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Under Armour Inc  (NYSE:UA) (NYSE:UAA)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the Under Armour Inc. third Quarter 2018 earnings webcast and conference call. (Operator Instructions) As a reminder, today's conference is being recorded.I'd now like to introduce your host for today's conference, Mr. Lance Allega, Vice President of Investor Relations. Sir, you may begin.

Lance Allega -- Vice President of Investor Relations

Thank you. And good morning to everyone joining us on today's call to Under Armour's third quarter 2018 results. Participants on this call make forward-looking statements. These statements are based on current expectations and are subject to certain uncertainties that could cause actual results to differ materially. These uncertainties are detailed in this morning's press release and documents filed regularly with the SEC; all of which can be found on our website at uabiz.com. During our call, we may reference certain non-GAAP financial information including adjusted and currency-neutral terms, which are defined in this morning's release. We use non-GAAP amounts as the lead in some of our discussions because we feel they more accurately represent the true operational performance and underlying results of our business.

You may also hear us refer to amounts in accordance with US GAAP. Reconciliations of GAAP to non-GAAP measures can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view on why this information is useful to investors.

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

And with that, I'll turn it over to Kevin.

Kevin Plank -- Chairman and Chief Executive Officer

Thanks, Lance and good morning everyone. On our call a year ago, I spoke about our story in the context of chapters, the early days going public and then getting big fast. In our get big fast period, we accomplished what we set out to do, gain the scale and innovation, product and global footprint necessary to show up in the consumer consideration set of the world's best athletic brands. Following this rapid growth, over the past two years of our transformation, we've been laser-focused on driving greater structural, financial and operational efficiencies, two years that has served as one of the most challenging yet productive and opportunistic times in our history.

During this tenure, we've executed against a number of strategic initiatives to better ourselves as a company and as a brand. To highlight some of these efforts, I'd start with our restructuring plans, which we've used to close underperforming facilities and retail locations, exit certain sports marketing contracts, optimize our global workforce and aggressively clear challenged inventories. In our supply chain, we've shortened lead times, our executing against the global vendor consolidation substantially reduced our inventory levels and are continuing to increase our distribution efficiencies. Within our product category and merchandising teams, we've aligned calendars across all functions, removed a significant number of SKUs, styles, trends, lastly the materials, shortened our overall go-to-market calendar by four months to five months and streamlined our category structure.

Within marketing, digital and IT, we're improving our global CRM, utilizing ROMI or Return On Marketing Investment to employee assets with the highest rates of return, updating our global ERP with our partners at SAP, and continuing to commercialize the intersection of our digital, fitness, e-commerce and social media platforms. And within our financial organization, efforts around smart spend, zero-based budgeting and more efficient SG&A and productivity continue to install a high level of discipline across our company. These efforts demonstrate the holistic approach we're engaging in this transformation. Yet this isn't a cost-cutting exercise, which is why we're being methodical and measured about its execution. It takes time and by design is purposeful. An evolution that is geared at producing smarter brand right decisions to generate consistent results through repeatable processes that ultimately drive greater shareholder returns, all the while ensuring that our brand remains coveted and desirable as we grow globally.

Today's third quarter results show just that. Another solid proof point that our multi-year journey toward becoming a more operationally excellent company is on track. As we work to close out the second year of this transformative chapter as we work to protect this house, we are steadfast in the challenge of becoming better at every turn. And as we continue attacking the dimensions of our strategic pillars; product, story, service and team, our foundation has become stronger and our ability to execute more successfully is gaining momentum.

Momentum, momentum is an essential asset to this transformation, because we never stopped. We never stopped innovating better products. We never stopped cultivating powerful consumer connections. We never stopped identifying ways to be a better retail partner. And we've never stopped evolving our culture as a team. This momentum is the very fuel that drives our reason for being to make you better by delivering performance solutions you never knew you needed and can't imagine living without. This is Under Armour. And as I look to the future, I've never been more energized, confident and excited about what is ahead for us, both as a brand and as an operator.

By product type; gender, category, channel or geography, we are underpenetrated by any measure and has significant scalable growth opportunities before us. Growth, of course, is not given. It's hard-fought and earned, whether by taking share or creating greater marketplace capacity. In this pursuit, we'll continue to apply the lessons we've learned and dictate the right tempo in our next chapter with an unmistakable commitment to protecting the Under Armour brand. Through smart marketplace management and optimal supply and demand execution, we'll be discerning as the definition of growth for Under Armour continues to evolve. Growth at all levels; this is precisely the position we're working to put ourselves in. By ultimately being able to employ multiple levers; revenue, margin, SG&A, cash flow and ROIC, the optionality we're working to establish will ensure our ability to deliver consistently to our consumers, customers and shareholders in both good and challenging times.

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

Patrik Frisk -- President and Chief Operating Officer

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

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

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

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

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

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

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

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

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

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

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

David Bergman -- Chief Financial Officer

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

Turning to our results. Let's start with revenue, which was up 2% to $1.4 billion in the third quarter, or up 3% if you exclude the impacts of foreign currency. Clicking down, by channel, sales to our wholesale customers were up 4% to $914 million, driven by growth in our international regions. Direct-to-consumer revenue was flat compared to the prior year at $465 million, and represented 32% of total revenue in the quarter. This was generally in line with what we expected, due primarily to significantly lower promotional activity, which made for a more difficult comp against last year's third quarter. For reference, our planned promotional days, in North America, are expected to be down by about one-third in 2018 versus 2017. Licensing declined 9% to $31 million, driven primarily by lower North American demand.

By product type, apparel revenue increased 4% to $978 million with growth in training, golf and team sports. Revenue for our footwear business was flat at $285 million. And accessories revenue was down 6% to $116 million, due to declines in our outdoor and training businesses.

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

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

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

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

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

To wrap up our financial review, let's walk through our updated 2018 outlook. We expect our full-year revenue to be up in the 3% to 4% range, driven by international growth of approximately 25%, being offset by a low-single-digit decline in North America. From a product perspective, apparel is expected to grow at a mid-single-digit rate, footwear at a low single-digit rate and accessories is now expected to decline at a mid-single-digit rate.

From a channel perspective, we expect a low-single-digit increase in our wholesale revenue. And there's no change to the outlook we provided on February 13, that our DTC business will be up at a mid-to-high single-digit rate. We continue to expect that gross margin should come in flat to slightly down. And if you exclude restructuring charges in both periods, there is no change to the expectation that adjusted gross margin should see a slight improvement on the full year.

We continue to anticipate SG&A to be up at a mid-single-digit rate. And on a GAAP basis, we now expect an operating loss of approximately $50 million to $55 million versus our previous expectation of a $60 million loss. If you exclude restructuring charges, adjusted operating income is now expected to reach the $150 million to $165 million range versus the previous $140 million to $160 million range.

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

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

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

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question will come from the line of Randy Konik with Jefferies. Your line is open.

Randy Konik -- Jefferies -- Analyst

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

Kevin Plank -- Chairman and Chief Executive Officer

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

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

We implemented and created a brand new operating model. Really implementing the four regions, out of Amsterdam, out of Hong Kong, out of Panama City and then here in the States. The evolving, I think what's really important also is, just the culture and the mindset that we have. I mean the athletes want to win. I've been thinking about it, I'm trying to figure, if we can make the claim whether we have more athletes as teammates here than any other place in the world. But I'd imagine we'd be pretty darn close because this is a competitive mindset, and one that just does just want to be better. And so we realize that we want to be clear, we're certainly not declaring victory, but we're really proud of the progress that this team has made, how far we've come and I think the opportunities that we have in front of us. And so there's work to be done, and the thing that will tell all of it is when you see the great product that compels you to want to buy and we're proud to see consumers making those choices a lot more for this brand right now.

David Bergman -- Chief Financial Officer

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

And if you think about Q4, we'd always anticipate that Q4 was going to be our highest gross margin rate improvement and the largest factor there really being that the significant supply chain initiatives that we initiated last year, that we've spoken to, they really take hold in later fall, winter 2018 product, but also in some are the spring, some are 2019 product that will go out toward the end of this year. And then also, we talked a lot about aggressively dealing with inventory. We've done a lot of that in the first three quarters, to the point that we don't need to do as much of that in Q4, so that ends up being no longer a gross margin headwind in Q4. So a lot of things going in the right direction there, as we drive through and execute on our plans.

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

Randy Konik -- Jefferies -- Analyst

Have you said for -- just on clarity on the SKU count progress?

Patrik Frisk -- President and Chief Operating Officer

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

Randy Konik -- Jefferies -- Analyst

A lot more -- good focus seeing into the numbers. Thanks guys.

Kevin Plank -- Chairman and Chief Executive Officer

Thanks Randy.

David Bergman -- Chief Financial Officer

Thank you.

Operator

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

Jonathan Komp -- Baird -- Analyst

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

Kevin Plank -- Chairman and Chief Executive Officer

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

Patrik Frisk -- President and Chief Operating Officer

Yeah, I think the way we're thinking about it is, stabilizing the business has been a priority for us from 2017 coming into 2018. And right now we're very much heads down operating through 2018, making sure that we're delivering on the year, that's really important to us. But as part of this transformation that Kevin talked about earlier, we've also been driving our supply chain really hard to make sure that we're servicing our accounts better. And we believe that with servicing our accounts better, doing our marketing and messaging better, and actually getting that great product that we have on the shelves, the right place at the right time, will start to drive momentum for us. And that's really what we're feeling right now. A bit of momentum building in North America specifically. But we've also made strategic decisions around, how to think about our promotional days like Kevin said. For example, we have a third fewer promotional days in our Direct-to-consumer business in North America alone this year. Those are things that are -- we believe over time going to help drive our brand heat back up. And if we can continue to do what we're doing now much better, which is servicing the business, we believe that you're going to start to see more momentum build for the brand going forward. I don't know if you want to add anything to that Kevin.

Kevin Plank -- Chairman and Chief Executive Officer

Yeah, we just -- if you don't mind, I was just staying on this, but again I can't iterate enough just the fact that great product wins. But in addition, just having great product, we're also driving operational excellence. And I think that's something where when we have the funnel that we have -- at the top or we've got enough great ideas, it's a matter of how we can execute them and really run the go-to-market in a way to deliver for the consumer. But another just couple of anecdotal things when I say momentum -- you know it is when you look at some of the recent signings we made especially on the baseball side of our house with Joel Embiid joining our team who is a perennial All-Star. The decision for him -- it wasn't just money, he had plenty of options. And so, we didn't have to be the biggest check out there is that there's something I think that the athlete sees is because when you come here and you get the tour, I think most importantly you feel the team. I think you see that there's a belief. And I want to be clear, we're not declaring victory. We've got a lot of work to do. We're not crazy about the -- sort of overall position is, if you ask me I'd say is business great, I don't know if it's great. I'd say if it's business -- not great. I'd say it's not great. I think we're just doing -- we're doing fine. And if we can do this sort of restoration of filling and really making strong this team and this operating structure, I think we're going to have -- we're going to really be something to deal with in about another 12 months or so. More to come on Investor Day.

Jonathan Komp -- Baird -- Analyst

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

David Bergman -- Chief Financial Officer

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

Jonathan Komp -- Baird -- Analyst

Understood. Thanks guys.

Kevin Plank -- Chairman and Chief Executive Officer

Thanks very much.

David Bergman -- Chief Financial Officer

Thanks Jon.

Operator

Thank you. Our next question comes from the line of Matthew Boss with J.P. Morgan. Your line is open.

Matthew Boss -- J.P. Morgan -- Analyst

Thanks. And congrats on a nice quarter Pat.

Patrik Frisk -- President and Chief Operating Officer

Thanks Matt.

Matthew Boss -- J.P. Morgan -- Analyst

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

Patrik Frisk -- President and Chief Operating Officer

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

Kevin, you want to?

Kevin Plank -- Chairman and Chief Executive Officer

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

On the apparel side, we've also talked about our rush and recover, a technology which is active recovery. It's actually -- actively helping increase blood flow that enhances and increases the speed at which you can recover. So, this isn't just apparel or nice silhouette or better styling, it's actually a product that is living the definition of -- in the DNA -- the mission in Under Armour is making you better. But probably, one of the things that I'm most excited about is -- I can argue, I don't think that we've -- I wasn't crazy about our product in '17, we like it much more in '18. We're really excited about the way it looks in '19. But all along, I think one of the things that we lost more than anything is we lost our ability for storytelling. And when I think about '19 and going forward, I really look forward to the ability to explain to people and communicate them, the number of scientists and PhDs and -- were testing hours that go into every product that we built to understand the science and the DNA behind really thinking and empathizing with that consumer who is going to aware of what we can do to put them in the best position to be excellent. And that's always been there, but I don't think we've done the best job of telling that story. And I think you'll see it -- begin articulate itself through just really beautiful design and product that's really well considered. But I think it's the whole package. And so there's a lot of things to be excited about. Again, we have work to do and we have to demonstrate that we can run the play. But, the good news about this is -- that this is a play that is capable of being repeatable even regardless of who's in the chair right down to myself or so.

Matthew Boss -- J.P. Morgan -- Analyst

Thanks a lot.

Operator

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

Matt McClintock -- Barclays -- Analyst

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

Kevin Plank -- Chairman and Chief Executive Officer

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

Patrik Frisk -- President and Chief Operating Officer

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

Matt McClintock -- Barclays -- Analyst

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

Patrik Frisk -- President and Chief Operating Officer

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

David Bergman -- Chief Financial Officer

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

Matt McClintock -- Barclays -- Analyst

Thanks a lot. It's great to see it all coming together.

Kevin Plank -- Chairman and Chief Executive Officer

Thanks, Matt.

Operator

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

Jim Duffy -- Stifel -- Analyst

Thanks. Good morning guys. Nice evidence of progress.

Kevin Plank -- Chairman and Chief Executive Officer

Thanks, Jim.

David Bergman -- Chief Financial Officer

Thanks.

Jim Duffy -- Stifel -- Analyst

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

David Bergman -- Chief Financial Officer

Yeah, I mean obviously we've talked a lot about the magnitude of the overhang we had coming into 2018, and we've aggressively been working that down. I think that we've been attacking North America the most first, international we're going to be working through a little bit further next year. So we would expect to continue to drive some improvement there. But it's really a holistic effort. I mean you've got a much tighter go-to-market process, and much tighter supply chain relative to the forecasting side, the demand side, the timing of inbound receipts versus outbound, the processing efficiency within our DHs and maximizing the DH space that we have. So it's really a combination of all fronts between the GTM supply chain and all the way processing through. So we are excited to see the improvements. I mean, it's fairly dramatic when you think about starting back in Q3 of 2017, we're at 22% growth and Q4 2017 26%, Q1 2018 27%, and then now working that all the way down to a negative 1% this quarter, and planning for flat to slightly down by end of the year. So by no means are we going to stop there. We've got more work to do in 2019. And Patrik and I, and the teams in supply chain are all going to be working through that together.

Patrik Frisk -- President and Chief Operating Officer

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

Jim Duffy -- Stifel -- Analyst

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

Patrik Frisk -- President and Chief Operating Officer

Well, I would say that with the amount that we've done through third-party off price this year, we probably will be looking to normalize that a little -- that level a little bit more going forward. That is something that we're going to be incorporating into our discussions on 2019, and we'll give more color to that on Investor Day.

Jim Duffy -- Stifel -- Analyst

Thank you.

Kevin Plank -- Chairman and Chief Executive Officer

Thanks Jim.

Operator

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

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Hey good morning guys, and thanks for taking the question. I guess first on footwear, you guys have done a really great job, kind of generating heat around some of these limited batch releases like Project Rock, I guess how successful you think you've been in translating some of the strength of the Halo product to the rest of the footwear portfolio? And then, I guess second, obviously e-com will be big this holiday season I guess, how do you think your position there? How should we think about your capability sets, and is there anything we should expect there will be an improvement versus the e-commerce experience last year? Thank you.

David Bergman -- Chief Financial Officer

Yeah hi, thanks Edward. I'll start off and then I'll hand it off to Kevin, because I'm sure he would love to add some color around the product. But from a process perspective, in terms of how we think about driving our direct consumer business, at the back half of the year, like I said before, we're heads down delivering on I think as it relates to both North America, and also some really important events coming up in China around 11/11 and so forth. And we feel ready. We feel that we have the right level of inventory, we have the right plans in place. We learned a lot last year, we had a bit of a rough time last year as we were working through both our operating model and in general our entire supply chain transformation. This year, we see a much better. We have improved our service levels, increasingly throughout the year, and we feel we're coming into Q4 ready both from a messaging perspective, as well as a supply chain perspective. And we feel that we have the right product that will be on the shelf. So that's kind of how we feel about running into -- head into Q4.

Kevin Plank -- Chairman and Chief Executive Officer

And I'd just add, in Footwear, it's interesting just understanding this industry, and it'll be our 13th, heading into our 14th year as a public company next month. So just a couple of weeks, we'll celebrate that anniversary. And you just look at the things that you've learned and thinking of starting an apparel sporting company, and what it means to be a footwear company. It is a long road, and the barriers to entry are incredibly high, especially when you're trying to do that at scale. And so from a company that was trying to launch 0.5 million or 1 million pairs of shoes to now being in the 40 million-ish kind of range with what we're building, we want to keep it special. And the one thing we're doing is that we are certainly playing the long game. And we have learned some massive lessons and allow those lessons have been what Patrik's spoke about with some of the vendor consolidation and how do we make sure that, where we're doing business that's really meaningful impactful and that we can have the A teams that are working on our product because footwear is one of those many things, defined by the last 10% or the last 5%, and making sure that we finish there. But when you go back a year, we hadn't -- we didn't have the capacity for the franchise capacity. I don't think it's something that we mastered beyond the product building. We continue to see the progress that we're making, but it's now having things like HOVR, it is having the Phantom and the Sonic platforms. It's the Project Rock. It's the highlight and the spotlight on the cleated side of our businesses. It's the Fortis, it's the Curry franchise. And again, we learned a lot of lessons with introducing the Curry One. We learned a lot of lessons on the Curry Three, and now having the Curry Five and heading into Curry Six, it's -- you're really beginning to see the cadence build in our partnership with Stephen, is one that we're learning how to do this.

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

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Great. Thanks so much guys.

Operator

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

Lauren Cassel -- Morgan Stanley -- Analyst

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

Kevin Plank -- Chairman and Chief Executive Officer

Lauren, when I think -- Dave you'll start off, I think right.

David Bergman -- Chief Financial Officer

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

Patrik Frisk -- President and Chief Operating Officer

Yeah, we're excited about our opportunity. I think as it relates to both wholesale and direct consumer, we do believe that in North America, we're underpenetrated from a direct-to-consumer perspective. And as we are -- we have very strong intent to continue to drive a premium brand in the marketplace. We believe that the direct-to-consumer, full price store portfolio also plays an important part in that. So you'll see us investing into that going forward in the same way that we continue to invest into that premium experience around the world. Kevin and I were just down in Mexico a while back here opening our 1,000th store. And we clearly see an opportunity for us to continue to drive that part of the business. And we also continue to do a better job of our CRM capabilities helping drive our e-commerce business, not just here in North America, but also around the world. I think it's the balance between the three components that we continue to calibrate. wholesale is still a very, very important part of our business, especially here in North America. But we're looking forward to painting a picture for you guys when you get here in December of how we think about this going forward. But, it's very exciting we see -- we see a great opportunity for us to strengthen ourselves as it relates to premium positioning by showing up better in the direct-to-consumer channel going forward.

Lauren Cassel -- Morgan Stanley -- Analyst

Okay, great. Thank you so much.

Patrik Frisk -- President and Chief Operating Officer

Thank you Lauren.

Operator

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

Michael Binetti -- Credit Suisse -- Analyst

Hey guys, good morning. Thanks for all the details. They are really helpful.

You know if I may ask on direct-to-consumer. Would you mind just quickly help us and click down a little bit on some of the color related to the outlets versus e-commerce in the quarter? Maybe help where did you see the slowdown and how should we think about which components will grow gross lower maybe for a few quarters versus some of the things -- some of the headwinds that could unlock in the near term to reaccelerate. I'm thinking maybe there's a correlation between the inventories coming down so much and what you saw in the outlets but maybe you can help add a little clarity there.

Patrik Frisk -- President and Chief Operating Officer

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

Michael Binetti -- Credit Suisse -- Analyst

Let me-since you've mentioned spring '19 a couple of times on this call and I know we'll get into a lot more of the multi-year outlook at the Analyst Day, but I guess if there's one thing that we feel that we hear a little bit of tension on -- it's those people who watch some of the industry data in the US would posit that you know the sporting goods channel has been fairly negative for you guys on a wholesale basis, really since Sports Authority went away and those that caused some problems in the channel.

But as you look out next year, how can you help us think about how to override a long-term business reality that is the buyers in your sporting goods retail channel would typically tend to keep buying forward seasons lower on a year-over-year basis until they see current sales trends and sell-throughs turn positive on a year-over-year basis? You sound like you have a lot of optimism around spring '19 that that historical norm could be abandoned. You sound like you have some product coming. But can you just help us think about what the big unlock is for spring '19, that's so much different as we look at the sporting goods channel in the US in particular?

Patrik Frisk -- President and Chief Operating Officer

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

Kevin Plank -- Chairman and Chief Executive Officer

And. Hey Michael, if I could jump on and maybe cover bit of a closing comment too. But I think what's really exciting is that -- thinking about just the growth in building this company, it really came down to a lot of strengths and sort of forces of personalities, forces of will, forces of nature. And what we're building is the ability for a business to be repeatable. And when I look back and I say I don't know how great our product was in the last couple of years or how great our storytelling was, this isn't about any individual. This is about the team that we have in place, it is the team and you're seeing. We've got some great leaders also step up an organization. But, it's not to look back and say we almost had the wrong people. I just think we had the wrong process. And that we pushed so hard in order to build this engine and now we're at a moment in time where we're really getting to refine and to put a real plan in place, to put a play in place so that we can -- everybody knows what it is. We can call it, we can run it and we can do it on a consistent basis. And I keep using the word repeatable that we can make it happen over and over again for us and that we have the ability to know what's coming in that, our consumer then knows what's coming and all that time it begins to align. And I think that's what will make us a better organization. That being said, there's still a lot of parts of our organization, parts of this company and parts of our culture that are still in constant evolution and we're really proud I think of the progress that we've made. But we also look in really -- we're beginning every day from what we're going to call, day 1. And this day one is we're really proud, I think, at where we are. I think today is a good indication of what that progress has meant. But we have -- we really have a great opportunity. And I'm excited for our team and I'm appreciative, because this is really a great reflection of the team we have around us, as well as the work of David and my partner, Patrik here and our executive team too. So, we look forward to tell you more about that on December 12. Thank you. Thank you very much everyone.

Michael Binetti -- Credit Suisse -- Analyst

Thanks a lot.

Operator

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

Duration: 58 minutes

Call participants:

Lance Allega -- Vice President of Investor Relations

Kevin Plank -- Chairman and Chief Executive Officer

Patrik Frisk -- President and Chief Operating Officer

David Bergman -- Chief Financial Officer

Randy Konik -- Jefferies -- Analyst

Jonathan Komp -- Baird -- Analyst

Matthew Boss -- J.P. Morgan -- Analyst

Matt McClintock -- Barclays -- Analyst

Jim Duffy -- Stifel -- Analyst

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Lauren Cassel -- Morgan Stanley -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

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