Under Armour Q1 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2025

Key Takeaways

  • Negative Sentiment: Q1 revenue declined 4% year-over-year to $1.1 billion with North America down 5%, APAC down 10% and only EMEA showing growth of 10% (6% currency-neutral).
  • Negative Sentiment: Under Armour now expects approximately $100 million in additional tariff costs this year, pressuring gross margin by about 200 bps and reducing adjusted profitability to roughly half of last year’s level.
  • Positive Sentiment: The company is cutting SKUs by 25% and materials by 30% in 2025 to speed execution, improve pricing power and reinforce a brand-first strategy focused on sharper assortments.
  • Positive Sentiment: Under Armour is premiumizing its lineup by launching “pinnacle” products and redesigning its top 10 volume drivers to drive higher average selling prices and deeper full-price sell-through.
  • Neutral Sentiment: A new category management model, revamped go-to-market process and over 80 AI automations are being rolled out to streamline workflows, enhance planning and speed time-to-market.
AI Generated. May Contain Errors.
Earnings Conference Call
Under Armour Q1 2026
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good day, and welcome to the Under Armour Q1 twenty twenty six Earnings Conference Call. Today, all participants will be in a listen only mode. Please note that today's event is being recorded. I would now like to turn the conference over to Lance Allaga, Senior Vice President, Finance and Capital Markets. Please proceed.

Speaker 1

Thank you. Good morning, and welcome to Under Armour's first quarter fiscal twenty twenty six earnings conference call. Today's call is being recorded and will be available for replay. Joining us on the call this morning are Under Armour President and CEO, Kevin Plank and Chief Financial Officer, Dave Bergman. Before we begin, I'd like to remind everyone that our remarks today will include forward looking statements that reflect Under Armour management's current views as of 08/08/2025.

Speaker 1

These statements may include projections about our future performance and are not guarantees of future results. Actual results may differ materially due to several risks and uncertainties, which are described in this morning's press release and in our filings with the SEC, including our most recent annual report on Form 10 ks and quarterly reports on Form 10 Q. Today's discussion may also reference non GAAP financial measures, which we believe provide useful insight into our underlying business trends. When applicable, reconciliations of these non GAAP measures to their most comparable GAAP counterparts can be found in this morning's press release and on our Investor Relations website at about.underarmor.com. With that, I'll turn the call over to Kevin.

Speaker 2

Thanks Lance and thank you all for joining us this morning. With the first quarter complete, this is an important moment to evaluate our position and importantly our direction. We're undertaking a bold reinvention and rebuilding with purpose to become a sharper, more focused brand, one that blends sports, style and innovation with financial discipline and edge. This isn't about fixing the past, it's about unlocking our full potential. Undermush started as a product in 1996, became a brand over the following two decades and quite frankly, has spent the last eight years operating more like a company than a brand.

Speaker 2

Sixteen months back into the CEO role, my hands are firmly on the wheel. We're in the process of flipping that script, where every decision we make is focused through a brand first lens. This in no way means retreating on operational discipline. In fact, means being a better company with rigor and process, capital allocation and execution. But simply requiring that every decision we do make contemplates, is this the best decision for our brand?

Speaker 2

Because if it's the best decision for the brand, then it's the best decision to create long term shareholder value. World class financials don't build world class brands. It's actually the other way around. The only way we win is by creating a brand people can't ignore. Our current numbers don't yet tell the whole story, but the signs are there.

Speaker 2

Brand health is starting to gain traction. Cultural relevance is returning and our phone is ringing from talent that wants to join us. EMEA is outperforming, North America, APAC are on path towards better stability and team sports are heating up, while digital engagement is increasing. We're stronger than we were six months ago and will be even stronger six months from now. This transformation isn't easy and requires a lot of patience, more than any of us would like, but we're taking the right steps to build deeper lasting connections with consumers and focused on creating mid and long term shareholder value.

Speaker 2

The good news, we're not starting from scratch. We have the essentials with presence in nearly 150 countries, 2,000 mono branded stores, 15,000 teammates, a new headquarters, almost thirty years of sports credibility. Our strength is authenticity, which I don't believe we fully embraced and that's now changing. And yes, the environment is challenging, limited spending, higher promotions and a dynamic domestic tariff policy. Independent of that, our mission is clear, stop the decline and rebuild stronger.

Speaker 2

I understand what's at stake and intend to apply a lifetime of brand building experience, twenty years of it with the same public company and creating our best work driving this transformation. At the heart of this are bold from two shifts, deliberate moves that redefine our brand identity and reshape our operations. Let me walk you through how we're turning that vision into reality. Over the past year, we've achieved significant progress in realigning our product engine, simplifying operations and positioning Under Armour to better serve athletes, customers and shareholders in the long run. We faced some tough truths.

Speaker 2

Our assortment had been too broad, our material library is too complicated and our design language lack clarity. So we're simplifying, we're consolidating, we're editing and we're laying the foundation for sharper execution and better pricing. Cutting down the product range and materials is already making us faster, leaner and more focused. We're on track to meet our initial goal of producing SKUs by 25%. We're discovering more ways to streamline.

Speaker 2

This focus sharpens execution and strengthens our product lineup. We've already cut our materials by 30% for our 2025 products and plan to reduce it further in 2026, lowering costs, improving sourcing and supporting more sustainable innovation driven design. In effect, as our old saying goes, we plan to spend much more time writing a much shorter letter. We certainly made progress and now aim to push even harder, especially with underperforming and low margin products, leading with math like any basic eightytwenty rule, but ensuring that we are also brand informed as we make decisions. In March, we introduced a new category management operating model and go to market process.

Speaker 2

Both are now active and continuously being refined. Along the way, we've combined experienced UA talent with fresh leadership to inject energy and expertise where it counts most. Just last week, Eric Litke and I guided our corporate team through our five strategic roadmap. Effectively, the final and third leg of the brand foundation to complement our operating model that rolled out in February and the go to market we described during our last call using the No Way Backpack as our example. These three brand foundational pillars are essential to any transformation and what I'm most excited about from a progress standpoint since April '24.

Speaker 2

Key component of any strong culture is ensuring that every teammate knows exactly what's expected of them what the definition of success is. The structure is now in place. Our team is aligned. We're set up

Speaker 3

to run. If I had

Speaker 2

to simplify the broader strategic goal for the organization, into one statement of what we aim to achieve, it is selling so much more of so much less at a much higher full retail price. That means tighter assortments, more key items safety stock, getting better order fulfillment, straightforward storytelling of intentional personified products that we make famous like our heat gear base layer. Realizing the full retail value for our product all the way out the door, it's what's essential for us to make this brand transformation happen. This is underway and we're driving through two key levers. First, we'll continue to launch pinnacle defining products like our Heat Cure OG compression mock, the Velocity Elite three running shoe, the Magnetico football boot and Halo collection along with accessories such as the Stealthform Hat and the No Way backpack, products that only UA could make, informed from our unique brand intersection of sports authenticity, cultural style and distinct innovation, all with higher ASPs that we are inviting the market to stretch to and they're gaining real traction.

Speaker 2

Secondly, we're working to apply those lessons of premiumizing our brand to our top 10 volume drivers across apparel, footwear and accessories. We're systematically redesigning our top 10 volume items for better performance, bolder designs leading to better and more full average selling price revenue. We're elevating the reason of buy UA, updated industry leading innovative products with richer storytelling and brand confidence for our consumers. These top 10 styles represent tens of millions of units that once driving higher average selling prices will fall straight to our bottom line. This two lever strategy also has the benefit of being the same play we are and would run to help mitigate tariff impacts.

Speaker 2

While we cannot affect holistically in the short term, we should see this benefit coming through our P and L in coming seasons. Pulling this example all the way through, where prior to April 2, we'd already been planning to improve product quality for our consumers with an item like our $25 tech tee, moving that to a higher price point justified by enhancing fabric material, design and story. Now we're considering pushing that price point a bit further to an embedded consumer who we do have pricing power with. Effectively, we're running a very similar play to elevate the brand that we're now incorporating to mitigate tariffs. We're not however walking away from value driven consumers.

Speaker 2

Sports gives us room to compete at every level, good, better and best. We're expanding our top tiers while keeping the right products at entry price points, but moving those price points and the products quality themselves up. That balance is what built Under Armour and it's how we'll continue to succeed by creating performance gear that is desired by consumers regardless of the price point. We're also changing how we connect with athletes, a realignment of our presence and who we serve. We're shifting from a gym first approach to a focus on team sports emphasizing both American and global football, basketball, baseball and volleyball.

Speaker 2

It's a deliberate move back to performance bringing new energy and relevance to today's game. At the same time, we're expanding beyond our Gen X foundation to connect with Gen Z and Alpha, purpose driven athletes who value transparency, authenticity and daily relevance. We're also shifting from primarily a professional athlete only model to an influencer led network broadening our athlete roster to include high school stars, college athletes, creators and their communities. Through NIL partnerships, grassroots efforts and authentic storytelling, we're building momentum from the ground up and the energy will continue to grow. This transformation cuts across every category.

Speaker 2

We're expanding beyond just the locker room, building real sportswear credibility while continuing to deliver high performance gear for athletes both on and off the field. We're also working to close the gap we've let sit for too long, the needs of women. Yes, we built a billion dollar plus women's business, but a share of our total hasn't increased. That's on us and we're addressing it. We're integrating a women centered approach directly into our category management model led by long time UA veteran, Jeanette Robertson.

Speaker 2

It's a structural change and we're working hard to get it right, not only in product but also in how we design, market and bring her into our brand. Next, let's talk about footwear. We know it's not where it should be. For too long, we lacked focus and consistency in a category that defines our industry. We pursued too many ideas, adopted franchise architecture late and missed opportunities in innovation, design and storytelling that athletes expect from Under Armour.

Speaker 2

Two years ago, we reset our footwear business under the leadership of industry veteran Yassine Saiedi. We made a very intentional decision to take a step back to move forward, streamlining the portfolio, eliminating underperforming lines and rebuilding with a sharper, more focused foundation, deeply connected to the athlete in all aspects of how they

Speaker 3

live. Running footwear is a

Speaker 2

great example, where we now have two very clear pinnacle vertical silos of product, Velocity and the recently launched Halo. We've made the decision to sunset our previous Infinite franchise, which we believe is a long term brand right decision, but has come at a price which you're seeing affect our near term footwear declines and replaced it with a broader aperture and more sports casual vertical of Halo, while doubling down on our velocity franchise and high performance run. These deliberate decisions combined with softer demand are weighing on our results and we own them. However, we believe this to be near term and over the mid to long term, we anticipate harnessing our velocity and Halo foundation to drive greater intention across our running category and a blueprint for the broader footwear business. Our immediate numbers reflect the transition, but believe that our long term results will reflect the transformation.

Speaker 2

The goal is simple, sharper design, stronger storytelling, reliable performance on and off the field. Early signs are promising and we're moving in the right direction. In running the Velocity Elite three is delivering six major wins this year, American records in the half and mile and Sharon Locates course record in Boston just this past year. This is exactly the kind of pinnacle moment we're building for, From the $250 Elite three with design continuity that stretches across six price points all the way down to the $75 redesigned Assert, our largest volume program. Our running collection connects with runners at every level, boosting brand momentum, earning credibility with athletes and turning that momentum into real commercial success.

Speaker 2

In American football, the Spotlight Pro Suede sold out at launch. In baseball, our King of Diamonds and Juice Drops are driving momentum. In global football, Ashrafakimi wears Magnetico Elite on the world's biggest stage and in basketball, Flow continues to drive our iconic franchises. These wins are restoring our credibility and fueling performance growth with new sports style 120 plus dollar franchises like Slip Speed Echo and Apparition along with fresh launches like Solo and Halo. We're confidently moving into the premium space.

Speaker 2

The goal isn't just to compete, but to lead with ASPs that reflect the strength of our brand and the quality of our products. From a channel perspective, we're shifting from transactional selling to a story driven brand that consumers seek out and support. In The U. S, this involves replacing a longstanding focus on discounts with premium athlete centered narratives brought to life through elevated DTC experiences. These stories generate demand and improve full price sell through while strengthening our loyalty memberships and driving wholesale interest.

Speaker 2

From an operational perspective, we're transforming how we work by moving from siloed functions to collaborative category led teams driven by real time data and shared KPIs. This modern system is built for speed, scale and smarter decision making, utilizing AI to help us. We're also shifting seasonal drops to an ongoing cycle of brand led storytelling, fostering emotional connections and lasting loyalty through culturally relevant moments and timely innovation. Additionally, AI is becoming more integrated across the business, enhancing design, planning and forecasting. After two years of data and platform development, we have over 80 automations that are streamlining workflows, reducing time to market and improving execution from predictive pricing to real time inventory management.

Speaker 2

Next, let's talk about the regions, starting with North America, where we expect fiscal twenty twenty six to see challenges from higher costs due to tariffs and yet softer demand. Yet we see this as an inflection point, not a ceiling. Despite the environment, we're executing a phase plan to rebuild brand loyalty, improve revenue quality and lay the groundwork for sustainable growth. In our largest market, we're regaining cultural relevance beginning with American football and expanding into team sports, creators and cultural collaborations that connect Under Armour to the core of the athlete and culture. Our priorities are clear, strengthen brand loyalty through top tier sports culture and emotionally compelling storytelling, stabilize the growth by increasing full price e commerce, boosting factory house profitability and rebuilding wholesale partnerships, And shrink the battlefield by concentrating on key product franchises and optimize distribution to achieve more consistent wins, doing less things better.

Speaker 2

Amid this reset, we're seeing early signs of progress. In digital, we're recreating a more connected experience driven platform. Although results are still modest, the momentum is evident. Spotlight Suede became our top full price footwear style driven by organic TikTok buzz. Our SMS program launched in June has already gained over 100,000 subscribers and our Instagram shop has been seeing strong growth since its relaunch this past month.

Speaker 2

Our e commerce net promoter score has increased by 18 points year over year to nearly 70, a strong signal that our customer experience is improving and our efforts are resonating. Traffic and sell through still have room to grow. We're tackling that with faster site performance, richer storytelling and smarter merchandising. In our Factory House business, innovation is fueling sales growth. Even with this value channel, we're seeing success testing new key items at full price including our $45 Stealthform Hat and our Heat Gear collection are both strong examples.

Speaker 2

Although traffic remains slower, improved execution is boosting conversion rates. Factory House continues to serve as a proving ground for mixed experimentation, raising ASPs and protecting margins through smarter promotions and targeted merchandising. Wholesale remains our biggest North American growth opportunity. Reclaiming shelf space takes time, but we're approaching with discipline and optimism and our partners are listening. Leading with innovative products like heat gear and a strong fleet of footwear performance, we're re engaging customers and building trust.

Speaker 2

Each season brings new opportunities and we're laying the groundwork now for future success. In our storytelling, we're making one thing clear. Under Armour is back. We're beginning to see it in the numbers. Brand health is improving and our renewed narrative and full funnel media investments are connecting with the athletes we want to reach.

Speaker 2

Our renewed NFL partnership and signings like the number one draft pick Cam Ward and Luther Burton the third show a long term commitment to performance. That momentum drives our We Are Football campaign that'll be debuting in early September. Blending sports, music and culture with athletes, creators and stars like Justin Jefferson, recording artist Gunna and top seven on seven talent. With the rapid rise of flag football, especially among youth and women based on our gridiron credibility, we see a clear path to lead here. All in, cultural energy continues to grow.

Speaker 2

Justin Jefferson's UA Next Flight School content reached over 7,000,000 views even before launching on YouTube. Spotlight Swage TikTok Buzz demonstrates our product and storytelling can create demand. Activations like the No Way Backpack Blend performance and lifestyle in a way that feels fresh and uniquely UA, especially to the 16 to 24 year old team sports athlete. Excitement is also growing for this year's Curry Tour in China, which is a multi day single city immersion that unites 30 of the top APAC basketball athletes for Curry Camp, creates one on one moments with Steph and his training team, engages regional media and culminates in CurryCon, a fan driven celebration where supporters from across APAC share memorabilia and connect deeply with Stefan, delivering a powerful brand and business opportunity through meaningful high impact interaction. In EMEA, our strongest performing region, we're achieving profitable brand driven growth through sharper execution, local relevance and financial discipline.

Speaker 2

We're not trying to be everywhere, we're focused on winning where it matters most, guided by a high return one, two, three, four strategy. Let me explain. One sport, football, being on pitch with elite athletes like Ashraf Fakimi, Tony Rudiger, Pedro Porro and so many more is how we're establishing brand authenticity in Europe. Through targeted marketing, credible athletes and franchise led storytelling, we're building trust from grassroots to the elite levels. Two cities, London and Paris are driving our growth.

Speaker 2

Three countries, The UK, France and Spain. This brings us to four categories of focus, football, sportswear, training and running. Momentum is building and we're unlocking EMEA's full potential. And importantly, we're applying the lessons from the success in North America and APAC. This strengthens our confidence in the path toward greater stability and eventual return to growth in these markets.

Speaker 2

In Asia Pacific, we've emerged from a reset year stronger, more focused and positioned to advance with discipline, Starting with the appointment of Simon Pestridge, a 25 industry veteran to lead the region. With structural challenges addressed and key roadblocks removed, we're now building a premium high integrity marketplace that reflects Under Armour's true brand strength. Our APAC strategy is clear, reignite relevance through local storytelling and innovation, drive full price growth and elevate the marketplace through sharper distribution, disciplined pricing and premium partnerships. Combined with tighter inventory management, these efforts will strengthen both retail and wholesale execution. That said, fiscal twenty six is about stabilizing APAC and building momentum for sustained growth.

Speaker 2

Now, I finish, I want to address the incremental tariffs announced on July 31 and increased pressures our business is facing this year. Following those updates, we estimate approximately $100,000,000 in additional tariff related costs along with softer than expected demand in fiscal twenty twenty six. When combined even with mitigation efforts and disciplined SG and A management, our profitability is projected to be about half of what it was last year. None of this is ideal. We don't like this.

Speaker 2

But also it won't define our year. There's just too much good happening with the overall shape and energy of our business. We faced bigger headwinds before and this is simply the next one we'll get through, because no matter the environment our mission remains unchanged to execute the strategy, strengthen our brand, increase average selling prices and succeed with athletes. We're running our play and that's exactly what we're doing. With a world class team and a clear strategy aligned across the organization, we're advancing with clarity, agility and accountability.

Speaker 2

Even now before this transformation is fully realized, Under Armour is a $5,000,000,000 brand. That's a testament to our enduring relevance, strength of the brand and a clear signal of the massive potential ahead. At our core, we're not reinventing who we are, we're reclaiming it, bold, original and unapologetically UA. I appreciate your attention and trust this morning. And with that, I'll turn it over to Dave to discuss first quarter fiscal twenty twenty six results and the outlook we have

Speaker 3

for Q2. Dave? Thanks, Kevin. Moving directly into our first quarter fiscal twenty twenty six results, we're pleased to have delivered another quarter that met or slightly exceeded our outlook on every line item. First quarter revenue declined 4% to $1,100,000,000 with regional results as follows.

Speaker 3

In North America, revenue declined 5% primarily due to a decrease in our full price wholesale business and lower e commerce sales. Revenue in EMEA increased 10% or 6% after adjusting for foreign currency fluctuations indicating steady growth in the region. Furthermore, EMEA saw growth across all channels during the quarter led by our full price wholesale business. APAC revenue decreased 10% on both the reported and currency neutral basis with declines in wholesale and DTC as consumer confidence remains weak amid a highly competitive and promotional environment. And within Latin America, revenue declined 15% partially due to foreign currency headwinds.

Speaker 3

On a currency neutral basis, revenue declined 8% for the quarter with decreases in full price wholesale and DTC partially offset by growth in our distributor business. From a channel perspective, wholesale revenue declined 5% as lower full price and distributor sales were partially offset by growth in our off price channel driven by timing of sales to third party partners. Direct to consumer revenue declined 3% including a 12% decline in e commerce sales caused by highly competitive conditions in APAC and in North America. Sales at our owned and operated stores increased by 1% this quarter led by our factory house business. And licensing revenues increased 12% with growth in both North American and international licensees.

Speaker 3

Finally, by product type, apparel revenue declined 1% with softness in run, outdoor and golf, partially offset by strength in train and sportswear. Footwear revenue was down 14% in the quarter with declines across all categories. This reflects a challenging consumer demand environment and our deliberate work to optimize the business as we prepare for stronger, more impactful launches in the seasons ahead. Accessories grew 8% this quarter driven by strength in train and sportswear along with accelerated inventory management actions. Our first quarter gross margin increased by 70 basis points year over year to 48.2%.

Speaker 3

This growth was driven by 55 basis points of favorable foreign currency impacts, 30 basis points of pricing benefits and 30 basis points of favorable product mix. These benefits were partially offset by 45 basis points of unfavorable channel mix and supply chain headwinds. Now moving to SG and A expenses, which decreased 37% to $530,000,000 in the first quarter as last year's first quarter included a considerable litigation reserve expense. Excluding approximately $8,000,000 in the transformation expenses related to our fiscal twenty twenty five restructuring plan, our first quarter adjusted SG and A expenses were $522,000,000 reflecting a 6% decline compared to last year's adjusted figure. Decrease was primarily driven by lower marketing and savings across various areas resulting from our restructuring plan and ongoing cost management efforts.

Speaker 3

In the first quarter, we recorded $13,000,000 in restructuring charges and $8,000,000 in transformation related SG and A expenses totaling approximately $21,000,000 Since launching our fiscal twenty twenty five restructuring plan, we've recognized $110,000,000 in charges and transformation expenses to date, dollars 65,000,000 of which are cash related and $45,000,000 in non cash. We now expect total plan charges to finish towards the high end of our previously disclosed 140,000,000 to $160,000,000 range, with the remaining costs primarily tied to the planned closure of our Rialto distribution center recognized by the end of fiscal twenty twenty six. As a result of these actions, we delivered approximately $35,000,000 in savings in fiscal twenty twenty five and expect approximately $45,000,000 more in fiscal twenty twenty six. With the emergence of significant new tariff pressures, we are actively reviewing our cost structure to find additional efficiencies, always with a brand first approach to ensure we can offset headwinds while reinvesting in this product, storytelling and experiences that drive our growth. Continuing through the P and L, we reported operating income of $3,000,000 in the first quarter.

Speaker 3

Excluding transformation expenses and restructuring charges, our adjusted operating income was 24,000,000 Looking at the bottom line, our reported diluted loss per share was $01 while our adjusted diluted earnings per share was $02 for the quarter. Now moving to the balance sheet. Inventory at the end of Q1 was 1,100,000,000 a 2% increase year over year. Our cash balance was $911,000,000 and we did not utilize our revolving credit facility during the quarter. The sequential increase in cash was mainly driven by our June issuance of $400,000,000 in senior notes due in 02/1930.

Speaker 3

We plan to use the proceeds along with borrowings under our revolver to redeem the $600,000,000 of senior notes that are due in June 2026. Looking ahead to our outlook for the year and building on Kevin's opening remarks, last quarter we noted that before any global trade policy changes, we expected a modest revenue decline in fiscal twenty twenty six as we focused on strengthening the brand and increasing higher quality sales. Since then, changing trade policies have created additional headwinds including on the demand side, making it more difficult to predict the future environment, but also highlighting the importance of our disciplined brand first strategy. Considering our expected fiscal twenty twenty six cost of goods sold headwind of approximately 100,000,000 or about 200 basis points of negative gross margin impact, we are actively pursuing mitigation strategies such as cost sharing with suppliers and partners, exploring alternative sourcing options and making selective pricing adjustments. However, due to the complexity and lead times involved, we anticipate most of the gross margin offsets to be realized in fiscal twenty twenty seven and beyond.

Speaker 3

Amid these headwinds, we are also maintaining cost discipline in SG and A, reducing discretionary spending and continue to expect to leverage against revenue as we stated on our last call. That said, we are working to protect the brand and preserve strategic investments that are critical to unlocking long term value. Given the new tariff cost this year and related demand impacts, partially offset by our mitigation actions, we expect operating income on an adjusted basis to be roughly half of fiscal twenty twenty five levels. Additionally, we also expect fiscal twenty twenty six EPS to be pressured by higher other expense, primarily interest expense from increased debt and an adjusted effective tax rate more than double fiscal twenty twenty five, driven primarily by unfavorable regional mix and profitability. Now,

Speaker 2

turning

Speaker 3

to our outlook for the 2026. We expect revenue will decline 6% to seven percent year over year, which we believe will be our toughest quarterly top line result of this year. In North America, we anticipate a low double digit decline due primarily to continued weakness in our wholesale business. APAC is expected to be down at a low teen rate as we continue to navigate soft consumer sentiment in a highly promotional environment. That said, in both of these regions, we're staying focused on improving sales quality and creating a healthier, more premium marketplace.

Speaker 3

On the upside, we expect EMEA to deliver high single digit revenue growth, strong performance across both wholesale and DTC channels. Regarding gross margin, we expect decline of three forty to three sixty basis points compared to last year, driven by approximately 300 basis points of declines from higher product costs of which about two thirds relates to new tariff costs and approximately 100 basis points of decline from channel mix. We expect these decreases will be partially offset by favorable changes in foreign currency and pricing benefits. Excluding transformation expenses from our fiscal twenty twenty five restructuring plan, second quarter adjusted SG and A is projected to grow at a high single digit rate year over year. Recall that last year's second quarter was not adjusted for a $27,000,000 insurance recovery benefit tied to prior year legal fees.

Speaker 3

Excluding the insurance recovery, adjusted SG and A is expected to grow at a low single digit rate, driven primarily by higher marketing investments as we lap a timing shift that pushed most of last year's spend into the second half of the year. Bringing this together, we expect adjusted operating income for the quarter of 30,000,000 to $40,000,000 Incorporating the previously mentioned other expense and tax headwinds, we anticipate adjusted diluted earnings per share will range from $01 to $02 for the second quarter. So to close, while the environment remains dynamic, we're staying focused with financial discipline, confidence and a clear sense of direction. We are shaping Under Armour into a brand that stands apart where sports, performance, and style converge in a way only we can deliver. This transformation will take time and requires patience as we take the deliberate steps needed to get it right.

Speaker 3

Our team is making bolder decisions, streamlining operations, and moving with greater speed and precision. In the near term, we'll remain agile and disciplined through this building phase. Over time, these actions will deliver what matters most, stronger results, deeper consumer loyalty and a brand that's more resilient, more distinctive and positioned for lasting success. Now, we'll open the call to questions. Operator?

Operator

Thank you. We will now begin the question and answer session. And today's first question comes from Jay Sole with UBS. Please proceed.

Speaker 4

Great. Thank you so much. Kevin, two part question. First, can you just talk a little bit about how tariffs are impacting demand from your wholesale channel partners and kind of what you've seen and what those conversations have been like? And then secondly, maybe on North America, you mentioned in the prepared remarks that brand has been inflecting maybe before the business.

Speaker 4

But can you maybe dive in a little bit more and share with us some of the green shoots you're seeing of improving brand health? Thank you so much.

Speaker 2

Yeah, thanks Jay. First of all, I think the tariff environment isn't ideal for anyone and I think it inadvertently hits our industry probably harder than everybody's affected at some level, but it really hits our industry differently. But I gotta tell you, I'm not sure that what we'd be doing for tariffs would be any different than what we've already started underway. And I think I did a good job of laying that out. The two part approach that we have, the two lever strategy we have attacking tariffs, is number one, We don't like the environment, we don't like where the math is, we don't like how we're sitting.

Speaker 2

And I think it's important that I say that. But what we're doing about it is some of the things we've been trying to in an industry with an eighteen month go to market cycle, and for myself being back in this chair for sixteen months, we had plenty of good things happening before I got back in the chair, but I think where we've really rallied ourselves around is focusing on key items that the consumer can look at and understand it's a product that only UA could make and it's special. I think that we've been able to put that proof in the pudding when it comes to things like, that Stealthform cap at a $45 price point and inventing from what has been a $25 price point in our industry that usually is out the door closer to $13 or $14 for most brands. So changing that price point, doing the same thing with the go to market strategy we laid out with the No Way backpack in a $40 to $65 market introducing $140 And so that first lever is that we're going to keep creating shiny new things that the consumer looks at, covets and must have.

Speaker 2

Secondly, it's really the attack that we're taking across our broader portfolio. It's beginning with the top tens in apparel, in footwear and accessories. This has been underway as I use the example of the Tech T product we have. But to be honest with you, we haven't and this Under Armour owns this, we hadn't updated that product in too long. And we watched our average selling price continue to migrate further and further from the suggested retail price.

Speaker 2

And so that discounting is something that we've been actively addressing and that we have a relaunch plan for that product where we're not only just going to reinvent the product, but it gives us the ability to move that price point up. We talked about pricing power before and our ability to sort of broadly add that to our overall ecosystem. We're cautious with that of where we are right now. But we believe that this process, as we've been through this reinvention, is something that will give us the ability to come back to the consumer with an embedded consumer who knows the product, is looking and expecting something, delighting them and giving them more and the ability to push that price point much closer to the full retail price. So I think that lever is very solid.

Speaker 2

And I think this is very related, so thank you for the question Jay. But when you ask about the brand inflecting before the business does, let me give you three aspects of how I think about that. First of all, it's factual. In being out and seeing, our base layer is trending. This campaign we have here in North America and our European team is doing a great job talking about our foundation of base layer compression, etcetera.

Speaker 2

But here in North America we'll be launching this UAS football campaign coming up in September. And I think the product that we're marketing is on point. The product and what we're seeing is actually checking really well. I'm talking double digit types of sell throughs that we're seeing in our compression base layer, which has a halo effect for the overall brand of sort of bringing compression back into top of mind, which is a category that UA owns. There's also, and that's hard facts.

Speaker 2

There's also our NPS score that I mentioned about things like our ecom site of going from 53% to 70%. That's best in class type of points that we have there. We've also seen brand metrics rising, especially with our eighteen to thirty four year old demographics growing low double digits to mid single digits as well with brand perception. And then adding and being able to get into things like the SMS program I think is really helpful. Secondly, let me just point us to retailer confidence.

Speaker 2

I've been out, I've been talking to our customers, reigniting those relationships that we have with them. I have to say, I believe there's belief from our customers that we're talking to. And that's because in some of the channel checks and you're unfortunately not seeing that come through immediately with the math, but we're seeing positive comps out there with some of our biggest and best retailers, when it comes to men's and women's apparel specifically. In order to get that shelf space back, it's exactly where we need to be and those are the conversations we're engaged in right now. Those are just six and nine month conversations typically.

Speaker 2

But they're believing and I think it's happening. Thirdly, I'll say just the subjective. You're right, Jay, I have been doing this for a long time, close to thirty years and twenty as a public company. But something's just different. As I said, our phone is ringing, you can feel it.

Speaker 2

This kid is not sort of turning their back to UA. I think they're turning into the brand. And we're really seeing something which feels like just positive momentum. It's a sentiment that's here in our building every day. It's a sentiment that we're again feeling from some of our partners.

Speaker 2

And it's not perfect out there for sure and we have a number of things to work with and tariffs are certainly on that list. But I think if we put our head down, what we're doing right now and we just continue to make small steps, small bites of the elephant, we're moving in the right direction. And I'll end that with just, I can confidently tell you that today as we sit, from what I knew taking taking this job sixteen months ago, to just even a a year ago, we're we're better than we were a year ago. We're better than we were six months ago. And I have great confidence, all the confidence that we'll be better six months from today.

Speaker 2

So, this projection, it feels like the trajectory is going in the right way.

Speaker 4

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

Speaker 2

Thanks, Jay. Thanks, Jay.

Operator

Our next question comes from Sam Poser with Williams Trading. Please proceed. And Mr. Poser, your line is open.

Speaker 3

May be muted Okay. On your

Speaker 1

We can go to the next question and we will get back in the queue.

Operator

All right. Thank you. The next question comes from Peter McGoldrick with Stifel. Please proceed.

Speaker 3

Hey, thanks for taking my question. Dave, a question for you. As we think about the SKU cleanup and pullback on promotion and pricing, Can you help us think about within the 2Q revenue guide in terms of AUR and units, how should we be expecting this to develop moving forward? Yes, would say Q2 as we mentioned is probably going to be our toughest quarter as we think through the year as we're making a lot of progress relative to product and hopefully we'll see some of that coming through when we get forward towards Q4. But in Q2, I think North America is going to be a tougher decline for us.

Speaker 3

We talked about low double digit there. We're still seeing the impact of the trailing SpringSummer twenty twenty five order book challenges that we spoke to before. Also some traffic challenges within retail. So we're doing our best to navigate through that. As we think about promotions and discounting, we made a lot of improvements and progress last year and we talked about that a lot.

Speaker 3

We saw that come through the gross profit last year. We intended to make more progress on that this year. I think with the tariff environment and how that's impacting demand in the overall market, it's going to be tougher to make more progress this year. But I think we do have that increased discipline. So we're going to make sure that we're sharper in how we do that and we don't want to go backwards for sure.

Speaker 3

So it is going to be tough as we navigate and some of that is what's assumed in our Q2, which is knowing that it's going to be a promotional environment, knowing that we don't want to play in it as much and we don't want to take steps backwards. That does pressure revenue a little bit in our Q2 outlook, but then also the pressure that we're seeing in APAC. So those are really the puts and takes there. And then obviously, we spoke a lot about the EMEA progress and the continued momentum there, is great to see. Thanks for that context.

Speaker 3

And then I'm curious on marketing investment direction. As you work to engage the 16 to 24 year old, team sports athlete, is there anything you can point to to substantiate, improve consideration with this, younger demographic?

Speaker 2

Yeah, Peter. I think as I just covered with JHQ as well, we're seeing brand perception is up in the mid single digits. 18 to 34, the brand awareness is moving up. And so we're seeing these, we're seeing actual measurements moving in the right direction. But I have to say the subjective is probably something that weighs it even more.

Speaker 2

It's sort of the energy and excitement, some of the things that we're seeing on our own e commerce site, how people are acting and engaging the products that are selling. It's products that people would typically be using other brands for. We're starting to see some of that push and that moves from on field pleated products all the way to some of the more sportswear styles that we've been launching of late. We have products like the apparition tech and the new solo that we just launched, which I don't think the consumer would see themselves purchasing that from us before. That they're giving Under Armour permission, their self permission to buy our brand at this time.

Speaker 2

So I think we feel pretty positive about where it's moving. And it's also the athletes that are signing with us and the partnership with Gunnas and again looking for influencers that are gonna give, we keep saying give that kid permission. Thank you.

Operator

And the next question is from Sam Poser with Williams Trading. Please proceed.

Speaker 5

Yeah, sorry about that folks. Could you hear me now?

Speaker 3

Yes, we can.

Speaker 5

Alright. Good. Good. So I have a handful of things. One, Kevin, you seem to be much more circumspect now than you were, you know, in February, you know, prior to 2019.

Speaker 5

Love some color there. Number two, can you also bridge sort of how you see this brand improvement sort of start to show up? Number three, tax rate. And then number four, can you talk anything about order book for a holiday or even into spring twenty six? Now, if you're seeing any, what you're starting to see there versus you're only really guiding the quarter, you say it's going to take a little bit it's going to take longer now because of the tariffs and so on.

Speaker 5

Can you give us some color looking out a little further as well?

Speaker 2

Yes, I'll start Sam and I'll let Dave handle tax rate. But let me just give you, I think how I'm thinking about the business, which is I've been doing this a long time and have the ability to come back and hopefully apply all the benefit of that experience with a bit of wisdom, a lot of humility and real understanding and empathy for our consumer, for our team, and what it means to be in this business. So it's a privilege. And I approach it like that every day. You know, one of the the phrases we use here is model the behavior, which means it it doesn't mean showing up for a 06:30AM type o class or 6AM boxing class, being with our team, being here every day, and just seeing and building this in a much bigger and better, more effective way.

Speaker 2

I'm really proud of the team that's been assembled here. I think it's clear, we're substantially built as we look at right now. Now it's just a matter of execution. Bringing that confidence from bringing a brand partner like Eric Licht to the organization and many of the other additions and hires that we've made. We painstakingly have been building out the product infrastructure of the company.

Speaker 2

Now it's moving into the marketing function. Now that we have the three legs of the operating model, the go to market, the strategic business plan clearly articulated, it's a matter of execution. So, as I said, it's an eighteen month process in our industry, but we'll continue to execute there. So, hopefully what you feel is a bit of much calmer and clearer confidence in where the business is heading and that's why I gave that reflection of thinking where we're going. The brand improvement, it feels we have metrics as I've stated some of the NPS scores and other things we're seeing as it relates to brand awareness and perception with the company.

Speaker 2

But you're just seeing it from these kids. I've got to tell you that it's different. Something's different. And that's where I get to apply the experience I've had doing this to just what you see and I think almost as importantly as what you feel in your gut. It feels like we're moving in the right direction.

Speaker 2

Let me just touch on order book and I'll let Dave touch that as well. We're out now the move for our fiscal year moving to the March. It extends things, so we're seeing a little bit of a greater impact as it relates to tariffs to the full fiscal year. And that's something that's had a bit of an effect as we're looking at some of our orders as we're trying to work all this through to the bottom line. We've energy and momentum, especially with some of our sportswear products that we're bringing in.

Speaker 2

And again, buyers and the retailers committing the things that we've won with before. Our compression base layer, anything performance in on field, We've got the innovation pipeline is really full right now and there's a lot of energy from our customers with that. And I think we've laid out, I mean, in footwear alone, I think we've had seven or eight launches over twelve weeks span from our Slip Speed Echo to Sportswear Solo, the Halo collections. How they're selling in right now? There's a bit of wait and see.

Speaker 2

And by wait and see, mean people are bringing them in, but they're testing. And so we're making bets where we think that we're going to win. We're going make sure that we're in an inventory positive position to be able to service that demand. But there's nothing wrong with a little bit of scarcity too. So our order book, let me let Dave give a little more color there.

Speaker 3

Yes, I mean, I think that obviously, we're only giving real detail here on Q2, but we are excited about the reactions and the feedback we're seeing on the product. And I think that as we think forward, we get to the tail end of fall winter twenty twenty five, but then more so when we get into spring summer twenty twenty six, which is more Q4, we think that they'll be the most strength there and that's what we're kind of excited about as far as how we're talking with the accounts and how they're receiving the product, what they're seeing from our kind of newly developed product team and some of the partners we're working with. So that's kind of what we're looking at this point, but we're not at a point yet to give a lot more detail than that. I would say from a tax rate perspective, there is a lot going on within taxes and I think maybe if I try and simplify it as much as possible, at a high level, we're paying taxes and we're incurring tax expense in the foreign jurisdictions where we're making income there, which that makes sense. But when you think about the additional tariff costs, etcetera, that we have this year, we actually won't make money in The US this year.

Speaker 3

So that expected loss is there, but we can't actually take the benefit of those US losses from a tax perspective because they're actually being absorbed by US GILTI tax regulations which basically requires to use our domestic losses to offset foreign earnings first. So, it's a little bit of a double negative there that we're dealing with, but it all kind of is attributed to the lower profitability this year that we will grow out of as we move forward beyond this year.

Speaker 5

Thanks. And just one last thing, heard through the grapevine that you guys, you're are you looking at different channels? Are you getting good response from different channels of distribution? And you've signed that one rapper, Ganna, I heard there might be some other or even more prominent rapper on the horizon. Can you give us any color there?

Speaker 2

Yeah. We we we've got a lot of things in flight right now, Sam. So that's the good news. As I said, our phone is ringing. So I want to make sure as well that when we're sort of trying to articulate like where the brand is or where we sit, I tend to come with a North American bet.

Speaker 2

But the momentum that we've seen in EMEA of sort of where Under Armour's positioned there, think we're probably top brand in France and we've really built a great foundation in The UK as well through our European strategy. But the brand's just working and that's what gives us probably even greater confidence that the play we're running here now is what EMEA was running four or five years ago. And so there's great things on the horizon to come for. So, we just gotta head down, just keep chopping wood. But the team feels that there's a great confidence here.

Speaker 2

Thank you.

Speaker 5

Thank you.

Operator

The next question is from Brian Nagel with Oppenheimer. Please proceed.

Speaker 4

Hey, good morning. Thanks for taking my question. Kevin, the question I want to ask,

Operator

and I guess bigger picture, but

Speaker 4

clearly, you're executing this reposition against a very fluid macro competitive backdrop. But as you've been as you and the team have been pushing this forward, dealing with some of these challenges, are there any key course corrections that you've made so far and you've started to see results from those?

Speaker 2

I'd start with Brian is that I think that overall theme, if you ask me to sum it up, is selling so much more, so much less at a much higher full retail price. It's our commitment to doing that with the right partners. We're not trying to eat the whole elephant at once. We are taking this in bites. We are dealing with a dynamic and fluid environment as you said.

Speaker 2

But we'd be doing this anyway, whether it's tariffs or whatever else is happening. I think this is frankly the right component as we've looked at other turnarounds, what people have done in strategic transformations. There's nothing else to do but just slow down, focus on your core, do it better. As I said, we're in the SKU reduction, we're in materials reduction, and just getting people, making the tool kit smaller. So there's not as many questions as to how we're trying to build this next chapter for us.

Speaker 2

We're focused on the controllables, doing all the right things that we can, but it's not magic. And I say that not as, I'm asking you to wait years upon years, but I think, again, month 16 of an eighteen month industry go to market process, I think we're not that far away. We've got work to do, but you'll start seeing it where the math will start to back up what we're doing. We can't point to it today, and it's not prudent for us to do. We just, again, have our head down and just marching forward.

Speaker 4

That's helpful. And the follow-up question to that for me is, you talked a lot about today about really focusing on the brand and reestablishing the brand. Is the operational structure of Under Armour correct right now? Or should we expect some additional operational changes as well?

Speaker 2

No, that's what's been put in place. As I said, in February, implemented our operating model, which is category management, followed by showing you what the go to market is a very sort of commercial version of what that go to market looks like utilizing that No Way backpack, which elite product number one, clear storytelling to be able to communicate that to the sales force and how they can sell that into accounts, making sure that the POP is correct in the way we sell it through. And then finally, execution of how we're brand building around it, which I think everybody continues to ask about is that is the willingness from the consumer to be there, and that's what we're finding in some of these premium price points products that we're putting out there really seem to be working for us. The strategy wise for us, it's just about, again, I think execution is probably the topic of the day for us to lean on and get after. And then finally, it's the strategic business plan.

Speaker 2

Those three legs are in place. The foundation is there. It's a matter of us just running that through the model right now. So the GMs are really excited about. We have got four great leaders here that are running our business and they're reporting into Eric.

Speaker 2

It's someone with experience who's seen it before with a lot of Under Armour UA integral knowledge combined with expertise from the outside. So we're doing this ourselves, meaning it's just industry experience that's driving this force.

Speaker 4

Got it, I appreciate all the color, thanks.

Speaker 2

Thank you.

Operator

Our next question comes from Paul Lejuez Please proceed.

Speaker 6

Hey, thanks guys. I wanted to understand the second quarter North America sales decline a little bit better and how we got to that down low double digits. Was that always what the order book looked like? Did you see some cancellations? If so, you see more on the apparel side or footwear?

Speaker 6

And also curious if any of those cancellations, if you did see them, were tied to price increases that you tried to take that the retailer sort of pulled back from? Thanks.

Speaker 3

Yeah, Paul, this is Dave. I'd say a couple of things there. We did speak before about the harder SpringSummer twenty five order book that we've been dealing with and that's definitely out there. On the factory house side and on the also brand house side, we've seen traffic definitely trail off and we a lot of that has been tied to the timing of the developments in tariff environment and some of the uncertainty that's out there in the market. And then from an e commerce perspective, it's been pretty promotional and we're trying not to play into that as much as we took so many good steps forward last year.

Speaker 3

So there's a lot of different pieces to that I would say that's coming into play. And that's something that we're continuing to kind of navigate and we want to stay true to the strategy. We don't want to divert from that. We understand that creates some extra pressure as we step through Q2, but we're going to navigate through that. And I think when you look at the product breakdown, there are more headwinds in footwear than in apparel and we saw that in Q1 and we expect that will continue in Q2.

Speaker 3

Again, as we go further into the back half of the year, we see that starting to turn the other way as we get more of the new product out there and there's a lot of new excitement around that product. So we think that that should be more of a temporary situation as far as the lag on footwear more than apparel.

Speaker 6

Got it. And then just with the elevation strategy, have you already started to take prices up on like for like items? And what has been your wholesale partner response to that?

Speaker 3

So I'd say a couple of things there. We have worked through some specific and targeted price increases. More of that's going to be around some of our new product launches or re launches. And then as we think about further down the road and this is why we talked about more of it being a benefit in fiscal twenty twenty seven is where we might be able to drive through some more holistic price increases more from a band perspective on price levels as we see a lot of our competitors in the space moving into that as well. We believe there will be an opportunity to do that.

Speaker 3

Again, that's not something that we can move through as quickly as far as how it could benefit fiscal twenty six. So there will be some benefits in fiscal twenty six that are more targeted and specific and I think the accounts are okay with that. As we step into fiscal twenty seven, there will be some broader benefits from the pricing changes. And based on what we're seeing in the market from other brands, we're believing that that's going to be fairly accepted.

Speaker 6

Thank you. Good luck.

Speaker 3

Thank you.

Speaker 2

Thanks, Paul.

Operator

The next question is from Brooke Roach with Goldman Sachs. Please proceed.

Speaker 7

Good morning and thank you for taking our question. Kevin, as you think about the execution of the North America transformation, has anything changed in this current macro backdrop that shakes your confidence in your ability to deliver that on a medium term basis? And then for Dave, can you just parse the comments on the DTC a little bit more? In North America specifically, what actions do you have in place that can help move the needle with your customers in both ecom and brick and mortar post moving through some of this pressure that you're seeing in the second quarter? Thank you.

Speaker 2

Yeah, thanks Brooke. I think that we're relatively confident with what we're seeing. And that means again, some of the outlook in near term. And I think that confidence is something that's reflecting through to our retailers and some of the performance they're seeing. So the software traffic trend is certainly affecting across all channels for us, especially here in North America.

Speaker 2

But there's clearly, again as I stated earlier, there's clearly momentum that we're seeing with some of our products, particularly around our core with base layer and other things that we're pushing out there. You've got these one off sort of glimpses of light that we're seeing in some of the new sportswear offerings, but that's a new trade for the consumer. They haven't really expected and seen us there. So we're coming out and launching things like the new solar collection, Halo, the new apparition tech, which is something in an urban environment, which is doing really well for us in some of our more targeted city stores that we have. But we're we're we're also showing them things like the collaboration we did with the the the car manufacturer, Mansory, in in global football.

Speaker 2

And, I think you're starting to see just aspects of the brand that people haven't seen before. And it's showing up in a new way and a new place. That underpinned by our core getting stronger is something that we think is the halo that should help us. And so while we're not ready to give that in terms of outlook of how that'll inflect on the business immediately, we're doing well with the business. I think that's where we continue to do what we said we're going to do and just marching forward.

Speaker 2

And I want to say that with more confidence than fingers crossed. There's real context to what we're seeing in some of the NPS scores and some of the other indicators that we have around awareness and perception for the brand. You're feeling it and we're just starting to see that in the sell through. So one place at one space at a time, one foot in front of the other is how we're marching through North America.

Speaker 3

And Brooke, I think when you think about the DTC front, the two big pieces are really factory house and ecom for us. Brand house is pretty small as you know. And the bigger pressure that we're seeing is really going to be more on the ecom side and that has to do with the level of promotions in the market right now. And we'll have to play in that to a degree, but we're really trying to hold the line and not really lose the ground the improvements that we drove through strategically last year and that is creating some of that extra pressure on ecom. I think some of the additional marketing efforts that are coming through and some of the campaigns that Kevin mentioned are going to help us better in back half of year relative to e comm, but Q2 is still going to be pretty tough there.

Speaker 3

On Factory House, we've seen the decreased traffic and that's been really retail in total for us, Brand House and Factory House. We've been combating that with some of the assortments that we have. We've been adding some of our full price product to draw consumers in a little bit more as well just because there's not as many access points for them to get to the brand since we don't have many Brand House stores. And so we've been able to actually combat a good bit of that through better conversion. So the factory house impact on Q2 is less really than the ecom impact, but we're going keep driving against that improving as we go through the back half of the year.

Speaker 7

Great. Thanks so much.

Speaker 3

Thank you, Brother.

Operator

And today's last question will be from Laurent Vasilescu with BNP Paribas. Please proceed.

Speaker 6

Good morning. Kevin, Dave, thanks for all the color this morning. I know Kevin, you talked about lowered expectation on FY 2026 largely driven by tariffs on North American demand. And I know you're not prepared to guide for 2H revenues. Should we assume North America's 2Q guide of down low double digit continues into 2H?

Speaker 6

Or could we see further pressure on consumers in North America as they start to see a broad based inflation across the marketplace?

Speaker 3

Yeah, I think that there could be a little bit of that and we've built that into our expectations internally. But again, I think that with a lot of the relationships that Kevin and the sales teams have been driving, a lot of the new product that's being shown and the excitement around that new product, we feel that we're going to be able to kind of drive against that as best we can. So I don't know that you should expect a bigger deterioration in North America in the back half. If anything, as we get further into Q4, would expect a little bit of improvement there mainly driven by product and some of the impacts of the improved and prioritized marketing that we're doing.

Speaker 6

Very helpful and it's good to hear about the NPS scores. I wanted to ask the second question. Gross margin guide for 2Q to down three forty, three sixty. Can you unpack that a little bit more for the audience? Like how much is tariffs embedded in that?

Speaker 6

I think that's one of the two drivers of the pressure. And should we assume that kind of pressure rate overall on gross margins for the second half to get to that commentary around profitability being half of what it was last year? Thank you very much.

Speaker 3

Sure. When you think about the biggest driver is definitely the supply chain headwinds and that's probably in the neighborhood of 300 ish basis points. 200 of that or two thirds of that we mentioned is really the direct tariff cost impacts. And then there's some other pieces of product costing, inventory returns and things like that that comes into play there. Then there's smaller impacts relative to channel mix.

Speaker 3

We are doing or expecting a little bit higher liquidation this year than last year with third parties, still staying within that 3% to 4% operating mix, but definitely maybe on the higher end where we used to be on the lower end of that. So that's a little bit of a headwind as we think about the quarter. And then on the positive side, we do see FX benefits and then we also see some favorable pricing changes that we would be starting to drive through and some of that is even on the liquidation itself, even though the channel might be a little bit higher. We actually think with the product we have, we'll be able to get a little bit better pricing. Those are really smaller impacts.

Speaker 3

Would say the big one is obviously the tariff costs. And then as we think about full year, that 200 basis point comment really is the full year comment as well. And when we look at other puts and takes outside of that, there isn't a lot going on. When you think about regions, there could be a small headwind there just because APAC and North America declines and there are higher gross margin regions for us. But then on the flip side, with footwear growing or footwear challenged a little bit more than apparel, that mix actually helps gross margin a little bit.

Speaker 3

So there's some smaller puts and takes there, but in general, the big factor is the year over year 200 basis point hit on the tariff cost that we're estimating currently.

Speaker 6

Very helpful. Best of luck with back to school.

Speaker 3

Thanks. Thanks, Brad.

Operator

And this does conclude our question and answer session as well as today's conference. Thank you for attending today's presentation, and you may now disconnect your lines.

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