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Operator
Good morning and welcome to the Under Armour Q324 conference call. All participants are in a listen-only mode. Should you need assistance during the call, please press star zero to reach an operator. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star one on your touch-tone phone. To withdraw your question, please press star two. Please note this event is being recorded. I would now like to turn the conference over to Lance Salega, SVP, Investor Relations, Treasury, and Corporate Development. Please go ahead, sir.
Lance Salega
Thank you. Good morning, and welcome to Under Armour's third quarter fiscal 2024 earnings conference call. Today's event is being recorded for replay. Joining us on today's call are Under Armour President and CEO, Stephanie Lenartz, and CFO, Dave Bergman. Our remarks today will include certain forward-looking statements that reflect Under Armour's management's current view of our business as of February 8, 2024. These statements may include projections for our business in the present and future quarters and fiscal years. Forward-looking statements are not guarantees of future business performance, and our actual results may differ materially from those expressed or implied in the views provided. Statements made are subject to risks and other uncertainties detailed in this morning's press release and documents filed regularly with the SEC. including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Today's discussion may also include the use of non-GAAP references. Under Armour believes these measures provide investors with a helpful perspective on underlying business trends. When applicable, these measures are reconciled to the most comparable U.S. GAAP measures, reconciliations of which, along with other pertinent information, can be found this morning's press release and at about.underarmour.com. With that, I will turn the call over to Stephanie.
Armour
Thank you, Lance, and good morning to everyone joining today's call. Let me begin by saying that despite a challenging retail environment and consumer buying behavior that was inconsistent market to market, we are pleased with the results we achieved in our third quarter, with revenue in line with our November outlook and better than expected earnings. As I approach my first year at Under Armour, I am genuinely inspired by the power of the brand and our commitment to the strategies we are undertaking to unlock our full potential. Following our Protect This House 3 plan launched last spring, I am pleased with our progress in driving global demand creation and our focus on evolving and simplifying our approach to connecting with consumers. I also feel good about how our efforts are shaping up to deliver elevated design and products to the athletes we serve in nearly 100 countries around the world, strengthening our ability to drive success across our largest growth opportunities in footwear, sports style, and our women's business. With respect to driving U.S. sales, this remains a multi-year journey, and candidly, we have much more work to do to become a healthier business capable of returning to growth in our largest market. As detailed previously, inconsistency has permeated our U.S. business over the past years. In how we go to market across consumers, customers, and geographies, how our product is created and delivered with a consistent design language, channel segmentation, and how we show up in our owned physical and digital businesses. With a critical mass of work underway and additional analysis that will yield more work and decision points in the months ahead, we are on the right path to addressing these inconsistencies and turning them into strengths. All of this will take time, and it starts with leadership. To drive success, the right talent must be in the right places. with the trust and the freedom necessary to empower execution. Bolstering our leadership was amongst my highest priorities in my first year at UA, and we've made excellent progress. Since last summer, we've added several new experienced officers to lead our product, design, consumer, supply chain, and communications teams. Additionally, we named a nine-year company veteran to lead our Americas region. and announced the return of a UA veteran to head our EMEA business. We have also streamlined our business to be more responsive, including our marketing functions, where we recently consolidated our global and North American teams, who will report to a new chief marketing officer, a search that's currently underway. This unification will bring a cleaner, integrated approach to empower faster decision-making to accelerate our ability to connect more deeply with consumers. About two-thirds of my executive leadership team is new compared to last year, and each of these leadership changes is tied directly to the inconsistencies I mentioned earlier. So we are making good progress and hitting challenges head-on. The next steps are activating and empowering these teams to drive our strategic priorities, creating a future flywheel of operational excellence and execution that drives consistency back into our business. During the third quarter, I visited our Asia Pacific region and met with our team, athletes, and retail and factory partners. Like my EMEA trip, I am encouraged by the energy, passion, and effort we're bringing to our daily business. I also toured many of our North American stores to evaluate the opportunities we have to leverage our full price locations as a premium brand showcase to further build relevance with our consumers. In the near to midterm, as we navigate a dynamic global environment and our new leaders take time to ramp up, we are focused on cost management and profitability. As we close out fiscal 24 and assess how to best to allocate our investments in the year ahead. This includes efforts to understand where and how we are putting our resources to work to drive the best possible returns and identifying which strategies will be most critical to driving demand creation over the long term. especially in North America. With more strategic deployment of our marketing resources, we continue to see positive momentum here. A great example is the Curry brand, driven by the Curry 11 basketball shoe. And we recently launched the Dub Nation Pack, celebrating Stefan's commitment to the Golden State Warriors fans with unique colorways for the 11, the Curry 1 Retro, and the Spawn Flowtro. The Curry brand also dropped exciting collaborations with Bruce Lee and Apparel and Footwear, including the new Curry Slip Speed. And with the addition of De'Aaron Fox from the Sacramento Kings, we're looking forward to De'Aaron's first signature shoe later this year. In global football, we're leveling up our roster with some of the best up-and-coming talent at the highest levels of sport. We recently signed Mexican national team player Sebastian Cordova, FC Barcelona's Fermin Lopez, and Real Madrid's Antonio Rudiker. As we look to grow relevance in the world's most popular sport, this marks a significant move to bolster our presence, so we are very excited about the possibilities this brings in the years ahead. In American football, I want to congratulate our hometown Baltimore Ravens for a fantastic season, reaching the AFC Championship game, including UA athlete Kyle Hamilton, who was named a first-team All-Pro and to the Pro Bowl in just his second year. On the college side of the game, Notre Dame finished the season with a dominant bowl win, powered by Under Armour performance gear on the field, and had off-the-field swagger with UA slip speed, heat gear base layer, hoodies, and fleece. Adding an excellent example of our evolving approach to brand activation was last month's UA Next All-American event in Orlando. where the best U.S. high school volleyball and football players engaged in a week of unforgettable experiences and elite-level competition. As a pinnacle grassroots program, this provides the next generation of athletes an opportunity to elevate their physical and mental game. And, of course, they were kitted out in amazing UA gear, like the all-new Slipspeed Mega, a maximalist running shoe in fire and ice colorways, and other products like Unstoppable Pants, infinite pro running shoes, and all the accessories necessary to excel at their sport. With a massive social media activation, the UA Next All-American Week demonstrates how we maximize the authentic connection to sports culture, showcasing product innovations that make athletes better, and leveraging up-and-coming influencers to generate brand buzz and engagement. We have also made significant strides across social media over the past year and continue to gain traction. During this time, our Instagram followers showed strength across all UA accounts, with a significant uptick in the Curry brand. Likewise, our TikTok followers have also gotten stronger, as have our engagement rates. This past quarter, our focus was elevating footwear and sports style, and our strategic collaboration with external content creators and influencers meaningfully help to amplify the impact of our social media content. To drive engagement and demand for the brand, we must deliver elevated design and products. With the appointment of Yasin Saidi as our Chief Product Officer, I am incredibly excited about the evolution in style for our apparel and footwear. Joining us just last week, Yasin brings nearly 20 years of industry experience from several powerhouse brands. with a deep pedigree of developing authentic performance and sportswear apparel, and a reputation as a significant influencer in the sneaker market. With our Chief Product Officer and a new head of design in place, along with additional apparel, sneaker, and branding experts, we are making significant progress in getting the right team together to ensure a balanced approach to continuing to deliver industry-leading performance innovations on pitch, field, and court. with an ability to attack the massive sports style opportunity more effectively. Given our product creation cycle, it will take time for this newly led team to start driving more critical mass into the equation. Yet we're not hitting pause until then. We have a lot of newness to be excited about as we head into spring summer 24, especially in apparel. Over the past few quarters, we've made substantial progress in style consolidation and leaning into premium, as we started to place smaller run capsules and reposition existing products within our SportsVale offering. Although early, we are excited for fresh updates of our key apparel franchises to hit shelves later this spring, including the Unstoppable AirVent, a new, baggier, on-trend silhouette of our classic woven pants. Additionally, an expanded line of our soft and versatile Meridian Performance apparel is due out this spring, with stylish, flattering products for women, including bodysuits and tanks that she can wear from the classroom to practice and from the gym to the office. Next is an update to our iconic warm weather base layer with super light heat gear compression shirts and shorts that wick sweat for maximum performance, receiving new and improved fits, colorways, and styles for more versatile occasions. Our retail partners are excited about this evolution. and bookings for this product are strong, especially our women's products. Speaking of our women's business, we were honored to have received two Women's Health Fitness Magazine awards. Our UA SmartForm Evolution Mid Sports Bra received the best sports bra overall, and our Women's UA Rain 6 training footwear was also recognized. We are proud of these wins, which help drive more incredible momentum in this business, especially as we expand our sports style offerings. Shifting to our ability to harness innovation for our athletes and the planet, I'd highlight our collaboration with Celanese, a global chemical and materials company, in developing a new fiber for performance stretch fabrics called Neolast. This incredibly innovative fiber has the potential to offer our industry a high-performing, more sustainable alternative to elastane or spandex, which has recycling challenges. With the first apparel products due out later this year, We believe Neoless fiber could have a transformative impact on Under Armour and the textile industry. Next is footwear, which remains our single most significant growth opportunity. And we know we have a lot of work to do here. During the third quarter, our footwear business was down 7%, in part due to a tougher prior year growth comparison of 25%, but also due to softer demand, primarily in North America. In the rear view, we recognize some of the inconsistencies from our past are showing up in our current results. However, we believe these challenges are near-term in nature, and we continue to look forward by evolving our footwear strategies and investments to support our long-term growth expectations. Rounding out our product leadership changes, a search for a new head of footwear is also underway, further emphasizing our commitment to having the right talent to drive the right results in the years ahead. Leveraging our knowledge of nips, expertise in midsoles, and innovative cushioning, we have made good headway in our approach to our running footwear. As a highlight, our Velocity and Infinite running franchises are getting important updates for spring-summer 24 with base, pro, and elite styles to cover our good, better, best segmentation. In this spirit, we are intensely focused on franchises, identifying where we can win, and partnering with our wholesale customers to scale our footwear business more effectively. shifting next to our America's business, and much work remains. During the third quarter, our North American business was down 12%, which I will note was in line with our expectations and reflective of a challenging wholesale environment in the U.S. and softer demand. Here, we remain focused on serving our retail partners and working with them to optimize our assortment and segmentation, ensuring greater overall consistency and profitability. In our North American DTC business, I'd highlight that underneath slattish results in the quarter, we are encouraged by specific operational gains made during the crucial holiday period. These included exceptional customer service scorecards, elevated talent across our fleet, and significantly improved in stock levels. Thus, our work to become a better retailer is beginning to shine through. We are also progressing on our new full-price brand house design, and are set to test a smaller, easier-to-navigate format with a more premium and curated product positioning. One of the bright spots for our North American DTC business continues to be our UA Rewards Loyalty Program, with encouraging member engagement and spending trends. Our enrollment has hit nearly 3 million members, which is well ahead of the target we set for Fiscal 24. Our members continue to show a higher premium purchase frequency than non-members in these early months We drove engagement during the third quarter via our first ever Members Week, along with eight members-only holiday campaigns, which directly contributed to peak holiday business. We are also working to improve our digital business. Given that our North American e-commerce channel has been tempered during Fiscal 24, as we turn to Fiscal 25, we are exploring plans to reduce our promotional dependence to create a more premium online presence. Simply put, UA.com will become a showcase for our brand. We have done a lot of work to make our website more functional to increase conversion, but we must create a more premium shopping experience to elevate the brand. Closing out North America, we recently appointed Kara Trent to head up our largest region. Kara has been with Under Armour since 2015 and most recently led our EMEA business to consistent double-digit revenue growth during her tenure. She is an exemplary leader, and an industry veteran who builds performance-based teams, discipline segmentation, optimized marketing strategies, and strong wholesale relationships. As she steps into this role, I am confident that she has the right skill set, demeanor, and drive necessary to put this business back on a path of top-line growth over the long term. And finally, another leadership appointment is the return of 25-year industry and nine-year Under Armour veteran Kevin Ross, who will serve as Kara's replacement in EMEA to lead that business as Senior Vice President and Managing Director. With deep experience in general management, sales, team sports, and product creation, we look forward to Kevin's ability to hit the ground running in one of our most successful markets. In summary, as we close out the fiscal year amid a dynamic market environment, we are incredibly focused on managing the business and making the hard but necessary decisions now to set ourselves up for a more promising future. In the near term, this has involved making several leadership changes engineered to address our areas of opportunity. In concert, we are committed to prudent cost management, including identifying and optimizing the investments in our business towards the highest returns. Over the mid to long term, we are confident in our ability to drive global demand creation and elevate design and product, while ensuring the trifecta of product, place, and promotion are optimized to put us on a trajectory to reignite growth and deliver improved value to our shareholders. With that, I will turn it over to Dave for his comments on the quarter and our outlook.
Dave
Thanks, Stephanie. And good morning, everyone. Our third quarter revenue was down 6% to $1.5 billion, which aligned with our outlook. On a regional basis, North America revenue declined by 12%, coming in at $915 million, which was in line with our expectations. Wholesale was down meaningfully due to challenges in our full price business, partially offset by growth related to inventory management strategies, which included increased sales to the off-price channel. Our North American DTC business was down slightly during the quarter. EMEA revenue was up 7% to $284 million, or up 2% on a currency-neutral basis. This was driven by strong growth in our DTC business related to improved traffic trends across our retail and e-commerce channels. Our EMEA wholesale business was also up during the quarter. APAC revenue was up 7% to $212 million, or up 8% on a currency-neutral basis. We saw solid sales growth within our retail stores, and wholesale was also up during the quarter. China was a leading contributor to third quarter growth. And finally, our Latin American business was up 9% to $70 million in the quarter. or up 3% on a currency-neutral basis. From a channel perspective, wholesale revenue was down 13% to $712 million, with decreases in our full-price and distributor businesses partially offset by higher sales to the off-price channel. Direct consumer revenue increased by 4% to $741 million due to a 5% increase in our owned and operated store revenue and a 2% increase in our e-commerce business. And licensing revenue decreased 2% in the quarter to $29 million, driven by declines in our Japanese and North American licensee businesses. By product type, apparel revenue was down 6%, driven primarily by declines in our train and outdoor businesses, partially offset by strength in our sideline and basketball categories. Footwear was down 7% due to a tough comparison and softer demand, primarily in North America. As a reminder, we had robust growth during the third quarter of fiscal 23 as a significant volume of footwear products that were previously delayed due to COVID-related factory constraints meaningfully hit the market. And finally, our accessories business was flat year over year. Moving down the P&L, gross margin was up 100 basis points to 45.2% during the third quarter. driven by approximately 260 basis points of supply chain benefits, mainly due to lower freight costs. These tailwinds were better than our previous expectation and were responsible for most of the overdrive on gross margin. These benefits were partially offset by 140 basis points of unfavorable pricing due to increased promotional activities in our DTC business, our proactive strategy to reduce inventory through our factory houses, and deeper discounts in our sales to the off-price channel, along with about 20 basis points of unfavorable foreign currency impacts. In the third quarter, SG&A expenses were flat year over year at $602 million. Excluding a $23 million litigation reserve expense, adjusted SG&A expenses were down 4% to $579 million. Next, operating income was $70 million. and excluding our litigation reserve expense, our adjusted operating income was 92 million, which was above our outlook of 65 to 75 million due to the gross margin overdrive and lower SG&A. After tax, we realized a net income of 114 million, or 26 cents of diluted earnings per share. Excluding a $50 million benefit from our final earn-out on the sale of the MyFitnessPal platform and a $23 million litigation reserve expense, along with the related tax impacts of each, adjusted net income was $84 million, or 19 cents of adjusted diluted earnings per share. This came in above our third quarter outlook of 9 to 11 cents. Due to our adjusted operating income overdrive, and favorability on the other expense and tax lines. Now, moving on to the balance sheet. At the end of the third quarter, our inventory was down 9% to 1.1 billion as we trended toward normalized levels. This was in line with our outlook. And as we end the year, we anticipate our inventory to be down at a mid-teen percentage rate, which should put us close to 1 billion. Rounding out the quarter, Our cash and cash equivalents were $1 billion, and we had no borrowings under our $1.1 billion revolving credit facility. And finally, we repurchased $25 million of Class C common stock during the third quarter. This concluded our two-year $500 million program announced in February of 2022, thus retiring 45.6 million previously outstanding shares. Next, Let's turn to our full year outlook. To start, we have tightened our revenue expectation to a 3% to 4% decline for the full year, which is within our previous range of being down 2% to 4%. This shift within the range represents continued softer wholesale revenue. Breaking this down further, we now expect revenue in North America to be down at a high single-digit rate versus the previous expectation of a 5% to 7% decline. and we now expect our international business to be up at a high single-digit rate versus the previous low double-digit rate increase. From a product perspective, we expect our apparel and footwear businesses to both be down at a low single-digit percentage rate for the full year. Next, we expect gross margin to be up 120 to 130 basis points versus our previous expectation of a 100 to 125 basis point increase. This improvement is related to supply chain benefits and lower than expected full year sales to the off-price channel. Moving down the P&L, full year SG&A should be flat to down slightly, which is unchanged from our previous expectation. Dropping this through, our reported operating income is expected to reach 287 to 297 million. Excluding the company's litigation reserve, adjusted operating income is expected to reach 310 to 320 million. Putting it all together, our reported diluted earnings per share is expected to be 57 to 59 cents, which includes a 12 cent after-tax benefit from our final earn-out on the sale of the MyFitnessPal platform and a 5-cent negative impact from our litigation reserve. Excluding these net positive impacts of 7 cents, we expect adjusted diluted earnings per share to be between 50 and 52 cents. So to close, we remain encouraged by our evolving strategies to turn our inconsistencies into strengths. At the same time, We are maintaining a cautious view of the market, and we will continue to work the levers of our P&L to deliver appropriate financial performance while positioning the company for long-term growth. That means managing our supply chain to maximize gross margin opportunities, tightening expenses, optimizing investments, focusing on cash management, and making prudent capital expenditures in the near to mid-term. Without question, there is much work ahead of us. and we look forward to sharing more specific details on our year-end call in May, where we will provide our initial thoughts on fiscal 25. That said, we have confidence in our market sector and that our work will proactively set us up to return to creating value for our shareholders. And with that, we've finished our prepared remarks, so I'll turn it back to the operator for Q&A. Operator?
Operator
Our next question comes from Simon Segal from BMO Capital Markets.
Simon Segal
Hey, thank you, everyone. Good morning. Hey, Simeon. How are you? Good. Good to hear from you. Nice progress, guys. So, Simeon, just wondering if you could share a little bit more on your broader color on how you're viewing North America landscape. Maybe how are you guys thinking about when you think about the proactive inventory management? Do you feel like you're in a good place and maybe versus competition, just any color there? And then if we can just, any thoughts on freight and promotions embedded in the full year guidance. Thank you, guys.
Armour
Sure. So I'll start, and then Dave, I'm sure, will jump in. And good morning, Simeon. Thanks for your question. As it relates to North America, as we highlighted in our prepared remarks, the softness in North America is largely being driven by wholesale. And as the year went on, we saw continued softness in that channel. including at-once and replenishment wholesale orders. That's a big piece of the puzzle in North America. And then if you really particularly look at the holiday timeframe, there was quite a lot of promotional activity that impacted our performance and others. As it relates to inventory, I'll turn it to Dave in a second, but our inventory continues to trend to be in a much better place For Under Armour and the industry overall, I'd say, though, that doesn't necessarily mean there'll be no promotional activity. That really ties to demand. So there's not always that one-to-one correlation I think people think could be the case. So I think we're really, really excited about the game plan we have for North America. I'd highlight, again, Cara Trent coming back to lead that business. She has a great track record. from her time in EMEA. Terrific leader, terrific relationship with wholesale partners, disciplined segmentation, great targeted marketing efforts that have been driving the brand in that part of the world. And we know she's going to bring those same skills and leadership back when she starts her role in about a week here in North America. So we're excited about the work underway and our efforts around marketing, product, and distribution, which I'm sure we'll get into in the Further in the Q&A, but Dave, why don't you weigh in on inventory, that specific question?
Dave
Yeah, I mean, I think you covered the inventory pretty well in that the market, we think, is coming back to normalization at this point. Maybe a little bit longer to go, but pretty close. However, we are still seeing a fairly promotional environment out there, even with the inventory levels at the retailers in a lot better place. So I think the retailers are being fairly cautious and still really trying to keep clean after a year or two of obviously having more than they wanted. So we do see some of that promotional impact on gross margin continuing a little bit. And so you asked a little bit about freight and promotion relative to our assumptions on the full year outlook or essentially Q4. And I would say that from a freight perspective, we've seen the rates normalize pretty well at this point. And they had you know, really stopped with the big increase in our fiscal Q4 of last year. So when we think about Q4 of this fiscal year as we finish out the year, we're kind of at a more stabilized freight rate in Q4. So that's not going to be a huge tailwind for us in Q4. However, we are starting to work more deeply with our inventory vendors and have made a lot of progress on some of the costing initiatives there, which we're seeing some of that benefit favorably for Q4 of this year. And then I did mention relative to the promotion levels, we do anticipate it continuing to be, you know, more promotional than normal for a while here. And so we're continuing to expect that in our full year forecast as well. Great. Thanks a lot, guys. Best of luck for the quarter and our C year.
Operator
Thanks.
Armour
Thank you.
Operator
Thank you. Our next question comes from Jacell UBS.
spk05
Great. Thank you so much. My question, just a little bit on Europe, if you could just maybe touch on that business, how the wholesale channel there is looking, if it's different than sort of the comments that you made about the U.S. And then, Stephanie, I'd love to hear a little bit more about the product innovation pipeline, what you see coming over the next couple quarters and really into the Olympics, perhaps. Would love to hear your view on that. Thank you.
Armour
Yeah, sure. Of course. As it relates to EMEA, In Europe, that continues to be a strong market for us. The brand is doing very well there. That being said, we mentioned this in the remarks, we're seeing a little bit of cooling there with the consumer, particularly in Eastern Europe and some of our distributor markets. But again, the European market, particularly in England and Spain and France, is very strong for us. Let me touch on products, and I'll let Dave jump in on Europe as well. But on the product side, I mean, we have a lot to be excited about. You know, with Yassine, Yassine just started last week, but we're super excited to have him as our new chief product officer. And of course, as we've shared with you about five months ago, John Varvatos joined us as our new chief design officer. And there's just a lot of exciting things happening on both the apparel side and the footwear side. So let me hit a couple things that we're excited about on the apparel side. We continue to see a lot of traction with our Meridian product for women. Where we're really winning with women is in legs, or sorry, is bottoms and tops, and particularly with bras. We're having a lot of success there. I mentioned that we've got some exciting new things coming with our Unstoppable franchise that's really going to be terrific. And our core brand, base layer really has some new upgrades in terms of fit and colorways, and we're excited about that on the apparel side. On the footwear side, we have some real traction with Curry and the Curry 11. Excited about what's happening with our running footwear, in particular with our Velocity, Elite, and Infinite franchises. As a quick reminder, the Velocity Elite running shoe was worn by last year's New York City Marathon winner, Sharon Licati. She wore it again this year and came in third place with only a couple seconds off the top spot, which is remarkable. So that Velocity running shoe is a real winner at the highest levels of performance and running. And then on the Infinite shoe, we've really reimagined the hover technology, which is incredible cushioning. And so we have a... a base pro and elite level with that shoe really hitting that segmentation of good, better, and best. So we're excited about that. But we're just getting started. Again, Yasin just started last week, and we've got an amazing team here that has a great innovation pipeline. But we're excited to see what Yasin, in partnership with the new head of footwear, when he fills that position, that search is underway, and, of course, with our design talents. So we're excited with what we've got in the product pipeline. I will say it's worth noting that it will take time when we think about the product creation cycle in terms of any real massive new product. I think we're looking at spring, summer 25 plus, just given the product creation cycle that we're dealing with. But Dave, do you want to jump in with any additional color on Europe?
Dave
I mean, I think the only thing maybe that I would point out is, you know, we have a lot of strength moving forward in Europe, which is great to see. I think one of the points that is a little bit of pressure is just, you know, some of the Red Sea shipping disruptions do impact us a little bit there. And that is part of what went into our outlook tightening is that we see about a one point headwind from the Red Sea impacts. And that's primarily related to EMEA. And then obviously there's some geopolitical challenges in that region as well that we're dealing with. So we're working through that. And that's really when I'm mentioning that one-point headwind that's really talking about fourth quarter as we see it finishing out the year.
Armour
You know, I'd add one more thing on the product side just really quickly I should have mentioned because it's getting a lot of traction is with our slip speed mega, which we did a soft launch at the UAE. All-American game. We did a soft launch there. We have a very cool activation at the Super Bowl this weekend. But the Slip Speed Mega, it's a very cool shoe that I think is really resonating with consumers. So that's another highlight on the footwear front.
spk05
Terrific. Thank you so much.
Operator
Our next question comes from Lohan Vazilescu, BNP Paribas. Please proceed.
spk02
My question. Um, I was hoping that to drill down on North America wholesale, if possible, could you possibly quantify how down North America wholesale was for the quarter or just your expectation for the year? So the audience could better understand the dynamics within this channel. Are you starting to see, are you starting to have a conversations with North American retailers regarding restocking of inventories, particularly for the back half of 2024? And then just, Dave, on that point on the Red Sea, I understand there's some delays, but can you maybe just share with the audience how much you're contracted out and when you renegotiate your contracts with the shipping merchants?
Dave
Yeah, so I guess a couple things. You know, North America wholesale is definitely a pressure point. We've talked about that. We've talked about kind of the the softer orders as we saw coming in through fall-winter 23, and also a little bit relative to spring-summer 24. We haven't been quantifying the actual percentage for the channel within a region, but it definitely is a pressure point, and we're continuing to see and experience where our DTC channels in North America are performing much better than where we are with wholesale. I think, again, the retailers are being very cautious right now, even though the inventory levels at retail are in a much better place. And that's why we're continuing to see some of the promotional levels as well. When you think about the Red Sea impacts, we are seeing some impacts there from shipping disruptions, mainly impacting EMEA. The impact includes some increased shipping costs as well, not just some delays. And to kind of think about that, about 20% or so of our global apparel comes through that area, so it is meaningful to us. We're mitigating that through regional air freight, adjusted shipping lanes, differing forward buys, PO prioritization, et cetera. And with all that, we don't really see any concerns with daily operations of our inventory vendors in that region. But again, we are estimating for Q4 about a one-point revenue headwind because of the delays and mainly the impact on the EMEA region. And that's considered in our tightening of our outlook for the full year.
spk02
Very helpful. Thank you very much.
Armour
Sure.
Operator
Our next question comes from Bob Durbo, Guggenheim.
Bob Durbo
Hi. Good morning. Stephanie, just I guess a bigger picture question for you, but you've made a significant amount of new hires, new leaders since last summer. When I look at the list and think about it, Chief Design Officer, Supply Chain Product Officer in America, when you think about all these new leaders in the organization, How should we think about the time it will take for the organization to actually absorb the leadership changes, the impacts on the culture, the execution, eventual change, and feel the years ahead?
Armour
Well, good morning, Bob, and thanks for that question. During my first year, my top priority was building out the right team and to build out the right team to address some of the inconsistencies and challenges that we've had in the past. You're right, there's been a lot of change. Let me just put a little more color around it. I've been in the job for about 11 months, coming up on my first year. But since last summer, we've filled the following jobs. Let me just tick through them quickly. Chief Consumer Officer, Jim Dowse, seasoned Marriott executive, a lot of experience in product, marketing, sales, and brand. A new Chief Communication Officer, Amanda Miller, came from PayPal, bringing us real PR horsepower. New Chief Design Officer, John Barbados, great experience with his own company, Ralph Lauren, Calvin Klein, Converse. A new Chief Supply Chain Officer, Sean Curran, a 30-year veteran at the Gap who was most recently the COO at Old Navy but held various positions at that company over the years. A new Chief Product Officer, Yasin Saidi, who started again last week, as I mentioned. coming from some powerhouse brands and most recently owning his own company, so he's got that entrepreneurial spirit. A new president of the Americas just starting, Cara Trent, an industry and UA veteran. We talked about how spectacular she's going to be in her new role. I mentioned that Kevin Ross will back Phil Cara and EMEA. A 25-year veteran of the industry, knows UA, was with us for nine years, but experienced at TaylorMade and Yeti in addition to Under Armour. We did also, I didn't mention this, but in my remarks, we did hire a new SVP of direct-to-consumer for the Americas last summer to Josh Denton, an Under Armour veteran who came back to us, and we have an open CMO role. and a new head of footwear that I covered in my prepared remarks. So when you put all that in the blender, that is a lot of change in roughly six months. What's terrific is, again, these executives who all have really incredible backgrounds have hit the ground running. I'm so excited to see how well they're working together. You know, interestingly, Yasin and Kara worked together for close to nine years at Puma. So to have the head of North America and the head of product already have a deep working relationship between the two of them is terrific. Of course, when you think about executives like Kevin Ross and Josh Benton coming back, they know UA. So this team has hit the ground running, but they do need time to settle in, get their teams organized. You know, I should underscore, too, we have amazing talent at Under Armour already that these leaders are joining. really deep experience, particularly in terms of performance apparel, performance footwear. So we've got a great team at Under Armour. We've brought these critical new roles in. Most of them, when you think about it, are the forward-facing part of the business. I put supply chain in there, too, because if we can't get things to the right place at the right time, they won't be delivered to the customer. We've got quite a lot of work underway on the supply chain front under Sean's leadership. So it's going to take some time, but to get going, but I'm confident that we have the right team, we have the right strategy, and we're firing on all cylinders. So I'm excited with the amount of progress we've made on the talent front in less than a year.
Armour
Good luck. Thank you. Thanks, Bob. Thank you, Bob.
Operator
Our next question comes from Sandposer William Trading.
Sandposer William Trading
Thank you very much for taking my question. I've got three, and I'm just going to read them all up. One, when we think forward, do we anticipate that the SG&A is going to go down? And then you mentioned the Olympics. Is that going to be like a pump-up of investment sort of at the end of Q1 into Q2 of next year? And then... Two is what's the base of like, what's the base sales you look at for North America? Are we close to it? And then on product, it's like use of logo. You've got some good stuff going on with some of the unstoppable apparel, the fat tire, the forge 96 that really don't scream with the big UA logo and seem to be doing, you know, generally better than most. out there of the non-curry product and i just wondered you know sort of directionally how you're thinking of logo use and and and stuff like that and and maybe um optimize you know uh exploiting some of those styles that are sort of quieter uh don't don't make the list that often but appear to be have pretty good demand thanks yeah sam this is dave i'll i'll uh i'll take your first two questions and then maybe i'll hand off to uh to stephanie on the logo
Dave
You know, relative to SG&A and going forward, you know, obviously this is an area that we continue to focus on. You know, we worked hard over the past few years to become more agile from a cost structure perspective, but we do have more work to do. We understand the areas of highest returns, and we're continuing to validate those and also understand where the best investments need to go. So this is a continual work in process. We continue to drive further savings within our hiring, our incentive comp, tightening up our marketing prioritization, spending, travel and entertainment, et cetera. And we're going to continue that work as we drive into next year. So could we drive SG&A lower? Potentially. And that's our focus is to be able to be as optimized as possible. And we're going to keep working at that. Relative to North America, I think your question is have we hit kind of base sales level for North America yet? And I would say that that's kind of a loaded question because there's a lot of decisions within that. And we know that we want to continue to strive to be more premium. We know that we want to make some right choices as far as backing off of some of the deeper discounts, for example, on our website. So all of that goes into the blender as we think forward. And as we get to our May call, we'll be getting into much more details on kind of fiscal 25 and beyond. And then as far as you mentioned the Olympics, relative to SG&A, and is that going to be a heavy investment? Obviously, we're going to activate some things around the Olympics, but it is not a large investment for us, so it shouldn't be a big pop in SG&A for us in any way. Stephanie, do you want to take the third point?
Armour
Sure, of course. And good morning, Sam. Thanks for your questions. On the logo front, I mean, you highlighted some of our best-performing franchises when you mentioned Unstoppable. I'd put Meridian in there, Baselayer. And I think our design teams always do a terrific job of finding the most appropriate and elegant and stylish way to place our logo. And so we'll continue. That's in the very able hands of Yasin and John Barbados as we think about logo treatment. I think there's a broader point I'd like to make, though, around where we're headed with sports style, because I think that that's going to be a really important part of our story in the years to come. And let me define sports style again. We are not trying to be anything other than authentically Under Armour. And performance is in our DNA. It always will be. So for us, sports style is that intersection of performance and style. And they're inextricably linked. And I think what you'll see from us, and we're thinking about sports style as really more of an evolution versus a revolution. And we started with phase one, which is re-merchandising and re-marketing products to demonstrate kind of that non-active use occasion. And some of the franchises you mentioned, Unstoppable and Meridian would be great examples of where we have an opportunity where we have great, particularly on the apparel side, sports style offerings, but we need to market them differently. And we're doing that. And then phase two is really when we'll see more new product. We've already done some limited run capsules and some smaller capsules. collections or groupings of items. But again, it's not until spring, summer 25 plus where we think we'll see more mass in terms of new product given the product creation cycle. But again, throughout all of that, our talented design teams will be figuring out the best way to place the Under Armour logo for maximum return. So Again, we're excited. We're excited about where we're headed with product, including the best use of our logo.
Sandposer William Trading
Just one last thing. I mean, the one thing about the logo is that, like on the Forge and some of these other ones, they're there, but they're more discreet. So it makes the shoe more flexible rather than having the big Under Armour logo, like on the side of the shoe, which then makes it more active. Having it more discreet, seems to would make it more style, regardless of what the design of the shoe is or apparel for that matter.
Armour
Yeah, again, I think it depends on what's the particular item and what's its use. And so we'll continue to always be evolving and looking at the best way to, like I think like all world-class brands, the best way to use our logo is but you gave an example with a couple items where it was less smaller, but I think we'll continue to evolve and work on that.
Armour
Thank you very much. Thanks, Sam.
Operator
Our next question comes from Gene Duffy with the CFO.
Gene Duffy
Thank you. Good morning. Stephanie, prepare. Good morning, everyone. Prepared remarks and comments are fairly deliberate about your subdued expectations for the North American marketplace, the timing for inflection. Can you give us some perspective on what you're hearing in your discussions with wholesale partners? What are their forward thoughts on consumer spending behavior? What's the messaging on subdued orders despite what seems to be pretty well-managed channel inventories? And what are they asking of Under Armour at this point? And then I have a question on D2C.
Armour
Yeah, I'll start and then I'll kick it over to Dave to add his perspective. And we talked about the pressure that we're seeing in North America this year. And as we think about heading into fiscal year 25, I think we can see some anticipated continued bumpiness when we think about the fall-winter 23 order book that, of course, has an impact on the order book coming up. I should note we're in the middle of it right now, so we're not going to comment on fiscal year 25 in any detail today. But I think it's fair to say for the first part of the year, we'll see some continued bumpiness. Dave can jump in on that. But I think what we're working very, very closely with our wholesale partners to make sure that we have the right assortment. We are continuing to work with our wholesale partners as we deliver more better and best products to make sure that we get those better and best products on their shelves. And so our wholesale partners are incredibly important to us. When I think about our strategy on that side of the house, it really is all about getting more shelf space and better product in our existing partners, but then opening new doors of distribution, too, on the wholesale side. And that ties to having new product offerings. So that is an important part of our business. I think, again, particularly in North America with Kara coming back to lead our charge there, she has tremendous relationships with wholesale partners. I think that's going to just... further bolster our success in this area. But I know you had a question on DTC, but let me let Dave jump in on wholesale if he wants to add any other information.
Dave
Yeah, I mean, I think, you know, we've talked, as Stephanie mentioned, around kind of the environment and the continued discounting, which is a little bit of a headwind. I would say the other thing is we're kind of finishing out the year and moving into next year is, again, you know, we are looking to try and push harder into, you know, more premium distribution. We've got some good early reads on mall penetration and new doors there, which is good. And then also we're going to continue to edit and improve our segmentation as well as we move into next year. But again, you know, it is a little bit bumpy out there still, and it's still a pretty promotional environment.
Gene Duffy
Thank you. And just quickly on the D2C, you spoke to your intent to be less promotional in North America at D2C. That seems to suggest you're planning for declines in fiscal 25, lapping more promotional compares in fiscal 24. Is that a fair assessment?
Armour
Yeah. So, Jim, we're not going to get into details on fiscal 25 yet, but I will say as it relates to our own DTC channels, let me start with our website and our shop app. We've made a lot of progress on the functional side of that channel. Things like improving mobile speed, better search algorithms, upgrading product description pages, etc. So there's been a lot of great work done on improving conversion and having a more functional website and chat app. At the same time, and I think this is where you're headed, we do have plans to reduce our dependence on promotions. We need for UA.com and our shop app to be the most premium expression of our company. It's our largest storefront. when you think about it. So we are going to reduce our dependency on promotions. Could that have some reduction in revenue? Yes, it could. But at the same time, it will lift ASPs, it will drive profitability, and it will lead to a much better, more premium experience for our customers. So that's one piece of the DTC channel. The other part is our stores, our physical stores. I mentioned this in my prepared remarks, but we have a great effort underway to reimagine the Under Armour brand house of the future, a smaller store format, curated with more premium offerings, an easier to shop experience. We're going to be piloting our new concept later this year with a goal to roll out more full price brand houses in the years ahead. We know that our ratio of factory to full price brand houses is not where we want it. So there's a lot of effort underway to think about our physical space as well. And we all know that those two are inextricably linked, meaning the physical and the digital. So we've got a lot of great work underway on the direct-to-consumer front as it relates to the future.
Armour
Thank you. Thanks, Jim. Thanks, Jim.
Armour
Thank you, Jim.
Operator
Our next question comes from Tony. Nickick, Redbrush, please proceed. Tom, you there? Tom, your line is open. You may proceed. Our next question.
Armour
Please hold while all four questions.
Operator
We can go to the next person on the list, operator. It's fine. Our next question comes from Paul Ledgway with Citi.
Q4
Hi there, this is Kelly on for Paul. Thanks for taking our question. I just wanted to dig in a little bit more on the gross margin. It looks like you're guiding it up, you know, 200 basis points or so in the fourth quarter. And you mentioned some costing initiatives. Just wondering if you could elaborate on that and if there's any sort of raw materials deflation that is benefiting you guys and whether that can continue into F25. And then on the freight side, well, it's no longer going to be a benefit. Is there any chance with some of the Red Sea pressures that freight could become a headwind to the gross margin in the next 12 months, based on what you're seeing today? Thanks.
Dave
Yeah, Kelly, this is Dave. Relative to Q4, there are definitely a few puts and takes that we're seeing there. We do expect some continued supply chain benefits in Q4, and that's but that's shifting a little bit more towards the product costing initiatives that we're working on with our vendors that we're starting to see those benefits in this Q4 and then looking to see full-year benefits next year. The freight component, obviously we saw pretty substantial tailwinds in Q1, Q2, and Q3 of this year, but again, those have kind of normalized for Q4, so not as much of an increase year-over-year for Q4. Now, to your point, you know, relative to the Red Sea, we are seeing some increased shipping costs, but we're probably in the neighborhood of, you know, a million or two million bucks there, not something that is significant at this point. So we're managing through that, and that's all considered in our tightened outlook as well. And then, you know, a couple of the things that are going to be a little bit of headwinds for Q4 are We do believe that the kind of promotional environment is going to continue a little bit longer, so that's assumed in our Q4 as a headwind and potentially a little bit of FX pressure. So those are kind of the main puts and takes as we think about Q4. Got it.
Q4
And just lastly for me, any way to quantify or could you quantify for us the percentage of your off-price sales this year, particularly within North America and how that's trending relative to historical things?
Dave
Yeah, we've worked really hard over the last few years to really get our inventory management into a good spot and manage the off-price channel in what we feel is a pretty healthy range. And so we were targeting in the 3% to 4% of global mix of third-party liquidations, and that's generally where we're running. In fact, as we finish out this year, this fiscal year, we'll probably be at the lower end of that 3% to 4% total mix. Relative to North America, it's not that different, but we don't really get into the mix per region per se.
spk03
Thank you. You're welcome. Thank you.
Operator
Our next question comes from Alex Tratta with Morgan Stanley.
Lance Salega
This will be our last question, too. So, Alex, I'm just going to let everybody know this is going to be our last question, so appreciate it. But go ahead, Alex.
Alex
Yeah, no problem. Thanks a lot for taking this one. So, Stephanie, you noted a lot of leadership changes. I just want to drill down on kind of how you think about when they can start to have an impact on the P&L from a timeline perspective. And then also, in the meantime, understanding that can't be done immediately. What are the KPIs, in your view, that you're watching, that we should be watching for signs of some of these initiatives flowing through?
Armour
Sure, of course. Well, you know, these leaders have hit the ground running, so I think they're impacting the business right away. I don't want to tick through each one of them again, but, you know, for example, I'll use John Barbados as just an example. He's been here five months, but day one he started looking at things like FIT, finish, trim, color. So we're seeing the leaders have an impact on day one, but it will take time in terms of bigger, broader impact across the business. In terms of the KPIs that we're going to be looking at, I mean, it depends on the area, but let me hit on some that we're really focused on. In terms of the consumer and marketing KPIs, we are constantly keeping an eye on our loyalty, our UA Rewards signups and equally important activations. I mean, the loyalty program will be the backbone of our consumer strategy. It's all about customer acquisition and all about customer activation. And I mentioned some of the good progress we're having there in terms of not only signups, but increased spend from our loyalty members. And then on the marketing front, there's all sorts of leading and lagging indicators that we'll be looking at. And I'm sure over the course of our time with you, sharing updates on things like you know, search demand. I mentioned in my prepared remarks some of the progress we're having with social media. You know, we've really changed our marketing approach to be more product focused, more digital, social, always on. That's where the consumer is. And so we're always looking at the metrics on that critical marketing channel, NPS scores, increased earned media. You know, then we'll be looking at more lagging indicators as we move forward, increased full-price sales, faster sell-through of our key franchises, as we open more doors, further doors of distribution, getting into more specialty retail, seeing things like more UA sold on the aftermarket. So there's a lot of consumer metrics, both leading and lagging KPIs that we'll be looking at. Then we have made a lot of good progress over the past couple of years on supply chains. But this is where we still have more work to do. So we're focused on, Dave touched on this, our cost of goods sold, skew rationalization, better segmentation that will lead to ASP expansion. We'll be sharing more with you on our priority investments and the results there. So there's a whole host of KPIs and metrics across the business that we will be focused on and tracking and sharing with you as early indicators of how we're making progress along the way. Although I'll end where I started, which is my excitement about the team we've built here. We have brought in some fantastic executives to join our already fantastic team at Under Armour. So I couldn't be more excited and more thrilled with the team we're building here and our future. We've got a lot of great stuff underway. So thanks for your question.
Dave
Our team's on the field.
Armour
Our team's on the field, that's right. Great, good luck.
Dave
Thank you.
Operator
Thank you. Thank you for attending today's call for Under Armour, third quarter of fiscal 2024. This now concludes today's call. Have a great day.
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