Under Armour Inc

NYSE:UAA

Earnings Call Transcript 2018-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Under Armour, Inc.’s Third Quarter 2018 Earnings Webcast and Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.

I would now like to turn the call over to Mr. Lance Allega, Vice President of Investor Relations. Sir, you may begin.

[Lance Allega, VP, IR]

Thank you, and good morning to everyone joining us on today’s call today discuss Under Armour’s third quarter 2018 results. Participants on this call will make forward-looking statements. These statements are based on current expectations and are subject to certain uncertainties that could cause actual results to differ materially. These uncertainties are detailed in this morning’s press release and documents filed regularly with the SEC, all of which can be found on our website at uabiz.com.

During our call, we may reference certain non-GAAP financial information, including adjusted and currency-neutral terms, which are defined in this morning’s release. We use non-GAAP amounts as the lead in some of our discussions because we feel they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to amounts in accordance with U.S. GAAP. Reconciliations of GAAP to non-GAAP measures can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management’s view on why this information is useful to investors.

Joining us on today’s call will be Under Armour, Chairman and CEO, Kevin Plank; President and COO, Patrik Frisk; and our Chief Financial Officer, Dave Bergman. Following our prepared remarks, we’ll open the call for questions.

With that, I’ll turn it over to Kevin.

[Kevin Plank, Chairman and CEO]

Thanks Lance, and good morning, everyone.

On our call a year ago, I spoke about our story in the context of chapters, the early days going public and then getting big fast. In our get-big-fast period, we accomplished what we set out to do, gain the scale and innovation, product and global footprint necessary to show up in the consumer consideration set of the world’s best athletic brands. Following this rapid growth, over the past two years of our transformation, we’ve been laser-focused on driving greater structural, financial, and operational efficiencies.

Two years that has served as one of the most challenging yet productive and opportunistic times in our history. During this tenure, we have executed against a number of strategic initiatives to better ourselves as a company and as a brand. To highlight some of these efforts, I would start with our restructuring plans, which we’ve used to close underperforming facilities and retail locations, exit certain sports marketing contracts, optimize our global workforce and aggressively clear challenged inventories.

In our supply chain, we’ve shortened lead times, are executing against our global vendor consolidation, substantially reduced our inventory levels, and are continuing to increase our distribution efficiencies. Within our product category and merchandising teams, we have aligned calendars across all functions, removed a significant number of SKUs, styles, trims, lessened materials, shortened our overall go-to-market calendar by four to five months, and streamlined our category structure.

Within marketing, digital and IT, we are improving our global CRM, utilizing ROMI or return on marketing investment to employ assets with the highest rates of return, updating our global ERP with our partners at SAP, and continuing to commercialize the intersection of our digital, fitness, e-commerce, and social media platforms.

And within our financial organization, efforts around smart spend, zero-based budgeting, and more efficient SG&A productivity continue to install high level of discipline across our Company.

These efforts demonstrate the holistic approach we’re engaging in this transformation, yet this isn’t a cost-cutting exercise, which is why we are being methodical and measured about its execution. It takes time; and by design, it’s purposeful. An evolution that is geared at producing smarter, brand-right decisions to generate consistent results through repeatable processes that ultimately drive greater shareholder returns, all the while ensuring that our brand remains coveted and desirable as we grow globally.

Today’s third quarter results show just that, another solid proof point that our multi-year journey toward becoming a more operationally excellent Company is on track. As we work to close out the second year of this transformative chapter, as we work to protect this house, we are steadfast in the challenge of becoming better at every turn. And as we continue attacking the dimensions of our strategic pillars, product, story, service and team, our foundation has become stronger, and our ability to execute more successfully is gaining momentum. Momentum, momentum is an essential asset to this transformation because we never stopped. We never stopped innovating better products, we never stopped cultivating powerful consumer connections, we never stopped identifying ways to be a better retail partner; and we’ve never stopped evolving our culture as a team. This momentum is the very fuel that drives our reasons for being, to make you better by delivering performance solutions you never knew you needed and can’t imagine living without. This is Under Armour. And as I look to the future, I’ve never been more energized, confident, and excited about what is ahead for us, both as a brand and as an operator.

By product type, gender, category, channel, or geography, we are underpenetrated by any measure, and have significant scalable growth opportunities before us. Growth of course is not given. It’s hard-fought and earned, whether by taking share or creating greater marketplace capacity. In this pursuit, we will continue to apply the lessons we’ve learned and dictate the right tempo in our next chapter with an unmistakable commitment to protecting the Under Armour brand.

Through smart marketplace management and optimal supply and demand execution, we will be discerning as the definition of growth for Under Armour continues to evolve, growth at all levels. This is precisely the position we’re working to put ourselves in by ultimately being able to employ multiple levers: revenue; margin; SG&A; cash flow; and ROIC. The optionality we’re working to establish will ensure our ability to deliver consistently to our consumers, customers, and shareholders in both good and challenging times.

In summary, we are right where we thought we would be, stabilizing, fortifying, and operating with increased excellence across our business. From product, retail and sales to our regions categories and the functions that support them globally, we are working single-mindedly and driving resolutely into our next chapter. That said, we are looking forward to sharing a deeper perspective on our strategies and our long-term outlook with you at our December Investor Day.

And with that, I’ll hand it over to Patrik.

[Patrik Frisk, President and COO]

Thanks, Kevin.

With one quarter to go in 2018, our playbook is working. As we continue to execute successfully against our plans, we are focused on managing the business for the sustainable long-term profitability. Becoming more disciplined, however, does not mean that we’re on the defense. In fact, discipline gives us the freedom to elevate our innovation agenda even further, helping athletes to redefine what is possible physically, mentally, and spiritually, and delivering products that advances human performance is our promise. With that, let’s dive into a few product highlights.

Starting with training. We’re seeing great response and continued momentum in newer offerings like Project Rock 1 and Breathe Lace footwear collections. Our reengineered Armour Storm and ColdGear Reactor Fleece and our Recovery Apparel, which features bioceramic technology that uses your body heat to promote muscle restoration.

In running, UA’s HOVR cushioning technology found in our Phantom and Sonic, and now also in the newly added CGR style continues to validate our brand as a top choice for runners. Add to this the ability to seamlessly connect through MapMyRun app, and it’s easy to understand why we call this ecosystem an entirely new running experience. Yet, it’s not just our premium running products that’s checking, Pursuit and Assert, both had strong showings as well.

And in basketball, just like Stephen, the Curry 5 continues to perform well, authenticating the strength of this young franchise. With Curry 6, that’s to come out in a few weeks time, our ability to combine game-changing innovation with unparalleled aesthetic is gaining momentum. Also of note, of course, the zero-gravity feel of HOVR just now joined the UA basketball with the launch of our Havoc model. And of course, we’re very excited to announce the addition of Joel Embiid to the UA family, definitely a lot of energy coming from this business. HOVR also expanded into our sports style footwear category with the launch of SLK, which strikes the perfect balance between sport and street style, helping to drive relevance and wearing occasions.

We also launched the Forge 96, a throwback to the year we were founded, a limited edition that’s sold out in its initial launch quantities in just two days. Supporting this momentum is being a loud brand with improved storytelling, and we’re doing just that. With more cohesive, always on activations supporting pinnacle technologies like HOVR and the Project Rock and Curry franchisees, our training running and basketball categories are setting up for increasing success.

At the brand level, we just launched Will Makes Us Family, which speaks to the hard work, hustle and grind of everyday training, the relentless effort and commitment to improving one’s performance. Behind all of this, we’re also making meaningful changes to how we plan, build and execute our marketing investments including an amplified focus on return on investments and the ability to positively impact brand perception and consideration.

Turning to the quarter, let’s take a look at how we did in each region. In North America, revenue was down 2%, which was slightly better than our expectations. This was primarily due to improved service levels and related timing of shipments, so a bit earlier in the second half of the year, yet no change to how we see the full-year playing out. Overall, while there’s still work to do, we like the stability that we’re seeing in North America including the progress we’ve made driving our inventory into better alignment with revenue.

Our international business was up 15%, which is consistent with what we mentioned on our last call that the third quarter would be our lowest international growth period of the year. This is how we plan the business to better align with customer demand along with an expectation around improved international service levels in the fourth quarter. For the year, we expect international revenue to be up approximately 25%.

Clicking down into the regions, in EMEA, revenue was up 15%, driven by growth in our wholesale and direct consumer businesses. Revenue in Asia Pacific was also up 15% with particular strength in our wholesale channel. During the quarter, our commitment to maintaining our premium positioning resulted in fewer planned promotional events and thus lower growth within our DTC business. And finally, revenue for Latin America was up 16%, driven primarily by strength in our wholesale business.

So, to sum it up. We’re executing well against our strategic initiatives, and our transformation is on track. While we continue to navigate near-term challenges in certain areas of our business, the incremental progress we continue to make is laying the necessary foundation to deliver sustainable and profitable growth over the long-term.

And with that, I’ll hand it over to Dave to talk through the financials.

[Dave Bergman, CFO]

Thanks, Patrik.

Before discussing our third quarter results, I’d like to provide an update to our 2018 restructuring plan and the onetime items that impacted us during the quarter. Of the expected 200 to $220 million of restructuring and related charges, year-to-date, we have realized $154 million, including $24 million recognized in the third quarter. With respect to this plan, I will reiterate that we do not anticipate any significant updates to our 2018 restructuring plan, and we do not anticipate any additional plans or charges next year.

Turning to our results, let’s start with revenue, which was up 2% to $1.4 billion in the third quarter or up 3%, if you exclude the impact of foreign currency.

Clicking down, by channel, sales to our wholesale customers were up 4% to $914 million, driven by growth in our international regions. Direct-to-consumer revenue was flat compared to the prior year at $465 million and represented 32% of total revenue in the quarter. This was generally in line with what we expected due primarily to significantly lower promotional activity, which made for a more difficult comp against last year’s third quarter. For reference, our planned promotional days in North America are expected to be down by about one-third in 2018 versus 2017.

Licensing declined 9% to $31 million, driven primarily by lower North American demand. By product type, apparel revenue increased 4% to $978 million with growth in training, golf and team sports. Revenue for our footwear business was flat at $285 million. And accessories revenue was down 6% to $116 million due to declines in our outdoor and training businesses.

By region, our North American business was down 2% to $1.1 billion. On a currency neutral basis, North America was down 1%. Our international business grew 15% to $351 million, representing 24% of total revenue in the quarter. On a currency neutral basis, international revenue was up 17%. And finally, our connected fitness business was up 20% to $32 million, driven by continued strength in our subscription revenue.

Turning to gross margin, we saw a 10 basis-point improvement to 46.1%, inclusive of a $5 million impact related to restructuring efforts. Excluding restructuring charges in both periods, adjusted gross margin was 46.5%, an increase of 20 basis points. This was driven by approximately 70 basis points of improvement in product costs and lower promotions, partially offset by approximately 40 basis points of channel mix, driven by higher sales to distributors, which carry a lower gross margin rate. Relative to our previous expectations for the quarter, the mix of products sold through at a higher margin was greater than originally anticipated.

SG&A expense increased 5% to $528 million. We continue to focus our investments in our DTC, footwear and international businesses. Relative to our expectations, we are realizing some early benefits from our efforts to drive greater efficiency and effectiveness. We also had approximately $9 million in marketing spend move into the fourth quarter related to changes in media buys and activation timing.

Third quarter operating income was $119 million and our adjusted operating income was $143 million. Interest and other expense was $13 million, which was worse than expected, due primarily to increased foreign currency headwinds. Our effective tax rate was 29.3% in the third quarter and our adjusted tax rate was 14%. Taking this to the bottom line, net income was $75 million, or $0.17 of diluted earnings per share. Adjusted net income was approximately $112 million or $0.25 of adjusted diluted earnings per share.

Turning to our balance sheet. Cash and cash equivalents were down 35% to $169 million. Total debt down 25% to $803 million. Capital expenditures were down 47% to $29 million. And inventory was down 1% to $1.2 billion, which was a notable improvement over our previous expectation of a high single digit increase.

To wrap up our financial review, let’s walk through our updated 2018 outlook. We expect our full-year revenue to be up in the 3% to 4% range, driven by international growth of approximately 25%, being offset by a low single digit decline in North America. From a product perspective, apparel is expected to grow at a mid single digit rate, footwear at a low single digit rate, and accessories is now expected to decline at a mid-single-digit rate. From a channel perspective, we expect a low single digit increase in our wholesale revenue, and there is no change to the outlook we provided on February 13th that our DTC business will be up at a mid to high single digit rate.

We continue to expect that gross margin should come in flat to slightly down. And if you exclude restructuring charges in both periods, there is no change to the expectation that adjusted gross margin should see a slight improvement on a full-year. We continue to anticipate SG&A to be up at a mid single digit rate. And on a GAAP basis, we now expect an operating loss of approximately $50 million to $55 million versus our previous expectation of a $60 million loss. If you exclude restructuring charges, adjusted operating income is now expected to reach the $150 million to $165 million range versus the previous $140 million to $160 million range.

Next up is our adjusted effective tax rate. Previously, we had anticipated our full-year rate to approximate 25% to 27%. Based on a one-time favorable tax structure change related to an intercompany asset sale, we now expect our full-year adjusted effective tax rate to be 13% to 15%. After taking this true-up through to the bottom line, we now expect adjusted diluted earnings per share of approximately $0.19 to $0.22 in 2018, inclusive of a $0.02 benefit from the one-time favorable tax structure change.

With respect to inventory, we expect to end the year flat to slightly down compared to 2017, a direct reflection of the methodical and strategic focus we’ve employed, primarily in our North American business. And finally, we now expect capital expenditures of approximately $175 million, down from the $200 million we provide on our last earnings call.

As we close out today’s prepare remarks, I would like to underscore just how pleased we are at the progress we’re making to becoming more operationally excellent company. Through a number of strategic initiatives, we are driving greater discipline, efficiency and effectiveness across the organization. From operating model and structural changes to supply chain, marketing and DTC optimization strategies, we are increasingly more confident in our ability to deliver greater consistency, holistic growth and a more predictable profitability over the long term.

That concludes our prepared remarks. So, with that, I’ll turn it back to the operator for your questions. Operator?

[Operator]

Thank you. [Operator Instructions] First question will come from the line of Randy Konik with Jefferies. Your line is now open.

[Randy Konik, Jefferies]

Yes. Thanks a lot. I have two questions. I have a question for Dave and a question for Kevin. I guess, first for Kevin, the thing that really kind of stands out about the call is, the talk about operational excellence and discipline. It really shows through in terms of the speech. So, my question for you is, in terms of the accomplishments thus far, what are you personally most proud of, and what are you looking forward to in terms of continuing to permeate that operational discipline and excellence across the organization going forward? And for Dave, the other part of the quarter that was pretty impressive, I think the market will actually, -- is latching on to is the inventory down, yet gross margins better. You talked about the product cost improvement, the lower promotional posture. So, give us some perspective on where we are in that runway of product cost improvement going forward, how we should think about lower promotional posture as well going forward over the medium term, and any update on how much you’ve reduced the SKU counts in the business and how much that improved SKU productivity in the business and how we can think about that going forward? Thanks.

[Kevin Plank, Chairman and CEO]

Hey, Randy. Thanks very much for the question. I think first and foremost is the resilience of this team. I can’t speak enough about just how strong this team – we say things around here like we’re the best at getting better, and that we live in constant evolution and progression of being better than we were the day before, and that’s something I think the last nearly two years now have really defined for this company. First of all, it’s been terrific having a partner like Patrik come join David and myself, the executive team, but it’s much bigger than that because it has to be a holistic buy-in from the entire company to deciding that we’re just going to be better at how we operate. And that also isn’t limited to just structure, process, operations, but also how we’re constantly evolving as a culture. And I look at the company that we are today, I think of the brand that went public in 2005, and I’m incredibly proud of that.

A little more targeted and specific of what we’ve accomplished just in the last 20 months, and I think it’s important that people understand the seismic shift that we’ve been going through, and frankly the ability for us to do that and while limited and no one I think is really jumping up and down about the size of the growth, the ability to still move forward while implementing a brand new go-to-market process that has been really transformational for the company, and we even really haven’t even seen the benefit of that until beginning in spring 2019. But, you’re starting to see some of that come together with just the timing. Our ability to deliver, having gone through an SAP implementation last July and what it means to have that overhaul, we now have a best-in-class scalable system that we think really will allow us to grow and get the best out of what we’re doing.

And a lot of what we’re seeing with inventory and what’s coming through right now, I think speaks to and comes from the ability for us to deliver on time and really being able to just get those metrics in order. We implemented and created a brand new operating model, really implementing the four regions out of Amsterdam, out of Hong Kong, out of Panama City, and then here in the States. The evolving -- I think what’s really important also is just the culture and the mindset that we have. I mean, the athletes want to win. I’ve been thinking about it; I’m trying to figure if we can make the claim whether we have more athletes as teammates here than any other place in the world, but I’d imagine we’d be pretty darn close because this is a competitive mindset and one that just does just want to be better. And so, we realize this that we want to be clear. We are certainly not declaring victory, but we’re really proud of the progress this team has made, how far we’ve come, and I think the opportunities that we have in front of us.

And so, there’s work to be done. And the thing that’ll tell all of it is when you see the great product that compels you to want to buy, and we’re proud to see consumers making those choices a lot more for this brand right now.

[Dave Bergman, CFO]

And Randy, this is Dave. Relative to gross margin and inventory, we definitely are proud of where we’re driving through here. I mean, if you think about Q3, we did run a little bit better than what we had guided. Some of that was the mix of the product that went out the door; some of that was a little bit better promotional cadence and running less promotions et cetera and still being able to drive through. And that helped offset a little bit of the developing FX pressure that we are seeing in the back half of the year. So, again, no real change on full-year but we are happy to see how we are driving through there.

And if you think about Q4, we had always anticipated that Q4 was going to be our highest gross margin rate improvement. I mean, the largest factor there really being that the significant supply chain initiatives that we initiated last year that we’ve spoken to, they really take hold in later fall, winter ‘18 product, but also in some of the spring/summer ‘19 product that will go out towards the end of this year. And then, also, we’ve talked a lot about aggressively dealing with inventory. We’ve done a lot of that in the first three quarters to the point that we don’t need to do as much of that in Q4 so that ends up being no longer a gross margin headwind in Q4. So, a lot of things going in the right direction there as we drive through and execute on our plans.

And then, from an inventory perspective, we did land Q3 inventory little bit better than anticipated, which is also exciting to see. We did have higher North America revenue there in Q3, which helped with the service levels driving through. We have got tighter supply planning and receipt timing as we work through with supply chain team, and then also just working through some of the model changes with the Brazil model change. So, couple of different things going in our favor there, and we’re continuing to drive through for year-end on that.

[Randy Konik, Jefferies]

Can I just ask just on clarity on the SKU count progress?

[Patrik Frisk, President and COO]

This is Patrik. Yes. We continue to drive our SKUs down season on season. And right now, we’re down about 40% in our SKU count but we see the more opportunity going forward. So, it’s really about not just the SKU count but what that also means for how we think about materials in terms of the materials we use to make our product and we are also driving that down, the trims that we have in terms of zippers and buttons and stuff like that, also down about 80%. So, we are driving SKUs down, but there’s more efficiencies than just SKUs. It’s all of the things that go into building those SKUs as well as vendor consolidation. So, we are also driving our vendor base down by about 25%. And we’re seeing more opportunity actually as we now have started development of the spring 2020 to drive that even further down.

[Randy Konik, Jefferies]

And a lot of good focus and you’re seeing it through the numbers. Thanks, guys.

[Patrik Frisk, President and COO]

Thanks, Randy.

[Operator]

And our next question comes from the line of Jonathan Komp with Baird. Your line is open.

[Jonathan Komp, Baird]

Kevin, I wanted to start just by following up. I know you talked about a lot of the operating enhancements that have led to the results we see. But, you also used the word momentum several times. So, just wanted to follow up and maybe ask what indicators you’re looking at within the business when you talk about seeing momentum? And at what point do you think that translates to your core market, North America getting back to sustainably growing again?

[Kevin Plank, Chairman and CEO]

Let me touch on that and let me let partner pick up the other side of that. But, momentum is a word that you take and it’s all relative too. And so, I think from sort of where this brand was and one of the things that David called out is, as we’ve grown is I think that we are proud of what we’ve done with getting our inventories in line. Momentum from an operational standpoint, the fact that we are also doing that by having about almost a third less of promotional days. And so, it is difficult for me even to say that is because the brand that we see is a full price brand, and it is great product that is driving the appetite from the consumer to want to be a part to dive in and to grow with it. But, I feel -- let me let Patrik jump on the momentum.

[Patrik Frisk, President and COO]

Yes. I think the way we are thinking about it is stabilizing the business has been a priority for us from ‘17 coming into ‘18. And right now, we are very much heads down operating through ‘18, making sure that we’re delivering on the year. That’s really important to us. But, as part of this transformation that Kevin talked about earlier, we’ve also been driving our supply chain really hard to make sure that we are servicing our accounts better. And we believe that with servicing our accounts better, doing our marketing and messaging better, and actually getting that great product that we have on the shelves the right place the right time will start to drive momentum for us, and that’s really what we’re feeling right now, a little bit of momentum building in North America, specifically. We’ve also make strategic decisions around how to think about our promotional days, like Kevin said. For example, we have a third fewer promotional days in our direct consumer business in North America alone this year. Those are things that are we believe over time going to help drive our brand heat back up. And if we can continue to do what we’re doing now much better, which is servicing the business, we believe that you’re going to start to see more momentum built for the brand going forward. I don’t know if you want to add anything to that Kevin.

[Kevin Plank, Chairman and CEO]

If you don’t mind, just staying on this. But, again, I can iterate enough, just the fact that great product wins. But in addition to just having great product, we’re also driving operational excellence. And I think that’s something where when we have the funnel that we have at the top where we’ve got enough great ideas. It’s a matter of how we can execute them and really run the go-to-market in a way that it will deliver for the consumer.

But another just couple of anecdotal things when I say momentum, it is, when you look at some of the recent signings we’ve made especially on the basketball side of our house with Joel Embiid joining our team who is perennial All-Star. The decision for him, it wasn’t just money, he had plenty of options. So, we didn’t have to be the biggest check out there is that there is something I think that the athlete sees is because when you come here and you get the tour, I think most important, you feel the team. I think you see that there’s a belief. And I want to be clear, we’re not declaring victory. We’ve got a lot of work to do. We’re not crazy about the sort of overall position. And if you ask me, I’d say, is business great, I don’t know if it’s great. I’d say if this business not great? I’d say, I don’t it is not great. I think we’re just doing -- we’re doing fine. And if we can do this sort of restoration of feeling and really making strongest team and this operating structure, I think we’re going to have -- we’re going to have really to do something to deal within about another 12 months or so, more to come at Investor Day.

[Jonathan Komp, Baird]

Certainly. I appreciate the balanced view there. Maybe just one follow-up for Dave. I wanted to ask more specifically on the promotional day decline this year, I think you said down a third North America. Could you just give more of a sense of the pacing of that throughout the year? Like, maybe first half versus second half or even what you’re thinking for the fourth quarter? And then, I guess the bigger picture question on gross margin is, even though you’ve had less promotional days, it’s still stabilized and at pretty low levels relative to historical. So, any thoughts on what point you start to recapture and some of the drivers there?

[Dave Bergman, CFO]

Again, overall, about a third lower for the full year. We’re not going to really give the quarter by quarter cadence of that. But, I would say that gap in promotional days is a little bit less in Q4 than probably the first nine months. And then relative to gross margin, obviously, we’ve got a pretty big headwind this year with the amount of off-price liquidation we’ve done to be able to deal with the inventory overhang. And we are excited about the costing improvements coming through that we’ve mentioned a lot that we start to see in Q3 and Q4 of this year. But, relative to next year and beyond, we’ll be excited to talk about that when we get to Investor Day.

[Operator]

Our next question comes from the line of Matthew Boss with JP Morgan. Your line is open.

[Matthew Boss, JP Morgan]

I guess, first on product. Maybe Patrik, can you speak to progress you’ve made regarding channel segmentation? And then, Kevin as you talk about the momentum, maybe as we think about next year, how would you rank that excitement and momentum as we think maybe by category in terms of things that you really think will excite the customer on the product front?

[Patrik Frisk, President and COO]

Thanks, Matthew. I think, when you think about segmentation, this was a big topic for us as we kind of exited 2017 certainly. And one of the benefits that we have with this more holistic end-to-end go-to-market that we built is the fact that that actually begins with segmentation. So, we feel that from a category, gender, country, region, channel perspective going forward for the brand, we’re now really in a really good position in terms of segmenting our product across the world. So, you’ll see, as we as we turn the corner going into 2019, a really well-defined segmentation for the brand. And I think that’s going to further help us drive momentum and sell through in the various channels that we have. Kevin, do you want to…

[Kevin Plank, Chairman and CEO]

Yes. If were specific in picking them, I’d say we’ve demonstrated the amount of runway we believe is still in front of us with things like our footwear category, HOVR is obviously exciting within the training and running platforms we have in there. And you’ll see a training platform for HOVR begin to come to light as well. Women’s we think is a massive opportunity for us. And again, both these businesses now are over $1 billion. And then training just overall remains a massive, massive opportunity.

On the apparel side, we’ve also talked about our rush and recover technology, which is active recovery. It’s actually helping increased blood flow that enhances and increases the speed at which you can recover. So, this isn’t just apparel or nice silhouette or better styling, it’s actually product that is living the definition of -- and the DNA of the mission in Under Armour is making it better. But probably, the one of things I’m most excited about is, I can argue -- I don’t think that we’ve -- I wasn’t crazy about our product in ‘17, we like it much more in ‘18, we’re really excited about the way it looks in ‘19. But all along, I think one of the things that we lost more than anything is we lost our ability for storytelling. And when I think about ‘19 and going forward, I really look forward to the ability to explain to people and communicate them the number of scientists and PhDs and wear testing hours that go into every product that we build to understand the science and the DNA behind really thinking and emphasizing with that consumer who’s going to wear it of what we can do to put them in the best position to be excellent.

And that’s always been there. But, I don’t think we’ve done the best job of telling that story. And I think you’ll see it A, being to articulate itself through just really beautiful design, and product that’s really well-considered. But, I think it’s the whole package. And so, there’s a lot of things to be excited about. Again, we have work to do and we have to demonstrate that we can run the play. But the good news about this is that this is a play that is capable of being repeatable, even regardless of who’s in the chair right down to myself, so.

[Operator]

Thank you. Our next question comes from the line of Matt McClintock with Barclays. Your line is open.

[Matt McClintock, Barclays]

Yes. Good morning, everyone. Kevin, I was just -- thinking with all of the discussion about the intense focus on service and servicing the business et cetera, could you maybe talk high level how your conversations with retail partners has evolved over the past year, and where you see that partnership going in 2019 and beyond as some of these improvements start to take hold?

[Kevin Plank, Chairman and CEO]

Matt, probably one of the best things I think that Patrik’s done in the 17 months or so that he has been here is, he has just been to every office and visited nearly every major count that we have around the globe. So, with that fresh perspective, I think it’s probably the best way to be able to phrase and answer that.

[Patrik Frisk, President and COO]

Yes. Thanks, Kevin. I think when we think about our accounts, our relationships, I think they are right now strong and getting stronger. And we are really focused on winning with the winners. That strength or that relationship also comes on the back of starting to service our business better. And we are ramping that up very rapidly. It’s a combination of servicing the business better, having a very clear defined go-to-market for the accounts, they understand where we’re going, what we’re doing. Storytelling will be driving around our product as we move into the future and getting them excited about both the product and the storytelling together, having the correct segmentation in the marketplace. They are starting to feel confidence I think in our ability to make this brand as great as it could be. That ultimately I believe is driving a better relationship. Right? I think the other thing is, strategically, we feel we are much stronger now. We are able to speak to the accounts more longer term and we have very-defined pathways for each brand. And I think that’s also building strong confidence for them and giving them a reason to believe in the brand, the team and the product.

[Matt McClintock, Barclays]

Just one additional question just on manufacturing vendor consolidation and some -- follow-up on the product cost improvement. Can you maybe talk to some of the benefit that you’re getting from improving or consolidating your relationships with specific manufacturing vendors?

[Patrik Frisk, President and COO]

Yes. I think -- this is Patrik again. I think what’s great about the work that Colin Browne has done in terms of that aspect of our business is really taking the same approach that we’re doing on the front-end in terms of thinking about winning with the winners. The environment for manufacturing around the world, as you think about both, apparel, footwear and accessories is changing pretty rapidly as we all know. And making sure that we have a flexible, agile ability to produce the products that we create has been a really big initiative for us. So, making sure that we have also the flexibility with the vendors, in other words, having vendors that can flex where they produce the product that they can flex the scale, scaling of how fast they can scale our various initiatives that we, has been a really important aspect of how we’ve thought about the vendor consolidation. So, we believe we’ve bet on the partners that win with us going forward. And what you’re seeing now is really the -- that some of that effort coming to life, both in terms of our ability to execute to deliver the right product, the right place, the right time, but also in terms of how that’s showing up in our costing, and maybe I’ll hand it over you, Dave, and you can add some color there.

[Dave Bergman, CFO]

Yes. I think that it’s pretty powerful when you think about how we are attacking it from different lenses. When you have the vendor consolidation being coupled with better transparency with how we negotiate the costing with our vendors and really driving that costing down through the consolidation of the vendors and the transparency of which we negotiate coupled with the fact that we are also really digging in deep on our pricing, and how do we attack our markdown cadence, our promotional cadence, our initial ticket pricing to really maximize profitability and market share going forward. So, when you combine all those three things together, you are really starting to see some of the impact of that in Q3 of this year and Q4 of this year, and we’re excited to keep driving that through as you go forward.

[Operator]

Thank you. Our next question comes from the line of Jim Duffy with Stifel. Your line is now open.

[Jim Duffy, Stifel]

David, you talked some about the inventory numbers, can you talk about where you see the quality of inventory right now and what that should look like as we enter 2019?

[Dave Bergman, CFO]

Yes. Obviously, we’ve talked a lot about the magnitude of the overhang we had coming into ‘18, and we’ve aggressively been working that down. I think that we’ve been attacking North America the most first, international, we’re going to be working through a little bit further next year. So, we would expect to continue to drive some improvement there. But, it’s really a holistic effort. I mean, you’ve got a much tighter, go-to-market process, a much tighter supply chain relative to the forecasting side, demand side, the timing of inbound receipts versus outbound, the processing efficiency within our DHs and maximizing DH space that we have. So, it’s really a combination of all fronts between GTM, supply chain, and all the way processing through. So, we are excited to see the improvements. I mean, it’s fairly dramatic when you think about starting back in Q3 of ‘17 where we had 22% growth; and Q4 ‘17, 26%; Q1 ‘18, 27%; and then, now, working it all the way down to a negative 1 this quarter and planning for flat to slightly down by end of year. So, by no means are we going to stop there. We got more work to do in 2019, and Patrik and I and the teams and supply chain are all going working through that together.

[Patrik Frisk, President and COO]

Yes. Maybe, I’ll add. Jim, I’ll just add a little bit of color on that as it relates to the planning aspect of what we do, going forward. It’s not just about the inventory you have, right, it’s about the inventory you build as well. So, one of the things I’m really proud of this is how the team has pulled together and also now in the new operating model really driving a much better demand planning going forward as well as our supply planning. So, really taking a holistic view end-to-end also in that respect, which is certainly helping us become a tighter company, like Dave said, and really holding together through the entire go-to-market.

[Jim Duffy, Stifel]

Great. Margin progress is encouraging. Recognizing that clearance has been a component of the revenue base, can you guys help us think about that as we consider revenue trajectory for 2019? Does that clearance base represent a hurdle, you need to jump over?

[Dave Bergman, CFO]

Well, I would say with the amount that we’ve done through third-party off-price this year, we probably will be looking to normalize that level little bit more going forward. That is something that we’re going to be incorporating into our discussions on ‘19. We will give more color to that on Investor Day.

[Operator]

Thank you. And our next question comes from the line of Edward Yruma with KeyBanc. Your line is now open.

[Edward Yruma, KeyBanc]

I guess first on footwear, you guys have done a really great job generating heat around some of these limited batch releases, like Project Rock. I guess, how successfully you think you’ve been in translating some of the strength of the halo product to the rest of for portfolio. And then, I guess second, obviously, e-com will be big this holiday season. I guess, how do you think you’re positioned there, how should we think about your capability sets, and is there anything we should expect that will be an improvement versus the e-com experience last year? Thank you.

[Patrik Frisk, President and COO]

Hi. Thanks Edward. I’ll start off and then I’ll hand it off to Kevin, because I’m sure he would love to add some color around the product.

But, from a process perspective and in terms of how we think about driving our direct-to-consumer business back half of the year, like I said before, we’re heads down delivering on ‘18 now, I think as it relates to both North America and also some really important events coming up in China around 11/11 and so forth. And we feel ready. We feel that we have the right level of inventory; we have the right plans in place. We learned a lot last year. We had a bit of a rough time last year as we were working through, both our operating model and in general, our entire supply chain transformation. This year, we feel much better. We have improved our service levels increasingly throughout the year and we feel we’re coming into Q4 ready, both from a messaging perspective as well as a supply chain perspective. And we feel that we have the right product that will be on the shelf. So, that’s kind of how we feel about running into -- head into Q4.

[Kevin Plank, Chairman and CEO]

And I’d just add, in footwear, it’s interesting, just understanding this industry, and it’ll be our 13th, heading in our 14th year as a public company next month, so just a couple of weeks, we’ll celebrate that anniversary. And you just look at the things that you’ve learned and thinking of starting in apparel sporting company and what it means to be a footwear company. It is a long road, and the barriers to entry are incredibly high, especially when you’re trying to do that at scale. And so, from a company that was trying to launch half a million or 1 million pairs of shoes to now being in the 40 millionish kind of a range with what we’re building, we want to keep it special.

And the one thing we’re doing is that we are certainly playing the long game. And we have learned some massive lessons, and a lot of those lessons have been, what Patrik spoke about with some of the better consolidation and how do we make sure that where we’re doing business, it’s really meaningful, impactful, and that we can have the A teams that are working on our products because footwear is one of those many things defined by the last 10% or last 5% and making sure that we finish there.

But, when you go back a year, we hadn’t -- we didn’t have the capacity for the franchise capacity. I don’t think it’s something that we mastered, beyond the product building. We continue to see the progress that we’re making, but it’s now having things like HOVR; it is having the Phantom and the Sonic platforms; it’s the Project Rock; it’s the highlight and the spotlight on the cleated side of our businesses; it’s the Fortis; it’s the Curry franchise. And again, we learned a lot of lessons with introducing the Curry 1; we learned a lot of lessons on the Curry 3 and now having the Curry 5 and heading into Curry 6, you’re really beginning to see the cadence build and our partnership with Stephen is one that we’re learning how to do this.

And then, we also have the opportunity for these moments, like we just did with the Forge 96, which was a limited release product that sold out almost immediately. And the most important thing I think is the story. We’ve just gotten much, much better at the story. And if we have the opportunity to put this together, it articulates things like our Portland headquarters. We’re in this business, we’re not going anywhere. And we understand what that means. Resilience is how I started the first question on this call out with. And I’ll say that we’ve been resilient in footwear. We have certainly taken some lumps and we have learned a lot of lessons, but we’re in position. Again, I want to overemphasize, this call -- we’re pleased, we’re appreciative of the reaction, but we understand that our heads are down. We still have a lot of work to do, and we’re going to keep making this incremental progress that hopefully just makes us better and better each and every day.

[Operator]

Thank you. And our next question comes from the line of Lauren Cassel with Morgan Stanley. Your line is open.

[Lauren Cassel, Morgan Stanley]

I just wanted to ask about wholesale versus DTC growth going forward as part of your broader strategy. Is low single digit wholesale growth and mid to high single digit DTC growth the right way to think about the two pieces over the medium term, or do you see a scenario where wholesale is flat to perhaps down slightly and DTC accelerates into the double-digit range? I would think that you would see some nice margin mix benefit from that as well. So, any color on that would be great. Thanks so much.

[Kevin Plank, Chairman and CEO]

Hi, Lauren. I think, Dave you’ll start off, I think. Right? Go ahead.

[Dave Bergman, CFO]

Yes. I mean, I think, Lauren again, relative to this year, we’re pretty clear on our expectations. We’ve been holding up pretty tight throughout the year on the mix of wholesale and DTC and how we drive that through. There’s obviously been some puts and takes as we move through the year, but we feel pretty good about that. And we feel pretty good about where we stand with our DTC plan for Q4 of this year. Relative to 2019 and beyond, we’re going to be a little bit more careful on how much color we give there at this point. But, I’ll turn it over to Patrick.

[Patrik Frisk, President and COO]

Yes. We’re excited about our opportunity. I think as it relates to both wholesale and direct-to-consumer, we do believe that in North America, we’re underpenetrated from a direct-to-consumer perspective. And as we are -- we have very strong intent to continue to drive a premium brand in the marketplace. We believe that the direct-to-consumer full price store portfolio also plays an important part in that. So, you’ll see us investing into that going forward in the same way that we continue to invest into that premium experience around the world. Kevin and I were just down in Mexico a little while back here opening our 1,000th store. And we clearly see an opportunity for us to continue to drive that part of the business.

And we also continue to do a better job of our CRM capabilities, helping drive our e-commerce business, not just here in North America but also around the world. I think, it’s the balance between the three components that we continue to calibrate. Wholesale is still a very, very important part of our business, especially here in North America. But, we’re looking forward to painting a picture for you guys when you get here in December of how we think about this going forward. But, it’s very exciting. We see a great opportunity for us to strengthen ourselves as it relates to premium positioning by showing up better in the direct-to-consumer channel going forward.

[Operator]

Thank you. And our last question will come from the line of Michael Binetti with Credit Suisse. Your line is open.

[Michael Binetti, Credit Suisse]

Hey, guys. Good morning. Thanks for all the details. They are really helpful. Let me ask on direct-to-consumer. Would you mind just quickly helping us click down a little bit on some of the color related to the outlets versus e-commerce in the quarter? Maybe help where did you see the slowdown and how should we think about which components will grow slower maybe for a few quarters versus some of the things -- some of the headwinds that could unlock in the near term to reaccelerate? I’m thinking maybe there’s a correlation between the inventories coming down so much and what you saw in the outlets, but maybe you could help add a little clarity there.

[Patrik Frisk, President and COO]

Yes. I mean, Michael, when you think about as we play out the back half of this year, DTC was flat in Q3 but we are expecting it to return to growth in Q4. We plan to be less promotional and we’ve been working through that. That was a little bit tougher comps in Q3. We will be less promotional in Q4 versus last year but that differential may not be as large as it was in Q3 or prior. So, that comp isn’t going to be as difficult. So, we’ve been playing the business this way. We’re continuing to drive through. We’re continuing to invest in our DTC presence internationally and seeing a lot of good momentum there. While in North America we remain focused on optimizing our current footprint and protecting our brand through moderated discounting and focusing on kind of prudent profitable growth. And when you think about again Q4 with DTC, a lot of that was around door opening timing, a lot of it was around new product launches, and a lot of it around the promotional cadence of why we feel good about Q4.

[Michael Binetti, Credit Suisse]

Let me -- since you’ve mentioned spring ‘19 a couple of times on this call, and I know we’ll get into a lot more of the multi-year outlook at the Analyst Day. But, I guess, if there’s one thing that we feel that we hear a little bit of tension on, it’s -- those people that watch some of the industry data in the U.S. would posit that the sporting goods channel has been fairly negative for you guys on a wholesale basis, really since Sports Authority went away and those that caused some problems in the channel. But, as you look out next year, how can you help us think about how to override long-term business reality that is the buyers in your sporting goods, retail channel would typically tend to keep buying forward seasons lower on a year-over-year basis until they see current sales trends and sell-throughs turn positive on a year-over-year basis? You sound like you have a lot of optimism around spring ‘19 that that historical norm could be abandoned. You sound like you have some product coming. But, can you just help us think about what the big unlock is for spring ‘19, that’s so much different as we look at the sporting goods channel in the U.S. in particular?

[Patrik Frisk, President and COO]

Hi, Michael. This is Patrik. So, you’re absolutely right. So, here’s the deal. We’re caught in the calendar. Right? I mean, to some extent, when you’re in this business, you are only as good as your last season, right, to some extent. And when you’ve been in that down trough for a while, you’ve got to build a backup, and it’s just the nature of the beast. We feel really excited about spring ‘19 simply because we believe our product is better, our storytelling is better, and we’re going to start to march back. You can’t do that off cycle. It just happens, exactly like you said. If you’ve had a few seasons of poor sell-throughs, you’ve got to build it back up, and that’s why our business is -- the nature of our business is cyclical. What we’re excited and the reason we’re excited is because we believe, like we said here on this call today, that our product is better, our storytelling is better, our ability to execute is better. And all of those things together we believe is going to start to drive healthier sell-throughs for the brand. And that’s in all channels. And that’s all across the world, so. And then, you need to build that back up. Because to your point, right, I mean, the buyers in the wholesale channel, for example, they are only buying in the rearview mirror, which is their job. I mean, they’re trying to optimize what happens in their stores and they do that by looking at the numbers that they’re currently seeing. So, that’s how it works. So, I’m very hopeful that we’re going to get you guys excited when you get here in December because we’ve got some great stories to tell.

[Kevin Plank, Chairman and CEO]

Hey Michael, if I could jump on and maybe call it bit of a closing comment too. But, I think what’s really exciting is that in thinking about just the growth and building this Company, it really came down to a lot of strengths and sort of forces of personalities, forces of will, forces of nature. And what we’re building is the ability for a business to be repeatable. And when I look back and I say I don’t know how great our product was in last couple of years or how great our storytelling was, this isn’t about any individual. This is about the team that we have in place, is the team and you’re seeing some great leaders also step up in our organization. But, it’s not to look back and say we almost had the wrong people. I just think we had the wrong process, and that we pushed so hard in order to build this engine. Now, we’re at a moment in time where we’re really getting to refine and to put a real plan in place, put a play in place so that we can -- everybody knows what it is. We can call it, we can run it, we can do it on a consistent basis. And I keep using the word repeatable that we can make it happen over and over again for us and that we have the ability to know what’s coming in that, our consumer that knows what’s coming, and all that time it begins to align. And I think that’s what will make us a better organization.

That being said, there’s still a lot of parts of our organization, parts of this Company and parts of our culture that are still in constant evolution, and we’re really proud I think of the progress that we’ve made. But, we also look in really -- we’re beginning every day from what we’re going to call day one. And this day one is we’re really proud I think at where we are. I think, today is a good indication of what that progress is meant. But, we have -- we really have a great opportunity. And I’m excited for our team and I’m appreciative, because this is really a great reflection of the team we have around us, as well as the work of David and my partner, Patrik here and our executive team too. So, we look forward to telling you more about that on December 12. Thank you. Thank you very much everyone.

[Operator]

Thank you. That concludes today’s question-and-answer session. Thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone, have a great day.