Under Armour 2007 Annual Report Download - page 38

Although we believe these trends will facilitate our growth, we also face potential challenges that could
limit our ability to take advantage of these opportunities, including, among others, the risk that we may not be
able to manage our rapid growth effectively. In addition, we may not consistently be able to anticipate consumer
preferences and develop new products that meet changing preferences in a timely manner. Furthermore, our
industry is very competitive. Our profitability may decline if we experience increasing pressure on margins, if we
lose one or more of our key customers or if our competitors establish the brand loyalty of our current or potential
consumers. While we seek to diversify to minimize the risk of interruptions in the supply of raw materials for our
products and have what we believe is a diverse manufacturing base globally, we may still be susceptible to
general economic changes such as increases in the costs of raw materials, including petroleum, which is a
significant component of many of our products, or other disruptions in the economy or in international trade. For
a more complete discussion of the risks facing our business, see “Risk Factors.”
General
Net revenues comprise both net sales and license revenues. Net sales comprise our five primary product
categories, which are men’s, women’s and youth apparel, footwear and accessories.
Cost of goods sold consists primarily of product costs, inbound freight and duty costs, handling costs to
make products floor-ready to customer specifications, and write downs for inventory obsolescence. In addition,
cost of goods sold includes overhead costs associated with our Special Make-Up Shop located at one of our
distribution facilities where we manufacture a limited number of products, and costs relating to our Hong Kong
and Guangzhou, China offices which help support manufacturing, quality assurance and sourcing efforts. No cost
of goods sold is associated with license revenues. We include a majority of our outbound shipping and handling
costs as a component of selling, general and administrative expenses. As a result, our gross profit may not be
comparable to that of other companies that include outbound shipping and handling costs in the calculation of
their cost of goods sold. Outbound shipping and handling costs include costs associated with shipping goods to
customers and certain costs to operate our distribution facilities. These costs were $13.7 million, $10.5 million
and $7.8 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Our selling, general and administrative expenses consist of costs related to marketing, selling, product
innovation and supply chain and corporate services. Our marketing costs are an important driver of our growth.
For the full year 2007, our marketing investments were 11.7% of net revenues, within our historical range of 10%
to 12% of net revenues. For the full year 2008, we expect to increase our investments in marketing to the range of
12% to 13% of net revenues. Marketing costs consist primarily of commercials, print ads, league, team and
player sponsorships, amortization of footwear promotional rights, depreciation expense specific to our in-store
fixture program and marketing related payroll. Selling costs consist primarily of related payroll, commissions
paid to third parties and the selling costs relating to our direct to consumer sales, which includes our website,
catalog and retail stores. Product innovation and supply chain costs include our apparel and footwear product
creation and development costs, distribution facility operating costs, and related payroll. Corporate services
primarily consist of corporate facility operating costs, company-wide administrative expenses, and related
payroll.
Other income (expense), net consists primarily of interest income, interest expense, both unrealized and
realized gains and losses on our derivative financial instruments, and both unrealized and realized gains and
losses on adjustments that arise from foreign currency exchange rate changes on transactions.
For 2007, our effective tax rate was 41.0%. In 2006, we earned and recognized a state income tax credit
which reduced our effective tax rate to 34.0%. We expect our 2008 effective tax rate to approximate 41.6%.
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