Under Armour : Q2 2025 Transcript

Corrected Transcript

07-Nov -2024

Under Armour, Inc. (UA)

Q2 2025 Earnings Call

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Under Armour, Inc. (UA)	Corrected Transcript
Q2 2025 Earnings Call	07-Nov-2024

CORPORATE PARTICIPANTS

Lance Allega	David Eric Bergman
Senior Vice President-Investor Relations, Treasury & Corporate	Chief Financial Officer, Under Armour, Inc.
Development, Under Armour, Inc.
Kevin A. Plank
President, Chief Executive Officer & Director, Under Armour, Inc.

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OTHER PARTICIPANTS

Simeon Siegel	Paul Lejuez
Analyst, BMO Capital Markets Corp.	Analyst, Citigroup Global Markets, Inc.
Jay Sole	Brian Nagel
Analyst, UBS Securities LLC	Analyst, Oppenheimer & Co., Inc.

Robert Drbul

Analyst, Guggenheim Securities LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Good morning and welcome to the Under Armour Q2 2025 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] . After today's presentation, there will be an opportunity to ask question. [Operator Instructions] . Please note this event is being recorded.

I'd now like to turn the call over to Lance Allega, Senior Vice President, Investor Relations, Treasury and Corporate Development. Please go ahead.

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Lance Allega

Senior Vice President-Investor Relations, Treasury & Corporate Development, Under Armour, Inc.

Good morning and welcome to Under Armour Second Quarter Fiscal 2025 Earnings Conference Call. Today's event is being recorded for replay. Joining us on today's call are Under Armour President and CEO, Kevin Plank and CFO, Dave Bergman.

Our remarks today will include certain forward looking statements that reflect Under Armour management's current view of our business as of November 7, 2024. These statements may include projections for our business in the present and future quarters and fiscal years. Forward looking statements are not guarantees of future business performance and our actual benefits may differ materially from those expressed or implied in the views provided. Statements made are subject to risks and other uncertainties detailed in this morning's press release and documents filed regularly with the SEC, including our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q.

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Under Armour, Inc. (UA)	Corrected Transcript
Q2 2025 Earnings Call	07-Nov-2024

Today's discussion may also include non-GAAP references. Under Armour believes these measures gives investors a helpful perspective on underlying business trends. When applicable, these measures are reconciled to the most comparable US GAAP measures. Reconciliations, along with other pertinent information can be found this morning's press release and at about.underarmour.com.

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

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Kevin A. Plank

President, Chief Executive Officer & Director, Under Armour, Inc.

Thank you, Lance, and to everyone for joining us on this morning's call. At the halfway point of fiscal 2025, we're pleased with another quarter of profitability ahead of our outlook, thanks to gross margin improvement from actions we've taken to reduce promotions and discounting in our DTC businesses and ongoing initiatives that improve product costing.

Although we are early in our reset, I believe this demonstrates that our strategies to strengthen this brand are beginning to gain traction. Our team is working incredibly hard and diligently to build a better business and so proud of this collective effort. Though we still have much work to do, we are on offense and are committed to reconstituting the Under Armour brand deliberately and methodically.

With a roughly $50 million second quarter adjusted operating income beat compared to the outlook we provided in August, we are splitting the difference and allocating about half of those dollars to our revised adjusted operating income outlook for fiscal 2025. The other half will be invested in marketing and brand building efforts to deepen our connection with consumers.

Q2 also marked another quarter of planning our flag as a sports house, meaning one of only a handful of athletic brands globally who can credibly outfit athletes head to toe on field, court or pitch in virtually any sport or athletic endeavor. We will defend and build on this position to exploit our global opportunity. And to be clear, Under Armour is more than just a single category or activity of athletic excellence. And this breadth is what provides us with the sports house status to build from. And what differentiates the UA sports house from the other brands on the podium with us is our position as the brand for the little guy or little girl who has not had the size or resources to truly compete. Therefore, we're not innovating so that our athletes and teams can run up a score, but simply to give them that fighting chance to compete.

This tri-heart persona and grit that defines UA has four key attributes; athletes, sports, innovation, and passion. This is our concept muse and describes our affinity for the underdog, the athlete who puts in the work from pillar to podium, looking for every edge possible from their training, studying, and especially from their gear. The ones who have no choice but to apply the rule of 10,000 hours to achieve excellence in their sport. And who also are seeking a competitive edge from the best athletic performance apparel, footwear and accessories on the planet.

These are our Under Armour athletes. Because of this, we must use every resource and waking hour to help them improve. This mindset drives our product, storytelling and commercial strategies. Ultimately expressed by the perfectly balanced UA logo, where the top is the same as the bottom, the left is the same as the right, and an ambition, or at the least, the metaphor for the gear that we make. Performance apparel and footwear meant to prevent you from getting too hot or too cold, targeting equilibrium in every wearing occasion.

The symbol of our athletes underdog spirit was something to prove. Being clear about who we are and where we're going, front and center in all interactions, including those with retailers, athletes and teammates. A direction that is being received well as we've taken this narrative to our partners and we will build on from here.

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Under Armour, Inc. (UA)	Corrected Transcript
Q2 2025 Earnings Call	07-Nov-2024

As a podium brand with a foundation of performance products forged at the highest levels of athletic competition, we worked tirelessly to deliver head to toe outfitting with style, fit, form and function across the high school, club and professional levels. UA must give athletes an edge to perform, feel and look their best. We will honor our nearly 30 year history with that hard earned place on the podium by elevating our products, amplifying our stories, delivering best-in-class service, and empowering our team to drive consistent execution. As we've said previously, this chapter is not a repeat of the first time building the brand, there will certainly be parts that rhyme. We plan to utilize every tactic, relationship, strategy or ethos that served this brand in the past to our benefit.

One of those is certainly product, story, service and team, four powerful dimensions that when working in concert, can drive this brand to greater heights. This is what we have brought to life, what we are evangelizing internally and externally and what we are executing against.

The elevation of our product offering continues to gain momentum. This includes a critical mass of new products designed and developed by our expert product team, with an immediate focus on our men's apparel, business and footwear, as well as a significant evolution in style and innovation offerings as we work toward Fall/Winter 2025.

Based on previews in the initial selling cycle, we've received strong feedback showcasing products with brand new innovations, refreshed design direction and a holistic approach to outfitting our core revenue categories, training, running, basketball, sportswear and golf. In the meantime, we've refocused to relaunch basics like base layer compression, where we have market leadership, which gives us the ability to change our trajectory. This includes recent success in premium distribution with HeatGear, franchises like Unstoppable, particularly Fleece, as well as our Vanish training collection and an increasing but targeted selection of UA sportswear.

In addition to what we call Trojan Horse products, recently articulated in accessories with the StealthForm Uncrushable Hat, where we showcase what Under Armour's take on a category as seemingly ordinary as a ball cap that traditionally has been only the logo on the front that differentiates it from other brands and applied the performance lens of stretch, recovery and moisture management, which also allow us to charge a premium of $45 to a category that typically sells for less than $25.

This is the type of consistent innovation and premiumization you should now expect from UA with the purpose of making a consumer wonder. They put this much performance thinking into a hat, I wonder what their shirts and shoes are like.

In footwear, we're making some of the greatest strides with our enhanced product team having an impact. There's much work to do as we're experiencing challenging results in the near term, particularly in our good level products. Well, it will be a couple of seasons until it hits the market. We've taken a different tack here with good level refining and eliminating redundant SKUs, assigning our best footwear designers to work on some of our lower ASP products, but that have big volumes like the UA Assert whose volume is in the millions of pairs with updated designs that focus on the price, the value perception and winning consumers to the brand with just simply better looking and performing products at great value. Just because a shoe costs less than $100 does not mean that it does not deserve to be beautiful.

And I'm excited about our strategies for improved assortment across our better and best segmentation over the next few seasons, as more elevated products like our Infinite running collection have been tracking well for us. While our footwear business continues to reset, our objective is to emerge with a more substantial, better and best level offering and a streamlined, improved good level offering. All-in-all, more precise, well-defined

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Under Armour, Inc. (UA)	Corrected Transcript
Q2 2025 Earnings Call	07-Nov-2024

segmentation within our franchises to deliver for all tiers of distribution that will serve us in the ambition of premiumizing the UA brand. It's really about selling so much more of so much less.

Critical to our evolution is our team sports positioning, the sharp point and epicenter of our connection with young athletes. With school back in session, we saw a solid performance from cleated products in baseball and American football, as well as in basketball with Curry brand footwear. Building on that a few weeks ago, the Curry 12 launched globally following limited releases of select colorways, including the red, white and blue version Stephen wore during his iconic performance in the Paris Olympics, which helped secure gold for Team USA. The response to the Curry 12 has been solid, so we're off to a good start ahead of our next launch, which will see the first ever signature shoe for rising NBA star De'Aaron Fox under the Curry brand.

Next up is story, and continuing with Stephen is an excellent example. In September, we conducted our first tour in China with him since 2019. The response to Stephen in the market was frankly overwhelming and demonstrated the power of the Under Armour brand when we holistically integrate compelling athlete moments with elevated products and storytelling. Despite our four city tour turning into a three city tour, because the second stop in Shenyang had to be canceled due to a Taylor Swift like reaction with just one example from Shenyang, 7,000 people waiting outside of his hotel to greet him. We unfortunately had to cancel that visit, but successfully pulled off our most impactful tour ever.

With historically high brand exposure, including over 4 billion media impressions, nearly 34 million live stream views and incredible social buzz and engagement, overall basketball sales impacted in China that week along with a threefold increase in Curry sales. One thing that is certain is that the opportunity we have with Stephen to build on his celebrity for the benefit of Curry brand UA Basketball and Under Armour as a whole, we plan to be much more aggressive with Stephen's global presence as we scale our business in the upcoming years.

Taking this learning and replicating it more frequently at multiple touchpoints is the goal, holistic and synergistic moments to reach young team sport athletes more effectively, as a sports house with an ability to outfit the world's most incredible athletes at the highest level of competition, including Major League Baseball's World Series and Los Angeles' Freddie Freeman, driving in 12 runs and four homers to become the MVP as the Dodgers won their eighth title.

American Football NFL standouts Justin Jefferson, Zay Flowers and Kyle Hamilton, headline the UA roster in the sport our brand was founded in. And with that, we had Notre Dame sitting squarely in the College Football Playoffs Top 10. Also elite runner, Sharon Lokedi with her top 10 finish at last weekend's New York City Marathon, wearing the unreleased Velociti Elite 3, the most technologically advanced running shoe we've ever made truly.

And our mark on the world's most elite football stage with players like Ben White at Arsenal, Pedro Porro at Tottenham and Tony Rüdiger at Real Madrid, we have an incredibly talented global athlete roster that demonstrates our breadth and why we are a sports house, engaging young athletes more effectively while telling their compelling stories. As a work in progress, activations will look and feel more aligned over the next several months, underscored by our brand identity and ethos.

Next, shifting to service and an update on elevating our consumer experience. In these efforts, our initial strategies have primarily focused on DTC and evolving our e-commerce channel into a more premium manifestation of the Under Armour brand. The second quarter has continued to give us confidence in what is possible. One of the most visible aspects of our work has been the impact of our significant reduction in promotional activities, particularly our e-commerce business in North America.

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Under Armour, Inc. (UA)	Corrected Transcript
Q2 2025 Earnings Call	07-Nov-2024

It is still early, but this, along with our work to reduce SKUs, creates a more deliberate and premium product assortment, better curated looks and outfitting presentations for a cleaner, faster consumer experience. So despite expected declines in traffic and revenue, the quality of our business has improved, creating a better foundation from which to grow in the future. With lower promotions and markdowns, our full price sales rose again in the second quarter, representing now about 50% of e-commerce revenue versus about just 30% just a year ago.

Further, our average order value and average unit retail metrics increased by double digits for the second quarter in a row, a promising trend that gives us confidence in our ability to move our e-commerce business to a more premium position with a higher quality of revenue and better profitability over the long term, as a flagship representation of the brand.

In North American DTC, currently our largest business, is our factory house outlet stores, where we're shifting from a full store discounting approach to a targeted strategy, which excludes certain programs that will remain full price regardless of broader promotions. The goal here is driving higher profitability, store productivity and improved brand affinity. This is one area we see significant upside margin potential over the long run as our brand and therefore our business becomes stronger.

With more than 1,400 full priced brand house locations globally, we're working to create an elevated experience for athletes with a cleaner, better curated product assortment and presentation. The combination of this work will show up in our new 24,000 square foot flagship store, set to open on November 21st at our new global headquarters at the Baltimore Peninsula. As our most premium full price expression, the store will serve as a living laboratory to inform how we think about what perfect looks like for our entire fleet, by utilizing consistent freshness, dynamic brand inspiration [indiscernible] (00:14:50) two way conversation with our consumers, we're excited about the opportunities to harvest learnings from this store and roll them out to the rest of our fleet over time.

Turning to our loyalty program, continues to be a significant unlock for driving repeat business and attracting new consumers. In October, we celebrated the first anniversary of our US-based UA Rewards Program and are pleased with this performance. Early in the second quarter, we initiated an account upgrade that welcomed another 6 million existing ua.com members into the program, taking our total to nearly 13 million members.

Fiscal year to date active members accounts for roughly half of US DTC revenue. Members also have nearly doubled the 90 day repurchase rate compared to non-members generating approximately 50% higher revenue per consumer. Across all programs in the US and APAC, we now have more than 28 million members and growing. I'm confident that loyalty will help us gain valuable insights to inform our business and enhance consumer engagement, driving even more benefits in the long term.

Within our wholesale business, we're managing through this reset period while focusing on our relationships with strategic retailers across distribution tiers. This includes working with UA partners, delivering elevated products with compelling storytelling, and driving toward a more premium representation of our brand in all doors where athletes shop for our products. Our strategic retail partners are family and we have significantly revamped our frequency, touchpoints and communication, first and foremost, letting them know that they are strategic partners, as one of the most foundational elements of a sales relationship, and we have not been doing this well. This means a two way conversation and openness to incorporating their constructive feedback as we evolve our strategies to unlock UA's full potential as we know that it will take time to build back shelf space. Still, we believe

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Under Armour, Inc. (UA)	Corrected Transcript
Q2 2025 Earnings Call	07-Nov-2024

we will gain traction with our cadence of new product launches and improved marketing activations over the next several quarters.

Finally, none of our strategies will succeed without the hard work of an energized and inspired team with momentum is absolutely building here, ensuring we have the right people, focusing on the right parts of our business is crucial to empowering our efforts. And this is a work in process. Being clear with every teammate so that they know exactly what we expect of them each and every day. Teams knowing what they're supposed to do when they show up while incorporating continuous improvement and their knowing exactly what that definition of success is. In this respect, I feel confident about our evolution, team and the opportunity in the market we see for Under Armour's unique underdog brand positioning.

One of my focal points of leadership in the first seven months has been empowering our product, marketing and commercial teams, ensuring the coordination and absolute teamwork of these three aspects of our sports house. It's essential to our success, and it leads in every management discussion that we have today. The entire organization is in support of this aspect of Under Armour leading for the brand.

Firing on all cylinders, Yassine Saidi leads an experienced team of experts to elevate our products, innovation, design language. And with only two months on the job, the new perspectives Eric Liedtke brings to our work, especially through marketing, but also evolving our strategy, approach to category management and go to market process, we are driving tangible brand-right changes to improve our positioning in the market. The clear alignment of who we are, what we stand for, and in preparation to launch the most significant marketing effort in our history in 2025.

Our team is on the court with a playbook capable of stabilizing and driving this brand to growth over the long term, with the focus of being an incredibly loud brand and quiet company. Our organization is more aligned and focused than in past years, and we're ensuring that time and resources are effectively prioritized to strengthen our brand.

At the center of this, though, is trust, which I believe is something that is built in drops and lost in buckets. For us, this means a cultural focus on positive relationships, well-informed decision making and consistency.

I believe our energy, collaboration and unity as a team will take an even more significant step next week as we begin moving into our new headquarters. So, this work to reconstitute our brand coincides with reconstituting our culture, and that's what's at the heart of it. We're not just building a company, we're building a brand. Companies can become famous because they make one thing defining for their business, while brands are famous because we've proven that we can do that over and over again.

Our job is to relentlessly fulfill our promise to inspire and surprise athletes for performance and design solutions they never knew they needed. Yet once they try them, could not imagine living without. Share this messaging and what this direction means for Under Armour. We're going to host an investor meeting on December 12th in New York City. At this meeting, we will detail our strategies to strengthen UA's premium marketplace and underdog positioning, and our ability to deliver improved long-term value creation for shareholders.

So now in closing, our reset to drive greater affinity with athletes while delivering sustainable, consistent long-term growth, is a journey that requires patience. We are progressing on critical aspects of our strategies, gaining early traction and confidence in our ability to run a better, more agile and disciplined business. Agility and being responsive to the market are critical as set forth in our new nine month speed-to-market capability to complement our historical 18-month go to market.

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Under Armour, Inc. (UA)	Corrected Transcript
Q2 2025 Earnings Call	07-Nov-2024

This product pipeline looks truly differentiated and excellent, and we are positioning ourselves to more effectively deploy our marketing dollars to connect with consumers even more deeply. We have a leadership and a team that is united and aligned on the critical dimensions of our business to unleash the full potential of the Under Armour brand. Underscoring all this, our culture, it's re-energizing and it's focused with steadfast resolve as we strengthen this sports house both one day and athlete at a time, with both the passion and care that Under Armour deserves.

And with that, I'll hand it over to Dave for more details on our results and outlook.

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David Eric Bergman

Chief Financial Officer, Under Armour, Inc.

Thanks, Kevin. Digging right into our second quarter fiscal 2025 results, we outperformed the profitability outlook we provided in August. However, in line with our expectations, revenue was down 11% to $1.4 billion, with a 13% decline in North America due to softer, full price, wholesale demand and lower sales to the off-price channel. Our North American DTC business was also down during the quarter, driven by continued decline in our e-commerce business resulting from proactive strategies to reduce promotional activity, and we also experienced lower retail store sales.

EMEA revenue was down 1% on a reported and currency neutral basis, driven by a decline in our wholesale business, partially offset by strength in DTC. Revenue in APAC was down 11%, or down 10% on a currency neutral basis, due to declines in our wholesale and DTC businesses amid a soft macro environment that continues to impact consumer traffic. In Latin America, revenue was down 13%, or down 4% on a currency neutral basis. Growth in DTC partially offset the decline in our wholesale and distributor businesses.

From a channel perspective, our wholesale revenue was down 12% in the second quarter, driven by softer demand in our full price and distributor businesses and lower sales to the off-price channel. Direct consumer revenue declined 8%, with a 21% decrease in e-commerce, as we expected, given strategies to drive a more premium online presence through reduced promotions and discounts. Sales from our owned and operated retail stores were flat in the quarter. Licensing was down 13%, primarily due to a decline in our North American business.

By product type, apparel revenue was down 12% with declines across most categories in the quarter, while we had good performance in outdoor. Footwear was down 11% with declines in most categories. However, relative strength in golf and team sports, particularly cleated products, partially offset the decline. And our accessories business was up 2% in the quarter.

Our second quarter gross margin increased by 200 basis points to 49.8%. This increase compared to the prior year was driven by 120 basis points of supply chain benefits due mainly to lower product costs, 50 basis points from a favorable channel mix driven principally by a reduction in off-price sales and 40 basis points of pricing benefits due to lower discounting and promotions mainly in our direct-to-consumer business as we work to drive a more premium position for our brand. And lastly, we also had lower markdowns in the wholesale channel. These benefits were partially offset by 10 basis points of headwinds from unfavorable foreign currency impacts and regional mix.

The significant gross margin outperformance in the quarter relative to the outlook we provided in August was due to three main factors. First, we saw increased supply chain benefits from additional product cost savings compared to our plan, along with lower-than-expected freight costs. Second, wholesale markdowns and allowances were less than initially anticipated. And third, our channel mix was more favorable due to lower than planned sales to the off price channel.

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Under Armour, Inc. (UA)	Corrected Transcript
Q2 2025 Earnings Call	07-Nov-2024

Next, SG&A expenses were down 15% to $520 million in the second quarter. As mentioned on our last call, our second quarter benefited from a shift in the timing of marketing expenses, in this case about $15 million, which is in our third quarter outlook. Excluding roughly $13 million in benefits from a litigation related insurance recovery and approximately $3 million in net transformation expenses related to our fiscal 2025 restructuring plan, second quarter adjusted SG&A expenses were down 13% to $530 million. This decrease was primarily driven by lower marketing expenses, as some of our brand investments are concentrated in the second half of the year. As anticipated, we also recognized a $27 million SG&A benefit due to an insurance recovery for legal fees incurred in previous years. Lastly, ongoing cost management actions, including head count reductions, also influenced the decrease.

Moving down the P&L, we recognized $3 million in restructuring charges, which together with the $3 million in transformation expenses booked in SG&A, resulted in $6 million in restructuring charges and related expenses for the quarter. Through the first half of the year, we have recognized $40 million in charges and expenses under our fiscal 2025 restructuring plan, of which roughly $36 million were cash related and $4 million were non-cash expenses.

In September, we announced an expansion of our restructuring plan with additional initiatives to optimize our logistics and transportation network and overall business performance. This expansion included approximately $70 million in new opportunities, primarily related to the exit of one of our distribution facilities in Rialto, California. This change will allow us to utilize capacity better and gain efficiencies in our remaining facilities as we invest in automation over the next several years. These efforts are expected to be completed by the end of fiscal 2026.

Incorporating this decision, we now expect between $140 million and $160 million in total restructuring charges and expenses, of which roughly two-thirds will be realized in fiscal 2025 and the remainder in fiscal 2026. Given the time required to wind down and close the Rialto distribution facility, this expansion to the plan is not expected to result in additional restructuring related savings in fiscal 2025, above and beyond the approximate $40 million annual savings previously disclosed.

Finally, moving to profitability. Our second quarter operating income was $173 million. Excluding the litigation related insurance recovery, transformation expenses and restructuring charges, our adjusted operating income was $166 million. Taking this to the bottom line, we realized diluted earnings per share of $0.39, while adjusted diluted earnings per share was $0.30 in the quarter. The profitability overdrive versus our second quarter outlook was mainly due to our gross margin outperformance, with additional benefits from better SG&A expense control and shifting some marketing spending into the back half of the year.

From a balance sheet perspective, our inventory was down 3% compared to last year, which aligned with our plan. We continue to expect our fiscal year end inventory to be roughly flat compared to our fiscal 2024 ending balance. Our cash position was $531 million, which is after the payment of our legal settlement during the second quarter. And we had no borrowings under our $1.1 billion revolving credit facility.

Next, let's turn to our fiscal 2025 outlook. Our expectation that full year revenue will decline at a low double digit rate has not changed. We also reiterate our outlook for a 14% to 16% revenue decline in North America, flat revenue in EMEA and a high single digit decrease in APAC. Given our outperformance in the second quarter, we have increased our outlook for gross margin and now expect an improvement of 125 to 150 basis points for the full year, which is better than our prior outlook improvement range of 75 to 100 basis points.

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Under Armour, Inc. (UA)	Corrected Transcript
Q2 2025 Earnings Call	07-Nov-2024

This anticipated increase in our gross margin is driven by reduced promotional and discounting activities in our DTC business, which continue to benefit our average selling price along with the actions to improve product costs. This implies that second half gross margin is expected to expand at a lower rate than in the first half, which is driven by tougher comparisons with the prior year, as well as the impact of some inventory cleanup actions later in the year, as we prepare the market for product introductions in the Fall/Winter 2025 season.

Concerning SG&A, excluding the litigation settlement expense and related insurance recoveries and the midpoint of estimated transformation expenses related to our restructuring plan, adjusted SG&A is expected to decline at a low- to- mid-single digit rate, which is unchanged relative to our prior outlook, despite larger-than-anticipated declines over the first two quarters of the year.

This also incorporates our recent decision to reinvest some of our first half gross margin upside into brand building investments ahead of upcoming pivotal seasons and the timing shift of marketing into the second half. As a result, roughly half of our second quarter adjusted operating income outperformance will be invested in incremental marketing later this year, while the remaining half is reflected in the increase in our adjusted operating income outlook, which we have raised by $25 million versus our prior call.

Therefore, we anticipate that adjusted operating income will reach $165 million to $185 million for the year. Incorporating all this into the bottom line, we expect adjusted diluted earnings per share to be $0.24 to $0.27, up about $0.05 at the midpoint from our prior outlook.

Next, I'd like to provide context for our third quarter of fiscal 2025, where we expect revenue to be down approximately 10%, which assumes continued pressure in North America and ongoing proactive strategies to reduce promotional activities in our DTC businesses. This points to Q4 revenue being more pressured than Q3, which is primarily related to some timing differences in Q3, Q4 flow this year versus last year within our North America and APAC wholesale businesses, along with a more difficult prior year Q4 comp in our North America factory house business and some developing FX headwinds driven by the recent strengthening of the US dollar.

Third quarter gross margin is expected to be up 150 to 175 basis points due to supply chain benefits resulting from lower product costs, favorable FX and pricing benefits related to reduced discounting and promotions in our direct-to-consumer business. As mentioned earlier, a significant shift in the timing of marketing investments will cause our adjusted SG&A expenses to increase in the second half compared to last year, particularly in the third quarter when expenses should be up at a mid-single digit percentage rate. This brings us to an expected third quarter adjusted operating income of $20 million to $30 million, and $0.02 to $0.04 of adjusted diluted earnings per share.

In closing out today's prepared remarks, our work to reconstitute the Under Armour brand continues to gain traction after another quarter of outperformance. Our teams are executing our strategies, focusing on the dimensions of our business that will make a difference in our brand strength and premium positioning. Though we still have much work to do, we're encouraged by our early progress in this journey, and we're confident that with our strengthened leadership team, improved execution, clear alignment and prioritization, and renewed energy as an organization, we will continue to build momentum toward long term, sustainable and profitable growth.

With that, we'll open it up for questions. Operator?

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