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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________
FORM 8-K
________________________________________________________________________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 25, 2016
________________________________________________________________________________
UNDER ARMOUR, INC.
________________________________________________________________________________
Maryland
001-33202
52-1990078
(State or other jurisdiction of
incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification No.)
1020 Hull Street, Baltimore, Maryland
21230
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (410) 454-6428
(Former name or former address, if changed since last report)
________________________________________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of
the following provisions:




Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. Results of Operations and Financial Condition.
On October 25, 2016 , Under Armour, Inc. issued a press release announcing its financial results for the third quarter ended September 30,
2016 . A copy of Under Armour’s press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference. Under Armour has
scheduled a conference call for 8:30 a.m. ET on October 25, 2016 to discuss its financial results, and a portion of the script for that call is
attached hereto as Exhibit 99.2 and is incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
Exhibit 99.1: Under Armour, Inc. press release announcing financial results for the third quarter ended September 30, 2016 .
Exhibit 99.2 : Portion of conference call script for October 25, 2016 conference call.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UNDER ARMOUR, INC.
Date: October 25, 2016
By:
/s/ Lawrence P. Molloy
Lawrence P. Molloy
Chief Financial Officer
Exhibit 99.1
Under Armour, Inc.
1020 Hull Street
Baltimore, MD 21230
CONTACTS
Investors:
Carrie Gillard
Under Armour, Inc.
Tel: 410.843.7676
Media:
Diane Pelkey
Under Armour, Inc.
Tel: 410.246.5927
FOR IMMEDIATE RELEASE
UNDER ARMOUR REPORTS THIRD QUARTER NET REVENUES GROWTH OF 22% ;
REITERATES FULL YEAR NET REVENUES OUTLOOK OF $4.925 BILLION
•
•
•
Third Quarter Net Revenues Increased 22% to
$1.47 Billion
Reiterates 2016 Net Revenues Outlook of Approximately $4.925 Billion (+24%)
Reiterates 2016 Operating Income Outlook of $440 Million to $445 Million (+8%-+9%)
Baltimore, MD (October 25, 2016) - Under Armour, Inc. (NYSE: UA, UA.C) today announced financial results for the third
quarter ended September 30, 2016 . Net revenues increased 22% in the third quarter of 2016 to $1.47 billion compared with net
revenues of $1.20 billion in the prior year's period. On a currency neutral basis, net revenues increased 23% compared with the
prior year's period. Operating income increased 16% in the third quarter of 2016 to $199 million compared with $171 million in
the prior year's period. Net income increased 28% in the third quarter of 2016 to $128 million compared with $100 million in the
prior year's period and diluted earnings per share for the third quarter of 2016 were $0.29 compared with $0.23 in the prior year's
period.
During the third quarter , wholesale net revenues grew 19% year-over-year to $1.01 billion compared to $850 million in the prior
year's period, while Direct-to-Consumer net revenues grew 29% year-over-year to $408 million compared to $316 million in the
prior year's period. North America net revenues for the third quarter grew 16% year-over-year. International net revenues, which
represented 15% of total net revenues for the third quarter , grew 74% year-over-year, or 80% on a currency neutral basis.
Within product categories, apparel net revenues increased 18% to $1.02 billion compared with $866 million in the same period of
the prior year, led by growth in men's training, women's training, golf and team sports. Footwear net revenues increased 42% to
$279 million from $196 million in the prior year's period, driven by strong growth in running and basketball. Accessories net
revenues increased 18% to $122 million from $104 million in the prior year's period, driven primarily by growth in bags and
headwear.
Kevin Plank, Chairman and CEO of Under Armour, Inc., stated, "Under Armour is a growth company and our ambitions for the
Brand have never been higher. This marks our 26th consecutive quarter of 20+% revenue growth demonstrating the strength of the
Under Armour Brand. From the Olympic Games in Rio to the launch of Under Armour Sportswear at New York Fashion Week,
the Under Armour Brand continues to extend its reach to new consumers while remaining authentic and rooted in sport. In the
third quarter, our key strategies and investments to diversify our portfolio on a global scale were evident across categories,
channels, and geographies. In running, we experienced strong global demand for our Slingride and Bandit 2 footwear styles,
showcasing the continued expansion of our premium $100+ footwear offerings. Within direct-to-consumer we launched three new
e-commerce sites, bringing our total to 30 global sites, as we focus on expanding brand experience and premium offerings for
consumers wherever they shop. And
finally, we hosted our second tour through Asia with Stephen Curry, where the Brand continues to resonate and drive incredible
momentum in new markets."
Gross margin for the third quarter of 2016 was 47.5% compared with 48.8% in the prior year's period, primarily reflecting
negative impacts from the timing of liquidation, increased promotions, and foreign exchange rates, partially offset by continued
product cost margin improvements. Selling, general and administrative expenses grew 20% to $499 million compared with $416
million in the prior year's period primarily driven by investments in Direct-to-Consumer and overall headcount to support the
Company's strategic initiatives.
Balance Sheet Highlights
Cash and cash equivalents was $180 million at September 30, 2016 compared with $159 million at September 30, 2015 .
Inventory at September 30, 2016 increased 12% to $971 million compared with $867 million at September 30, 2015 . Total debt
increased 19% to $1.07 billion at September 30, 2016 compared with $902 million at September 30, 2015 .
Updated Outlook
Based on current visibility, the Company continues to expect 2016 net revenues of approximately $4.925 billion, representing
growth of 24% over 2015, and 2016 operating income of $440 million to $445 million, representing growth of 8% to 9% over
2015. Below the operating line, the Company expects interest expense of approximately $30 million, an effective full year tax rate
of approximately 35.5%, and fully diluted weighted average shares outstanding of approximately 446 million.
The Company will provide an update on its longer-term guidance on the third quarter earnings conference call.
Mr. Plank concluded, "Over the past twenty years we have established ourselves as a premium global brand with a track record of
strong financial results. Looking back over the past nine months, it has never been more evident that we are at a pivotal moment in
time, where the investments we are making today will fuel our growth and drive our industry leadership position for years to
come. As a growth company with an expanding global footprint and businesses like footwear and women's each approaching a
billion dollars this year, we have never been more focused on the long-term success of our Brand."
Conference Call and Webcast
The Company will provide additional commentary regarding its third quarter as well as its updated 2016 and longer-term outlook
during its earnings conference call today, October 25, at 8:30 a.m. ET. The call will be webcast live at
http://investor.underarmour.com/events.cfm and will be archived and available for replay approximately three hours after the live
event. Additional supporting materials related to the call will also be available at http://investor.underarmour.com . The
Company's financial results are also available online at http://investor.underarmour.com/results.cfm .
Non-GAAP Financial Information
The Company reports its financial results in accordance with accounting principles generally accepted in the United States
(“GAAP”). However, this press release refers to certain “currency neutral” financial information, which is a non-GAAP financial
measure. The Company provides a reconciliation of this non-GAAP measure to the most directly comparable financial measure
calculated in accordance with GAAP. See the end of this press release for this reconciliation.
Currency neutral financial information is calculated to exclude foreign exchange impact. Management believes this information
is useful to investors to facilitate a comparison of the Company's results of operations period-over-period. This non-GAAP
financial measure should not be considered in isolation and should be viewed in addition to, and not as an alternative for, the
Company's reported results prepared in accordance with GAAP. In addition, the Company's non-GAAP financial information
may not be comparable to similarly titled measures reported by other companies.
About Under Armour, Inc.
Under Armour (NYSE: UA, UA.C), the originator of performance footwear, apparel and equipment, revolutionized how athletes
across the world dress. Designed to make all athletes better, the brand's innovative products are sold worldwide to athletes at all
levels. The Under Armour Connected Fitness™ platform powers the world’s largest digital health and fitness community through
a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal. The Under Armour global headquarters is in
Baltimore, Maryland. For further information, please visit the Company's website at www.uabiz.com .
Forward Looking Statements
Some of the statements contained in this press release constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs,
projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as
statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction
of new products, the implementation of our marketing and branding strategies, and the future benefits and opportunities from acquisitions. In many cases, you
can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“outlook,” “potential” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this press release
reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our
actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers
are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially
from those indicated by the forward-looking statements, including, but not limited to: changes in general economic or market conditions that could affect
consumer spending; the financial health of our customers; our ability to effectively manage our growth and a more complex global business; our ability to
successfully manage or realize expected results from acquisitions and other significant investments or capital expenditures; our ability to effectively develop
and launch new, innovative and updated products; our ability to accurately forecast consumer demand for our products and manage our inventory in response
to changing demands; increased competition causing us to lose market share or reduce the prices of our products or to increase significantly our marketing
efforts; fluctuations in the costs of our products; loss of key suppliers or manufacturers or failure of our suppliers or manufacturers to produce or deliver our
products in a timely or cost-effective manner, including due to port disruptions; our ability to further expand our business globally and to drive brand
awareness and consumer acceptance of our products in other countries; our ability to accurately anticipate and respond to seasonal or quarterly fluctuations
in our operating results; risks related to foreign currency exchange rate fluctuations; our ability to effectively market and maintain a positive brand image; our
ability to comply with trade and other regulations; the availability, integration and effective operation of information systems and other technology, as well as
any potential interruption in such systems or technology; risks related to data security or privacy breaches; our ability to raise additional capital required to
grow our business on terms acceptable to us; our potential exposure to litigation and other proceedings; and our ability to attract and retain the services of
our senior management and key employees. The forward-looking statements contained in this press release reflect our views and assumptions only as of the
date of this press release. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the
statement is made or to reflect the occurrence of unanticipated events.
(Tables Follow)
Under Armour, Inc.
For the Quarter Ended and Nine Months Ended September 30, 2016 and 2015
(Unaudited; in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF INCOME
Quarter Ended September 30,
% of Net
Revenues
2016
Net revenues
$
Cost of goods sold
Gross profit
Selling, general and
administrative expenses
Income from
operations
Interest expense, net
Other expense, net
Income before
income taxes
Provision for income taxes
Net income
$
Adjustment payment
to Class C capital
stockholders
Net income available
to all stockholders
Basic net income per share
of Class A and B common
stock
Basic net income per share
of Class C common stock
Diluted net income per
share of Class A and B
common stock
Diluted net income per
share of Class C common
stock
Nine Months Ended September 30,
% of Net
Revenues
2015
$
2016
$
% of Net
Revenues
% of Net
Revenues
2015
1,471,573
100.0 %
1,204,109
100.0 %
3,520,058
100.0 %
2,792,627
100.0 %
772,949
52.5 %
616,949
51.2 %
1,863,151
52.9 %
$
1,448,750
51.9 %
698,624
47.5 %
587,160
48.8 %
1,656,907
47.1 %
1,343,877
48.1 %
499,314
34.0 %
415,763
34.6 %
1,403,336
39.9 %
1,112,912
39.8 %
199,310
13.5 %
171,397
14.2 %
253,571
7.2 %
230,965
8.3 %
(8,189 )
(0.5)%
(4,100 )
(0.3)%
(18,476 )
(0.6)%
(10,572 )
(0.4)%
(772 )
(0.1)%
(3,239 )
(0.3)%
(1,025 )
—%
(5,038 )
(0.2)%
190,349
12.9 %
62,124
4.2 %
128,225
8.7 %
$
164,058
13.6 %
63,581
5.3 %
100,477
8.3 %
$
234,070
6.6 %
80,322
2.2 %
153,748
4.4 %
$
215,355
7.7 %
88,384
3.2 %
126,971
4.5 %
—
—
59,000
—
128,225
100,477
94,748
126,971
$
0.29
$
0.23
$
0.22
$
0.29
$
0.29
$
0.23
$
0.49
$
0.29
$
0.29
$
0.23
$
0.21
$
0.29
$
0.29
$
0.23
$
0.48
$
0.29
Weighted average
common shares
outstanding Class A and
B common stock
Basic
218,074
215,743
217,535
215,347
Diluted
222,115
221,053
221,709
220,708
219,756
215,743
218,147
215,347
223,738
221,053
222,301
220,708
Weighted average
common shares
outstanding Class C
common stock
Basic
Diluted
Under Armour, Inc.
For the Quarter Ended and Nine Months Ended September 30, 2016 and 2015
(Unaudited; in thousands)
NET REVENUES BY PRODUCT CATEGORY
2016
Apparel
$
Quarter Ended September 30,
2015
% Change
1,021,185
Footwear
$
278,891
Accessories
865,514
18.0%
196,279
42.1%
Nine Months Ended September 30,
2016
$
2,300,596
2015
$
785,843
% Change
1,936,221
18.8 %
510,864
53.8 %
121,832
103,564
17.6%
302,266
249,755
21.0 %
Total net sales
1,421,908
1,165,357
22.0%
3,388,705
2,696,840
25.7 %
Licensing revenues
29,484
24,313
21.3%
69,923
59,355
17.8 %
Connected Fitness
20,181
14,439
39.8%
62,180
36,432
70.7 %
—
(100.0)%
2,792,627
26.0 %
Intersegment eliminations
Total net revenues
—
$
1,471,573
$
—
—%
1,204,109
22.2%
(750)
$
3,520,058
$
NET REVENUES BY SEGMENT
Quarter Ended September 30,
2016
2015
% Change
North America
$
1,225,188
International
Connected Fitness
1,059,440
15.6%
226,204
130,230
73.7%
20,181
14,439
39.8%
—
—
—%
1,204,109
22.2%
Intersegment eliminations
Total net revenues
$
1,471,573
$
$
Nine Months Ended September 30,
2016
$
2,932,915
2015
$
20.2 %
525,714
315,467
66.6 %
62,179
36,432
70.7 %
—
(100.0)%
2,792,627
26.0 %
(750)
$
% Change
2,440,728
3,520,058
$
OPERATING INCOME (LOSS) BY SEGMENT
Quarter Ended September 30,
2016
2015
% Change
North America
$
International
Connected Fitness
Income from operations
182,840
$
24,984
(8,514)
$
199,310
181,822
6,180
(16,605 )
$
171,397
0.6%
Nine Months Ended September 30,
2016
$
304.3%
48.7%
16.3%
251,084
2015
$
34,996
(32,509 )
$
253,571
272,543
6,126
(47,704 )
$
230,965
% Change
(7.9)%
471.3 %
31.9 %
9.8 %
Under Armour, Inc.
As of September 30, 2016 , December 31, 2015 and September 30, 2015
(Unaudited; in thousands)
CONDENSED CONSOLIDATED BALANCE SHEETS
As of
9/30/16
As of
12/31/15
As of
9/30/15
Assets
Cash and cash equivalents
$
179,954
$
129,852
$
159,398
Accounts receivable, net
713,731
433,638
551,188
Inventories
970,621
783,031
867,082
Prepaid expenses and other current assets
162,255
152,242
134,751
Deferred income taxes
—
—
60,692
2,026,561
1,498,763
1,773,111
Property and equipment, net
751,286
538,531
478,418
Goodwill
576,903
585,181
591,872
Total current assets
Intangible assets, net
68,248
75,686
79,692
Deferred income taxes
155,592
92,157
42,866
Other long term assets
106,747
75,652
66,404
Total assets
$
3,685,337
$
2,865,970
$
3,032,363
$
250,000
$
—
$
300,000
Liabilities and Stockholders’ Equity
Revolving credit facility, current
Accounts payable
254,222
200,460
274,285
Accrued expenses
238,284
192,935
188,266
Current maturities of long term debt
27,000
42,000
42,124
Other current liabilities
81,898
43,415
43,929
Total current liabilities
851,404
478,810
848,604
Long term debt, net of current maturities
796,768
624,070
559,411
Other long term liabilities
114,011
94,868
89,094
Total liabilities
1,762,183
1,197,748
1,497,109
Total stockholders’ equity
1,923,154
1,668,222
1,535,254
Total liabilities and stockholders’ equity
$
3,685,337
$
2,865,970
$
3,032,363
Under Armour, Inc.
For the Nine Months Ended September 30, 2016 and 2015
(Unaudited; in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
2016
2015
Cash flows from operating activities
Net income
$
153,748
$
126,971
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization
105,382
Unrealized foreign currency exchange rate (gains) losses
72,211
(4,846)
Loss on disposal of property and equipment
24,677
504
Stock-based compensation
434
43,445
44,800
(61,561)
(15,266)
70,565
19,577
Accounts receivable
(342,342)
(288,687)
Inventories
(186,472)
(357,874)
(9,232)
(52,629)
Deferred income taxes
Changes in reserves and allowances
Changes in operating assets and liabilities, net of effects of acquisitions:
Prepaid expenses and other assets
Other noncurrent assets
—
(10,470)
Accounts payable
68,093
58,155
Accrued expenses and other liabilities
43,945
44,863
Income taxes payable and receivable
35,079
(94,162)
9,320
(313,448)
(251,378)
(226,733)
Net cash used in operating activities
Cash flows from investing activities
Purchases of property and equipment
Purchases of property and equipment from related parties
(70,288)
Purchase of businesses, net of cash acquired
—
(24,230)
(539,460)
(80,272)
30,712
68,314
Purchases of available-for-sale securities
Sales of available-for-sale securities
Purchases of other assets
Net cash used in investing activities
—
(858)
(2,670)
(316,042)
(780,821)
Cash flows from financing activities
Proceeds from long term debt and revolving credit facility
1,302,537
Payments on long term debt and revolving credit facility
650,000
(889,000)
(29,527)
Excess tax benefits from stock-based compensation arrangements
44,444
40,768
Proceeds from exercise of stock options and other stock issuances
13,022
(5,250)
Payments of debt financing costs
Cash dividends paid
7,527
(947)
—
(2,927)
Contingent consideration payments for acquisitions
—
(2,424)
Net cash provided by financing activities
460,402
Effect of exchange rate changes on cash and cash equivalents
667,821
(96)
Net increase (decrease) in cash and cash equivalents
(7,329)
50,102
(433,777)
129,852
593,175
Cash and cash equivalents
Beginning of period
End of period
$
179,954
$
159,398
Under Armour, Inc.
For the Quarter Ended September 30, 2016 and 2015
(Unaudited)
The table below present the reconciliation of non-GAAP financial measures to the most directly comparable financial measures calculated in
accordance with GAAP. See "Non-GAAP Financial Information" above for further information regarding the Company's use of non-GAAP
financial measures.
CURRENCY NEUTRAL NET REVENUE GROWTH RECONCILIATION
Quarter Ended September
30,
2016
22.2%
0.7%
22.9%
Total Net Revenue
Net revenue growth - GAAP
Foreign exchange impact
Currency neutral net revenue growth - Non-GAAP
North America
Net revenue growth - GAAP
Foreign exchange impact
Currency neutral net revenue growth - Non-GAAP
15.6%
0.1%
15.7%
International
Net revenue growth - GAAP
Foreign exchange impact
Currency neutral net revenue growth - Non-GAAP
73.7%
6.1%
79.8%
Connected Fitness
Net revenue growth - GAAP
Foreign exchange impact
Currency neutral net revenue growth - Non-GAAP
39.8%
—%
39.8%
BRAND HOUSE AND FACTORY HOUSE DOOR COUNT
As of September 30,
2016
Factory House
Brand House
North America total doors
Factory House
Brand House
International total doors
Factory House
Brand House
Total doors
2015
145
17
162
137
10
147
32
31
63
7
19
26
177
48
225
144
29
173
Exhibit 99.2
Under Armour: 3Q16 Earnings Call, October 25, 2016 (Chip Molloy)
Thanks, Kevin. I would now like to spend some time on reviewing our third quarter 2016 financial results followed by
our updated outlook for the remainder of the year as well as our long-term outlook and initial guidance for next year.
Our revenues for the third quarter of 2016 increased 22% to $1.47 billion . On a currency neutral basis, net revenues
increased 23% compared with the prior year's period. Our ability to deliver another quarter of consistent growth is a
direct result of continued investments we have made in the business to meet consumer expectations through categories,
channels, and geographies. As we continue to navigate through the changing dynamics of the North America retail
landscape, we remain focused on solving problems for athletes all over the world and meeting the consumer with
premium compelling product wherever they are interacting with our brand.
During the third quarter , our wholesale revenues grew 19% to $1.01 billion . Our Direct-to-Consumer revenues grew
29% to $408 million , representing approximately 28% of total revenues for the quarter. During the quarter, licensing
revenues grew 21% to $29 million and Connected Fitness revenues grew 40% to $20 million .
On the product category front, Apparel revenues increased 18% to $1.02 billion compared to $866 million in the prior
year's quarter led by consistent growth in our sport categories including Men's Training, Women's Training, golf, and
team sports.
Third quarter Footwear revenues increased 42% to $279 million from $196 million in the prior year's quarter. Within
running, we saw strong global demand for the brand led by two of our new $100 price point product offerings: the
Bandit 2 and Slingride, showcasing our continued focus and investment in this key category of long-term growth. In
Basketball, the Curry Signature line continues to drive strong growth for the Under Armour Brand.
Our Accessories revenues during the third quarter increased 18% to $122 million from $104 million in the prior year's
quarter, primarily driven by bags and headwear.
1
On a regional basis, North American revenues in the third quarter increased 16% to $1.23 billion compared to $1.06
billion during the same period last year.
Within our direct-to-consumer channel, our North American store count at the end of the quarter included 162 company
owned stores, comprised of 145 Factory stores and 17 Brand House stores. With the opening of three new brand houses
in the quarter in Philadelphia, New York City World Trade Center, and Madison, Wisconsin, we continue to invest in
building and creating the best premium retail expression of our brand.
International revenues increased 74% to $226 million in the third quarter to reach 15% of total revenues. On a currency
neutral basis, International revenues increased 80% . Within our international wholesale channel, the store count at the
end of the quarter included 282 partner stores.
Within our direct-to-consumer channel, our company owned international store count at the end of the quarter included
63 stores, comprised of 32 Factory House stores and 31 Brand House stores.
Looking at our international regions:
•
•
•
Starting with EMEA, we continue to post strong growth in the region as we expand our presence with key
wholesale partners and distributors while building out our direct-to-consumer business.
In the Asia-Pacific region, our premium performance brand strategy continues to resonate with the consumer
driving strong growth in the quarter. As Kevin mentioned, we continue to see strong growth in basketball led by
the Stephen Curry Signature line and believe we are well positioned to capitalize and scale the business in our
fastest growing region.
And in Latin America, we drove incredible brand awareness in the region and around the globe through the strong
performances of our Olympic athletes. We remain focused on the long-term growth opportunity of this region as
we continue to build and expand our distribution.
Moving on to margins, third quarter gross margins decreased 130 basis points to 47.5% compared to 48.8% in the prior
year's period. The following items contributed the majority of the margin contraction this quarter:
•
First, liquidations negatively impacted the quarter by approximately 80 basis points versus the prior year.
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•
•
Second, product margins negatively impacted gross margin by approximately 30 basis points versus the prior
year, driven by product mix, higher discounts and promotions partially offset by continued improvement in
product input costs.
Finally, foreign currency exchange rates negatively impacted gross margin by approximately 30 basis points.
In the quarter, gross margin declined more than planned, driven predominantly by higher than expected promotions,
both the volume and rate of liquidations, and foreign exchange rates.
Despite liquidations having been a headwind on margin rates for most of this year, we now believe that our inventory
position is healthier and that liquidations should not have the same negative impact moving forward.
Selling, general and administrative expenses grew 20% to $499 million compared to $416 million during the third
quarter of last year. Growth was predominantly driven by investments in our Direct-to-Consumer businesses, both
retail and E-Commerce, along with the infrastructure and people necessary to support our growth and strategic
initiatives such as product creation, innovation and sport category management.
Selling, general and administrative expenses were less than planned in the quarter due to lower incentive compensation
and the timing of marketing activations. A portion of the expected marketing spend shifted from the third quarter to the
fourth quarter to better align with key initiatives including the launch of Curry 3 that Kevin mentioned earlier.
Operating income for the third quarter increased 16% to $199 million compared with $171 million in the prior year
period.
Interest expense for the third quarter increased to approximately $8 million compared to $4 million in the prior year's
period. Within other income and expense, we recorded a loss of $1 million in the current year versus a loss of $3
million in the prior year. In addition, the tax rate in the third quarter was 32.6% compared to 38.8% in the prior year,
largely due to improved international profitability in the current year period and a tax benefit related to our prior year
acquisitions.
Our third quarter net income increased 28% to $128 million compared to $100 million in the prior year period.
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On the balance sheet, total cash and cash equivalents for the quarter was $180 million compared with $159 million at
September 30, 2015 . Inventory for the quarter increased 12% to $971 million compared to $867 million . Total debt
increased to $1.07 billion as compared to $902 million .
Looking at our cash flows, our investment in capital expenditures was $73 million for the third quarter compared to $71
million in the prior year's period. We now expect to spend approximately $450 million for the full year, including
investments in our global offices around the world including our headquarters in Baltimore, our distribution centers,
our SAP platform, and global Direct-to-Consumer.
Now moving on to our guidance for the remainder of the year. Based on our current visibility, we continue to expect
full year 2016 net revenues of approximately $4.925 billion, representing growth of 24%, and operating income in the
range of approximately $440 million to $445 million, representing growth of 8% to 9%. Gross margins for the full year
are expected to decline approximately 80 basis points compared to last year driven by the same factors that we have
experienced through the year. Based on our outlook of $4.925 billion in revenues, SG&A is now expected to grow
approximately 26% as we remain focused on making the right investments today to drive our long-term global success.
Below the operating line, we expect interest expense to increase to approximately $30 million in 2016. In addition, we
now expect a full year tax rate of approximately 35.5% and fully diluted weighted average shares outstanding of
approximately 446 million.
I would also like to provide additional color on the fourth quarter.
For the fourth quarter, we expect revenues to grow approximately 20%. We believe the strength of our brand and
increased breadth of head-to-toe product offerings position us for another quarter of strong growth in what has been a
challenging North America retail environment. With strong momentum in footwear and international, we remain
focused on delivering key products and assortments for the holiday season.
Gross margin is expected to be relatively flat versus prior year. Within SG&A, as I mentioned earlier, the timing of
certain marketing activations along with continued investment in long-term growth opportunities like Connected
Fitness, international, and direct-to-consumer will drive the growth in the quarter.
For the fourth quarter, we expect operating income in the range of $186 million to $191 million, representing growth of
5% to 8% over the prior year.
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Before we turn it over to Q&A, we would like to briefly discuss our long-term outlook and associated guidance for next
year.
At our 2015 Investor Day, we announced our goals of achieving $7.5 billion of revenues and $800 million of operating
income by 2018. We are on track to achieve our 2018 revenue goal of $7.5 billion and expect to grow full year
revenues consistently in the low-20s in both 2017 and 2018. At the same time we expect annual operating income
growth in the mid-teens in each of the next two years as we focus on investing to GET BIG FAST.
As Kevin highlighted earlier, the landscape for our business and our industry continues to evolve and in a fast-paced
world, we must be willing to adapt, make game time decisions, and drive our Brand forward. North America Apparel
growth is slowing across the industry. While we expect to continue to significantly outpace the apparel industry, the
growth rate going forward will be less than expected from our Investor Day in 2015.
This is a moment in time. We could choose to optimize for more near-term profits but we believe it is more prudent to
invest to maintain superior growth rates while gaining both share and scale. Growth, share and scale are the priorities
for our brand. That said, we will invest more heavily in areas that we can grow faster such as footwear,
direct-to-consumer and international as well as more aggressively enter Sport Fashion, like UAS, and the much broader
sports lifestyle category.
In footwear, that means doubling down on creating great product through innovation and design, scaling and extending
our pinnacle footwear franchises and investing in the complete market strategy from merchandising to in-store
marketing. In direct-to-consumer, we are driving investment in mobile, the optimization of the factory house store
footprint, and building out premium brand house expressions to help us drive market share. International growth
includes being more aggressive in key markets where we are gaining significant awareness such as Asia. In the sports
lifestyle category, we are accelerating investment in the people necessary to design relevant and brand right
product. And finally, we will continue to make key investments in assets that promote the brand.
Beyond 2018, we believe we have opportunities across categories, channels and geographies to consistently deliver
superior revenue growth relative to our industry. We also believe that as we approach $10 billion in revenues, the scale
it provides along with the investments we have made in people, infrastructure and systems will begin to pay off in the
form of increasing operating margin rates.
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As Kevin stated earlier, we've delivered great results on the path that has led us to this moment in time. The dollars we
are committing reflect a broader investment strategy that will enable us to build a company as big as our Brand.
We would now like to open the call for your questions. Similar to our last earnings call, Dave Bergman, our SVP of
Corporate Finance will be joining us this morning to provide additional assistance with your questions. We ask that you
limit your questions to two per person, so we can get to as many of you as possible.
Forward Looking Statements
Some of the statements contained in this press release constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs,
projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as
statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction
of new products, the implementation of our marketing and branding strategies, and the future benefits and opportunities from acquisitions. In many cases, you
can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“outlook,” “potential” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this press release
reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our
actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers
are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially
from those indicated by the forward-looking statements, including, but not limited to: changes in general economic or market conditions that could affect
consumer spending; the financial health of our customers; our ability to effectively manage our growth and a more complex global business; our ability to
successfully manage or realize expected results from acquisitions and other significant investments or capital expenditures; our ability to effectively develop
and launch new, innovative and updated products; our ability to accurately forecast consumer demand for our products and manage our inventory in response
to changing demands; increased competition causing us to lose market share or reduce the prices of our products or to increase significantly our marketing
efforts; fluctuations in the costs of our products; loss of key suppliers or manufacturers or failure of our suppliers or manufacturers to produce or deliver our
products in a timely or cost-effective manner, including due to port disruptions; our ability to further expand our business globally and to drive brand
awareness and consumer acceptance of our products in other countries; our ability to accurately anticipate and respond to seasonal or quarterly fluctuations
in our operating results; risks related to foreign currency exchange rate fluctuations; our ability to effectively market and maintain a positive brand image; our
ability to comply with trade and other regulations; the availability, integration and effective operation of information systems and other technology, as well as
any potential interruption in such systems or technology; risks related to data security or privacy breaches; our ability to raise additional capital required to
grow our business on terms acceptable to us; our potential exposure to litigation and other proceedings; and our ability to attract and retain the services of
our senior management and key employees. The forward-looking statements contained in this press release reflect our views and assumptions only as of the
date of this press release. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the
statement is made or to reflect the occurrence of unanticipated events.
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Non-GAAP Financial Information
The Company reports its financial results in accordance with accounting principles generally accepted in the United
States (“GAAP”). However, this script refers to certain “currency neutral” financial information, which is a
non-GAAP financial measures. The Company provides a reconciliation of this non-GAAP measure to the most
directly comparable financial measure calculated in accordance with GAAP.
Currency neutral financial information is calculated to exclude foreign exchange impact. Management uses this
information internally to assess sales performance and believes this information is useful both internally and to
investors to facilitate a comparison of the Company's results of operations period-over-period.
This non-GAAP financial measure should not be considered in isolation and should be viewed in addition to, and not as
an alternative for, the Company's reported results prepared in accordance with GAAP. In addition, the Company's
non-GAAP financial information may not be comparable to similarly titled measures reported by other companies.
Currency Neutral Net Revenue Growth Reconciliation
Total Net Revenue
Net revenue growth - GAAP
Foreign exchange impact
Currency neutral net revenue growth - Non-GAAP
Quarter Ended
September 30,
2016
22.2%
0.7%
22.9%
North America
Net revenue growth - GAAP
Foreign exchange impact
Currency neutral net revenue growth - Non-GAAP
15.6%
0.1%
15.7%
International
Net revenue growth - GAAP
Foreign exchange impact
Currency neutral net revenue growth - Non-GAAP
73.7%
6.1%
79.8%
Connected Fitness
Net revenue growth - GAAP
Foreign exchange impact
Currency neutral net revenue growth - Non-GAAP
39.8%
—%
39.8%
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