Under Armour, Inc. (NYSE:UAA) Q2 2023 Earnings Conference Call November 3, 2022 8:30 AM ET

Company Participants

Lance Allega - Senior Vice President, Investor Relations and Corporate Development

Kevin Plank - Executive Chair and Branch Chief

Colin Browne - Interim President and Chief Executive Officer

Dave Bergman - Chief Financial Officer

Conference Call Participants

Matthew Boss - JPMorgan

Simeon Siegel - BMO Capital Markets

Jay Sole - UBS

Adrian Lee - Barclays

Brian Nagel - Oppenheimer

John Kernan - Cowen

Lorraine Hutchinson - Bank of America

Michael Binetti - Credit Suisse

Operator

Good day and thank you for standing by. Welcome to the Under Armour Second Quarter Fiscal 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today Lance Allega, Senior Vice President, Investor Relations and Corporate Development. Please go ahead.

Lance Allega

Thank you. Good morning and welcome to Under Armour second quarter fiscal 2023 earnings conference call. Today's event is being recorded for replay. Joining us on today's call will be Under Armour Executive Chair and Branch Chief Kevin Plank, Interim President and CEO, Colin Browne; and CFO, David Bergman.

Our remarks today include forward-looking statements that reflect Under Armour management's current view and certain forecasts elements of our business as of November 3, 2022. Statements made are subject to risks and other uncertainties detailed in documents regularly filed with the SEC including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Today's discussion also includes the use of non-GAAP references. Under Armour believes these measures provide investors with a useful perspective on underlying business trends. These measures are reconciled to the most comparable U.S. GAAP measures a reconciliation of which along with other further information can be found this morning's press release on our website at about.underarmour.com.

With that, I'll turn the call over to Kevin.

Kevin Plank

Thank you, Lance. And good morning, everyone. I'll start with a brief update on our CEO search and that we remain on track to announce our permanent leadership before the years end. I want to thank our Board for their incredible engagement in this process. And a special thanks to Colin for his strong steady and thoughtful leadership throughout. As he is of course a serious candidate.

Now onto the call. 17 years into our life as a public company. We have learned experience evolved and grown as an organization. We're operating in a complicated uncertain time for every industry including ours. Still beyond the macro factors we all face, it's a pivotal time for Under Armour, we will not miss the opportunity to reposition and establish our sector leadership wherever we choose to compete. But that starts with knowing where we are today. Our eyes are wide open, and we know exactly where we are, how others see us, where we're positioned, and specifically what we need to do to drive more love for the Under Armour brand.

A company let alone a brand is a constant work in progress. And we've made great progress toward that broader love in just the last six months, and our momentum is building. We are evolving our strategy to address the near to mid-term environment by leaning into our strength as we pivot to growth. Protecting our house through continued operational discipline and investing in growth initiatives to capitalize on the upside potential we know is there for the taking.

This require problem solving innovative products for athletes delivered with designs that combine clean aesthetics with cultural style, brought to life through epic storytelling and meeting our consumers where they choose to transact with us. All the while driving quality top and bottom line growth over the long-term. And we believe UA is the brand most perfectly positioned to drive thought leadership among young athletes. Why? Because we're a globally recognized authentic on-field, on court, and on pitch performance brand. One of only a handful who has his credibility.

From Bryce Harper bringing the Phillies back to the World Series to Stephen Curry, who picked up his fourth ring just a few weeks ago, while wearing new Curry 10 dealt with Under Armour flow cushioning technology. Trent Alexander-Arnold the English Premier League, to our recent signing of reigning WNBA World Champion Kelsey Plum of the Las Vegas aces. To Dwayne The Rock Johnson, our roster has some of the greatest ambassadors in the world.

And to be sure, we have worked to do. Yet that work is already in motion with Colin at the helm. Well, he'll get into greater detail in a few minutes. There -- these are some of the highlights that Colin and the team have accomplished over just the last 90 days including refining our target audience to 16 to 20-year-old young athletes, and how we'll strive to connect even more deeply with them. Accelerating our product and operating rhythm by opening the aperture of our brand and product line to now include live in addition to train, compete, and recover, which means providing gear to cover all 24 hours of a young athlete's life, while considerably expanding the addressable market size that we can attack.

A terrific example of what we mean by this new approach is this week's launch of the future of training footwear. UA slip speed, pure performance versatile footwear. And what you can continue to expect from Under Armour, energy, excitement, and innovation delivered with cultural relevance. Products athletes never knew they needed and once they've tried them can't imagine living without.

And finally, recognizing that in the product world of good, better, and best, we allowed the pendulum to swing too far creating an overemphasis on good level products. So we're amplifying our efforts to ignite significantly more better and best level products, while never compromising the operating efficiencies we've gained over the last several years. These are just a few of the things I'm excited about at the core. It's about our moving forward, one great product at a time and one great story about that product at a time. And all the while ensuring we're delivering our product to consumers in a relevant inspiring and efficient way. Maximizing our opportunities for growing UA's top and bottom line. Make no mistake, we are leaning forward to growth. Our product pipeline is full. We are in this fight and we're well positioned to grow and we're going to win.

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

Colin Browne

Thank you, Kevin. And good morning, everyone. I'll start by underscoring that I'm in a highly challenging retail environment, we're pleased that we're able to deliver second quarter results that were in line with our expectations. This demonstrates our team's ability to operate through near term volatility, staying focused on execution and delivering the world's best sports performance products.

As we navigate this environment, we are working to amplify opportunities for our existing core business, while laying the groundwork to accelerate broader product considerations for more pronounced growth in the years to come. Essential to this effort is ensuring we keep athletes at the center of everything we do, and ensuring we continue our strong operational discipline.

I want to stress that again, this is an end and not an all. We are taking action to empower our ability to deliver the growth we know we're capable of over the long-term and protecting our brand as we scale. As we strengthen our foundation and architecture of evolving path forward. Our growth strategies are focused on product, story, digitalization, and culture.

I'll start with product. It's at the core of our DNA and what inspires and drives athletic performance. Under Armour's promise to athletes is to make them better to provide them with performance solutions they didn't know they needed, and once they have them cannot imagine living without. We are at our best when we empower those who strive for more. To equip athletes on the journey is a privilege we honor and respect. We love athletes.

Expect them to reach nearly $6 billion in revenue this year, we've done an incredible job at building an iconic brand. Still, as we continue to fine tune our strategy, there are areas we are good at, and areas that we must address more effectively to realize our full potential. In this respect, I'll highlight two refinements we've made to strengthen our long-term growth strategy. First, the foundational underpinnings of our unique brand are strong and unmistakably present in the products and how we connect with athletes.

Yet, as we've observed meaningful changes in the market dynamics and consumer behavior over the past few years, it was clear that our consumer centric strategy needs to evolve. Consequently, we have refined our target audience, which is now centered on the 16 to 20-year-old team sport athlete. This definitive group personifies our brand attitude and lives at the intersection of multi-generational influence from pushing the boundaries of what's possible in sport to seamlessly blending fitness, music, and street culture. This target audience will allow us to bring our product and storytelling into sharper intensity across the entire athlete experience influencing the larger target market.

This brings us to our second refinement. As Kevin alluded to broadening our product aperture driven by insights we are working to outfit occasions beyond the fields, courts and gyms. So we cover a young athletes entire day. Still, we won't stray from our unique performance DNA that every product must do something. Under Armour's versatility and consideration will span an athlete's closet by encapsulating magical fabrics with premium beautiful and fresh designs.

Adding live to our train, compete and recover construct nearly triples our total addressable market to around $300 billion. Our live strategy has already begun to manifest itself in fiscal '23 and we expect it will show up even more significantly in fiscal '24 with expanded product offerings and experiences to balance all parts of an Athlete Day.

Within product, another area we're digging into is segmentation. While we've done a solid job of building good and better level products, we have opportunities to do more with our best level offerings. As we look to fiscal '24 and beyond, we are working to elevate the premium aspects of our brand and product portfolio with a greater focus on better and best products to drive growth in key areas such as footwear, women's and international.

This should also contribute to our ability to drive more significant gross margin expansion over time. We've also barely scratched the surface on exclusives and collaborations so we believe there is a flywheel opportunity with these offerings to drive improved brand consideration and loyalty. On our last call, we teased a new footwear platform discovered through athlete insights. Three days ago, we had our initial limited launch of the $150 Under Armour SlipSpeed, the world's most versatile training shoe, and a perfect example of what's widening our aperture while building best level product means.

SlipSpeed has a molded convertible heel so that athlete can wear it in speed mode with the heel up for training, or switch over to the heel down slip mode for recovery. This new trainee uses our award winning flow cushioning and positionally system, which enables a unique lock down fit. This is part of a sixth feature set, which includes being machine washable. Since Monday, we've sold out on ua.com with limited pairs still available in our North American brand houses and at Dick's Sporting Goods. This was a prequel to our broader launch plan for Valentine's Day in February, when a full assortment of colors will be offered.

Even more exciting, this is just the start of a larger platform we are looking to leverage into other categories in the future. Now let's move to our second strategic focus, which is story. Telling great stories is the most powerful means to influence and inspire. This connection between athletes, passion and performance drives us to do what we do. It's at the core of building consumer relationships, inspiring them and welcome them into our family. Our recent SlipSpeed launch is an excellent example of what you can expect from us moving forward, where the ingredients of innovative product, authentic athletes and cultural relevance build the story, pure performance and versatile footwear combined with Under Armour NIL athletes in an authentic setting, doing what they do best, and engaging the artists logic to develop the sound for SlipSpeed.

This demonstrates how we see going -- how we are going to market in the future. Through combined social channels, we've generated millions of positive brand impressions in just seven days. A great example of what can happen when we combine terrific product, story and execution. Our third strategic focus is digitalization and driving a premium frictionless experience as consumers engage our brands across their journey.

Insights and benchmarking have helped inform where we're doing well, and where we have work to do. To address these opportunities, we're investing in mobile speed, brand and storytelling, SEO site search and loyalty. This is grounded in improving the user experience, further strengthening the Under Armour brand. From finding our product quickly to telling inspirational stories with cutting edge visuals, to product specs and data. The frictionless building and checkout routines evolving this ecosystem is crucial to how we intend to unlock more significant ROI in the future. We're also committed to delivering premium retail experiences in our physical doors, both full price and asset where we are investing in order management and point-of-sale systems and advancing our endless aisle and buy online pick up in store capabilities.

With more work still to come, we are beginning to see the benefit of these investments with solid ecommerce growth in the second quarter, particularly in our largest North American market. Momentum we expect to continue for the balance of the year. Further in the second quarter, we began testing in select markets our first ever North America loyalty program UA Rewards, members can join for free to earn points for gearing up and working at, points will be redeemable for rewards including exclusive athletes experiences and our latest gear.

They will also be able to access member only perks including special events, promotions, and expert training tips and birthday rewards. Only a few weeks into the pilot phase, we're encouraged by the results. And the initial learnings are helping us refine this essential offering for our consumers. We expect to roll this out more broadly in 2023. And finally, this takes us to our fourth focus culture, which makes Under Armour unique.

We've worked hard to cultivate our identity and how our family is defined. When an athlete with the UA logo, when they run our flag, it represents something different. It's great, it's determination. It signals when they step into the gym, onto the field, court or track they've put in the work, we will perform at best and earn the swagger that all Under Armour athletes have in common. This culture starts with the 1000s of teammates who work daily to make this the best athletic performance brands in the world. Our talented team is more efficient, effective and inclusive than ever.

Our discipline, agility and powerful playbook remains critical advantages for both the near-term environment and the longer-term opportunities for us. By pivoting back to our plan, playing both offense and defense is critical in this environment. It's not yet clear how prolonged these conditions may persist. However, elevated inventories including late arriving products across our sector, higher levels of discounting and promotions, and softer retail trends have impacted how we see the rest of fiscal '23 playing out.

Based on these factors, we provide our full-year outlook. At the top line, we expect revenue to increase at the low single-digit rate. This revision is related to softer retail trends, particularly in North America, along with additional FX headwinds. Even so we're holding the line on the gross margin outlook, which reflects our measured approach to maintaining brand health. We're also being vigilant with SG&A, which we now expect to be slightly down as we prioritize investments towards areas with the highest returns and actively managing expenses.

Taking it to the bottom line, our full-year operating income and EPS outflows have also been revised slightly. Additionally, we remain in a strong cash position, and we are proud of our inventory management. The last two years have had us in a defensive position concerning inventory, but also left us with more out of stock than optimal service our business. As inventory approaches a more appropriate level for our size and with the composition of this inventory being mostly current and not aged, we feel confident and how we are managing with aspects of our business.

And finally, before transitioning today, I want to highlight a significant event that occurred during the second quarter. In September, we published a new sustainability and Impact Report. From how we create our products to our workplace, interaction with suppliers, and key relationships with stakeholders worldwide. We are proud of this work. With this strategy in place, the next phase of our journey has begun. And I'm inspired every day by the work our team is doing to reach our targets while being transparent about our progress and challenges.

This is strengthened -- this is a strengthening step in our long-term commitment to run a more sustainable business. And like our report title states, what's under matters. In closing, as we navigate this dynamic near-term environment, I'm emboldened by the opportunity to continue fine tuning our strategy and laying the groundwork for Under Armour's next chapter. We're in this fight. And I am confident that by leveraging our strengths, product innovation, deep consumer connection, and Under Armour's unique culture, we will create better value for our shareholders through more robust, profitable growth over the long-term. Now I'll hand the call over to Dave.

Dave Bergman

Thanks, Colin. At the halfway point of fiscal 2023, our second quarter results demonstrate that our operational execution has not wavered amid an uneven global market. Despite several developing factors during the quarter, we protected our health and stayed disciplined, allowing us to deliver results aligned with our outlook. As a reminder, due to our fiscal year change, our second quarter of fiscal 2023, ending September 30 is comparable to the third quarter of fiscal 2021.

Diving right in, our second quarter revenue was up 2% to $1.6 billion compared to the prior-year. Excluding the negative impact of foreign currency, revenue was up 5%. As discussed on our last earnings call, this result includes approximately five points of headwinds from proactive reductions and cancellations that we made late last year and early this year, due to COVID-19 related supply chain constraints.

On a regional basis, North American revenue declined by 2% coming in at just over $1 billion for the quarter, with wholesale down slightly due primarily to the proactive order reductions and cancellations previously noted. In North America DTC solid performance in our e-commerce business was offset by declines in our Factory House stores as late arriving inventory and a challenging retail environment tempered sales. The EMEA was a standout again for us this quarter with revenue up 9% to $263 million or up 20% on a currency neutral basis. This was driven by growth in our wholesale business, partially offset by a decline in our DTC business.

Following logistical challenges in the first quarter, positive operational progress helped us better serve strong demand. APAC revenue was up 7% to $226 million, or up 14% on a currency neutral basis. Despite ongoing COVID challenges and a relatively muted economic recovery in China, we saw growth in all channels, led by our southern APAC markets. And finally, our Latin America business was up 3% to $58 million in the quarter, or up 4% on a currency neutral basis.

From a channel perspective, wholesale revenue was up 4% to $948 million with increases in our distributor business partially offset by lower sales to the full-price and off-price channels. Direct consumer revenue declined 4% to $577 million due to declines in our factory and Brand House stores, partially offset by a 4% increase in our e-commerce business. And licensing revenue increased 7% in the quarter to $33 million, driven by a solid performance from our North American business.

By product type, in a challenging retail environment, our apparel business was down 2% with strength in team sports offset by softness in training. However, we did see strength in rival fleece across all channels. And in our women's business, we continued to see momentum in infinity bras and meridian leggings and it was also a strong sell through of unstoppable pants in our men's business in the quarter.

In footwear, revenue was up 14% with positive results in all categories, led by significant strength in team sports with outstanding performances from Curry and jet in basketball, spotlight RM and highlight cleats in American football and Harper cleats in baseball. Additionally, we saw double-digit increases in our outdoor and training categories. Our momentum and footwear, which we expect to continue for the balance of the year is encouraging proof that our innovation is resonating.

And finally, our accessories business was down 12% due mainly to planned lower sales of our sports mask compared to last year. Taking sports masks out of the comparison, accessories were up at a low single-digit rate in the quarter. In line with our expectations, gross margin was down 560 basis points during the second quarter driven by approximately 300 basis points from higher promotions and discounting, 100 basis points to supply chain impact mainly due to elevated freight costs, 70 basis points of various unfavorable channel impacts, 50 basis points of negative effects from changes in foreign currency. And finally, about 30 basis points of unfavorable product mix due to the strength of footwear sales.

In the second quarter SG&A expenses were down 1% to $594 million. This decrease was primarily due to lower marketing expenses, as we normalized against our elevated spending in the first half of calendar 2022, partially offset by a 10 million legal expense related to ongoing litigation matters. In total, our marketing expense in the second quarter was 9% of revenue.

Next, operating income was $119 million. Excluding the previously mentioned legal expense adjusted operating income was $129 million, which was above our outlook of $105 million to $115 million, primarily driven by lower than planned SG&A expenses.

After tax, we realized the net income of $87 million or $0.19 of diluted earnings per share. Our adjusted net income was $92 million, yielding $0.20 of adjusted diluted earnings per share coming in above our outlook of $0.15 to $0.17 for the second quarter.

Moving to the balance sheet. At the end of the second quarter, our inventory was up 29% to $1.1 billion. As a reminder, our comparisons are against leaner inventory levels in 2021, when we ran a proactive constraint model. As supply chain deliveries continue to rebalance from recent disruption, we expect elevated inventory growth rates over the next few quarters with a peak in the high 40s, coming in our current third quarter, and then closing out our fiscal year in the mid-30% growth range.

Looking at this from a different angle. Going back and comparing it to pre-COVID 2019, would put both our estimated three-year inventory and revenue growth rate up about 19%, further demonstrating our inventory management strength in this environment. Rounding out the quarter, our cash and cash equivalents were $854 million. And we had no borrowings under our $1.1 billion revolving credit facility. And finally, we repurchased $25 million of Class C common stock during the second quarter, thus retiring $3.2 million previously outstanding shares. Under our two-year $500 million program, we have repurchased $350 million worth of Class C stock thereby retiring 26 million shares.

Next, let's turn to our fiscal '23 outlook. As a reminder, the comparable periods of the corresponding quarters in the trailing 12 months from April 1st of 2021 through March 31st of 2022. As Colin alluded to earlier, general economic uncertainty has increased since the last we provided our outlook. As such, we've revised our full-year revenue and profitability expectations. Accordingly, we now expect revenue to be up at a low single-digit rate on a reported basis, versus our prior outlook of 5% to 7% growth. Excluding about three points of FX headwinds, currency neutral revenue should be up at a mid single-digit rate in fiscal '23 versus our previous outlook of 7% to 9%.

Looking down into our full-year revenue outlook. We're now expecting North American revenue to be about flat and our international business to be up at a mid single-digit rate. And our apparel business to be about flat with low teen growth in our footwear business. Next, there is no change to our expectation that gross margin should decline 375 to 425 basis points in fiscal '23. This compares with our prior years baseline rate of 49.6%. Within this decline, we expect roughly a quarter will be related to negative impacts from higher promotions and discounting. A quarter from elevated freight and product costs and the rest from channel mix, changes in foreign currency, and product mix.

Moving down to P&L, as we manage against the more temperate top-line. We are now planning SG&A to be down slightly compared to the prior year. We remain committed to ensuring our investment dollars are optimized to the areas with the highest returns, while proactively identifying areas to manage expenses appropriately. Thus further demonstrating our agility and balanced approach to SG&A management. Dropping this through, we now expect our operating income to reach $270 million to $290 million, excluding a legal expense related to ongoing litigation matters, adjusted operating income is expected to reach $290 to $310 million.

That takes us to diluted earnings per share for fiscal '23, which we now expect to be $0.56 to $0.60, lowering the range by $0.05 versus our previous outlook. This includes a $0.28 benefit related to a tax valuation allowance release, expected to be realized mainly during the fourth quarter. Of this $0.28 benefit, $0.16 is related to prior restructuring. Additionally, the previously noted legal expense have a $0.04 negative impact, therefore excluding these net positive impacts of $0.12 adjusted diluted earnings per share is expected to be between $0.44 and $0.48.

Now, turning the color on the second half of fiscal '23, where we expect third quarter revenue to be flat to slightly up on a reported basis and up at a low-to-mid single-digit rate on a currency neutral basis. For the fourth quarter, we expect revenue to be up at a mid-to-high single-digit rate on a reported basis and up at a high single-digit rate on a currency neutral basis.

As a reminder, the fourth quarter of fiscal '23 laps our transition quarter of 2022, which was significantly impacted by revenue headwinds from our proactive decision to cancel orders due to COVID related disruptions. Thus part of our fourth quarter growth expectation is related to recapturing some of that business. Next, we expect gross margins to be down approximately 550 to 600 basis points in the third quarter. Due to negative impacts from elevated promotional activities, shifts in channel mix, changes in foreign currency, and changes in product mix due to footwear skewing higher than apparel.

We expect 100 to 150 basis point decline in the fourth quarter as we finish the year. Bringing this to the bottom line, we expect third quarter operating income to reach approximately $75 million to $85 million and $0.09 to $0.11 of diluted earnings per share. This includes a tax valuation benefit of $0.02 related to the prior restructuring. So excluding this benefit, adjusted diluted earnings per share is expected to be between $0.07 and $0.09. To round it out, this would imply an expected fourth quarter diluted earnings per share range of $0.27 to $0.29, which includes an estimated $0.24 benefit related to the tax valuation allowance release.

Excluding the restructuring related valuation allowance benefit of $0.13, we expect $0.14 to $0.16 of adjusted diluted earnings per share for the fourth quarter. In closing, we remain bullish about our evolving long-term strategy and confident that our playbook positions us well to navigate the challenging near-term environment. Having the ability to take a balanced approach to mitigate near-term pressures, while laying the groundwork for our next chapter of more pronounced growth is due to the hard work we put into our operational plan and our brand, with a team that is relentlessly focused on our product, our story and serving athletes globally.

In the near-term, we are driving the business efficiently and with agility while executing the strategic shifts necessary to prime Under Armour for more sustainable, profitable growth over the long-term. I will turn it back to the operator so we can answer your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Matthew Boss with JPMorgan. Your line is now open.

Matthew Boss

Thanks. So maybe for Kevin or Colin, how would you describe the current health of the brand? Any material changes that you're seeing with forward wholesale orders and what do you see as the timeline for that pivot to growth that Kevin, I think you've decided to kick off the call.

Kevin Plank

I think we found that few things playing out there. I think this has been part of our journey for a couple of years now with regards to just trying to exit number of undifferentiated doors. And we're already kind of starting to see more, the quality of the revenue we're showing now is certainly much better than it was kind of three or four years ago. So from that point of view, we already feel as if we're kind of on that journey. We're obviously continuing to build that out. And part of that is kind of this resetting of the core consumer that we talked about this target consumer to 16 to 20 years seems for athletes to pivot into live and allowing us to kind of lean into a larger part of the market as well.

So all of this is coming together from the point of view of how do we actually think about continuing to premiumize the brand, and continue to kind of drive the brand further up market and allow us to really start to drive the growth that we know that there is for this brand and the demand there is for this brand. So we're feeling pretty comfortable and confident with regards to how that is starting to manifest itself.

Matthew Boss

Great, and then maybe just to follow-up on that, Colin so on the strategic opportunities that you cited, I guess first on the accelerated segmentation, should we think about this is offensive? Or is there a cut to grow that we need to consider with that? And then secondly, on the total addressable market opportunity for casual wear, what's your confidence in broadening the base to that segment?

Colin Browne

Well, two questions there. One was, I think we don't see this as a necessity to cut to grow, there's clearly a demand for Under Armour to kind of play on this higher, I guess, at this slightly more premium level perhaps than we have been playing here in North America. So working through the mechanics of how we unlock that is something that we believe we can do and accessing that through the 16 to 20 year old teams for athletes, because they clearly drive so much more, they cost a much larger Halo with regards to how they shop across the market. And sorry the second half of your question, could you just repeat that?

Matthew Boss

Just on the live category that you cited, the casual wear, what's the total addressable market opportunity there and just your confidence of competing in that categories as an expansion of the core?

Colin Browne

While we believe there's about a $300 billion opportunity there that we just never, we haven't really focused on or work through how to plan. And so we clearly aware that if we look at kind of where we meet the athlete at this moment in time, we talked about the journey to compete, train, compete, recover, which has been the three kind of aspects of the journey of compete that we're focusing on today. And if you think about that, Matthew, it really only probably encompasses probably 30%, 20%, 30% of that day.

So the opportunity of leaning into the other 70% of the day is clearly a huge opportunity there. And when we talk to athletes as well, it's clear, they want to have access to our product, or they want to feel comfortable to wear our product backwards. And as they're traveling to this, the court, field or pitch. So the opportunity for us to lean into that it feels as if -- it's an open door for us, we need to just do a better job of working through how we execute against that. And that's the pivot to live that we're putting in place at this moment in time. And you're starting to see a little bit throughout this show up through SlipSpeed. So yes, clearly we feel there's a big opportunity there and we're leaning into it.

Matthew Boss

That's great color. Best of luck.

Colin Browne

Thank you.

Kevin Plank

Thanks, Matt.

Operator

Thank you. And our next question comes from Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Simeon Siegel

Thanks. Hey, guys, good morning.

Colin Browne

Good morning.

Simeon Siegel

Colin, if I can follow-up on that a little bit. I was just hoping to get your perspective on how you guys are thinking through maybe what external signals might impact and how you think about that balance between the desire to grow versus brand elevation and gross margin. Like I know, the core focus is looking for the future growth, but just reflecting on all the success you've had over the past couple of years of re-elevating the brand and honestly, much to the credit of the team, you're still one of the largest brands in the world, I'm just wondering if there's a scenario where it might make sense to sell less charge more, and then earn more while doing that. And then Dave, I have a follow-up for you after that, if I can.

Colin Browne

Sure. I think we already, when we look at the amount of consideration there is out there for the brand, we believe there's clearly an opportunity for us to maintain our current customer base that we have in place now while continuing to work through how do we elevate that, and that's kind of the model we've been running for the past couple of years as we've gone through what we kind of call our constraint model, where we've actually been holding back a tad in order to kind of optimize the way in which the brand shows up and the fact that we've continued to reduce our exposure in the off price market and working away from undifferentiated doors can't say that this morning undifferentiated doors is a great example of how we think we can continue on that journey.

So I don't think it requires us to make fundamental shifts, if anything, I think there's opportunities for us to lean into additional parts of the market where we haven't really shown up particularly well, if you think that the mall, the mall kind of stores and the mall traffic is not somewhere where we play particularly well. And footwear is an incredibly important part of our business and continues to grow significantly improving pretty well last quarter. And that's clearly an area where we continue to increase ASPs and really start to resonate in that part of the market as well. So we believe we can certainly kind of continue to drift upwards a little bit in the way in which the brand is showing up.

But we don't believe that requires us to do a wholesale kind of restructuring from the point of view of how we're thinking of selling through. Dave, I'm not sure if you want to add anything.

Dave Bergman

Yes, I would maybejust add to that too that as you think about a lot of what we're focusing on with our investments right now around really leaning in on the digital on the ECOM front with a lot of the different things that Colin already mentioned in his prepared remarks. And being able to leverage that to be able to show a broader range of our product and more, best level product as well. And same thing relative to brand house stores and leaning in there on the concepts and wanting to roll out more full price brand house stores, especially in North America as we go into next year. So I think controlling that and being able to show the premium assortment in a bigger way is going to be helpful, all while continuing to kind of step off and slow down relative to use of kind of a third-party off price channel, which we've done a lot of work to bring that down into kind of that 3% range of revenue over the last few years.

So a lot of different things at play there. But I think we're definitely on the right track. And there's a lot of opportunity to lean in even further when we go further into the live side of the product.

Simeon Siegel

I agree.

Dave Bergman

Thanks for the question.

Simeon Siegel

Thanks, guys. Thanks and then Dave, if I could a quick follow-up. It looks like there is across the channel, maybe a footwear versus apparel dynamics. So within the full-year guide, how you're thinking about footwear versus apparel, and then if you could just elaborate a little bit more on the ability to hold gross margin guidance, despite the revenue, I think that'll be helpful, because that's obviously encouraging. Thank you.

Colin Browne

Yes, I mean, a couple of things there, I would say. First of all, you're right in that there is a little bit of a headwind relative to driving and performing so well on the footwear side, which we're excited about. And that's something we can absolutely plan for and lean into. I would say, though, that that product mix headwind is getting smaller and smaller. As we build more scale in footwear and continue to get better in our design and overall efficiency, that product margin gap is getting smaller between our apparel and footwear. So it's not as much of a differentiating headwind on gross margin than it used to be.

The second thing I would say is that, we -- when you think about three months back, when we gave our outlook then and we took our gross margin down then, in that we had contemplated a very pressured environment especially in Q3 fiscal of this year. And so I think we were pretty aggressive and got ahead of it, then. And we're planning to hold at that level. Again, this is where we want to try and keep the brand as premium as possible. We understand there's going to be a lot of discounting of promotion out there. And we are going to play in that. But we are not planning to go kind of below 2019 levels. And that's reflected in our revenue update.

So again, it is a little bit of maybe less is more, relative to how we finish out the back half of the year, but we feel confident in holding our outlook there. And I'd say that, it's not that there hasn't been any noise per se, when we think about it. We have had some additional FX pressure developing from three months back. But then on the flip side, we're also planning a little bit less business with third-party off price. And those two things kind of offset a little bit as well.

So there's been some small puts and takes on our view of gross margin, but we still feel like we're in a great spot when the outlook that we're reaffirming here on gross margin.

Simeon Siegel

Great. Thanks a lot guys. Best of luck for holiday.

Kevin Plank

Thank you.

Colin Browne

Thanks.

Operator

Thank you. Our next question comes from Jay Sole with UBS. Your line is now open.

Colin Browne

Good morning, Jay.

Jay Sole

Great. Thanks for taking the question. Obviously, there's a lot of supply chain costs impacting margins this year. Maybe just talk about a little bit more about supply chain expectations, as you look into next year given spot rates of change and maybe flow of goods as improved. What you're expecting about the kind of margins you can recover and just sort of like the ability to deliver on time and accurately as we go through the rest of the fiscal year into next year?

Dave Bergman

Yes, Jay, this is Dave. I'll take that. If you think about this year, we've talked about our biggest headwinds being the higher promotions in discounting and then also the elevated freight and product costs. And although we're not ready to give detailed thoughts on next year, we would expect gross margin to improve next year. If you step back and look at two of those big drivers, we would anticipate that the year-over-year freight costs would be better next year than it is this year. We're already ceiling that trend, as we look at Q3 that we're going into right now, that it's starting to kind of stabilize.

And then with those rates coming down, we're actually ceiling freight costs become a gross margin tailwind for us in Q4. So we would expect that to definitely continue some next year, which would help year-over-year gross margin. Then also the promotions and discounting, we're not exactly expecting the market to completely get better as we hit April 1, but we also do believe it will get better as we go throughout next year. So the promotion and discounting level, we would expect to probably get a little bit better as well. So there's just two simple factors there that would lead you in a positive direction for next year.

Colin Browne

And let me just jump in on the service levels. I think there's a couple of stories there. One is the that we are undoubtedly seeing kind of service levels improve as kind of supply chains getting themselves into a much healthier position. And I mean, the teams have done a lot of work here to make sure that we can optimize that. And so, we're feeling pretty good about our ability to service the business through the balance of the year.

Add to that the fact, I think we have done a nice job in managing inventories at the right appropriate level. Although, as you've seen, the numbers are up on a year-over-year basis. It feels as if we are back at the inventory levels, we kind of need to be in order to run this business appropriately. So overall, we're feeling pretty strong with regards to how supply chain is playing out. And our ability to kind of use that actually as a tool for us to continue to drive further growth so.

Kevin Plank

Yes, and I'd just tag one last thought onto that. Not just the freight rates, but use of air freight late last year and throughout this fiscal year has been a lot higher due to the supply chain challenges and having to ketch up on getting that product. And so, as Colin mentioned, now that we're working through that and supply chain is getting more up to speed and more up to the right timeline. The utilization of air freight, which is pretty costly is starting to go significantly down. And we would anticipate that that would also continue down next year as well. So another little bit of a tailwind for us as we go into gross margin next year.

Jay Sole

Got it. That's super helpful. Thank you so much.

Colin Browne

Thank you, Jay.

Kevin Plank

Thanks Jay.

Operator

Thank you. And our next question comes from Adrian Lee with Barclays. Your line is now open.

Adrian Lee

Yes, thank you for taking my question. Two questions, I guess the first is on the promotional kind of holiday and how that's coming through? Are you only seeing that sort of in the athletic apparel? Is it concentrated there? Is it concentrated mostly in the U.S.? Clearly, your footwear was very strong. So I'm assuming the ASPs are nicely up there with units up without a lot of promo. So any color on that?

And then finally, are you using any off-price or elevated more off-price than perhaps from last quarter, because I know you had talked about kind of using that channel a little bit more. And then my second kind of topic is on the wholesale order book. When you're having discussions with retailers kind of in the out season, as they had built safety stock and spring of this year? How are they talking about building their inventory in the channel? If that makes any sense, will they be not buying that they've used up or just shifting it to where it normally should be the normal chains of receipts? Thank you very much.

Kevin Plank

So Adrian, a lot to eat -- a lot to that question, I would say, a couple of different things. I would say, as we saw through Q2 from an ASP perspective, our ASPs globally were slightly down, but really not very much. They were down a little bit in North America and APAC, where there's been a little bit more discounting in the market right now. Where they were actually a little bit up in EMEA. So not a huge story though, yet, definitely a mix shift for us though with the higher growth in footwear that absolutely helps us out.

And as we think about the back half of the year, and from a discounting strategy, we do expect the higher discounting and promotional activities kind of given the evolving market conditions. But again, we expect to hold the line there and not go kind of deeper than 2019, and prior. So we do think we're well [Technical Difficulty] there to kind of navigate however the environment may develop. So that's kind of how we're seeing things there.

And then, Colin, I don't know if you want to comment on the wholesale or if you want me to jump on that?

Colin Browne

No, I think just building on that from this point of view, obviously it's a little early to kind of give information, we don't generally give it kind of into quarter kind of numbers with regards to holidays playing out. But yes, there was an expectation that obviously wholesale partners will look to kind of manage their inventories as we all do. As we kind of go through next year, we feel as if, again, we're in a good place from the point of view of being able to service our business.

And we have good visibility of our spring summer '23 order books, and we're feeling pretty strong, feeling pretty comfortable, and how that will allow us to continue to execute throughout the year. And we haven't really started taking orders before when the '23 yet. So it's a little early to kind of say how that's going to play out. But undoubtedly, those guys will be managing that inventory appropriately. But we continue to lean into those relationships. We've got a good, strong, solid relationship with our wholesale partners, and we continue to partner with them to ensure we get to the right solution.

And again, we do continue to feel more optimistic with regards to what we're starting to see from the point of view of the positivity around the brands that -- and the demand that we feel that there for the brands that will allow us to continue to optimize those relationships as well.

Kevin Plank

And Adrian, I know kind of the last piece there of wholesale, you mentioned the off-price channel. Within the off-price channel, we are anticipating to keep that in check. And actually, make sure that the business is continuing to kind of stay at that 3% of total mix of revenue for the year. So that is not going to be really a growth area for us or one that we're leaning into that heavily. So right now, that market is pretty tough as well. And pricing isn't that great.

So from a brand perspective, it's not really where we want to lean in. We want to lean out if anything there and rely more on our outlet stores and continued type management of our inventory. And I know that our inventory levels are going to be growing year-over-year. And we mentioned that in the prepared remarks. But I think just keep in mind how lean we were running last year, and comping against that. And the fact that we're still going to be running the business at a 3.0 turn or better, as we run through the back half of this year. So I think that's probably a little bit of a better metric than just year-over-year growth with such a volatile environment that we're dealing with.

Colin Browne

Yes, and I just add that our inventory is clean and current stock is not particularly aged stock. So I mean, it's the right place -- right stock in the right place at the right time to optimize the market. So I don't think we're going to need to play any more than we've already called out.

Adrian Lee

Fantastic. Thanks for the color. It's very helpful. Thank you.

Kevin Plank

Thank you.

Colin Browne

Thanks Adrian.

Operator

Thank you. Our next question comes from Brian Nagel with Oppenheimer. Your line is now open.

Brian Nagel

Good morning. Thanks for taking my questions. So a couple of questions and I think both bigger picture. I mean we want a bit of a follow-up your prior question, but I know it's hard. It's difficult to port parses out, but if you look at the promotional activity happening now within the space or even at Under Armour -- apologies. Is that, is it more a function of brands looking through excess inventories? Or so actually a component now that do that that's just more normal promotions and maybe reacting to a potentially softer consumer backdrop?

Then the second question I have related to that, you mentioned in your prepared comments about if the overall environment turning more challenging this quarter than what we discussed in the prior quarter. And obviously, that a lot of pressures on the consumer are very well documented out there. But can you talk more specifically about what you're seeing that sort of gives you that view? Thanks.

Kevin Plank

Yes, I guess a couple things Brian. I think that when we look at the promotional activities, it's a little bit of both, as far as what you mentioned. We see a lot of brands have been bringing in a lot of inventory, because they assumed, some assumed that the demand was going to be as high as last year. And because a lot of the factory bases were behind, they were really putting in a lot of orders to try and catch up and assume that demand was going to be similar this year. So you've got a lot of inbound inventory, that's coming in to a market that's been softening. So there are a lot of brands that have a fair amount of product out there in the market. And so they are starting to aggressively discount more to be able to move that and not hanging over as much in the next year. So that's definitely a big part of it.

But then on top of that, the consumer is getting tighter, their wallet and their spend on discretionary is getting a little bit tighter, you do see a little bit more spend on travel and entertainment. But the overall wallet size is a little bit less. So it's a little bit of both that we're seeing. And as we think about the promotion levels in the back half of the year, keep in mind that we are seeing next quarter or this quarter we're in right now, Q3 expected to be down 550 to 600 basis points. And the biggest part of that is the continued promotional activities we expect to see. So that is built into our outlook. And we're comfortable with kind of where we're sitting in that range.

Kevin Plank

But I would just add that I think although we are obviously heading into some choppy times in the kind of the midterm, I guess it'd be best way to put it from the point of view of the economy. We do also believe that kind of this part of the market is going to continue to remain strong. I mean there was recently a UPS forecast came out that was suggesting there's a 6.5% global long-term CAGR. And it's kind of part of the industry. So we feel as if we're playing in the right part of the industry. And yes, we're going to have to navigate these short-term, these short-term challenges, but we're in a great position to do that. And we feel we're in the right industry. And with that, we're well set to kind of continue to accelerate through that.

Brian Nagel

Great, thank you very much.

Kevin Plank

Thank you.

Colin Browne

Thanks, Brian.

Operator

Thank you. And our next question comes from John Kernan with Cowen. Your line is now open.

John Kernan

Good morning guys. Thanks for taking my question.

Colin Browne

Good morning, John.

John Kernan

Nice job on the quarter. Yes, I think it is, you're proving the ability to manage SG&A dollars in rate, particularly in the back half of this year. Can you talk to as revenues reaccelerate in the fourth quarter on a constant currency basis and potentially into next year? How you're going to manage the rate, both the SG&A rate and dollars?

Colin Browne

Let me lead off on this and then I'll hand it to Dave. But I think the work that we've done over the past three to five years and kind of standing up our operating model is one of the reasons why we feel confident that we now have a process through which we can ensure that we're optimizing our SG&A based upon the size of the business, it's clear that -- this has been an important part of the kind of the work that we've had implied for the past couple of years. And obviously over the last kind of 90 days or so we've doubled down on that to make sure that we've been incredibly efficient in how we optimize the operating model. And that's really now starting to pay dividends. And it feels as if we are well positioned for this pivot to grow. We've got SG&A in check, we know how operating model works, we know how to optimize the individual parts of it, and really how to drive leverage out of that. So, Dave, I'm not sure if you want to go through in a little bit more detail.

Dave Bergman

No, I mean I think that with all the work that we've done that Colin mentioned, fortunately, we removed a fair amount of some of the fixed costs and anchors that were kind of dragging along. So now it allows us to be much more nimble. And I would also say that from the leadership team, we have a very enterprise mindset. So making the decisions of how to reprioritize and therefore some business units having to sacrifice for others to be able to drive forward in key investment areas, whether it be kind of a digital and omni front or whether it be on footwear design, those conversations and making those changes and pivots like that are much, much more efficiently done than in the past.

And with all the operating model and restructuring work that we've done, we're in a point now where we've got a really solid base to be able to grow from. So as we step forward, yes, there might be a little bit of a SG&A headwind relative to over index growth from a DTC perspective. But that would come with higher gross margin as well, which would offset. So we're going to keep managing tightly. There's a lot of discipline within the organization at this point, everybody's leaning in, and we're in a good spot to pivot to growth off of that.

John Kernan

Got it. Thank you.

Dave Bergman

Thank you. Thanks, John.

Colin Browne

Thanks, John.

Operator

Thank you. And our next question comes from Lorraine Hutchinson with Bank of America, your line is now open.

Lorraine Hutchinson

Thank you. Good morning, I was hoping you could provide a State of the Union on the women's division, can you just talk to the progress you've made, and if you see any investments needed to bolster your position here?

Colin Browne

Obviously, it continues to be a major focus from the point of view of how we continue to kind of look to drive out that part of the business. We've seen really strong results in areas from our whole meridian line, which was initially focused on our Women's Business has done incredibly well with the Meridian pants and Moisture Infinity in the Crossback. In addition to that, things like the Crossback, Crossback also, so we continue to kind of double and we continue to see opportunity for us to continue to grow that business, the work we've done in standing up women's specific running product, as well as something that's really started to resonate. So we expect to continue to double down in that part of the business. And certainly as we're thinking about how our stores are merchandised the ways in which our Women's Business shows up, across our DTC enterprise is something which we're continuing to work on. And we expect to see that continue to play out. Dave, do want to jump in?

Dave Bergman

Yes, I mean, again I think as we look to push hard on all the ECOM investments and also on full price brand house store rollouts. That's an opportunity for us to be able to really increase the women's share of product assortment there, and then continue to grow from that. So we're excited about where that could go. But we're continuing to dig deep on that side.

Lorraine Hutchinson

Thank you.

Dave Bergman

Thanks, Lorraine.

Operator

Thank you. And our final question comes from Michael Binetti with Credit Suisse. Your line is now open.

Michael Binetti

Hey, thanks, guys for fitting me in here. And Dave, I was just wondering if you could help us I know this is asked a little bit earlier, you gave us some directional color, but the gross margin guidance down 550, 600 in the third quarter, and the handoff to the down 100 to 150 in the fourth quarter. It seems like there's big enough buckets and I know you highlighted the promotional activity, but maybe just, if you could try to connect us to the rough scale of the components of that gross margin that you -- what you just gave us some of them for 2Q, it sounds like promotions are the biggest in the third quarter.

And then is that the biggest piece that assume to roll off as you go into the fourth quarter? Maybe just a few thoughts on the biggest pockets between them. And then I guess just on the -- on as you look at next year, and you gave us some such shape of inventory of high 40s in third quarter, mid-30s at the end of fourth quarter. How do you see the inventories coming into alignment. How long does that take do you think?

Dave Bergman

Yes, Michael, great, great questions. I'll dive in first on the gross margin. So, for Q3, we gave outlook that we expect to be down 550 to 600 basis points. The largest is definitely the assumed continued elevated promotional activities, that's probably roughly in the range of three points. And then I would say kind of the middle or medium sized drivers, one would be the shifts in channel mix, which is going to be a little bit more distributor base just based on timing of that business.

But overall, the channel mix is probably somewhere around one or 100 basis points. The FX is continuing to be a pretty big headwind for us. That's probably in the range of about 100 basis points for Q3 as well. So that right there is definitely the Lion's share. The footwear mix being higher is a smaller headwind, as I mentioned earlier on the call. And then we'll actually see a little bit of an offset, a little bit of a tailwind from freight costs in Q3, not much. But as those rates are coming down, and air freight utilization is also coming down that actually starts to become a little bit of a tailwind for us in Q3. So largest again is the promotional levels. And then kind of the medium factors are going to be channel mix and foreign currency.

As we step into Q4, we would anticipate that the remaining largest headwind is still going to be foreign currency. And to your point, the promotional activities is still going to be a headwind. But we don't see it being as large as what we anticipate here for the current Q3. And then again, product mix with footwear assumed to be higher growth and apparel is a little bit of a headwind. And then the tailwind from freight costs actually gets larger and becomes a bigger factor to help offset. So that's kind of how you get to the expectation of being down 100 to 150 in Q4.

So hopefully that gives you some good color there. And then relative to next year with inventory. We're not giving details yet on that. But we do feel that as we're going through the back half of this year, even though the growth rates are a little bit higher, we're doing it off of a super lean base last year. And now we're getting more towards kind of the right level of inventory for our business. But at the end of the day, we're probably going to be focusing more on inventory turns than just the growth rates and wanting to be able to make sure we stay above three as we run out this year, and then continuing to start driving that up as we go forward to get to a better place as we get past some of the market challenges.

But we feel good about where our inventory is. Again, as Colin mentioned earlier, it's fairly healthy, more current product, we believe our outlet stores can handle the excess very well with a small percentage going to the off price channel. And we'll keep managing that balance in the most premium ways we go into next year as well.

Colin Browne

Yes, and just to close it. I mean, I think the work we've done on managing gross margin and inventory has left us in a strong position to kind of close out the year and think about what that means for 2024 as well. I think the work when we look at brand consideration and the way in which we believe we are still continuing to resonate with consumers. And we look at the work we're doing around the strategic shift in the kind of making this pivot to growth, that brings with it, a certain swagger and a certain confidence that is starting to grow across the business as well. I think we feel as if we're well positioned to kind of close out the year and grow into 2024. So yes, thank you for your time today. Appreciate the questions, Michael.

Michael Binetti

Very helpful. Thank you.

Dave Bergman

Thanks, Michael.

Lance Allega

Thank you. That'll conclude our call today. Appreciate everybody's participation. Thank you, operator.

Operator

Thank you. This concludes today's conference call. Thank you for participating, you may now disconnect.