Under Armour 2012 Annual Report Download - page 36

General
Net revenues comprise both net sales and license revenues. Net sales comprise sales from our primary
product categories, which are apparel, footwear and accessories. Our license revenues consist of fees paid to us
by our licensees in exchange for the use of our trademarks on core products of socks, team uniforms, baby and
kids’ apparel, eyewear, inflatable footballs and basketballs, as well as the distribution of our products in Japan.
Beginning in 2011, net sales includes the sales and related cost of goods sold of internally developed hats and
bags. Prior to 2011, hats and bags were sold by a licensee. Net revenues increased by approximately $65 million
from 2010 to 2011 as a result of developing our own hats and bags, which includes an increase in accessories
revenues and a decrease in our license revenues in 2011.
Cost of goods sold consists primarily of product costs, inbound freight and duty costs, outbound freight
costs, handling costs to make products floor-ready to customer specifications, royalty payments to endorsers
based on a predetermined percentage of sales of selected products and write downs for inventory obsolescence.
The fabrics in many of our products are made primarily of petroleum-based synthetic materials. Therefore our
product costs, as well as our inbound and outbound freight costs, could be affected by long term pricing trends of
oil. In general, as a percentage of net revenues, we expect cost of goods sold associated with our apparel and
accessories to be lower than that of our footwear. No cost of goods sold is associated with license revenues.
We include outbound freight costs associated with shipping goods to customers as cost of goods sold;
however, we include the majority of outbound 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 handling costs in their cost of goods sold. Outbound handling costs include costs associated
with preparing goods to ship to customers and certain costs to operate our distribution facilities. These costs were
$34.8 million, $26.1 million and $14.7 million for the years ended December 31, 2012, 2011 and 2010,
respectively.
Our selling, general and administrative expenses consist of costs related to marketing, selling, product
innovation and supply chain and corporate services. Personnel costs are included in these categories based on the
employees’ function. Personnel costs include salaries, benefits, incentives and stock-based compensation related
to the employee. Our marketing costs are an important driver of our growth. Marketing costs consist primarily of
commercials, print ads, league, team, player and event sponsorships and depreciation expense specific to our in-
store fixture program. In addition, marketing costs include costs associated with our Special Make-Up Shop
(“SMU Shop”) located at one of our distribution facilities where we manufacture a limited number of products
primarily for our league, team, player and event sponsorships. Selling costs consist primarily of costs relating to
sales through our wholesale channel, commissions paid to third parties and the majority of our direct to consumer
sales channel costs, including the cost of factory house and specialty store leases. Product innovation and supply
chain costs include our apparel, footwear and accessories product innovation, sourcing and development costs,
distribution facility operating costs, and costs relating to our Hong Kong and Guangzhou, China offices which
help support product development, manufacturing, quality assurance and sourcing efforts. Corporate services
primarily consist of corporate facility operating costs and company-wide administrative expenses.
Other expense, net consists of unrealized and realized gains and losses on our foreign currency derivative
financial instruments and unrealized and realized gains and losses on adjustments that arise from fluctuations in
foreign currency exchange rates relating to transactions generated by our international subsidiaries.
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