Prepared remarks
Good morning, and welcome to the Under Armour First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lance Allega, SVP, Investor Relations, Treasury and Corporate Development. Please go ahead.
Good morning, and welcome to Under Armour's first quarter fiscal 2025 earnings conference call. Today's event is being recorded for replay. Joining us on today's call are Under Armour President and CEO, Kevin Plank; 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 August 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 non-GAAP references. Under Armour believes these measures give investors a helpful perspective on underlying business trends. When applicable, these measures are reconciled to the most comparable US GAAP measures. Reconciliations, along with other pertinent information, can be found in this morning's press release and at about.underarmour.com. With that, I'll turn the call over to Kevin.
Thank you, Lance, and good morning everyone for joining us on today's call. With the first quarter of fiscal '25 behind us, I'm pleased that we started the year ahead of expectations and I'm encouraged by the early progress we're making in executing our Protect This House strategy. At the center of this strategy, we've recently declared to our team and partners that Under Armour is a sports house, a term that we're using to define the landscape in which we compete. The sports industry's version of the only handful of brands from Europe who've earned the right to refer to themselves as fashion houses. Across the sports brand landscape, we believe there are less than five brands that could be represented on this podium for sports globally, and that we are one of them, earned over our 29-year history the credibility to show up in virtually any athletic endeavor on the field, pitch, or court as an outfitter, and be seen by athletes in the more than 100 countries where we do business today and are generally famous as an authentic brand, an authentic sports house brand.
This rare era amongst the landscape of the sports industry is an aspect of Under Armour that we feel is incredibly unique and just one of the attributes of strength we see for ourselves. We contemplate the opportunity that Under Armour has in front of us. We believe this authenticity gives us an advantage as we reconstitute our brand strength and execute our strategy. To make that happen, this, of course, begins and ends with our culture, elevating its importance and visibility, raising the bar of our culture across the enterprise and like our brand positioning work, we're also reconstituting this. Our culture is unique in how it describes our brand, the athletes we have, and the ones we plan to attract. In this spirit, we've redefined who and what we stand for within our strategic plan. As discussed on our last call, the who we are being about athletes, sports, innovation, and passion. And we have a passion for, in its simplest definition, the underdog.
The athlete who is not given all of God's gifts of talent and despite what they're missing, is not tall or fast enough or strong or swift or clever enough for all those who have to stay late after practice to work on a skill or study harder than the rest, this is our underdog. And because of this, UA's athletes must use every resource and waking hour to make themselves better. Said differently, we don't innovate as a brand for our athletes so that they can run up the score. We expect every product we build to provide an edge for our athletes just to give them a fighting chance to compete. This mentality is what drives our innovation agenda and manifests through grit, an oversized chip on the shoulder that is UA's beacon, an underdog spirit that can never be counted out. Each day, this UA team will operate with the responsibility to do everything in our power to push the boundaries of innovation that makes athletes perform better.
And above all else, we recognize the privilege and joy it is to work in sports. Our aspired culture will be the output of bringing this to life. In this effort, we must become more deliberate in everything we do, recognizing the difference between experimentation and intentionality, and have the right talent and agile decision-making abilities to ensure we can do this consistently at a high level. As such, we've invested meaningfully in experienced leaders to supercharge our ability to execute differently than in years past. We're not just building a company, we're building a brand. And the reason is that a brand is so much more valuable than just a company. We're building the UA brand with purpose. One iteration, one success, one day at a time. Looking back at the last four months since assuming the CEO Chair, we still have much work to do, but I'm proud of what's been accomplished to date, including implementing a nine-month go-to-market process to complement our 18-month calendar with the StealthForm Uncrushable Hat being our first delivered product and now available and in stock online.
We also began the work to reduce our SKU/style count by 25%, implementing a category management structure and right-sizing our organization with a headcount reduction that, while painful, is now complete. However, we're still building too. This brings me to the announcement we made a couple of days ago, the appointment of 30-year industry veteran, Eric Liedtke, as Under Armour's EVP of Brand Strategy. Following a 26-year career at Adidas, culminating in his roles as Brand President and Executive Board Member, we're thrilled to welcome him. Complimenting one of the strongest product teams we've had in nearly a decade, Eric's proven track record of transformational brand growth and strategy will be an incredible asset to our product and regional leaders and our broader executive leadership team at this crucial time. As EVP of Brand Strategy, Eric will oversee our brand marketing, corporate strategy, consumer insights, sports marketing, creative and loyalty functions.
In addition, Eric will be tasked with building out our marketing organization, including its go-forward leadership, that will report to him. On our last call, we outlined what needed to be done immediately and distilled the key points of our strategy into a presentation that's now been delivered to all 16,000 UA teammates and taken on the road to our key retail partners, factories, and franchisees globally across North America, EMEA and APAC. From quick hallway talks to two to three hour meetings and presentations, we had transparent two-way conversations to gain perspective about how to take better care of our brand. These interactions have provided well-rounded insights into our strengths and areas of opportunity, such as being faster and bringing products to market, more intentional and committed storytelling for our launches, serving as a better business partner and driving deeper connections with athletes to ignite brand love.
Constant theme across these exchanges, parallel to the spirit of many of our investor conversations, is the optimism in Under Armour's ability to deliver a premium positioning and unleash our full potential. In the product construct of good, better, and best, we believe that UA can do business in all three, including, as it relates to price, a unique characteristic of being an authentic sports podium brand. This is probably the most significant business advantage of being a sports house and why we believe we can drive a more premium positioning while not abandoning good level altogether. This range is one of the reasons I know we can attract A-plus talent to join us in this next chapter. And this potential is evident when we combine innovative products, outstanding design, and thoughtful storytelling. We delight athletes with performance solutions they never knew they needed and now cannot imagine living without.
This, in conjunction with our strengthened product team and feedback based on early sharing of our evolving product line architecture, is encouraging. We aim to scale this more broadly across every product we make with renewed energy, story, clarity, and alignment across the company. With that, I'll highlight each element of our Protect This House strategy, starting with building better products and storytelling. Central to the evolution of our product organization has been the re-architecture of leadership and structure over the past year, with Yassine Saidi leading a talented and experienced team of apparel, footwear, innovation, and design experts. By order of operations, product was the most immediate fix and frankly longest lead time UA needed to address. I'm very confident in the work this team is executing, including a more centralized vision across product merchandise and marketing that will enable us to correct our past inconsistencies, always editing and innovating to drive our brands forward.
With new leadership also came new priorities and we're progressing well with our category portfolio realignment. This brings greater simplicity to the business and adds focus to our core sports categories, yielding much clearer roles and responsibilities for our product teams to identify and execute go-to-market plans that are ideally optimized for the highest quantitative and qualitative returns. As mentioned on our last call, our fall winter '25 season is when this team's efforts will begin to show up more robustly with new design language and improved balance between performance and style, a pivotal season that we will build into subsequent ones. Yet that doesn't mean we're just sitting back waiting for next year. We're working to elevate our core men's apparel business with a refined assortment, infusing it with industry-leading performance technologies in a more deliberate design direction.
At the same time, we're sequencing investments in our footwear and women's businesses to reinvigorate consideration among two of our largest long-term growth opportunities. We're also shifting towards a head-to-toe approach across our largest categories by employing key franchises, trend-right styles, and innovations to underscore an always-on authenticity. Looking at the season ahead, fall winter '24, we're going to see an uptick in our sportswear offering, with more to and from wearing occasions for the 16-year-old to 24-year-old varsity team sport athlete who we target. This includes the launch of high-performance streetwear in Unstoppable, versatile style and athletic performance in Meridian, elevated warmups and sport-inspired looks in our Icon Fleece collection, Infinite and Phantom running launches, and finally in basketball, the Curry 12, along with the first signature shoe for De'Aaron Fox of the Sacramento Kings.
Our next most significant effort is driving improved demand creation ecosystem through compelling storytelling and aligned merchandising. We've begun to optimize our marketing organization, including efforts to clean up our messaging, particularly in North America. A great example is our use of performance marketing. Last year, when we sent an email to consumers, two-thirds of these messages were about discounts or promotions, and one-third were focused on full-price selling and storytelling. This year, that ratio is now inverted, which, although early, is showing signs of positive traction and perception. So, it's encouraging to imagine how a year's impact might improve our brand affinity. In addition to not simply leading on the retail floor or online with price, we will ensure that we are telling a story about the product advantages with messaging focused on premium franchises and inspirational connections around key retail and sports moments.
In North America, upcoming back-to-school activations highlight key franchises across team sports, apparel, footwear, and sportswear styles. The Elite 24 basketball showcase this coming weekend in New York City and our All-America Volleyball and American Football events in Orlando in January give us an excellent platform to connect even more deeply with young team sport athletes. In Asia Pacific, Stephen Curry will be taking his first tour across China since 2019 this September, and we're generating brand heat through social media and activations, leading to millions of new followers and thousands of new member enrollments in just the first few days. With four major cities on tap, we look forward to September's tour and the energy it will bring to the Chinese market. In Europe across EMEA, football has been a sharp point in driving brand affinity with youth and unlocking our sportswear consideration, activations during critical sports moments including the English Premier League, Champions League Final, and the Euro Championships, focused on our iconic HeatGear Compression apparel and the Clone Magnetico boot, featuring a young stable of UA athletes including Toni Rudiger of Real Madrid, Eddie Nketiah of Arsenal, we are very much in this conversation in European football.
We're also increasing our investment in paid social media influencers. Over the next few years, we intend to double the number of influencers in our creator program to lean into fresh new content to drive reach and engagement. In line with this, we signed University of Miami Women's College basketball players, Haley and Hanna Cavinder to a multi-year partnership. This serves as a metaphor for tying together sport authenticity and influencer relevance. With nearly 7 million followers across Instagram and TikTok, it's great to welcome them to the brand. Another first quarter highlight was demonstrating staying on our front foot with collegiate assets, including extending our partnership with the University of Maryland to be the exclusive outfitter of athletics program, including 19 varsity sports and universities club and intramural sports. With now seven Power 4 teams for UA, 85 Division I squads, and 350 Division II and Division III schools, our NCAA presence is a testament to Under Armour being a brand that athletes trust, a true sports house.
We also announced our new partnership with USA Football, the official and exclusive uniform apparel and footwear provider, including the US men's and women's national teams. This is also an excellent opportunity to have a front and center grassroots pathway to defining flag football across more than a million member athletes by integrating it into our existing UA Next platform. We're very excited about this, especially as it leads to Flag Football's debut at the 2028 Summer Olympics in Los Angeles, where UA will be the official outfitter for Team USA, competing on the gridiron. And speaking of the Olympics, with more than 70 athletes from 26 countries across 28 sports representing UA, we've had a fantastic roster on the world's largest, most famous athletic stage. A few callouts, of course, are Stephen Curry and Kelsey Plum on the US men's and women's basketball teams, New York City marathon winner Sharon Lokedi representing Kenya at her first games and Fermin Lopez, a key Spanish player who's led his team to the final of the Olympic football tournament by scoring four goals and two assists in just five games.
Next up is our second strategic priority, running smart plays and our work to optimize our business to clean up unnecessary complexity, meaning growth by constraint. Our approach here is simple: test all existing rules to determine how to take advantage of all business dimensions more efficiently. Accordingly, no area is left unturned, and all systems, structures, and processes must have a clear and well-defined purpose and output and definition of success. Though a difficult decision, our restructuring program has given us a head start in streamlining the organization. During the quarter, we rightsized our workforce and are executing various transformational initiatives and advancing considerations around facilities, software and other areas. As a result of some of this work, we've begun laying out projects to automate tasks and decision-making processes, using both traditional and AI solutions to unlock data-driven insights and operational improvements.
So, very promising for long-term efficiency gains. An output of complexity led to the creation of frankly too many products that, without proper segmentation and marketplace differentiation, have challenged brand affinity. In this respect, I've tasked our team with achieving a 25% SKU reduction over the next 18 months, and we're making solid progress toward this objective. This is not, however, a blanket strategy across our good, better, best construct, nor does it apply to all categories equally. We're being surgical in this effort, distorting toward areas of opportunity with the highest returns both financially and strategically from a brand-building perspective, and purposefully over-indexing toward better and best level products as we elevate our brand positioning. We're also working to become smarter, more efficient by modernizing our supply chain, with two primary objectives. Improving our end-to-end planning and cross-channel capabilities, led by Chief Supply Chain Officer Shawn Curran, our end-to-end planning work spans multiple disciplines, aiming to enhance our ability to plan better and protect our consumers' needs to optimize our assortments and manage inventory across regions, channels, and retail doors.
We've also started a multiyear distribution logistics modernization initiative to enable cross-channel capabilities to optimize cost, maximize speed, ensure inventory availability, and increase service levels across our DTC and wholesale businesses. That takes us to our third priority, elevating consumer experiences, where we're focused on driving excellence across our direct-to-consumer and wholesale businesses. In DTC, the first quarter marked the beginning of our journey to elevate our North American e-commerce business toward a more significant and premium consideration. As expected, our e-commerce revenue was down, driven by roughly a third fewer promotional days than last year. However, positively, the percentage of full price sales in our digital channel rose significantly, along with a reduced mix of outlet and clearance sales. So, although still in the early days of this strategy, we're optimistic about initial performance metrics, which include higher average order values.
Regarding physical retail, we're focused on delivering service excellence and identifying areas to improve upselling, repeat business, and profitability. To support this, we're testing a new full-price Brand House concept and are pleased with the initial results, seeing an improvement in productivity and revenue per visitor. With cleaner sightlines and more curated product assortment, including nearly 50% fewer SKUs and an evolved in-store presentation, athletes can more easily see and feel the power of the Under Armour brand. All of this will come together even more beautifully later this year as we open our new flagship store at our new headquarters here in Baltimore before the end of December. In our factory house outlets, we're digging in to optimize this business better, especially in North America, which is critical to balancing future revenue and margin opportunities. During the quarter, we initiated trials with mixed results as we dialed various promotional levels up and down to assess volume and ASP impacts, an excellent test and learn as we solidify our go-forward strategies.
We're also working to change our assortment and segmentation, including less made-for-outlet products, SKU reductions, elevated visual presentations, and full-price selling, all geared at harnessing this platform more effectively to generate capital for other parts of our business. Our loyalty program is also giving us an added boost in realizing improved long-term growth, profitability, and higher brand engagement. With less than a year under our belts in North America, UA Rewards has grown quickly and its performance has been a positive contributor. The program has nearly 5 million members and is growing month by month. Exciting too that about half of recent enrollments are new to the brand. This is an excellent sign of expanding our reach with unique visitors. Further, nearly 60% of our North American DTC revenue comes from UA Reward members and we're showing roughly 50% higher revenue per consumer, along with a three-fold increase in the 90-day repurchase rate compared to non-members.
So, very encouraging for the long term. Now, shifting to wholesale. Following meetings with key global retail partners, I'm happy to report that they are encouraged by our progress and optimistic about the potential of our strategy. As mentioned, it will take time for the wholesale channel to inflect; we must allow for improved storytelling to take shape. In the interim, we're changing the script on what it means to be a UA partner and are committed to strengthening our crucial account relationships in each distribution tier. In addition to working out improved segmentation with our current mix of products, we're partnering on better integrated planning and joint marketing opportunities. In closing, though early in our journey to reconstitute Under Armour's brand strength, we're making tangible progress in building a more premium product offering. We're running smarter plays by tightening up our SG&A, reducing SKUs and materials, and beginning to elevate consumer shopping experiences.
Amid the early progress we're making and Eric coming on board to fill a critical missing piece of our puzzle through the marketing lens, we'll continue to empower and evolve our culture to reduce complexity and be more deliberate in everything we do. I have every confidence that our improving level of execution will result in a better presentation of the Under Armour brand through building this sports house. There's much to do, but we're undeniably back on offense. With that, I'll hand it over to Dave for more details on the results and outlook.
Thanks, Kevin. Starting right in with the results of our first quarter of fiscal 2025, which came in better than our outlook. Revenue was down 10% to $1.2 billion with a 14% decline in North America due to softer full-price wholesale demand and lower sales to the off-price channel. Our DTC business was also down during the quarter, driven mainly by a decline in our e-commerce business resulting from proactive strategies to reduce promotional activity and a decline in our retail store sales. Revenue in EMEA was flat on a reported and currency-neutral basis, with strength in our DTC business partially offset by a slight decline in wholesale. APAC revenue was down 10% or down 7% on a currency-neutral basis, driven by declines in our wholesale and DTC businesses amid a softening macro that impacted consumer traffic and a highly competitive and promotional environment in the region. In Latin America, revenue was up 16% or up 12% on a currency-neutral basis with solid growth among regional distributors.
From a channel perspective, first quarter wholesale revenue was down 8%, driven by softer demand in our full-price and distributor businesses along with lower sales to the off-price channel. Direct-to-consumer revenue declined 12% with a 25% decline in e-commerce as we work to evolve this channel to a more premium positioning via lower promotions and discounts, and sales from our own and operated retail stores were down 3%. Licensing was down 14% due to declines in our North American and Japanese businesses. By product type, apparel revenue was down 8% with declines across most categories partially offset by relative strength in golf. Footwear was down 15% with declines across most categories, partially offset by relative strength in outdoor and golf. And our accessories business was down 5%. Our first quarter gross margin was up 110 basis points to 47.5%. This increase was driven by 170 basis points of pricing benefits due to lower levels of discounting and promotions, mainly in our direct-to-consumer business because of our actions to drive a more premium positioning of our brand and 40 basis points of supply-chain benefits related to lower product costs and lower inventory reserves partially offset by 60 basis points of headwinds from unfavorable regional and channel mix shifts and 50 basis points of unfavorable foreign currency impacts.
Our first quarter gross margin outperformance relative to the outlook we gave in May was due to three main factors. First, we were even less promotional than planned in our DTC business as we started to test strategies for also reducing promotional activity in our factory house outlet stores, including less depth and discounts which was not contemplated in our prior outlook. Second, inventory reserve needs were lower than planned given a lower inventory balance and healthier overall composition. Third, we had some additional trailing benefits from year-over-year freight cost improvements compared to what was anticipated in our prior outlook. Moving down the P&L, our SG&A expenses increased 42% to $837 million in the first quarter. Excluding a litigation reserve net of an insurance receivable and transformation expenses, adjusted SG&A expenses were down 6% to $555 million. This was mainly due to ongoing cost management actions including headcount reductions and lower marketing expenses for the quarter.
During the quarter, we recognized $25 million of restructuring charges and incurred $9 million of transformational expenses booked in SG&A. We have now realized $34 million of the estimated $70 million to $90 million in anticipated charges and expenses under our existing plan. Bringing this together, we had an operating loss of $300 million or excluding the litigation reserve, transformation expenses, and restructuring charges, our adjusted operating income was $8 million. On the bottom line, we realized a diluted loss per share of $0.70 or an adjusted diluted earnings per share of $0.01. These results were ahead of our outlook due to our revenue and gross margin overdrive and better SG&A expense control. From a balance sheet perspective, inventory was down 15% compared to last year, which was ahead of our expectations due to our revenue outperformance and effective inventory management.
We continue to expect that our year-end inventory will be in line with fiscal '24. At the end of the quarter, after paying down the remaining $81 million outstanding balance of our convertible senior notes and purchasing $40 million of Class C common stock which retired 5.9 million shares, we had no borrowings under our $1.1 billion revolving credit facility and a strong cash position of $885 million. Shifting next to our fiscal '25 outlook, our expectation that full-year revenue will decline at a low double-digit percentage rate has not changed. In summary, we exceeded our expectations in North America during the first quarter, and thus we are modestly improving our full-year expectation for the region to now be down 14% to 16%. However, the North American improvement in our full-year forecast is expected to be offset by increasing market pressures in APAC for the balance of the year. Next, we expect a low single-digit percentage decline in our international business.
Within that, I'd like to give some regional color given a divergence in recent results between APAC and EMEA and thus balance-of-year expectations. For fiscal '25, we expect revenue in EMEA to be flat as we continue to protect the brand strength we built in the region amid an uncertain macro environment. In APAC, we anticipate revenue will be down at a high single-digit percentage rate, reflecting lower consumer demand and traffic trends. Moving to gross margin, although we saw a significant better-than-anticipated results in our first quarter, our expectation for a 75 basis point to 100 basis point improvement for the full year has not changed. There are three main reasons for this Q1 overdrive not passing through to the full year. First, emerging ocean freight cost headwinds. Second, developing negative impacts from changes in foreign currency. And third, a more unfavorable channel mix due to lower licensing sales and challenged margins in the off-price channel.
Relative to SG&A, excluding the litigation reserve expense and the midpoint of total estimated charges and related expenses of our restructuring plan, adjusted SG&A is expected to decline at a low-to-mid single-digit percentage rate. This includes anticipated savings of approximately $40 million in fiscal '25 from restructuring actions this year. Adjusted operating income is now anticipated to reach $140 million to $160 million, up $10 million from our prior outlook, and adjusted diluted earnings per share is expected to be $0.19 to $0.22. Next, I'd like to give some color on our expectations for our second quarter fiscal '25, starting with revenue, which we expect to be down approximately 12% compared to the prior year. This decline assumes continued wholesale softness and proactive strategies to reduce promotional activities in our DTC business, particularly in North American e-commerce.
Second quarter gross margin is anticipated to be up 20 basis points to 30 basis points due to benefits from lower product costing and less DTC discounting, partially offset by more expensive ocean freight and unfavorable foreign currency impacts. Adjusted SG&A is expected to decline at a high single-digit rate in the second quarter, partially driven by approximately 4 percentage points to 5 percentage points from an anticipated insurance recovery related to litigation expenses paid in prior periods. Additionally, this decline includes lower expenses related to headcount reductions and a shift in the timing of marketing expenses, which will be considerably higher in our third quarter. This takes us to an expected second quarter adjusted operating income of $110 million to $120 million and an $0.18 to $0.20 of adjusted diluted earnings per share. Finally, some color on how we expect our cash to evolve in fiscal '25.
After funding our legal settlement payment in the second quarter with cash on hand and our expected cash flow generation in fiscal '25, we expect to end the year with approximately $500 million in cash and no borrowings outstanding on our $1.1 billion revolver. Now, to close out today's prepared remarks, I'd underscore that we are encouraged by the early progress we're making to reconstitute the Under Armour brand and are tracking well against our strategies. With a leadership team and culture that gets more decisive quarter by quarter, we will continue to test and learn as we optimize our Protect This House strategy, and we are confident in our ability to establish the premium positioning we know the Under Armour brand deserves and set a higher quality revenue base that leads to improved sustainable growth and profitability over the long term. With that, we'll open it up for questions.
Questions and answers
Our first question will come from Jay Sole with UBS. Please proceed.
Great. Thank you so much. Kevin, it's clear you see some good progress happening in the business. Can you just tell us about what gives you confidence in the company's ability to deliver on the sales growth guidance that's implied in the guidance for the second half of the year and what you see happening there? Thank you so much.
Thanks, Jay. I believe we have a solid understanding of the business right now. During our last call, we positioned ourselves to make the best decisions for the brand. I've introduced the concept of a sports house, which we shared with our partners and team to help everyone stay grounded and not get lost in day-to-day happenings. We recognize our current situation; while we aren't thrilled about it, we are taking steps to improve. Our focus is on slowly and prudently assembling the best team, which is essential. We are also committed to refining our strategy, which hasn't been the issue; it's been about execution. It's important that our team is clear on our objectives and how we define success. The ability to attract top talent, like bringing Eric on board, is a strong indication that we are moving in the right direction. I feel optimistic. There are many macro factors at play that could influence our position globally, but we are focused on our work. While there isn't a lot of celebration yet, there is definitely a growing recognition of what we've achieved so far, and we are proud of what lies ahead.
Got it. Okay. Thank you so much.
Our next question will come from Bob Drbul with Guggenheim. You may now go ahead.
Good morning. Just a couple of questions for me. The first one, Kevin, on the business overall, you seem to have a sharper direction in product. Can you comment a little more on the evolution of your marketing? How long until you feel more confident about that? And then when you think about the brand marketing, what's working, what's not working, where do you think you can do a better job, and what does Eric bring to the table on that? Thanks.
Thank you. In our last call, we emphasized the importance of product, story, and region, and how these elements work together. We've effectively presented this message to our key partners and teammates globally. It's crucial for Under Armour to attract top talent. Over the past eight to ten months, our executive leadership team has significantly evolved. I used the term "product" to refer to the exceptional talent we've brought in, including John Varvatos, Yuron White, and Yassine, who leads that function. Their strength comes from joining an already capable team, including long-standing members like Dan Leraris, Kyle Blakely, and Jeannette Robertson, which adds real depth to our talent pool. Eric's addition to our business helps balance the focus on product, story, and region, enhancing our storytelling abilities. We need to be more aggressive in North America, and I want to emphasize the contributions of individuals like Kara Trent, who leads their force.
While there's a new mix, I believe it's a strong formula. We are stabilizing the business and maintaining a consistent strategy. After a prolonged period, we successfully brought in Eric, prioritizing not only his exceptional talent but also ensuring he integrates quickly. The marketing role is crucial and could unlock our brand's potential. While our products are outstanding, I think we’ve focused too much on selling based on the logo and price rather than sharing the compelling stories behind each product. We have invested $0.5 billion in marketing over the past year and will continue this year, but I’m not sure this investment is being felt in the market. There’s a huge opportunity for us to connect with the 16- to 24-year-old varsity athlete market in an authentic way. While we've concentrated on the gym, we also want to emphasize the field and narrate our story through that experience.
Our focus encompasses the entire sportswear lifestyle, and I believe our approach in this area offers a unique advantage for Under Armour compared to other brands. We'll convey our story through the authenticity we establish on the field, court, and pitch.
Thank you.
Our next question will come from Simeon Siegel with BMO Capital Markets. You may now go ahead.
Thanks. Hey, everyone. Morning. Hope you're having a nice summer. So, Kevin, nice to see the first step in the brand re-elevation. Just when you think through the North America resets and that 25% SKU reduction you mentioned, could you elaborate a little bit more on how that plays in terms of reducing specific categories, specific sports, retail partners, price points? Just you alluded to it, but maybe any more thoughts on how you're going to approach that would be helpful. And just as you think about that reduction, how are you thinking about units versus price expectations within the revenue guide? Thank you.
Thank you, Simeon. We plan to be very deliberate in our approach. As I mentioned earlier, this isn't a one-time action. Our strategy will be careful and focused on where we make cuts. The concept of reducing 25% of our SKU count symbolizes the current state of our organization; many feel overwhelmed with their workload. Thus, aiming to eliminate 25% of activities is a goal for us. This reduction will encompass everything from factory visits to lab approvals and other associated tasks. However, achieving Under Armour’s standards requires a thorough and special process; we want our products to be more than just ordinary items. They need to be true performance products that enhance the user's experience. We acknowledge that we haven't effectively communicated this mission, and we want to ensure that we create performance products that consumers didn’t realize they needed and become essential to them.
Moving forward, our focus will be on our base layer compression products, as we return to our business roots. We also have successful initiatives like our Unstoppable collection, and we’re excited about Sharon Lokedi competing this weekend in the marathon wearing our Velociti Elite 2 runner. We will also recommit to the SlipSpeed program. Under Armour must be more than just a logo on a t-shirt; what we offer needs greater depth. Clearly conveying this to consumers is a major focus. We are not trying to do everything at once; our approach will be thoughtful and specific regarding the products we prioritize. We want to effectively communicate the performance benefits of our offerings. From my perspective, it's important to highlight our unique ability to tell the compelling stories behind our fabrics and technologies like moisture management and compression, as seen in products like UA Rush and Vanish. These are our opportunities, and every Under Armour product should be distinct and exceptional, and we will ensure we receive recognition for that.
That's really great. That's exciting. Dave, any thoughts on the units versus price in the guide? And then just if I can also just throw one more. Looking at what you repurchased this quarter, how are you thinking about the approach to buybacks just given where the stock is? Seems like you're retaking brand control and recognizing the cash settlement. Thanks guys.
Sure. Yeah. I mean, I think, adding on to what Kevin said from a price value perspective, we are definitely focusing more on the ASP and ASP growth. When you think about the SKU reduction, we are trying to target a little bit more reduction in kind of the good level product and protect and really be able to invest in kind of the better and best level product all at the same time that we're working our way out of some of the deeper discounting and promotions, especially within North America e-com. So, when you kind of bring that whole equation together, that should lead to driving continued gross margin expansion, which we think is super important for the brand and for the overall business. So, that is part of that strategy that comes into play and trying to make sure that we're balancing relative to the SKU development and the higher-margin product versus lower-margin product and also how that plays into segmentation and continuing to kind of step forward better and better in how we segment, which we've taken some good strides in the last year or two, but there's still some more room to go there as well.
Relative to the share buyback program, obviously, we are pleased to have the new $500 million program set up. We executed on $40 million of that in Q1, and understanding that we've had some pretty big cash outflows recently with the settlement and paying down the convertible debt, we are continuing to kind of look at our future cash flow and making sure that we've got the war chest that we want to continue to protect for any kind of curves in the road as we had to deal with recently or being able to invest in new ideas and new talent and new experiences similar to the recent Unless acquisition that we're working through. So, I don't know that we're going to pursue the share buyback in a huge way this year, but we are going to continue to evaluate it each quarter and make moves as prudent, especially with thinking where the stock price is right now.
Great. Thanks a lot, guys. Best of luck for the rest of the year.
Thank you.
Thank you.
Our next question will come from Geoff Lowery with Redburn. You may now go ahead.
Yeah. Afternoon, team. I appreciate that the US is your main focus at the moment, but could you talk a little bit more about the performance of the brand in the EMEA and APAC and how much is market versus your own reset activity in those regions? Thank you.
Thank you. Let's start with Europe, where Kevin Ross, who has experience in both the States and Europe, is now leading that business. He took over recently, and I think we are making solid progress. EMEA is our strongest region, particularly in the UK, and we have gained a lot of momentum in France as well, especially with the current excitement around the Olympics. There is still work to be done, but we've built on a strong foundation, having crossed $1 billion in revenue last year, contributing to our size and scale. We're focusing on authenticity, especially in sports, with notable athletes like Toni Rudiger and Fermin Lopez, who is representing Spain in the finals against France. We're taking a targeted approach in both men's and women's football, while also maintaining strong relationships with partners like JD and Sports Direct. Wholesale is crucial, but we also aim to grow our direct-to-consumer (DTC) business and are investing in this area.
Looking ahead, we are evolving our strategy based on lessons learned in the US, especially as we are not completely satisfied with our performance in North America right now. We are being patient and cautious, aware of the macro environment, and focusing on long-term quality growth. In the APAC region, the situation is more complex due to its vastness and unique challenges. We recognize the macro pressures here and are actively working with our leader, Jason Archer. This region requires more attention from our headquarters, and we are looking for ways to better support our APAC business. Currently, Under Armour operates over 1,900 stores globally, most of which are in APAC, particularly in China. We are excited for Stephen Curry’s upcoming tour in September, which we hope will help invigorate the region and remind consumers of our presence. Additionally, we are mindful of competition from both global and local brands, making it a challenging landscape.
Beyond China, we are monitoring economic conditions in places like Japan and South Korea, which are complicated and affect consumer behavior. Nevertheless, we see a significant opportunity in APAC, which we believe will play a crucial role in our future growth.
That's great. Thank you so much.
Thank you.
Our next question will come from Jim Duffy with Stifel. You may now go ahead.
Thank you. Good morning. Hi, Dave. Hi, Kevin.
Good morning, Jim.
I want to discuss some of the management hires. You've added a lot of great talent. Eric is a fantastic addition to the team. Kevin, with the title of EVP of Brand Strategy, suggests a significant overlap with your past areas of focus. Can you share your vision for the partnership with Eric? Clearly, this was part of the discussion during the recruitment process. Now that Eric is on board, how do you anticipate allocating your time?
Thank you, Jim. It feels similar to the initial phase of building the brand. The focus wasn't on complementing skill sets, but rather on bringing in strong professionals. I'm a capable generalist, which allows me to contribute in various areas, and inviting Eric, who is a multidisciplinary expert, especially in marketing and strategy, will strengthen our organization. Our current need lies in enhancing our product region and story balance, and we haven't had the necessary leadership in that area. Eric will take on that challenge and help us build it out. I recognize the implications this has for my own role, as there are many tasks to manage, and it's my job to ensure I adapt and elevate my contributions. Regarding the acquisition, Eric's arrival signals that we will maintain our independence, while also integrating the important ESG approach from plant-based regenerative fashion, which is a priority for us. Eric will help communicate that effectively. Our primary need was finding someone who can partner with Yassine and Kara. Eric's experience at Audi, where he improved the operating model linking product, region, and marketing, will be invaluable. I’m confident in the work ahead and grateful we attracted someone of Eric's caliber. This feels like a fresh start, and while we aren't claiming victory yet, we are optimistic about the direction we're moving in.
Great. Thanks for that. And then, Dave, just a quick one on the D2C margins. Can you remind us when you'll anniversary the less promotional approach in D2C and get to more normalized comparisons on the D2C margins?
Yeah, it's a great question. I mean, generally speaking, it'll continue to be a benefit for us through the year. A little bit bigger in the front half versus the back half. And then as we step out of this fiscal year, we should be more on a comparable basis relative to the e-com gross margins and promotion levels as we've been kind of chipping away to get to a really nice, healthy level by the end of this fiscal year. And we're continuing to kind of test on the factory house side, which could be something that we play into more to continue to become more premium as we step into fiscal '26.
Thank you, guys.
You're welcome, Jim.
Our next question will come from Paul Lejuez with Citi. You may now go ahead.
Hey, thanks guys. Just wanted to ask a question on your guidance. You updated the full year, you gave third quarter. Just wanted to make sure I heard correctly. I think you said $110 million to $120 million in EBIT, and that would imply a pretty large percentage of the full year coming from the first half, much smaller from the second half. So, just want to understand what your outlook is in the second half, both from a gross margin and SG&A perspective that would lead to, some pretty weak numbers, I think, in the second half based on the guidance, if I heard it correctly. And then just separately on the factory business, I think you mentioned mix results when you adjusted prices. If you could just talk about what you saw as you move prices around? And what the ultimate plan is for the factory business in terms of number of stores and what role that serves within the company? Thanks.
Sure, Paul. When you think about kind of front half versus back half, a couple of things come into play there. First of all, when you think about Q1 and that overdrive, and then what does that mean for the full year, again, keep in mind that in the back half, we are expecting a little bit more developing APAC revenue pressure. We're also expecting a little bit higher ocean freight costs than we originally planned. There's also been some increasing FX pressure, and there's a little bit of caution that we have as well, just when you think about kind of the recent economic trends. But in general, from an operating income perspective, historically, we've definitely run higher amounts in the first half of the year and a little bit lower in the back half of the year. Some of that, if you think about Q2, that's historically a high revenue dollar quarter for us, and it's also generally a higher gross margin percentage quarter for us.
So, driving bigger gross margin dollars in Q2 is kind of a historical trend for us. And then that higher front half profitability is also kind of amplified this year by the planned insurance recovery relative to legal invoices paid prior to this year that I mentioned and also shifting some of our planned marketing spend out to Q3 and Q4. And maybe the last thing I'd mention there is, back half forecast also carries more incentive compensation compared to the prior year back half where we were adjusting down unfortunately and reversing some of that incentive compensation that was recorded in earlier quarters last year. So, when you add all those factors together, it points to the front half being a substantial portion of our full-year operating income, which is how we have things laid out in the plan. And on your second question relative to factory house, I would say that we did step into testing some lower promotion levels and less promotion levels, and we actually hadn't really planned on doing that.
But as we stepped into that more deeply in e-com and we were excited about the results there on e-com, we decided to start testing that a little bit on factory house. And I would say that, it was both the price level, the depth of the discount, and the results were really kind of mixed, to be honest. We're experimenting, we're learning, we're seeking balance. We did give up a little bit of revenue when we were doing that. And so, we're continuing to kind of test and learn on the factory house side. But right now, I would say that the results from that are mixed and we've got some more work to do.
Thank you. Good luck.
Thanks, Paul.
Our next question will come from Laurent Vasilescu with BNP Paribas. You may now go ahead.
Good morning. Thank you for taking my question. Dave, I wanted to ask about the guidance. Should we still expect wholesale to be down low double-digits and DTC down 10% for the year? Also, with e-commerce down 25%, is that how we should view it moving forward? Are there any lessons learned from the pullback and promotions in e-commerce that could be applied to the rest of the business?
Sure. I would say for the full year, we are still expecting wholesale to decline in the low double-digit range, roughly between 10% and 12%, while DTC is anticipated to drop by about 10%. This downturn is primarily due to our strategy to reset the brand, particularly in North America, which includes a reduction in promotional e-commerce activities and an increased product assortment. Although we're not providing specific guidance for e-commerce, you can expect that the decline within DTC will be more significant than the overall 10%, possibly not reaching the 25% drop we experienced in the first quarter, but that's a deliberate choice as we continue to refine our promotional strategies in North America.
And hey, Laurent, I want to add to that point because it highlights what we've accomplished through our full-price e-commerce site, which wasn't as focused on full price a year ago. Last year, about 65% of our sales were promotional, while only 35% were full price. Through our efforts to significantly cut down on promotional days, we didn’t completely reverse this trend, but we made notable progress toward increasing our full-price sales. This not only improved our gross margin but also positively impacted the algorithms on our partner websites, including Amazon. As a result, we’ve seen a general improvement across the board. This experience is valuable as we consider how to strengthen our brand and assess its current health. These issues are at the forefront of our strategy, and we’re beginning to identify investment models that will yield returns for us. Although we don’t have all the details yet, we’re encouraged by the early signs. We definitely prefer driving a more full-price business, and maintaining a gross margin of 47.5% is a solid indicator of our overall performance.
Thank you, Kevin. In fact, the gross margin showed a strong improvement in the first quarter. Dave, you mentioned three factors that could add to the challenges for the full year, including ocean freight, foreign exchange, and the mix from the license business. Could you provide some clarity for the audience on how significant these factors are as headwinds compared to what we discussed 90 days ago, particularly concerning the full-year guidance on the gross margin?
Yeah. I mean, I think what I was trying to elaborate on is the main year-over-year drivers that are behind our full-year improvement still are heavily weighted to the favorable pricing with less DTC discounting and also the supply chain benefits related to the improved product costing. Those are the two real big positives on the full year. And obviously, we saw a little bit of extra benefit there as we went through Q1. But as we look forward, the impact on freight costs is probably the largest kind of newer developing headwind that's kind of taking away some of that Q1 overdrive. And then a close second to that would be the foreign currency headwinds that have been developing that we saw during the first three months and that are projected a little bit forward. The change in mix due to licensing sales and some of the challenge margins on the off-price channel, that's a little bit of a smaller developing headwind. The first two around freight costs and FX are a little bit bigger.
Okay, thank you. Congrats again on the beat and good luck with back-to-school.
Thank you.
Thanks.
Our next question will come from Sam Poser with Williams Trading. You may now go ahead.
Many of my questions have been answered. Thank you for responding. I would like to follow up on the guidance for the second half of the year. When you mentioned a shift in marketing spending out of the second quarter, will that be redirected more towards the fourth quarter as you anticipate improvements for fiscal '26?
Some of the increase in Q1's profits was due to shifting some of our marketing budget to Q3 and Q4, and a similar approach is being taken with Q2. We are allocating more marketing resources to the second half of the year than we had initially expected. However, this isn't solely related to Q4; it's also about strengthening our brand for fiscal '26 and ensuring we adequately support our back-to-school and holiday sales, particularly during Q3, which corresponds to calendar Q4.
Thank you. Kevin, you mentioned a combination of having patience and wanting to act quickly. What is the plan for getting North America on the track you envision? How are you balancing patience, brand, and speed as we look ahead?
Yeah. I turned 52 on Tuesday, Sam. I've actually been growing and maturing, I guess.
Happy birthday.
Thank you for the birthday wishes. As an entrepreneur, you often feel like you're running behind and that everything needs to be completed immediately. This urgency can be a strength, but it also poses challenges, especially as the organization grows and needs to scale. We're reaching a pivotal moment as a business with the opening of our new headquarters in Baltimore, which is an impressive facility. While it may not be how shareholders would choose to invest, I believe it will be a significant asset for us. It’s about recognizing our current situation. I’ve compared our journey to having a pair of twos and a royal flush at different times; currently, we have neither, yet we've been successful regardless. I'm optimistic about our position and aware of the many areas we need to improve. Out of the one hundred things that need fixing at UA, around seventy to seventy-five percent are issues we've created ourselves.
The positive side is that we can identify these problems and work on them. Additionally, while we have many improvements to make, we also have a multitude of strengths working in our favor. For instance, our sports marketing endeavors with Notre Dame and IMG have the potential to establish a credible sports brand. This influence is somewhat regional, particularly in North America, but it will develop over time. We have a $500 million marketing budget that doesn’t feel fully utilized yet, and I want its impact to be evident. We possess a strong platform in terms of performance, technical capabilities, design, and style, but we haven’t excelled in making the most of it. I’m eager about the next chapter as we apply lessons learned over the years, particularly in thinking about Europe and our experiences in the US to inform better decisions. We're assembling an excellent team, and having someone like Eric join us is thrilling because we have capable industry experts in our midst. While we can't promise specific outcomes, I'm confident in our chances and ready to move forward.
Can you clarify the timeline for turning things around in North America? Are you planning to take 18 months and proceed slowly, or do you have a different timeframe in mind? I'm trying to understand whether this is a six, twelve, or eighteen-month plan.
I think after our last call, we set expectations for fall '25 and gave ourselves an 18-month outlook. However, to be honest, there’s no definitive point where we can say we’re done. This will be an ongoing process and a continuous evolution. So, I believe you will start to notice progress, and we aren’t just waiting until fall '25. We have some excellent products in the market right now, including our Meridian and Unstoppable platforms, which our team has been developing for some time. Our Baselayer platform also has easy improvements we can implement to ensure we’re gaining full recognition. I don’t think most people view compression as Under Armour's original product unless they have been around for 15 or 20 years. It’s important for us to highlight the story behind the products we are creating. I’m very confident and enthusiastic about this direction; it’s crucial for our organization to concentrate on product, storytelling, and regional focus, ensuring these three elements come together quickly. You will see ongoing advancements, and I believe there will be notable moments that showcase our products effectively. We will also start reducing SKU counts for the successful products. This doesn’t mean we will only focus on top-tier offerings; we can still support our current consumers while introducing more premium options.
And I think, Sam, even though we're not ready to talk about fiscal '26 or '27 revenues for North America, one thing you can be assured of is that we're going to keep driving forward on being a healthier business in North America. And I think that's really what we're excited about right now. And we'll talk more about the future in coming calls.
All right. Thank you very much.
Thank you, Sam.
This concludes our question-and-answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.