could just take a second on our Connected Fitness. Today, more than 150,000,000 athletes continue to add over 100,000 a day throughout 20 15, downloading one of our 4 apps.
I mean the scale is extraordinary. At Investor Day, we mentioned there were 6,000,000,000 foods logged at the time. Today, just a few weeks later, over 6,500,000,000 foods logged. Workouts, 1,300,000,000 is the number we gave you at Investor Day. Today, it's more than 1,500,000,000 workouts, more than 200,000,000 workouts have occurred just in the last few weeks.
More than 200,000,000 workouts have occurred just in the last few weeks. So the information we're gaining every day, we think is incredible and is going to continue to enable us to provide the consumer with really relevant information and insight to we like to use the word to enrich lives. We think the bigger opportunity though is much bigger is much broader than $200,000,000 target that we talked about and All Play is going to help us sell more shirts and shoes. The math house idea though, the ability to use data and analytics to drive business is something which is I don't even think we've quantified yet. I use the example and I think it's a really good one that Amazon, how they credit 40% of their revenues, what they call their recommendation engine.
And that's basically just based off of toothpaste. I know if I sold you a tube of toothpaste 5 weeks ago, a toothpaste has a 6 week life cycle and I can ask if you want me to send you a new tube. Not only do we know purchasing history, but we can tie that to activity, to fitness, to sleep, to nutrition and data and information that our consumers are voluntarily giving to us. And we recognize that as they do that, our job is becoming this destination, this daily dashboard of your health and fitness that we think we can become. And that's all built on trust.
And as I've said many times, trust is one of those things that's built in drops and it can be lost in buckets. But we think that we have the credibility at this point. And we think with some of the suite of products and apps and devices that we have as we're contemplating looking forward and partners we're looking with those devices to move forward. We've got a large announcement we're looking forward to making at CES in January. And we think it's an incredibly exciting space that is just partially contemplated as we look forward.
But the one thing that is clear, as excited as we are about our connected fitness and how it's going to enable us with this math house to be that much smarter about our overall business, ultimately what it's going to do is help us sell more shirts and shoes.
Great. Best of luck.
Operator, we have time for one more question.
Thank you. And our last question will come from the line of Omar Saad of ISI.
I'll
keep this quick. The first question, one follow-up on the gross margin comments, Brad. I understand the headwinds, the FX, the mix shift, etcetera. But you mentioned product margin as one of the benefits to the gross margin line, I think 80 bps or 90 bps, something like that. Can you be a little bit more specific and expand upon what you mean by product margin driving one of the takes against the
puts? Yes. That's really probably more kind of on our core apparel business. So just overall, our kind of core product margins, whether it be through pricing and or costing, just in general, international, again, most of our core apparel product margins are improving. So that's helping offset some of the other pressures we talked about.
Is that more generating scale in the business? On the cost side, are you taking price of more premium products? Maybe just expand a little bit more? Yes. It's a little bit across the board.
So obviously, some of the
innovations that we've come out with over the last few years from a price point perspective have helped our margins, getting more focused on kind of our higher volume products and the costing side of things. Obviously, scale is a big, big part of that. So it's kind of all the above, Omar, to some degree. But again, you would expect from a perspective of improving product margins that our apparel business would be the place we see the most of that because it's our obviously, our longer business and existing business. So that's where we're seeing it right
now. Okay. That's helpful. And then one last one on DTC. If you kind of look at the store growth, it's been accelerating.
You talked about at Investor Day accelerating the store growth longer term, being an important channel. I think it's over a quarter of the business now. The revenue slowed a little bit the last couple of quarters, which implies a slowdown in the same store sales number for lack of a better term. Can you help us understand, is there any subtle things going on there we should be aware of? Any timing issues?
Is it more on the e commerce side where maybe it's slowing a little bit or is the outlet channel as we've seen other companies with outlet exposure feel a little bit of a slowdown there? Just maybe a little more detail around what's going on in DTC and how we expect it to unfold in the coming quarters?
Sure, Omar. I think what you've seen from DTC is a little bit of if you go back to the Q1, it grew at 21%, and it grew 33% in the 2nd quarter and now 28% the Q3. So it's been up and down a little bit. A lot of that right now is going to be timing of new market entries on the e commerce side globally, retail on the global side too, entry into certain markets and expansion of certain markets. Kevin talked a lot about China and the growth in China, the timing of some of that.
Obviously, BrandHouse in the States, too. So if you look across the board, the e commerce side of it has been the strongest of the growth drivers across all the quarters. Really, if you look back over the last four quarters, e commerce has kind of led the way from a growth rate perspective. The retail, although been strong, has been below the e comm growth. When you look at just in general on the retail side, you have to remember that still the majority of our revenues on retail are being generated by North America factory house channel.
So although we talk about brand houses, both domestically and globally, what's going on in retail, the And we've talked about over the course of the last 6, 7, 8 quarters, And we've talked about over the course of the last 6, 7, 8 quarters that planning the slowdown of that growth rate as we open less doors going forward and focused on square footage growth that we plan the growth rate of North America factory house to decline as we got into 20 15 in the future. So that's, to some degree, what you're seeing is the impact of that North America factory house growth rate, which we plan to kind of come down, still healthy but planned down. That's kind of what you're seeing, I think, from the perspective of some of the growth rates in DTC.
All right. That's really helpful. Thanks. Great job, guys.
Yes. Thanks, Omar.
All right. Thanks, everyone, for joining us on the call today. We look forward to reporting you our Q4 2015 results, which similarly have been scheduled for Thursday, January 28 at 8:30 am Eastern Time. Thanks again, and goodbye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day everyone.