Under Armour (UAA) Q2 2027 Earnings Call Transcript

And France and Shawn continued to grow. These results give us confidence to back proven franchises and bring that same to upcoming launches. This starts with a simpler company, We have deliberately evolved our leadership structure clarified accountability. Reduced competing priorities. We are concentrating resources where our performance credibility gives us the strongest opportunity to win. Our leaders are then responsible for translating those actions into product athletes choose, stronger partner relationships, improved financial performance. Our industry is changing in how we operate 18 to 24 months from now, will look different from today. But we are acting now.

Last week, we held our supplier summit where we worked with key manufacturing on shorter lead times, more efficient use of materials, and faster response. Scale alone can no longer provide the advantage it once did. I believe, though, we are big enough to work with the best partners in the world yet small enough to move quickly with them. Drawing on their expertise and challenging familiar ways of working. We are building a stronger operational foundation, improving the system and processes behind our products and how we bring them to market. Our initial work with AI is focused on supply chain, product merchandising, and marketing.

A priority is calendar compression, shorten the time from an athlete insight to a product in the market supported by a complete launch plan. We see opportunities for AI to speed decisions reduce repetitive work so our teams can spend more time developing products and serving athletes. We are also evaluating where asset light models can bring in expertise and scale. We will judge those opportunities by the earnings and cash we retain, and the complexity and capital requirements we can reduce. An early example of this work is our decision to transition our youth apparel business to an expanded licensing model with Centric Brands, a long standing partner with deep children's product and retail expertise.

Beginning in fall 27, the model should reduce inventory. Working capital, operating complexity while delivering a consistent Under Armour product experience for young athletes. As a key entry point for consumers discovering Under Armour this category plays an important role in building our community. We are confident that this decision will help grow this business over the coming years. This partnership should give our teams more time to concentrate on the products and categories where Under Armour's capabilities can create the greatest value. We are simplifying our product line as well. Targeting a reduction of nearly 50% in SKUs from the level when I returned in 2024.

We have also removed more than 60% of materials while increasing global product commonality. Smaller assortment lets us invest more deeply in our strongest products. Simplify decisions, focus our storytelling, and make the offer clearer for our teams, partners, and consumers. This is about taking weight out of the system so we can amplify the products we make, with volume and demand. That means selling so much more of so much less at full retail price. Within that focus line, we are sharpening our good, better, best offerings across price points and channels to elevate Under Armour. That means strengthening product performance and presentation at every level giving athletes a compelling reason to choose UA at full price.

Our essentials must deliver performance and value Our established franchises must offer differentiated benefits and our most advanced innovation must set a higher standard for performance. All the while, we are communicating a much clearer story to the consumer as to why UA is different and better. We are being more deliberate about design, features, pricing, and distribution. So each level strengthens the brand and earns its place in the athlete's closet. That opportunity reaches into our highest volume programs including Tech Tee, a staple that we sell in the tens of millions. But not often enough at full price. We are building on that work with Tech Helix, an upgrade launching later this month.

With the ambition to become 1 of our top 10 volume drivers over time. See, the Under Armour innovation team developed a completely new fabric by taking 2 separate polyester fibers and wrapping them into a coil construction creates an actual helix shape. This allows the fabric to lift off the skin and provide stretch without spandex. Enhancing airflow and helping the fabric dry at amazing rates. It addresses a need central to Under Armour from the beginning. Helping athletes feel better and perform better in the heat. At $35, that innovation reaches a broad athlete base. And with focused marketing supporting its story, this should be a multimillion unit program for us at full price.

Our focused assortment lets us invest more behind products performance value and potential to become meaningful business contributors. Innovation is there. Our job is to explain the science clearly connect it to what athletes feel and how they perform. Earning pricing power by taking credit for the innovation we build into every UA product. We have seen what that combination could deliver with our $65 bouncy tee. Its launch sell through and growing volumes across geographies are an encouraging example of consumers choosing Under Armour at full price when they understand and value the product difference. That response gives us confidence in the opportunity ahead.

We are applying those lessons to Tech Helix and future launches with the goal of making that success more consistent across our business. Another example comes next month, with the Armor Short. Based on our goal to build the best compression short an athlete can wear. Compression shorts are already 1 of our largest volume programs, but traditionally serve that athlete with only a $35 good level option. Applying our 50% SKU reduction across categories, the discipline good, better, best architecture is not just about cutting, but also about highlighting on brand opportunities and leaving room to create something better. During team sports competition, less than 10% of male athletes wear a hard plastic cup.

Because of the bulk and restriction. We saw an opportunity to address that trade off. Our brand new shield form technology brings targeted growing padding into a compression short without sacrificing mobility. It does not replace the protection of a hard cup, but it gives athletes who otherwise go without 1 an added layer of confidence. The Armor Short's patent-pending design launched in December at $80 for adults and $55 for kids. On UA.com and 500 DICK'S Sporting Goods stores in the US. And, yes, we believe the opportunity is significant over the long term as the addressable market is virtually every male athlete who plays almost any sport.

We are building on the trust athletes already place in us for their first layer. A benefit they understand immediately in 1 single item. Early next spring, we plan to expand the Under Armour collection with a different enhanced solution for female athletes as well. This is where Under Armour plays best. Bringing differentiated innovation to a real athlete need. That is our DNA. All in, the Armor Short made it from concept to market inside of 10 months. With the product, epic storytelling, and full marketing and retail support all developed together. That is the speed and coordination we aim to make repeatable as we compress our calendar.

Earn a place in athletes' everyday routines, and strengthen our position as the official first layer of sports. That focus on athletes needs is guiding our footwear reset as well. We are building on strength in team sports while improving design and value across the portfolio. Running offers an opportunity to expand on the credentials we have established with our Velocity franchise. Our task is to translate that expertise into a broader segmented assortment that meets the needs of more athletes and earns its place at retail. Sharon Lokedi demonstrated those credentials with Shawn Chicago Marathon in October. She finished second in the Velociti Elite 3.

Improving her personal best by over 3 minutes and becoming the 8th fastest female marathoner in history. it is an exceptional achievement for Sharon, another demonstration of Under Armour footwear at the highest level. Her work with our product teams brings elite athlete insight the continued evolution of our running footwear. More commercial based execution of this $250 elite shoe will build on this momentum with upcoming expressions at more accessible price points this coming spring. Across apparel and footwear, each introduction must address a specific athlete need. Have a defined place in the line. With enough depth to become a business we can build over multiple seasons. Building demand is central to this stage of the transformation.

Over the past several months, we have established a more unified marketing model. bringing global creative direction, Content, and campaign priorities together under Simon James Pestridge, Simon became chief marketing officer in June after overseeing our Asia Pacific business. He brings more than 30 years of global brand marketing and leadership experience. Together with a direct understanding of our consumers, and commercial operations. Our investments moving forward will support fewer, bigger campaigns, giving our strongest products and athlete stories more reach a more recognizable Under Armour voice. Visual teams will bring those stories to life through local media, our own DTC channels, and wholesale partners.

We are aligning product inventory and retail plans earlier so athletes can find what they see in our marketing. We will assess that work through product discovery and full price sell through alongside reach and engagement. We are also introducing a globally consistent creative platform built on the concept of This Is Your Armor. It connects an athlete's ambition with product performance giving our stories a recognizable Under Armour identity across sports and markets. Also in marketing, starting with this month's Tech Helix launch, followed by the Armor Short in December, We plan to introduce 1 major product story each month throughout the calendar year. The approach is deliberately simple: 1 global product priority coordinated execution across regions and markets.

Local teams will adopt their story for their consumers while reinforcing the same technical product benefit. Support across social, digital, and retail will continue beyond launch to build recognition and demand. This coordinated execution will come to life with demonstrating the product's benefit through science, of course, but also through personality and, yes, humor. And social content and digital education will further support that connection. Dedicated retail presentations will bring that story to stores with select UK retailers joining our US launch. Our product and athlete stories are generating encouraging social engagement. From July through September, our Instagram brand account generated approximately 43 million impressions, up 55% year-over-year. And 27 million video views, up 126%.

Our TikTok account just crossed 1 million followers, That engagement gives us useful direction for our creative work. Our focus now is converting that attention to product consideration and purchase. Alongside marketing, evolving our retail concepts is a priority. Our stores must strengthen the brand and improve the productivity of our business. We are developing key city showrooms that highlight our strongest products, refining our full price stores around a clearer performance assortment, and reworking our factory house locations with a more deliberate mix of full price product. Each format has a distinct role, with assortments tailored to local athletes and shopping behavior.

Execution means connecting product presentation, launch support, and availability so consumers can understand the benefit, and find what they came to buy. These lessons will help guide investment with an emphasis on conversion. Full price selling, and store profitability. Our regional teams are translating these product and retail priorities into focused commercial plans. In North America, we are concentrating support behind the apparel franchises, including footwear that are performing. While addressing traffic and broader sell through pressure. That means coordinating launches more closely with wholesale partners and our own channels. Aligning inventory with demand, and making our product benefits more visible at retail.

Our priority is to turn strength in these businesses into more consistent performance across our largest market, right here in North America. In EMEA, we are building a momentum in France and Shawn while improving ecommerce execution. We are connecting marketing more closely with locally relevant assortments and product availability. So consumer interest has a clearer path to purchase. In The UK, we are focused on execution with partners and aligning inventory and investment with current demand. Across the region, we are backing the markets and channels where we see opportunity while maintaining discipline where conditions remain dynamic. In Asia Pacific, our priorities are improving productivity product availability. In China and optimizing our licensing business.

We are refining assortments in each channel, so our strongest products are supported by a better shopping experience. Carol Chen, who succeeded Simon as APAC's regional leader, brings more than 30 years of brand and commercial leadership experience across Greater China. Asia, and The United States. Her mandate is to bring those priorities together into stronger marketplace execution. Drawing on our understanding of local consumers and retail partners to improve the performance of the business. Altogether, we are challenging ourselves to improve how we operate every day. From the products we build, how we create demand and serve athletes.

We are setting clear priorities, acting on what we learn, and directing resources to the work that can make the greatest difference. Under Armour has a long track record of solving problems for athletes. Our responsibility is to bring that same discipline to the business. Follow through on the decisions and turn product strength, into stronger results. Our ambition remains high. We will measure progress by the results we deliver. And with that, thank you. Reza, over to you.

Reza Taleghani:Thanks, Kevin, and good morning, everyone. Turning to our second quarter fiscal 27 results. Revenue declined 7% to $1.2 billion By region, North America revenue declined 7%, reflecting traffic pressure in our direct to consumer business and softer wholesale sell through. Growth in select apparel franchises helped but did not fully offset broader demand pressure. EMEA revenue declined 9%, Retail traffic remains challenged in the UK. Partly offset by growth in France and Shawn. Shipment timing also remains a factor in quarterly progression, particularly in our distributor business. APAC revenue declined 9%, reflecting pressure in China in our licensing business, Pockets of improvement in e commerce and areas of wholesale resilience provided some offset.

Latin America revenue increased 3% largely due to favorable foreign exchange as revenue in the region declined 4% on a constant currency basis. Looking at performance by channel, wholesale revenue decreased 6% to $725 million reflecting the impact of softer full price sell through and pressure in parts of the distributor business, partly offset by select accounts and markets. Direct to consumer revenue decreased 8% to $494 million including a 7% decline in owned and operated stores and a 12% decline in e-commerce. Traffic remained the primary challenge, particularly in North America, with better conversion and targeted digital initiatives providing some offset. Licensing revenue decreased 4% to $28 million driven by a decline in North America.

By product category, apparel revenue decreased 6% to $880 million HeatGear and Core Vanish were areas of strength, while fleece and women's bottoms were challenged. We saw declines across most categories, partially offset by growth in outdoor and sportswear. Footwear revenue decreased 11% to $234 million with most categories down, although selected cleated businesses and run grew. Providing some offset to the broader weakness in the footwear portfolio. Accessories revenue decreased 7% to $105 million differentiated products such as StealthForm provided encouraging signals within a softer overall environment. Gross margin was 47.0%, down 30 basis points.

The year over year decline was due to 40 basis points of unfavorable foreign currency impacts, 35 basis points of combined unfavorable channel and regional mix and 20 basis points of unfavorable pricing, a slightly higher discount than in the prior year more than offset the benefit of our pricing actions. These headwinds were partially offset by 55 basis points as supply chain benefits, including more favorable product costs. And 10 basis points of favorable product mix. SG&A decreased 4% to $557 million driven by lower marketing expenses and continued cost discipline across other expense categories.

Adjusted SG&A decreased 3% to $559 million excluding $2 million in transformation expenses related to the fiscal 25 restructuring plan and the $3 million benefit from the reversal of certain previously accrued litigation reserve expense. In the quarter, we recorded $13 million under the fiscal 20 restructuring plan, including $11 million in restructuring charges and $2 million in transformation related SG&A. Costs incurred to date totaled $280 million of the projected $300 million to $350 million. The plan is expected to be substantially complete by December 31, 2026. Second quarter operating income was $15 million or $25 million adjusted for restructuring and transformation costs. and the reversal of certain previously accrued litigation reserve expense.

Reported and adjusted diluted loss per share were both approximately breakeven. We ended the quarter with $1.1 billion in inventory, up 4% year-over-year. The approximate $200 million reduction in our revenue outlook in August left inventory above our planned sales needs. We are reducing future buys and taking targeted sell-through actions to release working capital and strengthen liquidity with the anticipated margin impact reflected in our outlook. We ended the quarter with $285 million in cash $190 million of borrowings under our $1.1 billion revolving credit facility. We remain focused on liquidity working capital discipline, and investments supporting our transformation. Fiscal 27 capital expenditures are expected to be modestly below last year's level. Turning to our fiscal 27 outlook.

We are maintaining the expectation that revenue will decline at a mid single digit rate. And while current traffic and macroeconomic pressures could result in North America being down modestly more than the mid single digit decline we previously anticipated in that region. That potential downside is reflected within our unchanged full year outlook. For fiscal 27, gross margin, we now expect expansion of 170 to 22 basis points compared with our previous expectation of 22 to 72 basis points. This includes roughly 150 basis points of benefit from IEEPA tariff refunds related to cost expense in fiscal 26. Excluding that benefit, we expect gross margin improvement of approximately 20 to 70 basis points.

Supported by pricing actions, lower discounting and favorable channel and product mix. The 50-basis-point reduction in our gross margin outlook reflects ongoing elevated fuel and freight costs. Landmark downs to improve inventory alignment and a stronger U. S. Dollar. Keep in mind, our previous outlook assumed disruption from the Middle East conflict through September 30. Those pressures now extended into the second half. We reiterate our expectation for adjusted SG&A to decline at a low single digit rate, reflecting lower marketing spend and active expense management, while preserving priority investments. Our focus is not simply on spending less, but on making our marketing dollars work harder.

Reducing waste and duplicated content production, and deploying resources more efficiently behind priority franchises launches to improve marketing efficacy. Across the business, we are simplifying operations to strengthen profitability, by protecting investments essential to the transformation. The additional second half costs and planned inventory actions more than offset our second quarter operating income upside. As such, we continue to expect full year adjusted operating income of the $140 million to $160 million range. This excludes anticipated restructuring transformation expenses of approximately $44 million and the $3 million benefit from the litigation reserve accrual reversal, and includes about $70 million of benefit from IEPA tariff refunds related to fiscal 26 expenses.

This also assumes about $45 million of headwinds related to the ongoing Middle East conflict, up from the $35 million we cited previously. All in, we continue to expect full year adjusted diluted earnings per share of $0.08 to $0.12 Turning to our third quarter, we expect revenue to decline approximately 8% to 9%. In North America, we expect the low double digit decline, which includes about a point of wholesale shipments that were recognized in the second quarter. In EMEA, we expect a high single digit decline, which includes about 5 percentage points of distributor shipment timing moving into the fourth quarter. And in APAC, we anticipate roughly flat revenue as the business continues to stabilize.

Third quarter gross margin is expected to increase 30 to 50 basis points with pricing and mix benefits partly offset by higher supply chain costs and foreign currency headwinds. Adjusted SG&A is expected to decline at a low single digit rate as we continue to manage marketing towards greater productivity and discretionary expenses. For the third quarter, we expect adjusted operating income to range from a loss of $5 million to a profit of $5 million with an adjusted diluted loss per share of $0.01 to $0.03 With third quarter adjusted operating income expected anywhere around breakeven at the midpoint our full year outlook includes a stronger fourth quarter.

In North America, we expect a couple of percentage points of revenue benefit from the youth transition, and a few additional points from wholesale initiatives to reduce excess inventory. In EMEA, distributor shipments shifting into the fourth quarter account for about 5 percentage points of improvement. That timing supports fourth quarter revenue without changing our full year demand assumption. We are expecting stronger year over year profitability in the fourth quarter supported by pricing, and favorable channel and product mix. Alongside continued expense discipline. Partly offset by the external cost pressures and inventory actions mentioned earlier. In closing, our second half priorities are clear. Improve inventory alignment, maintain expense discipline, preserve liquidity while supporting key launches.

With that, we will open the call for questions.

Operator:We will now begin the question and answer session. To ask a question, you may press star If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Simeon Siegel with Guggenheim. Please go ahead.

Simeon Siegel:Thanks. Hey, guys. Morning. And if I forget, hope you and your families have a happy holiday season ahead. Kevin, I think your excitement around the existing and upcoming product innovation definitely shines through. Could you speak to us, maybe help us understand where you think the customer might not be seeing. If we were to take a step back, look at the overall revenues and maybe right now, more importantly, the margins, Just how do you translate that excitement into the price people are willing to pay, maybe the gross and operating margins the company is going to capture?

And just any help you can share with us on how you are thinking about the time line of the revenue reset and stabilization in North America. And then maybe can you just elaborate on that last piece you were talking about, the drivers of the confidence in the fourth--the stronger fourth quarter embedded within the full year guide? Thank you.

Kevin A. Plank:Hi, Simeon and thank you. Yeah. there is absolutely a passion for the product here. We know that is everything, but I think the good news is that we have a almost embarrassment of riches when it comes to product. I feel like the biggest place we have fallen down has just been in our competent storytelling. That reflects and needs to come through first and foremost and we wanna be clear that our priority is stabilizing and getting North America going. it is obviously. it is a bit complicated out there. And we have where we use the map differs from the terrain.

That is certainly something we have been dealing with, and we have been seeing some softer consumer traffic and a bit of a promotional marketplace out there. We are also seeing some of the sensitivity when we look at things like our factory house business. Let me maybe characterize this in 3 ways of where and how I think we are going to do this, and I think it is going to be product, it is going to be marketing, and it is going to be distribution. Followed with how we execute on that.

First of all, on the product side, we have got a force of nature in Kara Trent who is been simplifying assortments and reducing SKUs to help us just emphasize and make us focus. We are leaning in into our famous franchises, things like Heat and ColdGear that the consumer already knows us that we can build on. We have got great appetite from training, and it is something where we are looking to lean on and make sure that those products like Helix, again, at a $35 accessible price point really begin to come through for us. And things like the Armour Short, which I am happy to report just in case I am wearing 1 this morning.

Footwear is also it is something for us. it is a billion-dollar business. That we believe can be much larger for us as a whole. And we think you are going to see a lot more of that proof coming through in spring 27 especially the way that we story tell. And I will say that, I will maybe emphasize here because I think there is that disconnect between the consumer to your question and where we are. I believe, as I say, North America is our regional priority without question to make sure we get it going. Marketing remains our largest opportunity as a brand. To turn the trajectory of our business because we have what we need.

We have got leadership. We have got budget, and we absolutely have desire. But, frankly, as we found, just putting things out there and putting it under our logo does not do it. Meaning, a shirt or a shoe without a story, it is just a shirt or a shoe. So we have the riches we have from innovation. I do not think there is another brand that is close. We just need to make sure that people actually see that because every owner of our product actually does something. We are just gonna make sure that we tell you exactly what that something is.

The other thing I think is you-- You know, we are just applying this globally is I mentioned this idea of singular product launches per month, which may sound pretty unsophisticated because it is meant to be that. So we can coordinate this global pitch and story that we have to be sure it comes through. Because we have been running, basically smaller regional plays versus leveraging this incredible global brand that we have. Distribution, let me just. Because I think I wanna be comprehensive here.

You know, we have been working, really diligently on the partnerships especially with some of the elite partners that we have around the world, and it is the DSGs, and it is the sports directs and JDs and El Corte Inglés as we go globally with it. With that focus on rebuilding, our e-com approach, for full price selling. I mean, that is it. We talk about premiumizing the brand. And it means our definition of that is making sure that we sell at full price. And finally, I guess I would just say execution.

You know, we talked and I touched lightly on, you know, our own AI that we are in, and I think that our industry actually lines and maps up perfectly with the advantage of what AI brings for us. And it is a matter of us focusing, as I said, on supply chain merchandising, and marketing, of course. But this outsized focus that we have just making sure of the best things I ever heard is, you know, how can we increase or grow our business? and the answer is ship us everything that we ordered. The forecast accuracy and delivering on time in full is also a priority.

So you know, that is a long way to say it, but I guess I wanted to get be comprehensive because to be clear, we have everything that we need, and we are just here. I want you to know that our job and with my myself, Reza, our entire executive team, is ensuring that we have got nothing that we do not.

Reza Taleghani:Just to pick up on the point on gross margin specifically. Obviously, we are in an environment that is very promotional if you are looking at The US and UK. But as we have said just in the script that we just went through, overall, we are looking at gross margin improvement over the course of the year. And so in an highly promotional environment, the premiumization that we are looking at is selling more at full price. I think is something that should ladder as we continue to build on these franchises over time.

Simeon Siegel:that is great. Thanks, guys. Again, happy holidays ahead.

Reza Taleghani:Thank you.

Operator:The next question is from Jay Sole with UBS. Please go ahead.

Jay Sole:Great. Thank you so much. I would love to follow-up on your point about the marketing opportunity. What are some of the metrics that you are using to sort of establish, you know, how the brand is trending with consumers over the last 90 days. You talked about some social media. But, yeah, I thought, you know, the We Love Football campaign, great campaign. I love football. is exciting. Can you talk about that? And just kind of how you are seeing the plans that you put forth for marketing play out the way you expect when you actually launch them out there into the world? If you could give us a little update there, that would be great.

And then Reza, maybe if we talk about the incremental 50 basis points of margin change in the guidance, if you could talk about what the biggest driver was? Was it fuel? Was it promotions? FX? If you could kinda break it down for us a little bit more, that would be really appreciated. Thank you.

Kevin A. Plank:Thanks, Jay. Yeah. Number 1, we measure marketing by how we are doing with our with our selling, and so I do not think that we have been doing, what we need to. Metrics that we are measuring with are some of the things where we have seen the great positivity is, you know, in Q2, we saw consideration rise 90. Over 90% year over year and brand perception up over 24%. You are right that the campaigns we have are things that just underscore what our center is. And so as you are thinking about marketing for the brand as a whole, everything is changing in marketing.

We wanna make our story much simpler to understand and, again, establishing that 1 global brand voice as I talked about. The innovation pipeline that we have is. it is extreme; it just needs to be, spoken. We have not gotten there. The opportunity is telling our story more clearly and more consistently. And what we will see from us is probably, as I said, moving to the singular product launch per month when we go through it. Making sure that we are not just doing, brand storytelling, but we are really focusing on product storytelling. And as we say, you should not be able to tell the difference when we do that. So the.

This is your armor is something that is gonna anchor us globally, and supporting what we are doing. I also just wanna make sure as we think about, you know, the way that we measure what we are doing, it is significantly reducing things like performance marketing. You are still gonna see discounts as we work on inventory. We work through getting out in the market, but traffic's being replaced by spending on our story versus just spending on getting people here. So what you will see around things like the upcoming helix and the armor short is us really emphasizing product benefits and how that will translate to consumers. Great.

Reza Taleghani:And with regards to gross margin, pricing is a benefit. So pricing and favorable channel mix are on the positive side. As well as some product and regional mix. But that is being more than offset by supply chain headwinds. So that would say the greatest negative for us is logistics freight impacts that we are looking at for the balance of the year. And there is some unfavorable FX from translation that is playing into that as well. But I would say if I had to characterize the single biggest negative, it would be the supply chain headwinds that we have. Got it. Thank you so much.

Kevin A. Plank:Thank you. Thanks, Jay.

Operator:The next question is from Samuel Poser with William Trading.

Sam Poser:Thanks for taking my question. Kevin, can you talk a little bit about, you know, sort of the evolution of these--I guess these new franchise launches you are gonna be doing on a monthly basis. And you talked about how many stores the new shorts were going to with Dick's. Can you talk about the Helix You know, how big that is? Like, how is that built into fiscal 28? And do you anticipate revenue growth in 2028 with all the actions you are taking? And I have another question. More near term question as well.

Kevin A. Plank:Yeah. The. We are not getting to 2028 right now, but we are just taking this thing 1 quarter at a time. So, the franchises that we are built on is it is wide-ranging. So Helix in particular as I said, that is a multimillion unit program that we think can be a top 10 driver for us over time. So something we are really focused on. And as far as things like the ArmorShort, you know, we believe we may have embedded a new category there. Time will tell. But more importantly, this is not about just the new innovation pipeline we are really excited about.

And we said there are going to be 12 product launches, over the next 12 months, I would say probably 5 or 6 of them would be existing products that we already have in our pipeline just not getting good enough credit for. So I think we wanna make sure that we are amplifying that. Number 1, to our customers that we can meaning our retail partners to get out there and get placement in store because we need to create this premium profile for the consumer to really see and be able to believe in the brand.

That consumers will then have access to it because you can see these great ideas, Sometimes it can be more difficult to getting it at retail. So we have great partners. We just need to make sure we are doing a good job giving them the story and then giving them the tools to actually sell when it shows up at retail.

Sam Poser:And that leads to my second sort of all related for both you and Reza. Your inventories are a bit high. Where. You are working them down. How do you make sure when you are doing these new launches such as the Armor Short that you are not being too aggressive out of the gate and do not and then run into potential inventory problems down the road. I mean, how do you do this in a in a in a meaningful measured way to sort of optimize the business, but not put too much risk on it if it does not work.

Reza Taleghani:Why do not I start on that 1? So if you are talking about the new launches specifically, obviously, look at what the demand is coming in from the regions when we put in the buys for these different products. The other thing is these products that. If the inventory comes in and the sell through is slower than we anticipate, not like--like it spoils out of the gate. I mean, it is gonna be high quality inventory anyway, we can manage the inventory levels through watching the sell through and adjusting the future buys that we have for those categories.

When we are talking about kind of inventory and looking at the plus 4% that we had in this quarter, that is largely because of the revenue decline that we forecast on the last call where we took out 200 million of revenues. And because of that, all of that inventory was already in flight. And so we are we are managing through that by working through our factory partners in terms of trying to delay some shipments, looking at basically what we can do in terms of some other wholesale strategies that we have for the back half of the year and to try to manage that as best as we can.

Kevin A. Plank:And, Sam, building on that is, we spoke about with AI, hopefully it will get us a lot smarter with getting closer to what the demand actually forecast for us. But, you know, coming out of a couple weeks ago of having all of our key manufacturing partners here and working on what we can do to streamline our go to market is that our industry and I think a clear from the market, is our industry just moves too slowly.

As I said in my prepared remarks, the 18 to 24 month from now, I think that we will have a much better evolved model that is something which can be more streamlined to deal with getting closer to market, being closer to consumer, and, frankly, the ability to react, and we do see opportunity in certain products.

Sam Poser:Well, I am sorry. 1 more. I mean, retail buyers buy. that is their that is their that is what they do. They tend to go, oh, that looks cool. I am gonna buy it. And they tend their eyes often end up being bigger than their stomach is. Relative to the actual consumer demand. So with this potential.

With this increase of speed, this 10 minutes 10 months to market that you talked about, is there an opportunity for you to put I will just use the armor short, for example, on your website into some stores to really see consumer demand prior to counting on buyers who tend to like anything shiny new and then buy too much of it. And really use your given your increased speed, to use your own data to then really be able to measure the demand and put a check on what some of these retail buyers tend to do.

Kevin A. Plank:I feel like you answered the question in that ask because it is exactly what we wanna be doing. We wanna make sure that we can just get early reads, and so that is why we are testing things out like the athlete wear testing. I mean, I say storytelling, I think there are so many steps that Under Armour includes in our go to market. That other brands do not contemplate. What we do not wanna do is eliminate that, which is the athlete testing, the certifying the product, making sure it lives up to what we wanted to do. And then, of course, how is it going to be received by the market?

Is something which is a runaway hit? Is it something that we may want to hedge on? Is it something that we wanna wait and see? Is it something that we are gonna build scarcity around it? So that builds into everything we do, but yeah, we are not being crazy with the buys. We just wanna make sure that we have more intentional product that is required or necessary from the consumer. World does not need more stuff. The world does not need another capable apparel footwear manufacturing. It needs a hope and a dream.

It needs something that translates through that with something like the Under Armour brand, which should be an aspirational As our mission statement says, providing solutions that athletes never knew they needed. And once they tried them, they cannot imagine living without. And so making sure that we test the commercial viability of these things as they get to market and building a--creating a demand beneath that, that is that is what is required from us. So, yes, test and learn, before we make too big a batch is the way that we are thinking about the future. Thank you very much. Good luck.

Operator:The next question is from Bob Drbul with BTIG. Please go ahead.

Bob Drbul:Hi. Good morning. You mentioned asset light Can you give more color on what that means? How you are thinking about it? And what other areas could be up for consideration?

Kevin A. Plank:Yeah. Thanks, Robert. Let me. I think it is a unique it is a unique phrase, and I think it is something in which, our industry is screaming for. Because it. We have been built big and heavy, and I think that there is just opportunities for other partners to help us there. So the shift to asset light is about building bottom line about building brand value for us and finding where we can evoke the most value or the most bottom line from what we are doing. As I said, as we think about how we will evolve in the next 18 to 24 months, it is the way that we do business.

So as a brand, we effectively do things. 3 things. We make products in factories. We market and make them compelling to consumers who wanna buy them. We sell them at retail. it is roughly a third, a third, a third of our time. But we prefer to focus more than 50% of our time on the managing and the marketing and the brand building, creating the feeling what people have for this because we have incredible partners at both the factory and at the retail level it is what they are really good at. Believe our real value, it lies in the brand.

And so the brand lens is that every dollar resource spent it must help us sell more shirts and shoes. We think we can be the drivers of that. While putting more of this opportunity into our factory partners, more of what we have had in our traditional go to market in our factory partners and into our retailers. And so that is an ongoing work in process. As our operating model and the strategic partnerships as they as they evolve. So 30 years of doing this, we have incredible relationships at both ends of that with this. The manufacturers and the retailers. We wanna work on shortening lead times. We wanna work on better execution at retail.

And what we are doing is we are testing. I mean, this move that we had with our youth business, for instance, it is a. The idea of that is what is this like if we were a bit more asset light there? We think agility is gonna be the key. To this next chapter for any brand, and we wanna make sure that we are demonstrating that in every way, shape, or form. Thanks, Kevin.

Bob Drbul:And I guess a question on the footwear business. So the footwear business continues to be challenging. What do you believe is missing the mark there? And how do you think how long do you think it will take to stabilize and even return to growth?

Kevin A. Plank:Yeah. Bob, we have a we have a brand that is much bigger than our business, and especially when it comes to footwear, but it is still a billion dollar business for us to build on. You know, we have got authentic equity to build from, though, that our job is to extract the value from that. That I do not think we have done a good enough job, obviously, of making that come through. So delivering a clear point of view on what we want consumers to buy and then telling them why to buy it.

As I said, we have a, know, an overwhelming amount of innovation I think as we sharpen our design and get better, as we make a clearer and better good, better, best segmentation for products, it is something that could come through. Meanwhile, we are seeing some signs of things that we can work on. Our run business did actually grow in Q2 for us as well. As we build out and looking at our cleated business, we mentioned becoming the number 2 cleated brand in American football. it is a small category, but it is an important sign. Especially as we are driving higher ASPs.

So that on field credibility, the for the on race course, performance we are seeing from things like our velocity platform. You know, we need to make that authenticity translate into commercial success. So focusing on team sports, focusing on running, focusing on training, And, again, it is not just waiting for the next thing in the innovation pipeline. Have plenty to work with. We need to do a better job packaging those stories into a reason that consumers need to buy it. So making these making these franchises actually matter for us better. Thanks, Kevin.

Operator:The next question is from Laurent Vasilescu with p n. BNP Paribas. Please go ahead.

Laurent Vasilescu:Good morning. Thank you very much for taking my question. Kevin, I wanted to follow-up on your comment about the 50% SKU reduction initiative. Half of it is been completed. Curious to know if you can quantify in any way for the audience how much this pullback represents in revenue dollars that we can understand the underlying trajectory of the business. And then from a gross margin perspective, when should we start to see this initiative to pick in as a benefit to the gross margin? Thank you.

Reza Taleghani:So, Reza, I will take that in 2 parts, and I will just start with the first.

Kevin A. Plank:We seeing the benefit of this is the first thing is we can start to feel the weight coming out of the line, but from our industry of working with this traditional 18 to 24 month go to market, you are not exactly seeing it come through just yet. What we are feeling is we have our teams now working on less products less weight in the system, and getting more streamlined with putting our best people against the best products. That does not mean just, you know, 140 or $150 plus footwear.

We are putting our best people on taking probably an overcrowded market of where our family channel or value footwear in that 70 to $90 range making sure we have got real design there. So in the past, that is what this good, better, best exercise has really been able to give for us. So thank sure that we can be clear with the product proposition we have for the consumer And that as we say, premiumizing means selling at full price regardless of the good, better, or best level. And that is what we wanna create.

So getting that out of the system and, more importantly, just creating that architecture of a clear proposition at good, a clear proposition at better, and a clear proposition at best is much better than having you know, 6 or 7 styles between 70 or $80 So we need to make sure that we make that product proposition for the consumer just much clearer. So it. it is it will run through. And is there a revenue impact to it? The goal is that we are putting ourselves behind and focusing on these key styles and storytelling about them.

For instance, our cert 11 that we launched over our cert 10, is our highest volume shoe, is something that we are now. We are we are driving higher ASPs. Getting what we want. We are putting athlete storytelling behind it, make sure it is not a shoe or a foot covering on the wall. It actually has a reason to exist talking about the charge plus that we have in the midsole and talking about innovation and the athletes who support and wear it.

Reza Taleghani:Yep. And just to add to that, Kevin, and to get to the gross margin point, I think part of it, Laurent, is also looking at just the quality of revenues that come from these changes as well. There is some benefit as you start to rationalize from a gross margin perspective, the different materials that you use, etcetera. But I just finished saying that gross margin. The reduction that we just put. Talked about on gross margin largely due to supply chain. So what is essentially happening is there is some benefit that comes from the rationalization that you do over the, you know, 18-month cycle that you have or 24 month cycle that you have.

But then also, we are in an environment right now that is clouded by higher freight costs and other things as well. But if you were looking at it and drilling down at that level in of the product costing that is coming in, there are definitely improvements that come as you rationalize on the back end.

Laurent Vasilescu:Very helpful. And then, Kevin. Kevin, there is 1 particularly large brand out West that sold in a lot of products. Into the North American marketplace. You know, curious to know what you are hearing from your key retail partners when they think the North American marketplace will be clean Is that. Are you hearing something like spring 2027, or is it gonna be later into fall of 27? Any comments there would be very helpful. You very much.

Kevin A. Plank:Yeah. I cannot speak to what they are doing, but we certainly feel the impact of a lot of brands are clearing inventory right now. And they are not doing it to keeping the marketplace not as healthy as we would like or prefer it to be. Which means that we just need to focus on ourselves. And I think that is where we are of staying in the pocket, delivering, doing what we said we are gonna do, make sure that we, you know, do that really clear for our teams to know how to execute.

But, yeah, that applies some of the pressure and that, I think, speaks to the where the consumer's sitting right now in a bit of a challenging macro it makes it complicated, but it does not make it impossible. it is our job to make sure that we are cutting through from a brand lens and giving them a reason to purchase us. So the sheer volume of what that means and some of the clearance places where you are finding product right now, it is where we do not wanna be, but we are gonna be mindful of our inventory as well it is something which is always a hyper focus for us in this industry.

Reza Taleghani:Thank you very much, and best of luck. Thank you. Thanks.

Operator:The next question is from Brooke Roach with Goldman Sachs. Please go ahead.

Brooke Roach:Good morning and thank you for taking our question. Kevin, I was hoping you could speak to the changes you are implementing in your North America stores to improve consumer engagement and traffic. What are you seeing in the factory stores where you have added full price product, and where can that initiative go from here? How do you expect that to impact traffic both near and medium term?

Kevin A. Plank:Yeah. Thanks, Brooke. it is it is it is absolutely initiative. You know, we have got a lot of touch points when it comes to our factory house business here in the US. And it is a place where we do not want that experience just to be a. The product proposition or the buying proposition is not just there is a discount associated to it, but actually applying story there. The first way we started with where. What we are previously pure outlet experiences, putting some of our premium products in there, you know, putting our StealthForm caps into our stores at a full $45 price point.

That consumer, it is it is it is not unattainable, It allows them to start getting used to what we are trying to do to premiumize the brand, which means getting consumers to pay full price for Under Armour. But they need to see and understand the innovation I think the opportunity we have in our factory stores is to go deeper on the technology that sits there. Sometimes that is left for just our full price distribution, and I think we have a great opportunity to increase that.

As I said, we are we are we are we are targeting double digits of what that impact will be of selling full price product in that mix at factory stores, meaning brand new innovations that we can take advantage of the distribution footprint that we have. But, yeah, we are we are we are looking. Driving ASPs is 1 of the key metrics that we are using to evaluate our business on a daily, weekly, monthly, quarterly basis.

Reza Taleghani:Great.

Brooke Roach:And then, Reza, as a follow-up, can you unpack the fourth quarter inflection in operating margins in a little bit more detail? It looks like you will see improvements in both the gross and the SG&A line. Could you potentially quantify the magnitude of improvement that is coming from the youth business, the proportion that is happening from timing shifts, and your assumptions on the underlying base business profit improvement.

Reza Taleghani:Yep. Absolutely. So there. there is if you are looking at the Q4 numbers specifically, if you basically do the math around it, you. You will see that there is a there is a fair bit of moving parts, especially in our North America business. So we have traffic and promotion. That are being offset by some future product launches that we have where we that we are going to be gaining traction. There is a couple points that are coming from the youth transition specifically in Q4 in North America.

And then there is also a few points from wholesale initiatives that we have specifically in terms of trying to sure that we manage our inventory levels in the final quarter of the year. I also mentioned on the call that with EMEA specifically, there is a shift of about 5 points from Q3 to Q4 for EMEA. So that is working its way in. Into those numbers as well. As you look at gross margin and if you are looking at just the overall SG&A, we have been taking a lot of SG&A actions over the course of the year.

So some of those are really bearing fruit on the back half of the year and going into next year. So as you start to see the improvement in operating margin, it is a combination of those factors basically coming working their way through the P and L as well.

Brooke Roach:So much. I will pass it on.

Reza Taleghani:Thank you.

Operator:We will take our last question from Peter McGoldrick with Stifel. Please go ahead.

Peter McGoldrick:Hey, guys. Thanks for taking my question. I just wanted to get some clarity around the kids licensing. Can you illuminate the economics on the new business model? So what is the existing run rate for revenue? How had that been contributing and to the operating income line? And then what should we be thinking of, like, the net contribution when the that has been fully transitioned. And as you pointed out, that does have an impact on the fourth quarter, I would be interested on the influence of the transition and how long that takes.

Reza Taleghani:Yep. Why do not I take that 1? So of all, let's start with the fact that you absolutely remain strategic to what we are doing. it is an entry point to our brand. And this is an existing long standing partner with us that we are looking at basically expanding the relationship with. You should know that with it. That we will still be selling you within our own DTC channels. So in terms of what we are looking at, our DTC business around youth continues to go forward as well. And Youth is focused on specifically this transaction is looking at North America and EMEA.

And so our APAC business would be on the outside of that as well. We are not going to be giving you the revenue or profit we break out today. Obviously, as we basically come forward with our May outlook. Our May 2020 our May call with our fiscal 28 outlook, we will basically or we will we will go through and give you. You will get a sense in terms of royalties, transferred costs, inventory commitments, etcetera, that we will do. But overall, our objective is to retain earnings and cash contribution. As the royals. The royalties basically replace the product sales that we coming in.

And, obviously, it is a specialized provider in the space, we think that they will have a net benefit to us overall.

Kevin A. Plank:Yeah. And not piling on too much for that, but you know, we are we are really in a test and learn. We wanna know what we can do to have a more nimble organization making sure that agility is something that defines this brand. We have been doing this a long time, as we are closing out 30 years. And that means that we just need to be more thoughtful about what this next chapter looks like for us.

So we are also looking for other areas where what makes sense for us or places that do not do not matter and they are not strategic to the brand of what it means, but youth is certainly a strategic place, and so that is why we think this is a really healthy balance for us. And with a partner that we know and understand and some place where we can leverage and optimize to drive a better bottom line.

Peter McGoldrick:Appreciate that. And then, last 1 for me. I. Thinking about pricing as a driver in the fiscal fourth quarter, and perhaps dovetailing with the earlier commentary around the marketplace health. Can you help us think about the contribution from pricing in embedded mix, full price and like for like pricing considerations Yeah.

Reza Taleghani:So overall, we are expecting gross margin to improve as we get into the quarter. We have taken pricing actions but obviously we are also in a highly competitive environment. We are talking about looking at some of our competitors that are trying to move a lot of inventory right now. So we are selling into a market right now that. that is very promotional if you look at North America and especially the UK as well. So while we have taken pricing actions and we do expect some gross margin to come from that on a net basis, Some of that is being offset by greater promotional activity that is happening in the market.

And, you know, it is it is. It. it is across both wholesale and DTE frankly. So we are we are seeing it just as an overall market dynamic. Thank you. Thank you.

Operator:Thanks, everyone. This concludes Under Armour's second quarter fiscal 27 earnings conference call. Thank you for attending today's presentation. You may now disconnect.

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Under Armour (UAA) Q2 2027 Earnings Call Transcript was originally published by The Motley Fool