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Continued Sovereign Debt Buildup

I wrote a note a few days ago that summarized some key points from, “This Time is Different”, by Carmen Reinhart and Ken Rogoff.  As they write, global financial crises initiated by sovereign debt defaults are much more typical than most investors realize.  In many instances, the debt to GDP ratio of 0.9 is a metric that signals when many less than mature economies will risk defaults.


In the year-to-date, we have seen a massive issuance of global debt as many nations are attempting to plug holes in their budgets.  Below we’ve outlined from press releases some of the key recent issuances and their dates:


1/25 – Greece is reportedly trying to sell $32.5 billion of government bonds to the Chinese in a deal brokered by Goldman Sachs.  This deal would be more than 3x the size of the National Bank of Greece.


1/26 - Hungary on Tuesday sold $2 billion worth of 10-year debt, mainly to U.S. investors, in a move confirming its plans to come off International Monetary Fund aid this year.  Hungary sold the debt at a discount price of 99.86, bringing a yield of 6.269 or 265 basis points over comparable U.S. Treasuries, Deutsche Bank, one of the lead managers of the deal said.


1/26 -Vietnam raised $1 billion from its second global bond sale, offering higher yields than lower-rated Philippines and Indonesia, amid the busiest start to a year for global borrowing by developing nations since 2005.  The central bank set a 7 percent limit on the yield, the minimum amount investors AllianceBernstein L.P. and Western Asset Management estimated would be required to attract sufficient orders.


1/25- Greece raised 8 billion euros of a 5-year syndicated bond at a yield of 6.2%. The bond attracted total bids of EUR 25 billion, well above the EUR 3 billion to EUR 5 billion targeted by the government.


1/13- Indonesia scaled back an offering of dollar bonds to $2 billion from as much as $4 billion and scrapped a 30-year portion yesterday, people familiar with the deal said. Poland by contrast raised the most ever in a single sale of zloty bonds today, receiving 5.5 billion zloty ($2 billion) after 16.2 billion zloty of orders.


1/11 - Mexico sold $1 billion of bonds in the country’s first international offering since its credit rating was cut by Standard & Poor’s and Fitch Ratings. The bonds yield 5.25 percent, or about 1.42 percentage points more than U.S. Treasuries, the Finance Ministry said in a statement.


This acceleration of global debt issuances appears to be leading to a bubble in sovereign debt.  While we are not at bubble stage yet, we will be very focused on monitoring the issuance in the coming months.


Former Citigroup Chairman Walter Wriston once famously said, “Countries don’t go bust.”  In that case Mr. Wriston we have some Zimbabwean 30-years for you to buy . . .



Daryl Jones

Managing Director



From the presentation that just ended.




  • Current operating environment in Las Vegas?
    • Supply and demand environment that are out of balance hence putting pressure on rates
    • Still doing good volume but at materially discounted rates than 2 years ago
  • $200/night is still a reasonable but difficult rate to maintain given the competition.  However, they have reduced their expenses as well – despite the lower gross margins on rooms
  • 2010 group nights will definitely be better than 2009 – what’s on the books now is already better than 2009
    • Political rhetoric is over and Vegas is no longer a shunned location
    • Not at all worried about the group business in 2010 & 2011
  • The whole market is seeing more group activity than last year - the problem is getting that business at the rates that they used to have, and that’s not going to happen in 2010 and not in early 2011.  Although 2011 rates are up a little from 2010
  • Are there incremental opportunities to cut more costs here and in Vegas?
    • There are always opportunities, but the low hanging fruit is gone
    • Have 6500 employees in Vegas (casino/hotel level) – so think that they are pretty efficient given that they have 7,000 rooms


  • Take on political climate in Macau
    • Government of China has been very vociferous in supporting MICE and tourism business in Macau
    • As far as Visa & financial restrictions, expect that there will be some restrictions to allow for absorption.  Already said that they want Macau’s growth will be a few points above China’s GDP (~15%)
    • Feel like they are perfectly aligned with the government’s policy
  • Have had some success at growing direct play at FS.  However, junkets often try to steal that business
  • Their real success will hinge on a good balance btw VIP and Mass


  • Balance of VIP/Mass play in Singapore given the junket restrictions?
    • They are building their business based on the assumption that they will have no junket business.  
    • Will build their business on direct play and bussing programs (Malaysia for example)
    • Don’t think that many junkets will apply for licenses
    • Don’t know the mix right now, but Singapore is very accessible by flights
    • Piaza club (100 tables) Mass floor (600 tables) Slots (1500)
  • US entity is still very highly leveraged, what are the long term plans?
    • $5BN debt in the US restricted group, and $4.5BN of cash… they can meet covenants as long as they have > $3BN of cash in the bank
    • Once Singapore opens they can see what the cash flow/cash needs will be they can make a decision


  • Strategy in PA?
    • Disappointed with the numbers so far.
    • They will put in the tables games (80 tables) at a cost of $16-17MM. Projecting roughly a $25MM benefit from tables that open in the fall
    • No plans to start the hotels again until they can see justification from table games.  Will be using a newly opened Hyatt nearby for table players
    • Will have improved results in Bethlehem, slot facilities take about 17 months to ramp
  • RevPAR in Vegas for 2010 & 2011?
    • Guess is that in 2010 RevPAR will be down – but depends on what people put in for their “casino rooms” but that’s a fudged number since it includes comps.  Cash rooms will have lower rates
  • Will finish Sites 5 & 6 on Cotai with $500MM more equity


With the Big Three already reporting, here are some observations, some of which we will expound upon in more detail in later posts.




NA replacements for the industry seem closer to 10,000 than our 7,500 estimate but that doesn’t mean replacement demand is necessarily spiking

  • December is usually the seasonally slowest quarter for replacements but seasonality didn’t seem to hold up this year
  • It appears that some operators, having under-ordered all year decided to go the “use it or lose it” path and spent their previously allocated budgets rather than losing them.
  • Anecdotally, almost all the manufacturers stated that they weren’t seeing a big pick up in replacement orders yet despite positive sentiment.  Seems like operators are taking a cautious approach to utilizing their budgets.




New and expansion shipments in the December quarter were lower than our estimate.  We crossed checked our numbers with several suppliers and don’t yet have a great explanation as to why, since our original estimates weren’t far off of their estimates.  So what happened?  We don’t know exactly but here are some preliminary thoughts:

  • Our estimate included shipments of some participation units
    • The 1,700 units shipped to Alabama’s County Crossing almost all participation/lease
    • Generally 8% of total shipments are participation or lease
    • We estimate roughly 1,000 quarterly shipments into Washington State (replacements) & Florida (conversion to Class III) - these units may be accounted for in replacement demand by operators
    • There is always the issue of timing.  We generally assume that large openings & expansions ship one quarter in advance while smaller ones can go either way depending on timing of opening. Looking back at last quarter it does appear that close to 1,000 units that we accounted for in the 4Q09 were actually shipped in 3Q09.  It’s also likely that perhaps 1,000 units that we accounted for in this quarter won’t be recognized until next quarter
    • Not all the units that go into a new facility or expansion are actually new units, many casinos have some used machines or machines relocated from other facilities to the extent they operate more than one casino. (River City is a good example)
    • Many facilities open with less units than what they announce to name a few (Parx Casino, River City, Choctow Durant expansion)



All 3 manufactures reported lower conversion kit sales, why is that?

  • One of our takeaways at G2E was that while manufacturers weren’t explicitly discounting they were throwing more in – like more themes with each title
  • Perhaps content is just better and therefore lasting longer on the floors… we did walk away thinking that all the manufacturers had stepped up their game



All three manufacturers have learned to manage expenses to meet guidance and there’s nothing like lower tax rates to save the day.  Tax rates were low across the board.  IGT and WMS reported SG&A and R&D that was below trend and expectation.  BYI posted a very high product gross margin and also lower R&D than we thought.  Revenues were light for each of the Big Three.

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HBI: A ‘Do Nothing’ Stock


Near term visibility is good, and momentum picking up. But the company should be paying down debt instead of taking acquisitions. Also, we need to bank on seamless production out of new Asia plant and a healthier US consumer to offset headwinds 3 quarters out. Translation = do nothing…for now.


Overall, we’re no more or less inclined to own HBI in the wake of its 4Q. Is business getting better? Yes. Inventories are cleaning out while sales accelerate and margins appear healthy. Cash flow looks good – to the point where management is starting to mention ‘the A’ word’ (acquisitions).   The fact that it can think about acquisitions is good, but actually conducting them is not. Let’s face some facts here, HBI has too much debt in a commodity business that is undergoing a massive offshoring change while we’re seeing the greatest Macro cross currents in – well, just about ever. Let’s pay down some debt boys.  Earnings over the next 2-3 quarters look good, as higher cotton costs seem to be offset by previously announced cost cuts. But by 4Q, cotton exposure remains, and we need to bank on the Nanjing textile facility (which started up in 4Q) to be a fully ramped contributor to the business in order to give certainty for 4Q and 2011. In the meantime, the stock is not particularly cheap at 11x earnings and 8x EBITDA based on F10 estimates. For now, this is a ‘do nothing’ stock.



HBI 4Q FY09 Earnings Call


Quarterly Highlights:

  • Reaffirmed 2010 outlook
  • 5% sales growth
  • FCF of $300mm+
  • EPS 25%-35% growth yy
    • Strength in Innerwear - sell-throughs up end of Dec and in first 3 weeks of Jan
    • Pricing likely if cotton stays above $0.70


P&L Notables:

  • Sales down 4.5% (up 1% excluding 53rd week in F08) reflecting:
  • Innerwear +5%
    • Innerwear retail sell-through was flat for the quarter: slightly down in Nov, turned positive in Dec with the last two weeks particularly strong, seeing slightly positive sell-through for the first three weeks of Jan.
    • Direct to consumer +5%
    • International +2%
    • Hosiery -1%
    • Outerwear -6% 
  • Gross margins up 181bps reflecting:
    • price increase, cost savings initiatives, and lower cotton costs
    • more than offset the $13 million in incremental trade spending
  • Cotton costs for the fourth quarter was $0.47 per pound, ~$18 million benefit
    • Expect cotton costs to be $0.52 in Q1; $0.59 in Q2; and $0.73 in Q3 (should be able to offset with cost red.)
    • If cotton stays in mid-$0.70 in 4Q of 2010 - pricing in play as they have done before  
  • SG&A up 1.5%up 140bps yy reflecting:
    • Media + incremental $4mm ($10mm higher than last year)
    • $9mm benefit from cost savings offsetting $9mm in pension exp. 
  • Tax rate reduced to 12%, due to a higher mix of offshore profit
    • primarily as a result of domestic restructuring charges and the fourth quarter debt refinancing costs
    • Income tax rate, excluding actions, in 4Q was 3% 


  • Nanjing textile facility started production in Q4 and is right on plan
    • plant takes 18 months from start to be up to full production
    • will see impacts beginning in Q4 10 and all thru 2011 
  • Haiti is causing some short-term disruption in incremental costs - will not have a material impact on growth 
  • If inflation becomes systemic, strong brands give HBI the ability to price
  • Have already seen prices move in the industry and this trend may continue  
  • Beginning to think about acquisitions much more seriously and will share thoughts on criteria, priorities, and timing in February
    • Target acquisition price between $100mm and $300mm, must be domestic due to credit term  
  • Direct-to-consumer was previously included in innerwear chg'd with HBI’s strategy to drive retail sales with both the Hanes and Champion brands
    • Direct to Consumer in 2009: 1Q = $38 mil; 2Q = $49mm; 3Q = $53mm; 4Q = $48mm


Balance Sheet:

  • Inventory down $242mm (18.7%)
  • Paid down $284 million of debt despite cash outlays of ~$75 mm related to refinancing
  • Flex in leverage covenants - no restrictions on domestic acqs. Or share buyback
  • Pushed debt maturities out to 2013 to 2016





  • Sales growth of approximately 5% due to shelf space gains
  • Began shipping the new retail programs for 2010: These programs should result in 5% sales growth or approximately $200 million
  • Space gains should generate sales growth of approximately 6% in the 1H and 4% in the 2H
    • If consumer spending picks up, there could be upside to the 4% 2H est.
    • 2 months with the largest increase are March and April
    • growth by quarter is challenging because $20 million to $25 million can easily shift between months
    • By segment, 2/3 of the increases are to come from innerwear, and most of the remainder in outerwear
      • Innerwear gains will come from men’s underwear and intimate apparel. The new programs in men's underwear have already begun to ship, with the new intimate apparel program starting to ship in Q2.
      • Outerwear segment growth will be driven by the expansion of Just My Size in 1H. In 2H, Champion has confirmed space and distribution gains in fleece, performance apparel and sports bras across a broad set of accounts. Production capacity has increased to support growth
      • Both direct-to-consumer and international businesses should also see mid-single-digit growth and both have the most long term growth potential.
      • The remaining growth in the back half of the year will be driven by replenishment of these new programs
  • Goal to improve OMs 50 to 100 bps through costs savings (even with potential commodity price inflation), SG&A savings, and pricing
  • Goal to partially restore media spending from $80mm in 2009, to $90mm in 2010 and eventually back to historical $100mm
    • Interest expense should decline $20 million to $25 million
    • EPS growth of at least 25% and up to 35% or more in 2010
    • To reach the higher levels, HBI will need a little help from the consumer, possibly a little price, and an effective use of the potential $300mm or more of cash flow (domestic acquisitions)
      • See the potential for over $300 million in free cash flow
      • Expect tax rate to be in the 20% to 25% range for 2010 




  • Top line guidance: “feeling really good about 2010 and growth” retailers are in line right now, and increase in consumer spending would result in more inventory demanded by retailers 


  • Late 3rd quarter, early 4th quarter potential acquisition. 100 million to 300 million purchase price, not in negotiations, but looking out for the year


  • Era of apparel deflation is over, expect inflation, summer or by 4Q will see pricing take effect


  • Nanjing plant doesn’t contribute to production until the back half of the year, the process takes 18 months to get fully running and will only begin to see impacts of supply chain at the very end of 2010.


  • Great global low cost supply chain and can leverage it with adding volume from acquisitions
  • Small acquisitions of a couple million dollars are definitely possible and HBI is actively seeking it


  • Price increases: starting to see this and could raise prices in the back half of 2010, competitors are increasing prices which are matching HBI’s price increase from last year.  Men’s underwear industry pricing: Fruit of the Loom is $0.50 lower than HBI, private label is $0.50 cheaper than Fruit of the Loom. Oil and Asian wage pressures are potential risks that management is focused on for cost push inflation.  Relative to competition, HBI is very comfortable going forward if apparel industry experiences moderate cost inflation. Mix is favorable in 2010 with innerwear increasing.  Mix is one way to offset inflation cost pressures.   


  • Consumer Spending: watch weekly sell thru, inner wear category is their best read on the consumer, saw inner wear stabilize in September, weak in November, strong in December, especially on the back end.  1st 3 weeks of January are slightly positive, appears to be maintining the positive momentum from December.  Summer and beyond is when they are “hopeful” of consumer spending really pick up.  Starting to see a small but noticeable shift from low tier department store sell thru to mid-high tier, not a large move, but consumers are starting to pay up a tiny bit.


  • Shelf space gains: Good strong positive momentum. “Momentum breeds momentum.”


  • Long Term Growth Rates: will discuss in February at investor day conference


  • Gross Margin: additional volume increases will leverage supply chain, but management said to wait until February for more comments there


  • Strong shares in mid tiers, mass, and department stores: JCP taking men’s underwear for the first time, any channel shift is not a disadvantage because they have about equal share in mid tier and mass.


  • Categories: international and direct to consumer business are the 2 categories with the most room to grow long term. 


  • 8% of sales is traditional department stores, Macys is an opportunity, in JWN with hosiery


  • 5% revenue guidance is due to the space gains HBI has to make, if there is consumer spending gains that will be to the upside. 


  • Cap ex is much smaller than it ever has been because they have built out so much over the time.


  • Haiti: 2 buildings are structurally sound, 3,200 employed, 2,000 back today, 40% levels back up, will recover by early March, other plants across multiple hemispheres stepped up to cover the difference so there was no material impact.  Flow of goods is functioning out of a different port for the short term.  Only t-shirt production occurred in Haiti and only 5% of total sales.  Donated $2 mil of product to Haitians to aid the situation.


HBI: A ‘Do Nothing’ Stock - HBI S 1 10


It was not until it was too late that most people realized Dick Fuld was out of touch with reality.  As late as September 10, 2008, days before Lehman’s bankruptcy on September 15, Dick Fuld proclaimed Lehman was solvent and fully capitalized. 


Fact is, Mr. Fuld was not accountable, and had a laundry list of excuses, from naked short sellers, to credit rating agencies, to credit default swaps and the rumor mill.  The sad reality is, he probably thought that the then Treasury Secretary Henry Paulson would bail him out since he was bailing out AIG.


As we’ve been focused on over the last weeks, Greece CDS swaps are blowing out to the up side, while just today Prime Minister George Papandreou said Greece is being victimized by “rumors” in financial markets.  Further, he’s on the tape denied that Greece is seeking to borrow from the European Union to finance the country’s budget deficit.  While suggestions of international assistance are, according to the Prime Minister, “unfair”, I’m sure Dick thought the same thing....


Greece, which has a culture of levering debt upon debt that dates back centuries, is dealing with a credibility issue in a period of weak GDP (see chart below), which only further exacerbates its leverage issues as the government is hampered with cutting spending while attempting to stoke growth. Greece’s budget deficit is at 12.7% of GDP (four times the EU’s limit), as European Central Bank president Trichet says he’s “confident” that Greece will fix the problem.


We’re less confident in Greece’s leadership to fix the problem and are calling this spade for what it is, a sovereign debt crisis in the making.


Howard Penney

Managing Director


Matthew Hedrick






UA: Guidance is Too Low

Is it me, or is UA’s guidance starting to look very Nike-esque? That’s not a bad thing, by the way. This was a solid quarter all around, right in line with what we were looking for. What we were not expecting is for the company to raise EPS guidance – even slightly. There were definitely puts and takes – as there always are. But sales UP 24% with inventories DOWN 19%? Man, if that does not set the stage for a positive gross margin setup as 2010 progresses, then I don’t know what does. They guided to ‘no SG&A leverage’ which is typical Nike behavior when it wants to keep numbers at bay. Lastly, they continue to play down footwear in 2010 as Gene McCarthy builds up his organization and product flow throughout the year for a larger launch in 2011. Does he do himself ANY justice setting unbeatable targets with Kevin Plank and shareholders in his first nine months on the job? I think not.  


The bottom line here is that we sold UA from our portfolio in advance of the quarter. But that was purely based on near-term overbought factors. If numbers shake out over the next day or two to be in line with guidance ($1.02-$1.04), then this name goes right back up there on my list of favorite names. They’ll earn $1.15 or better.




Quarterly Highlights

  • EPS: $0.30 vs. street $0.25, guidance $0.22-$0.24
  • Raised outlook to the higher side of previous guidance: 10% - 12% revenue and EPS growth
  • Apparel wholesale and consumer direct were the leading growth drivers of Q4 and will be for 2010
  • Positioning footwear to not contribute to growth in 2010, basketball shoe launch in 2011
  • Suggesting Gross Margins will grow every quarter in 2010 while SG&A will grow faster than sales for the balance of 2010

P&L Notables

  • Revenue growth was 24% for 4Q, a sequential improvement on 1yr but a significant slowdown on the 2yr (lowest runrate in history of company).  2 year fell to 13% vs. the high teens low 20s average of 2009.  Sales compares are difficult in Q1 10, Q3 10, and Q4 10, but are easy in Q2 10.  Guidance of 10% - 12% growth 2010.


  • Apparel: Q4 posted 26% growth, a large sequential increase, but a 20 bps slowdown on the 2yr.  Looking forward Q1 10 and Q3 10 have easy compares, Q2 10 is a slightly more difficult compare. 


  • Footwear: Q4 posted -5%, a large sequential decline on the 1yr and 2yr trends.  Footwear fell as a % of sales from 5.1% of Q4 08 to 3.9% of Q4 09.  Footwear is 16% of the company in 2009 vs. 12% in 2008.  Looking forward Q1 10 and Q3 10 face very difficult compares of +100% growth. Running launch began in the last weeks of March in 2009 so Q1 10 compare will be most difficult. 


  • Accessories: grew 24% in Q4, a sequential increase on the 1yr but a slow down on the 2yr.  Looking forward compares are very easy in Q1 and Q2 2010 while the 2H 10 have difficult 20%+ compares. 


  • License: Q4 revenue grew 18%, and acceleration in growth on the 1yr and massive acceleration on the 2yr.  Looking forward Q1 10 has an easy compare and then compares are difficult going forward. 


  • Gross Margin: Q4 grew 64bps which was a nice sequential 1yr and 2yr improvement.  Compares are easy from Q1 through Q3 of 2010 with Q1 10 and Q3 10 being the easiest.
    • Strong revenue growth in higher margin channel of direct to consumer and shift in mix towards more apparel which has higher margins grew margins for Q4.


  • SG&A: grew 28.1% in Q4 09 which was in line with the 2 year trends of previous quarters.  SG&A margin grew 128 bps which was a sequential decline on the 1 year trend, but a sequential increase  on the 2yr.  Marking expenses were slightly lower than we expected them to be at 10.8% sales.  Looking forward SG&A margin has difficult compares in 1H 10 with Q1 10 being the most difficult compare. 
    • SG&A growth driven by continued expansion of factory house stores and higher personnel costs


  • Operating Margin declined 64 bps in Q4 to 12.1%, marked a 2 year decline of 202bps which was a large sequential decline from Q3 09. 


Balance Sheet and Cash Flow Items

  • Inventory at quarter end decreased 19%
  • Total cash and cash equivalents increasing over $85 million year-over-year to $187 million at year end.
  • No borrowings outstanding on the $200 million credit facility.
  • Net accounts receivable decreased 2% on a year-over-year basis as a result of conservative approach to credit terms during 2009, strong efforts from collections team, and direct to consumer business was a higher percentage of overall business.
  • Enhanced and expanded currency hedging strategy significantly reduced our Exposure to foreign currency fluctuations during the fourth quarter and the full year
  • Cap Ex was $25 million compared with $41 million in 2008. Previous outlook was for 2009 CapEx to be in the range of $30 million to $35 million.  

Additional Callouts  

  • The largest percentage of distribution growth in 2010 will come from existing wholesale partners through a combination of new doors and increased dedicated space within existing doors.
  • Added depth to the women's team across all functions working on bringing the right fit, the right colors and cohesive merchandising to women's line in 2010.
    • Expansion of women's business: goal is to rival their men's business, have momentum in women's apparel and expect it to continue in 2010, increased understanding of the female athlete, development of the Under Armour fit, the evolution of merchandise flow, and the support of retail partners will help gain floor space
  • Direct consumer business was a key driver of 2009 growth and will be a key element of our 2010 distribution expansion strategy. 53% growth in direct to consumer in Q4.
    • The second piece of UA’s distribution expansion is direct to consumer, continue to expand brand's access to new customers, direct to consumer allows UA to control and influence the presentation at retail. Factory house outlet stores have been a great inventory management tool
    • Goal to open 15 new stores to bring outlet stores from 35 in 2009 to 50 in 2010.
  • Need to invest capital, both human and financial to fully leverage the Under Armour opportunity in footwear. UA is not reliant on footwear to grow the topline in 2010.  Taking a more conservative approach to footwear revenue. 3 goals for the footwear business in 2010:
    • Strengthen existing categories, particularly cleats. UA expects to take market share in both football and baseball cleats in 2010 and beyond. Plans for double digit growth in cleats
    • Repositioning training and running categories with better organization to develop product that will drive multibillion dollar global brand
    • Developing new footwear categories that will begin to impact our business in 2011 and beyond. No major footwear launch planned for 2010. But developing basketball footwear and positioning for a future launch. Under Armour basketball footwear will not be for sale at retail, it is being tested and authenticated throughout 2010 on the feet of 10 division 1 basketball programs, more than 20 top high school programs, and NBA rookie of the year contender Brandon Jennings.
  • In July UA will be outfitting Boston college's athletic program.
  • UA is the official sponsor of the NFL Combine held in Indianapolis at the end of next month, outfitting every player head to toe in Under Armour and we will be telling our brand story during the NFL draft in April which this year will be held in prime time
  • Teaming up with ING performance to host Athlete Combines at regional sites across the country: host 50+ Combines touching thousands of young athletes showcasing the Under Armour brand as well as new products in categories from footwear.
  • Developing a comprehensive athletic training platform that will establish a global measurement standards for improved sports performance, health, and fitness called Combine 360. Hope Combine 360 will be as universal for athletic performance as the SAT score is for academics.
  • Will use these grass root platforms to launch key products for the brand like the upcoming Under Armour Core Short (a patented compression short with an iconic X type design that stretches across the body which stabilizes and supports muscles and core) and will be available at retail beginning this spring.
  • UA is the official uniform supplier for the US bob sled team and the free style ski team (including UA athlete Lindsay Vaugh)



  • Raised the low end of previous outlook and anticipate 2010 annual net revenues in the range of $145 million to $160 million, an increase of 10% - 12% in 2009.
  • 2010 EPS to grow in line with net revenue growth, $1.02 - $1.04
  • Expect topline growth in 2010 to be fueled by continued strength in direct to consumer as well as higher growth in our US wholesale apparel channels.
  • Planning footwear revenues to be down in 2010 with the most significant dollar impact occurring in the first and third quarters. Focus for footwear to continue to excel in the cleated categories while taking a conservative approach to the running and training categories to better position for new product in 2011.
  • Gross margins are planned to improve in all four quarters of 2010 over 2009 from partnerships in apparel and continued growth in higher margin sales and direct to consumer
  • Operating Expenses expected to exceed topline growth in 2010
    • invest in marketing in the range of 12% to 13% of net revenues, marketing may be a little more skewed towards the 2H because of easy 1H compares with running launch
    • will continue to invest in direct to consumer particularly around factory house and global direct online
    • product innovation supply chain team build out  and continue innovative design and
    • will increase investments in information technology around analytical tools to support long term growth
  • Effective tax rate in 2010 to improve approximately 50 basis points from the 2009 rate to 42.7% 43
  • Fully diluted weighted average shares outstanding of approximately 51.1 million to 51.3 million for 2010.
  • Cap Ex for 2010 expected to be in the range of $35 million to $40 million.



  • Channel Growth: Gaps in distribution present opportunities for growth.  Direct to consumer will fill the remaining gaps.  Example of UA uniquely filling some gaps can be seen in the Pacific Northwest where many bankruptcies have occurred (Joe’s Sporting Goods). Partnering with Fred Meyers to in the Pacific Northwest only (not a broad national opportunity).  Still great opportunity to reach athletes in malls and will continue to work on that in 2010. No plans to open additional full price stores but can see a time in which full price specialty rollout will help add yet another lever to solve the distribution gaps


  • European distribution: UA is proud of European achievement so far.  Working hard in Europe and Asia to achieve brand equity with athletes on the field.


  • Footwear Focus: Remain absolutely committed to footwear, see momentum, repositioning footwear to make sure they are spending time.  2010 is about being excellent in categories where UA already has existing strength. Big coming out party for UA in 2011. Not going to see a drastically different presentation of footwear at retail in 2010. Going to be taking a fresh look at training and really bolster that category and the same thing in running


  • Outlet product offerings and return on investment: Different product in outlet channel vs wholesale, but the outlets will still have top notch product. Direct to consumer in total is one of UA’s best return on invested capital models  with factory house as a very strong return on invested capital. Factory house has higher gross margins on the overall business but also have increased selling, general and administrative expenses to run those stores. Overall outlets are a positive for operating margins


  • Product, Channel, and Category Growth:
    • Future bookings see strong growth in apparel business through new products, additional doors, and additional floor space. 
    • Partners are in a very healthy inventory position. Men’s, women’s, and kids are all growing well and will grow substantially throughout the year. 
    • Women’s will continue to lead the pack for growth followed by youth and men’s.
    • Expanded apparel from compression to fitted, semi fitted, loose fit.  Understanding compression gives UA the capability to develop great loose fitting products as well. People are smarter about layering and it’s a new phenomenon, people don’t just go out with a big coat, they are smarter about their clothing choice and they demand better apparel products.


  • Gross Margins: direct to consumer was  a big upside, 70bps of upside in Q4.  Footwear is lower margins in 2009, but will be a benefit in 2010.  Management guided to grow gross margins every quarter.


  • Inventory Strategies: move forward with the inventory efficiency but also keep a very, very close eye on fill rate. In certain categories in 2009 demand outpaced UA’s ability to supply. Some of that is around the cold weather product and some around some training product. But going forward in 2010, UA will be a little bit smarter about how they take positions in raw materials and positions in finished goods. Gearing up to improve fill rate and will be a big plus in 2010
  • Olympics is the first chance to show UA as a global story: Taking advantage of relationships with a couple of different teams. 2010 is a little premature as a lot of the deals are done 3-5 years in advance. Formed a relationship with US ski awhile back. The number one curling team in the world is the Canadian team and probably will be outfitted in Under Armour in the upcoming Olympics. Focused on what 2012 is going to mean for UA and focused on what the future is. Goal is to the protect their 94% domestic of business while  continuing to plant seeds internationally. Currently doing business in more than 40 different countries today


UA: Guidance is Too Low - UA S 1 10