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Nike, Inc. (NYSE:NKE)

F4Q 2014 Earnings Conference Call

June 26, 2014 17:00 ET

Executives

Kelley Hall - Vice President, Treasury and Investor Relations

Mark Parker - President and Chief Executive Officer

Trevor Edwards - President, Nike Brands

Don Blair - Chief Financial Officer

Analysts

Kate McShane - Citigroup

Omar Saad - ISI Group

Bob Drbul - Nomura Securities

Robby Ohmes - Bank of America Merrill Lynch

Dave Weiner - Deutsche Bank

Jay Sole - Morgan Stanley

Mitch Kummetz - Robert Baird

Operator

Good afternoon, everyone. Welcome to Nike’s Fiscal 2014 Fourth Quarter Conference Call. For those who need to reference today’s press release, you will find it at http://investors.nikeinc.com. Leading today’s call is Kelley Hall, Vice President, Treasury and Investor Relations.

Before I turn the call over to Ms. Hall, let me remind you that participants on this call will make forward-looking statements based on current expectations and those statements are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in the reports filed with the SEC, including Forms 8-K, 10-K and 10-Q. Some forward-looking statements concern future orders that are not necessarily indicative of changes in total revenues for subsequent periods due to mix of futures and at-once orders, exchange rate fluctuations, order cancellations, changes in the timing of shipments, discounts and returns, which may vary significantly from quarter-to-quarter. In addition, it is important to remember a significant portion of Nike Inc.’s continuing operations including equipment; Nike Golf, Converse and Hurley are not included in these futures numbers.

Finally, participants may discuss non-GAAP financial measures, including references to wholesale equivalent sales. References to wholesale equivalent sales are only intended to provide context as to the overall current market footprint of the brands owned by Nike Inc. and should not be relied upon as a financial measure of actual results.

Participants may also make references to other non-public financial and statistical information and non-GAAP financial measures. Discussion of non-public financial and statistical information and presentations of comparable GAAP measures and quantitative reconciliations can be found at Nike’s website, http://investors.nikeinc.com.

Now, I would like to turn the call over to Kelley Hall, Vice President, Treasury and Investor Relations.

Kelley Hall

Thank you, operator. Hello, everyone and thank you for joining us today to discuss Nike’s fiscal 2014 fourth quarter results. As the operator indicated, participants on today’s call may discuss non-GAAP financial measures. You will find the appropriate reconciliations on our press release, which was issued about an hour ago and at our website, investors.nikeinc.com.

Joining us on today’s call will be Nike, Inc. President and CEO, Mark Parker, followed by Trevor Edwards, President of the Nike Brands and finally, you will hear from our Chief Financial Officer, Don Blair, who will give you an in-depth review of our financial results.

Following their prepared remarks, we will take your questions. We would like to allow as many of you to ask questions as possible in our allotted time. So, we would appreciate you limiting your initial questions to two. In the event, you have additional questions that are not covered by others, please feel free to re-queue and we will do our best to come back to you. Thanks for your cooperation on this.

With that, I will now turn the call over to Nike, Inc. President and CEO, Mark Parker.

Mark Parker

Thank you, Kelley and hello everybody. Fiscal ‘14 demonstrated a point I often make and that’s when we innovate, we just don’t innovate for the sake of change, we innovate to change the game and that’s what we did throughout the year. We introduced great products, launched new consumer experiences, expanded our digital ecosystem and developed engaging retail concepts that drove excitement and energy for our brands in the marketplace. By staying true to the Nike spirit, we continued to deliver great results like those we are reporting today.

Here are the fiscal ‘14 highlights. Nike Inc. revenues grew 10% to nearly $28 billion. Gross margin increased 120 basis points to 44.8%. SG&A rose 12% reflecting continued strategic investments in our brands and operations. And despite significant currency pressure, diluted EPS rose 11% to $2.97 for the full year. We are proud of those results we delivered in fiscal ‘14, but more than that, we are proud of the consistent level of growth we have been able to deliver over the years.

As we continue to get bigger as a company, I am often asked how can Nike continue to grow? Well, first and foremost, there is absolutely no shortage of growth opportunities for Nike. This has never been clear to me as it is today. When I look within and across our five brands, six geographies and eight categories, I see tremendous untapped potential. And this includes areas where we can build on our current foundation such as apparel and women’s and converse as well as areas where we can extend our current leadership position such as running, basketball, and football.

The key to unlocking this potential is and always has been to focus on the consumer. Our relationship with the consumer is something we need to earn every day. Increasingly this relationship is one to one through the lens of their favorite sport. This is why our category offense is such a powerful advantage. The insights we draw from our deep consumer connections fuel our ability to create new products and services that excite and engage. We also know we need to remain nimble to meet the changing needs and expectations of those we serve globally. The world is becoming increasingly interconnected and consumers expect companies to be able to deliver the same level of innovation everywhere. And that means continuing to elevate and accelerate our level of innovation in products, in services, in our supply chain and in our digital ecosystem.

We also know that when we focus on the consumer, we deliver value for our shareholders. We do this by ensuring our growth is profitable. The strength and diversity of the Nike Inc. portfolio allows us to manage the levers in our business to drive profitability and invest for the future so we can continue to innovate to meet the expectations of our consumers. And that is what you saw in our fiscal ‘14 performance, across all the elements of our business. And that is the virtuous cycle that fuels our success.

Our unmatched ability to innovate is how we turn insights from athletes and consumers into amazing products and services that no one else can deliver. Throughout the past year, we used key events and sport moments to launch our most forward-thinking products. Together with KOBE in Los Angeles, we introduced the KOBE 9 Elite, the first basketball shoe to use our unique Flyknit technology. At the Sochi Winter Olympics we leveraged significant advances from across our categories to deliver high performance apparel, such as the lightweight hockey Game Jersey with Flywire and the Aeroloft Summit Jacket.

In New York at the Super Bowl, we launched the Vapor Carbon Elite Cleat, our first cleat to take advantage of the revolutionary potential of 3D printing. At the world’s premier track meet, the Prefontaine Classic in Eugene, Oregon Nike athletes set new U.S. records and world’s best times in our performance racing footwear. And throughout fiscal ‘14 we have built tremendous momentum for the business and the brand as we delivered an unprecedented level of innovation heading into the World Cup.

The combination of the world’s best players and teams, our most innovative performance products and new levels of consumer engagement through social media is truly extraordinary. It sets the new benchmark for Nike and the industry. There is a lot more to share with you on our execution at World Cup, but I will save that for Trevor to discuss.

The products we launched this year were the culmination of an intense period of creativity for us. But make no mistake, there is much more in the pipeline. In fact, this is the pace of innovation that you should expect from us. We know innovation is a long-term growth driver and that is why we have been so focused on extending our investments in this area. And we are seeing clear returns on these investments.

I recently completed a comprehensive look at the product development taking place in each of our categories. And as you know, I am someone who lives and breathes innovation and I have never so – seen so much potential. I can tell you that the scope and scale of the innovations we will be delivering for our consumers is truly incredible. Our drive to innovate extends beyond product into areas such as digital. Our consumers expect us to be digitally connected as they are, making digital one of my top priorities for the company.

Athletes are demanding more real time personalized feedback on their performance. They want easy access to products and services that will help them improve. And they want to be part of a community where they can share and compare information, find performance tips and motivate each other. We are building an integrated system of digital services that will provide seamless access to our products, a full array of services and the most advanced digital tools to measure, motivate and inspire. Delivered with the soul of sport, this will be the digital platform for lifetime consumer relationships. Our goal is to grow the Nike+ community from tens of millions to hundreds of millions of members.

An ongoing two-way dialogue with consumers is also a critical element of our digital ecosystem. It provides us insights that drive innovation, strengthens consumer connections to our brands, and provides a platform for consumers to interact with each other. Through our social media platforms, we leverage the power and passion of sport to deepen our relationship with our consumers. A perfect example of this is our Risk Everything campaign, which celebrates the energy and enthusiasm of global football. Two of the campaign’s videos, Winner Stays and The Last Game, have set new records for engagement with over 370 million digital views and growing.

And finally, in e-commerce, we have made significant investments in infrastructure, capabilities and geographic expansion to provide a better experience. We know that when consumers shop online, they want a seamless, premium experience and that’s our goal for nike.com. Our efforts are paying off. Our online business grew over 40% in fiscal ‘14, with the growth rate accelerating every quarter throughout the year. When all three elements of our digital ecosystem come together, it’s a powerful strategy to drive growth and meet and exceed the expectations of our consumers around the world and its potential is enormous. It is changing how we conduct our business, tell our stories, and engage consumers. It’s a big part of our future and will only get bigger and better.

Fiscal ‘14 has been another strong year for us and we will take that momentum into fiscal ‘15. We have aligned our leadership and resources to fully leverage those opportunities with the greatest potential for growth. With our deep consumer connections and our obsessive drive to innovate, we will excite, inspire and no doubt, surprise. That’s what you should expect from Nike in fiscal ‘15 and beyond.

So, thanks and now here is Trevor to discuss the Nike Brand.

Trevor Edwards

Thanks Mark. The Nike Brand had a strong finish to a great year, one that confirms the tremendous confidence that we have in our long-term growth strategy. Looking at the results, on a constant currency basis, Nike Brand revenue grew 13% for the quarter. For the year, revenue was up 11% with growth across all key categories and geographies. Nike Brand DTC revenue was up 27% for the quarter, with 22% for the year, putting DTC revenue past the $5 billion dollar mark. Results for the year were driven by comp store growth of 10%, new store expansion and online sales growth of 42%. And finally, global futures are up 12%. As always, these results can be attributed to Nike’s unrivaled ability to understand the consumer, what they need and what inspires them. That knowledge drives us to identify the biggest growth opportunities and align our resources against them.

Let me highlight three areas of the business, where we have seen significant revenue expansion on a wholesale equivalent basis clearly demonstrating the power of our consumer focus. First, I will start with global football, which in fiscal year ‘14 grew 21% to $2.3 billion. And that doesn’t even include our football sportswear product. Now, I visited Brazil many times over the past 20 years. But having just returned from Rio, I have to say, I have never seen energy like that before. There is a tremendous passion for football across the country. At Nike, our connection with Brazil is powerful. We have been there for years and we will be there long after the World Cup ends.

The enthusiasm we see in Brazil coupled with our number one footwear market share around the world is living proof that our football business has never been stronger. And the power of the category offense continues to fuel growth in football, with superior executions against engaging consumer connections, innovative products and premium retail destinations.

We bring the game’s passion to footballers worldwide by creating meaningful connections with them through unique events and experiences. A great example of our series is our series of Phenomenal Houses, which combine product trials, athlete appearances, football tournaments in an immersive Nike experience. Over the last 10 weeks, the Phenom Houses in Rio, London and New York and many other cities hosted more than 50,000 fans and thousands more played in our Winner Stays football tournaments around the globe.

As Mark mentioned, we are incredibly proud of our successful Risk Everything campaign. For years, we have taken inspiration from the best footballers and as we always do, we share that inspiration in the stories we tell. That kind of engaging story-telling energizes current football fans and brings new fans in, growing the market today and into the future. We also delivered an incredible number of innovative football products this year which led up to the first match in Rio. With the most teams in the tournament, we launched 10 new team kits, achieving a new milestone in performance and sustainability.

We introduced four ground-breaking performance boots the Hypervenom, the Tiempo 5, the Magista and the Mercurial Superfly. Both the Magista and the Mercurial use our transformative Flyknit technology to take football boots to a whole new level. The player’s response of these boots has been tremendous. There are more players wearing Nike boots in the World Cup than all other brands combined and more than a third of them are playing in the distinctive and revolutionary Magista or Mercurial Flyknit boots. And finally, we are seeing great excitement at retail, as Nike football helped to drive great results in our stores, online and at football shops with our wholesale partners around the world. Our comprehensive offense on the pitch and in the marketplace drives our leadership as the world’s best football brand and positions us for growth in this category for years to come.

Next, I would like to talk about running, which is also driven by product innovation, consumer engagement and retail presentation. It’s that focus that powers us, growing revenue 10% for the year to $4.6 billion dollars. Our results were driven by key product innovations like Free Flyknit footwear, Dri-Fit Touch and Aeroloft apparel just to name a few and we are expanding the business by connecting with a new generation of runners. In Q4 alone, we engaged with over 85,000 runners through events and millions more via our Nike+ platform. That energy directly translates at retail worldwide, in our DTC locations and running destinations like Cross Town Running at JD Sports and the Nike Track Club at the Finish Line. The consistent achievement in the running category confirms the strength of our strategy, and points to the massive potential we see for running going forward.

And third, our women’s business continues to drive strong growth. For the year, the women’s revenue grew 12% to nearly $5 billion, moving us closer to our goal of $7 billion by fiscal year ‘17. Our women’s strategy is very clear to combine running, training and sportswear into compelling product assortments that women want to run, train, and live in. With key styles like the Legend Tights, the Nike Pro Bras, and the Sky Hi Dunks, are must haves for her.

Our goal to elevate women’s product distribution this year was a success, as we brought the energy of the Nike Training Club app to life at retail. We blended three vital components pinnacle product assortments, premium services, and great shopping experiences that clearly demonstrate that Nike understands this consumers’ needs. The 50 plus stores where we have executed these concepts have been outpacing comp store growth for the rest of the fleet. Our success in fiscal year ‘14 only hints at the enormous opportunity we see in the women’s business and we are completely focused on capturing it.

Now, let’s shift focus on to the few of our key geographies. North America had another great quarter and posted a record year. Revenues were up 10% for the quarter and the year helping North America surpass $12 billion in annual revenue. The geography also had its most profitable year ever, with reported EBIT expanding faster than reported revenue to reach $3 billion for the year. For the last decade, we have heard that our opportunities in North America are tapped out. But as we continue to demonstrate, nothing could be further from the truth.

So, how do we do it? We expand the market and at the same time we take market share by understanding the consumer better than anyone else. We extend our leadership on our perennial strengths like the basketball and running categories. This expertise also gives us insight to capitalize on the significant growth opportunities like in e-commerce and in our apparel, women’s and young athletes businesses, just to name a few. And as we have often discussed, our confidence in the category offense in North America gives us the roadmap to continue to unlock opportunities in this geography and around the world.

Now, let’s turn to the emerging markets, which delivered exceptional Q4 results with revenue up 25%. These results were very well-balanced, with double-digit growth in almost every territory and increased revenues in nearly every key category. The Q4 results in our emerging markets demonstrated that our brand and products resonate with consumers in every corner of the globe. It was a great way to end a year that had some challenges. As we have talked about previously, we had logistics issues in Mexico in the first half of the year. This, combined with increased macroeconomic headwinds across Latin America, slowed revenue growth for the geography in fiscal year ‘14. We are continuing to closely monitor retailer inventory and the flow of product into Mexico and across Latin America to ensure the marketplace and our brand stay healthy.

Now on to China, where we had one overarching goal for fiscal year ’14: reset the marketplace for growth. We have made great progress and we are on track to achieve our goal of returning this market to sustainable, double-digit revenue growth. In our DTC doors, we tested and deployed new merchandising concepts, which drove Q4 comp store sales up 22% with continued increases in profitability. We have also tightened our merchandise assortments for our wholesale partners and re-profiled hundreds of the Nike-only stores they operate. As a result, comp store sales and profitability for their overall fleets are up with the re-profiled stores significantly outperforming. And importantly, inventory levels in the marketplace are also down significantly. While we still have work to do in China, we are making great progress. And we remain confident that we have the right plan in place to achieve our true potential in this growth geography.

And finally, there is the outstanding results we are seeing in Western Europe. Q4 revenue grew 18%, a truly remarkable finish to an incredible year, as revenues in this important geography increased 14% to nearly $5 billion for the year with growth across all key categories and nearly every territory. The success we are seeing today in Western Europe stems from decisions we made more than two years ago to align our teams against the biggest growth opportunities through the category offense. We fueled growth in fiscal year ‘14 by transforming the marketplace, with shop-in-shops at JD Sports, Foot Locker, and Intersport, as well as our own retail stores and online. And we have only just gotten started. There are tremendous opportunities for continued growth ahead. By being focused and decisive, we now lead the market as the region’s most coveted sports brand. Nike is the number one brand in each of the top 10 cities in Western Europe and we are the footwear market share leader in every key country. And we are not done yet.

As we start a new fiscal year, we will continue to do what we do best, lead: lead with the world’s most innovative products and services, inspired by the greatest athletes; lead by connecting with consumers who share our passion for sport; and lead by energizing the marketplace with superior experiences at retail and online across the world. There is no doubt about it, the momentum surrounding Nike makes me incredibly excited about what’s to come.

Thanks. Now, here is Don.

Don Blair

Thanks, Trevor. Our FY ‘14 results continue to demonstrate our ability to leverage our diversified portfolio to drive sustainable, profitable growth. We are able to consistently deliver results like these for three key reasons. First, we invest effectively to build our business. The category offense is the framework for our growth strategy. And as Mark and Trevor described earlier, we are delivering outstanding value to consumers on each component of that framework: product, brand and marketplace. The results were clearly on display in FY ‘14. We continue to drive remarkable growth in North America and we have significantly accelerated our business in both of our European geographies.

Using the learnings gathered in more developed markets, we are making great progress resetting China, while continuing to build our brands and our business in the emerging markets. Within all of those geographies, our direct to consumer operations are the sharp point, delivering strong growth in revenue and profits, while setting a benchmark for our brand and our business in store and online. And beyond the Swoosh, we are continuing to build the Converse, Jordan and Hurley brands reaching toward the enormous potential they each offer. The results we are reporting today flow directly from the investments we have made over the past several years and we are confident the investments we are making today will continue to drive sustainable, profitable growth well into the future.

Second, we work hard to maintain balance across growth and profitability, investments and returns, near-term and long-term results. The breadth and depth of the Nike portfolio gives us the opportunity to invest for the future while delivering strong growth and expanding returns on capital. And that’s important for us to compete effectively and to continue to deliver value for our shareholders.

And the third reason we deliver consistent growth is that we effectively manage risk. In FY ‘14, we delivered 11% growth in EPS, despite losing 8 points of growth to currency headwinds. Our ability to deliver in a volatile environment demonstrates that we can pull the levers of our business to mitigate unforeseen downsides.

With that context, I will recap our Q4 and fiscal 2014 results. Nike, Inc. fourth quarter revenue grew 11% on a reported basis and 13% on a currency neutral basis bringing our revenue to $27.8 billion for the year, up 10% as reported and up 11% on a currency-neutral basis. Nike Brand futures orders advanced 12% on a currency-neutral basis, driven by an 8% increase in units and a 4% rise in average selling price. Growth was led by continued strength in North America and Europe, even as our futures window moved beyond the World Cup. On a reported basis, futures grew 11%, reflecting weaker international currencies, particularly in Japan and developing markets such as Brazil, Argentina, Russia and Turkey.

Fourth quarter diluted EPS increased 3% to $0.78 bringing full year EPS to $2.97, up 11% versus last year. Strong revenue growth, gross margin expansion and a lower share count more than offset SG&A investments and currency headwinds to drive EPS growth for the quarter and the year. As discussed on our previous call, our SG&A was more concentrated in the fourth quarter, primarily reflecting demand creation investments behind the World Cup. We estimate that changes in currency exchange rates, including the impact on gross margin, other expense and P&L translation reduced our year-on-year EPS growth by 7 percentage points for the fourth quarter and 8 percentage points for the full year.

Gross margin increased 170 basis points for the fourth quarter and 120 basis points for the year. The expansion for both periods was primarily driven by higher average prices, reflecting the power of innovative products and strong brands, as well as the continued strength of our DTC business. These upsides more than offset downward pressure from product cost inflation and FX headwinds. Gross margin for the quarter was better than expected mainly due to the strong performance of our growing DTC business, a mix shift to higher margin product and higher margins on closeout sales.

As we expected, Q4 demand creation spending was significantly higher than last year, driven by marketing investments in the World Cup and key product initiatives. Full year demand creation grew 10% in line with our full year revenue growth, largely driven by an increase in sports marketing expense, as well as marketing for global sporting events and new product launches.

Operating overhead grew 13% for the quarter and 14% for the full year. This reflected support for key growth initiatives, such as DTC and consumer digital, as well as infrastructure investments to support Nike’s current and future growth. Other expense, net was $17 million for the quarter and $103 million for the fiscal year, driven largely by foreign exchange losses, primarily from developing markets.

The fourth quarter effective tax rate was 23.5% higher than last year’s 22.9% rate, which benefited from a reduction in tax reserves related to foreign operations. For the full year, our effective tax rate was 24%, a 70 basis point improvement over the prior year primarily due to an increase in earnings from lower tax jurisdictions. We continued to deliver strong returns on capital in FY ‘14, as ROIC reached 24.5%, 70 basis points above last year. For the year, we delivered $2.1 billion in free cash flow and returned $3.4 billion in cash to shareholders, in the form of share repurchases and dividends.

As of May 31, inventories were up 13%, a somewhat faster rate of growth than revenue or futures. Our inventories are healthy in most markets, reflecting builds to support the World Cup and to optimize the flow of goods in Europe and China. We are continuing to work through higher inventories in Latin America, particularly Mexico as a result of the distribution center issues we experienced earlier in the year.

Now, let’s look at our performance by segment. North America delivered a great year, as revenues grew 10% to $12.3 billion, marking the fourth consecutive year of double-digit revenue growth. For the fourth quarter, revenue also grew 10% led by double-digit growth in basketball and global football. In Q4, DTC revenue grew 21% driven by an 8% increase in comp store sales and significantly higher nike.com revenues. For the year, EBIT for North America grew 16%, as strong top line growth and gross margin expansion were partially offset by higher DTC operating costs and demand creation.

As Trevor described earlier, Western Europe also had a fantastic year, as revenue reached nearly $5 billion, up 14% on a currency-neutral basis. Fourth quarter revenues grew 18%. FY ‘14 reported revenue for Western Europe grew 19%, while EBIT increased 33%, driven by revenue growth, gross margin expansion and SG&A leverage, as well as FX benefits from the stronger euro.

In the Central and Eastern Europe, currency-neutral revenues increased 12% in Q4 and 15% for the year, with growth in every key category, except Action Sports, and every territory except Israel. Football, running and women’s training were the fastest growing categories, with each reporting growth of 20% or greater for the quarter and the year. Russia, Turkey, Poland and Greece each reported double-digit growth for the year. On a reported basis, FY ‘14 revenue grew 13% and EBIT grew 19%, reflecting revenue growth and expanding gross margins. In Q4, EBIT fell 10% as stiff FX headwinds and SG&A investments more than offset higher revenues.

In Greater China, currency-neutral revenue grew 2% for the quarter and 3% for the year, led by strong DTC growth. For the year, reported revenue increased 5%, while EBIT was flat, as revenue growth and gross margin expansion were offset by higher SG&A, reflecting investments in DTC and our new headquarters in Shanghai. In Q4, EBIT fell 12%, largely reflecting the timing of demand creation and operational investments.

As Trevor noted, we are seeing great results from the actions we are taking to reset the China market for renewed growth. For FY ‘15, we expect revenue for the geography to grow at a high single-digit rate. As we have discussed before, we expect quarterly growth will vary, as we fine tune the seasonal flow of product into the market and given the significant variations in prior year comparisons. We expect those factors will drive somewhat faster revenue growth in the first quarter.

In Japan, currency-neutral revenues were flat in Q4, but up 5% for the year, driven by growth in sportswear, football and basketball. DTC revenues increased 18% for the year, reflecting comp store sales growth, as well as the launch of nike.com. On a reported basis, results in Japan were significantly impacted by the weaker yen. For the year, revenue was down 12% and EBIT fell 6% on a reported basis.

In our emerging markets geography, currency-neutral revenues grew 13% in FY ‘14, despite logistics issues in Mexico earlier in the year and generally weak macroeconomic conditions across Latin America. Every key category, except men’s training, posted higher revenues for the year paced by football, running and sportswear. The geography finished the year strong, with Q4 currency-neutral revenues up 25%, reflecting double-digit growth in nearly every territory and in most key categories. On a reported basis, results in the emerging markets were also significantly affected by weaker currencies in a number of developing markets.

FY ‘14 revenue grew 3%, but EBIT fell 3% as the FX headwinds eroded gross margins and generated losses on the other expense line. EBIT increased 8% in Q4, as stronger revenue growth was only partially offset by FX and World Cup demand creation investments.

Converse continues to deliver strong growth with revenue up 15% on a currency-neutral basis for both the fourth quarter and the full year. The growth was largely organic driven by mid-teens revenue growth in Converse’s direct distribution markets, particularly the United States, China and the UK, as well as expansion of the direct-to-consumer business. For the year, reported revenue grew 16% and EBIT grew 17%, as gross margins expanded. Fourth quarter EBIT increased 6%, as higher revenue and gross margins were partially offset by investments in infrastructure, DTC and demand creation.

Nike delivered strong growth in FY ‘14 and we are beginning the new fiscal year with great momentum across our portfolio. Our FY ‘15 guidance reflects that momentum, as well as continued investments in growth drivers such as DTC, product innovation and consumer digital, along with the operating capabilities to support our growth. Overall, our expectations for FY ‘15 are largely unchanged from what we shared last quarter. Specifically, for the year, we expect reported revenue to grow at a high single-digit rate, reflecting low double-digit currency-neutral growth partially offset by continued FX pressure from developing market currencies.

We expect Q1 reported revenue to grow at a low double-digit rate, driven by tremendous energy around the World Cup and continued growth in North America, Europe, China and the emerging markets. We expect gross margin for Q1 and the full year to expand by about 75 basis points. We expect average selling prices to increase driven by our ongoing focus on optimizing pricing and driving our product mix to premium. Growth in our DTC business should also benefit gross margin helping to offset increases in product input costs, particularly labor.

As both Mark and Trevor discussed earlier, our growth strategies are working and we will continue to invest in them. For Q1, we expect demand creation to grow at approximately 30% as we continue to leverage the energy of the World Cup. Operating overhead for Q1 is expected to grow in the high-teens, reflecting investments in innovation, consumer digital, DTC and key operating capabilities. For the full year, we expect total SG&A to grow at a similar rate as FY ‘14. For FY ‘15, we expect the effective tax rate will be approximately 25%.

As Mark said at the top of the call, by staying focused on consumer engagement and relentless innovation, we drive value for our shareholders. We are proud of the strong results we delivered in FY ‘14 and we are more confident than ever that we will deliver sustainable, profitable growth and value for our shareholders. We are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kate McShane with Citigroup. Your line is open.

Kate McShane - Citigroup

Thanks. Good afternoon.

Kelley Hall

Hi, Kate.

Kate McShane - Citigroup

Just one quick question on guidance, I think Don on the last call you had said for fiscal year ‘15 you had expected slightly below mid-teens EPS growth rate, is the guidance and the line items you gave today implying that same guidance?

Don Blair

Well, Kate, as you know it’s not been our practice to regularly give EPS guidance, but we do give you parameters on key line items. And I would point you back to the guidance that we gave in the prepared remarks and that’s where I would like to leave it for now.

Kelley Hall

And Kate, you can give a call into my team. We will walk you through it.

Kate McShane - Citigroup

Okay, great. And then my second question is on share buybacks, it looks like this quarter you have bought back more on a dollar basis than you ever have in your history, how should we think about buybacks going forward?

Don Blair

Well, overall, our strategy as you know is to continuously increase the level of cash returns to shareholders. And as you know, we have done that very consistently with our dividend. And we do create our share repurchase program based upon analysis of value of the company and market conditions. So, over the long-haul what we would expect is that we would continue to deliver more cash back to shareholders. The specific timing of that is based upon our assessment of the marketplace, but we are confident in our ability to continue to generate sustainable profitable growth and we think Nike is a good investment.

Kate McShane - Citigroup

Thank you.

Operator

Your next question comes from Omar Saad with ISI Group. Your line is open.

Omar Saad - ISI Group

Thanks. Great job on the World Cup so far. You guys seem really visible. Congratulations. Two questions, one on China, one on supply chain. When it comes to China, it’s really great to hear that you have got a store format that seems to really be working. Now that you have got this kind of this DTC format that works, are you going to re-profile the partner stores? Are you going to shutdown some of the partner stores there? Any sort of deeper dive explanation of what the retail strategy there would be helpful? And then my supply chain question on the supply chain revolution really, are you starting to see gross margin benefits from some of those activities? I mean, Flyknit is really starting to get larger in size or is that really all in the come in terms of the margin benefits of some of the new supply chain innovations? Thanks.

Trevor Edwards

Okay, yes. Omar, I will take the first one. Yes, around China, yes, obviously we are seeing great results in the stores that we have re-profiled. So, we clearly feel that the reset strategy is working. What we are looking to do is continue to expand on the number of stores that we actually re-profile and so that we can continue to actually scale the results. Right now, it still represents a smaller part of our entire business, but we do believe that by re-profiling more doors, we will continue to actually build the business in the right way. So, again, we feel very confident about where we are today. We will accelerate at a faster pace as we kind of come out, but we certainly feel very confident of what we have been doing.

Don Blair

And just to be clear, Omar, when we say re-profiling stores, it’s not just a physical format, it’s also the way we assort the stores and to Trevor’s earlier point this is already in a number of stores with our partners not just in DTC and those partners are seeing great results both in terms of sales results as well as margin. So, with respect to your second question to take the financial part of the question, we are still in very early days in terms of seeing the impact of some of the more transformational approaches to manufacturing. We are starting to proliferate that into our sourcing base but we think there is huge opportunity going forward on that.

Mark Parker

I will just add Omar that we are very familiar to modernizing our manufacturing and really focusing on innovation with some key partners to transform the whole process. There is lots of opportunities I think to reduce product costs and we are focused on the ones that we think have the most potential to make an impact so we are selective as to where we can innovate and how we can scale those innovations. Flyknit you mentioned has enormous potential. We are getting tremendous response to that product we are improving or extending the scope of Flyknit across multiple categories. I think you will see over the next couple of fiscal years Flyknit and some of the other investments we are making in manufacturing innovation really starts to make a more sizable impact on our product cost reduction. And that will only continue to get bigger and stronger I think in the fiscal years to come. We are very bullish on this and it’s really important part of our strategy to contain product costs and then advance the innovation in our products at the same time.

Omar Saad - ISI Group

Thank you. Very nice job guys.

Mark Parker

Thank you.

Kelley Hall

Thank you, Omar.

Operator

Your next question comes from Bob Drbul with Nomura Securities. Your line is open.

Bob Drbul - Nomura Securities

Hi. Good evening.

Kelley Hall

Hi Bob.

Bob Drbul - Nomura Securities

The first question I have is around the FX and the currency hedging losses, Don how should we model that or think about that I think it came in a little bit below the expectation this quarter at least and just sort of how to think about it for ‘15 from a modeling perspective and I guess similarly on those – that line can you just elaborate a little more how you are managing the risk in some of the emerging market volatility that you are seeing right now from a business standpoint as well as an FX standpoint?

Don Blair

Sure. So I am going to leave – need to leave the conversation around modeling with our IR folks as it all depends upon the individual who is doing the modeling, but as far as the way we manage this we do have a pretty robust hedging program or the developed market currencies because normally those are the largest impacts on our business and it’s relatively economical to do those sort of hedges. For a lot of the other currencies we have done quite a bit of work in the last few years developing natural offsets to some of the exposure by purchasing in multiple currencies and so as a result we have reduced our overall volatility. But there is a base line level of volatility especially in the developing worlds like Brazil, Argentina, Russia, Turkey that just is not economical to eliminate through the use of a hedging program. So unfortunately we are going to see some of that volatility flow into our numbers. With that said we have very diversified portfolio of businesses. And just as you saw in FY ‘14 we have a lot of levers to pull and we were able to deliver double digit growth in EPS even though we absorbed eight points of FX headwind for the year.

Bob Drbul - Nomura Securities

Okay. And then just my second question is a lot of talk on the World Cup and the product offering, I just wondered if any of you guys would share your predictions for the winner?

Mark Parker

We just hope that the best teams win.

Bob Drbul - Nomura Securities

Alright. Thanks very much.

Mark Parker

Good luck.

Operator

Your next question comes from Robby Ohmes with Bank of America Merrill Lynch. Your line is open.

Robby Ohmes - Bank of America Merrill Lynch

Thanks guys. Thanks for taking my question. Congrats on a great quarter. My question is on North America I get this question a lot, how – can you give us a little bit more of a map on how you are going to keep the North America momentum going, is it more price increases, is it an acceleration in store growth, internet is it more leaning on women’s growth acceleration, just maybe a little more color on how you guys expect to keep that going through the next year or two?

Trevor Edwards

Absolutely. It’s a question that we clearly always get that same question. And the thing that we would continue to say is that we see great momentum in North America today. Our futures growth of 11% continued to demonstrate that we can continue to leverage the category offense to continue to grow the brand and the overall market. One of the key things that we have certainly learned is by drilling down against any of the opportunities in the category, we can continue to grow. So, we see great growth coming from the categories that currently are perennial categories as I talked about earlier, whether that’s running, that’s basketball. Those are obviously our key categories, which will see growth and will see sportswear growth.

In addition, we see great growth come from the other categories, such as our women’s business, our young athletes business as well as e-commerce. So, those are all very under-penetrated opportunities. So, we look at the North America and we see just tremendous growth potential in the marketplace. Overall, also we have our focus with our key retail partners around continuing to transform the marketplace. So, we can increase the capacity in that marketplace, which we are certainly seeing great success from doing that today. So, all-in-all, we still see tremendous ways to grow e-commerce, young athletes, women’s, apparel, all of those represent really great opportunities for us to grow in addition to the current and expected businesses, where we are doing well today.

Don Blair

And I will just quickly add that we have a sizable investment and ongoing investment in DTC and that’s not just to create more premium points of distribution. It’s actually to help us elevate our business and how we manage our brand in North America certainly and then around the world. We are getting better I think at retail presentation, consumer experiences, storytelling, merchandising, product flow, assortment planning. These are the things that you have to do just to be a better brand in a better business. And so we are leveraging that investment in DTC that really drive more potential in North America, but then also it’s really a blue print for expanding our business around the world.

Robby Ohmes - Bank of America Merrill Lynch

It sounds great. Thanks guys.

Don Blair

Thank you.

Trevor Edwards

Thanks, Robby.

Operator

Your next question comes from Dave Weiner with Deutsche Bank. Your line is open.

Dave Weiner - Deutsche Bank

Great. Yes, good afternoon. So, I was looking for a little more color on your long-term gross margin driver. So, I think the key drivers that you have talked about in the past are shift to – our geographic shift outside of the North America, a shift from footwear to apparel and then also a shift to DTC. It feels like the DTC is what’s helping the most right now. Could you just kind of confirm if that’s the case? And if it is, maybe provide a little color about when maybe the shift to apparel and the geographic gross margin shift may start to contribute to the overall gross margin gains as well if they are not already? Thanks.

Don Blair

Okay. Well, let me just start with the biggest drivers. I mean, certainly, we start with the top line. And as I said in my prepared remarks, we have done quite a bit of work around our consumer value equation. And one of the things that the strength of our brand and the innovation that’s in our products means that there is a great consumer value proposition at higher price points. So, certainly, working to optimize that price value equation, we think we can continue to raise prices, particularly around product innovation and brand strength. And then the second thing is migrating consumers to premium product. So, that is definitely a trend we have seen both on the footwear and the apparel side.

The second one is really making sure that we are working that product cost equation. And as Mark indicated earlier, there is a whole range of supply chain and manufacturing initiatives in place all the way from the evolutionary to the revolutionary. And the objective there is to raise the productivity of labor to reduce waste of materials and produce even more premium product. And we are driving hard against those. DTC is certainly a positive driver for us. And our DTC business has increased significantly in profitability as we have driven our .com business and also as we have gotten better and better as Mark indicated at operating retail. So, all of those are key drivers. They were key drivers in ‘14. We expect them to be key drivers again in ‘15 and going forward.

Dave Weiner - Deutsche Bank

Great, that’s helpful. Thanks.

Operator

Your next question comes from Jay Sole with Morgan Stanley. Your line is open.

Jay Sole - Morgan Stanley

Hi, good afternoon.

Mark Parker

Hi.

Jay Sole - Morgan Stanley

Mark, I just had a question about the reset going on in China, can you just walk us through the strategic decision-making process, we’re thinking about whether to prioritize investment in distribution into nike.com versus investment in brick and mortar retail whether it’s your own or wholesale partners, I am sorry, retail partners?

Mark Parker

Well, we are actually investing in both. We are as I have said you have heard us talk about quite a bit we are investing in elevating the presentation of Nike at retail looking at how we can improve our ability to create a more profitable, more focused business, raise the level of execution against the categories, it’s really imperative that we will not only learn how to do that ourselves in that market but actually help to leverage those learnings through our retail partners. So the physical retail investments we are making in China are absolutely critical. I am really excited about what has transpired over this past year and then our ability through ’15 and beyond has started to scale those learnings across both our own retail and our wholesale partners. Certainly, we are very bullish on dot-com not only in China but around the world. We think that’s just going to continue to be a bigger and bigger percentage of business going forward and China is certainly no exception. Very digitally connected country consumer and that channel for us, that medium for commerce is absolutely the future. So, we are going to be as bullish there as we possibly can.

Don Blair

Yes. The one thing I would also underline from an economic standpoint is our focus is on productivity and profitability of retail. So for us from a return standpoint this is really driving more revenue, more profitability though a given size of distribution infrastructure which is not to say we won’t expand over time but the strategy is not adding lots of new stores in lower tier cities here. We are really focused on making our existing base more profitable, more productive for us and for our retailers.

Trevor Edwards

One other thing too as Mark just mentioned in China specifically last quarter we actually went in and upgraded our entire nike.com site in our China business. And that again is one of those things as we continued to transform that marketplace using all of the investments that we put in place we are now leveraging that in China specifically. So I think you will see that play out and in the future as that continues to grow.

Jay Sole - Morgan Stanley

Got it. Thanks so much.

Operator

Your next question comes from Mitch Kummetz with Robert Baird. Your line is open.

Mitch Kummetz - Robert Baird

Yes, thank you. Trevor, in your prepared remarks, you referenced the momentum on the women’s side. I was wondering, is that more of a U.S. phenomenon, are you seeing that trending elsewhere? And then in terms of the growth that you are seeing there, is it more on the apparel side and footwear, is it more DTC than wholesale? Just any color on that would be helpful.

Trevor Edwards

Yes, certainly. We absolutely see just great momentum in women’s business. Actually, it’s not only in North America, but actually across all the geographies. We are seeing great growth as we have gone in and certainly we are seeing really a strong brand position. All the work that we have done around the Nike training app has really helped to unlock a connection with our female consumer. We continue to bring really great products and premium products into the marketplace. And so she is very obviously excited about that. And then thirdly what we are also doing is around distribution, we have been able to go in and work at our DTC doors to use them, as Don said, as a sharp point to better understand that consumer and then roll that strategy out with our wholesale partners.

Now, in terms of footwear and apparel, actually we are seeing growth on both dimensions. Certainly our footwear, on both running – from running to training to actually sportswear and certainly around apparel, we are seeing great growth in the women’s training apparel as well as in women’s running apparel, so again just tremendous upside here. And I think going forward, you are going to see us put a lot more focus on this part of the business, because we truly believe this is an area where we can be very successful and then we see great opportunity.

Mitch Kummetz - Robert Baird

Okay.

Mark Parker

I will add to this. The women’s business on the .com side has been incredibly healthy as well. And we expect that to continue through ‘15 and beyond and that’s a real focal point for us on the women’s side is that .com business. And then the futures on our women’s business are actually very, very healthy as well. So, we see a lot of momentum going into fiscal year ‘15.

Mitch Kummetz - Robert Baird

Okay. And then real quickly on Western Europe, I mean, a lot of momentum there, you have talked about some of the strategies that you have placed in that market. I am also wondering how much of a factor is an economic recovery there? I mean, is it mostly that you are taking share with some of these strategies or are you also benefiting from somewhat of a tailwind from economic recovery?

Trevor Edwards

I think from our side we are certainly seeing just broad-based growth across all of the Western European marketplace. And that we truly believe is a function of the reset that we did two years ago when we decided to really focus against the category offense as well as have a more centralized approach to the European marketplace. So, we’re seeing great growth really across all the territories and even in the Iberia, so the Southern parts, where it was struggling, we are certainly seeing strength in those zones coming back. So, we really truly believe our category offense is what’s driving that. And we are seeing the numbers actually go really ahead of any economic recovery. So, we feel very strong that it’s really about our approach in that market. And we think we have only just gotten started. We think there was just tremendous growth continuing to come through.

Mitch Kummetz - Robert Baird

Okay, thanks. Good luck.

Kelley Hall

Alright. Well, thank you everybody. I appreciate you joining us for our year end call today. And we look forward to talking to you next quarter.

Operator

This concludes today’s conference call. You may now disconnect.

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