NIKE F2Q08 (Qtr End 11/30/07) Earnings Call Transcript

Dec.19.07 | About: Nike Inc. (NKE)

NIKE Inc. (NYSE:NKE)

F2Q08 (Qtr End 11/30/07) EarningsCall

December 19, 2007 5:00 pm ET

Executives

Pam Catlett - VP of IR

Mark Parker - President and CEO

Charlie Denson - President, NIKEBrand

Don Blair - VP and CFO

Analysts

Jeff Edelman - UBS

Brian McGough - Morgan Stanley

John Shanley – Susquehanna

Bob Drbul - Lehman Brothers

Virginia Genereux - Merrill Lynch

Omar Saad - Credit Suisse

Brad Cragen - Goldman Sachs

Jim Duffy - Thomas Weisel

Operator

Good afternoon everyone. Welcometo NIKE's Fiscal 2008 Second Quarter Conference Call. For those of you who needto reference today's press release you will find it at www.nikebiz.com, leadingtoday's call will be Pamela Catlett, Vice President, Investor Relations.

Before I turn the call over toMs. Catlett, let me remind you that participants of this call will makeforward-looking statement based on current expectations and those statementsare subject to certain risks and uncertainties that could cause actual resultsto differ materially. These risks and uncertainties are detailed in the reportsfiled with the SEC including Forms 8-K, 10-K and 10-Q. Some forward-lookingstatements concern futures orders that are not necessarily indicative ofchanges in total revenues for subsequent periods due to the mix of futures andat once orders, exchange rate fluctuations, order cancellations and discounts,which may vary significantly from quarter to quarter.

In addition, it is important toremember a significant portion of NIKE Incorporated's business includingequipment, most of NIKE Retail, NIKE Golf, Converse, Cole Haan, NIKE BauerHockey, Hurley and Exeter Brands Group are not included in these futuresnumbers.

Finally, participants may discussnon-GAAP financial measures. A presentation of comparable GAAP measures andquantitative reconciliations can also be found at NIKE's website. This callmight also include discussion of non-public financial and statisticalinformation, which is also publicly available on that site, www.nikebiz.com.

Now I'd like to turn the callover to Pam Catlett, Vice President, Investor Relations.

Pam Catlett

Thank you. Happy holidayseveryone and thank you for joining us today to discuss NIKE’s fiscal 2008second quarter results. We issued our results about an hour ago. If you need toreference them as the operator said you can find the results on our pressrelease on our website at nikebiz.com, where you'll also find reconciliationsbetween GAAP and non-GAAP reported items.

Joining us on today's call willbe NIKE Inc.'s CEO, Mark Parker followed by Charlie Denson, President of the NIKEbrand and finally you'll hear from our Chief Financial Officer, Don Blair whowill give you an in depth review of our financial results. Following theirprepared remarks we'll take your questions.

As for questions, you all knowthe drill. We'd like to allow as many of you to ask questions as possible inour allotted time. So we would appreciate you limiting your initial questionsto two. And in the event you have additional questions that are not covered byothers please feel free to re-queue and we will do our best to come back toyou. Thanks for your co-operation on this, and it is now my pleasure tointroduce NIKE Inc.'s CEO, Mark Parker.

Mark Parker

Thanks, Pam, and welcome, everybody,to our second quarter call. Q2 was another strong quarter for NIKE and showsthat we continue to meet the promise of delivering sustainable profitablegrowth. We increased revenue and gross margins in every region. Net revenue forthe quarter was up 14%, that's 25 consecutive quarters of year-over-yearrevenue growth.

In the quarter we added over $500million of incremental revenue to reach $4.3 billion. Global futures are up 10%on a constant dollar basis. EPS grew 11% for the quarter to $0.71 a share. Wecontinue to manage down our inventory levels, our footwear business continuesto build strength in every region, and we increased our quarterly cash dividendto $0.23 per share, a 24% increase over the previous quarter and that's consistentwith our five year average of dividend increases.

These numbers really illustratethe ability of the NIKE brand to connect with consumers. Q2 also shows thebenefit of having multiple levers to pull; across categories, geographies andthroughout the portfolio. This gives NIKE a lot of flexibility, especially inshifting macroeconomic conditions. This flexibility has helped NIKE consistentlyoutperform our competitors. And that's a good indicator for some people, but wedon't focus in the past, we focus on our potential.

Specifically we are building someserious momentum is emerging markets, China continues to be a big focus;revenues grew 37% in Q2. We have a solid and strategic presence in tier-1 andtier-2 cities. We're seeing very solid year-over-year comps sales performanceacross our retail base in China.For example our flagship store in Beijingis exceeding our expectations and is now one of the most productive andexciting stores in the world. We are on plan in Chinaand looking forward to showcasing NIKE innovations on the world stage in Beijing this August.

Another big story is our CEMEAregion, which includes Central and Eastern Europe, the Middle East and Africa. Revenues for the region are up 30% led by Russia and Turkey where revenues are up 45% and39% respectively. Both Chinaand CEMEA are on track to surpass $1 billion in revenue this fiscal year andit's truly just beginning for these two key markets.

Here in the US we continue to help driveinnovation in the marketplace. I hope some of you had the chance to visit theHouse of Hoops store in New York or therunning experience in NIKETown New York ormaybe even the new iD spaces in New York and London.

If you have then you saw how weare able to enrich the consumer experience at retail. It's a good first step inshowing how we can further differentiate in segment NIKE and our retailpartners.

In Apparel, our NIKE Pro and NIKESport Essentials continue to do well and we see tremendous opportunity in oursportswear business. Sportswear in one of our six key growth categories andthat means the team is laser focused on this consumer. Gaining the insightsthat takes to create compelling product and then elevating the way thoseproducts are merchandised at retail.

The success of our performanceapparels is a great base to build on in the Sportswear space. You get to seehow that works in Beijing.We will deliver what I would consider to be the most significant performance insportswear apparel initiatives in NIKE's history.

It really shows how the power ofdesign and the art of merchandising can work together to create premiumconsumer experiences in apparel.

In our portfolio of brandsperformance and potential remain very strong. In Q2, the subsidiary businessescontributed over $600 million in revenue, up 16% over last year and delivered$71 million in pre-tax income, up 31% since last year. This includes record Q2performance from Converse and Cole Haan. We certainly see a lot of potentialfor continued growth in the subsidiaries.

In Q2 we also made three boldmoves to strengthen the performance and the potential of our portfolio, two ofthose moves were divestitures, NIKE Bauer Hockey and Starter. And we alsoannounced our intention to acquire Umbro. We're very excited about what thismeans for NIKE's global soccer business.

All three of these moves showthat we're committed to investing and divesting to create a higher potentialportfolio. That we are flexible. That we're willing to make bold moves, andthat we are able to capital to work in the right places to maximize ourrelevance with consumers and our value to shareholders.

All of this is about leadership,how NIKE leads the consumer, leads the product innovation, leads the market andthe industry. We are aggressively managing costs and also investing in thoseareas that give us the foundation we need to expand our leadership.

Consumer connections, retailcapabilities, emerging markets, talent management, technology, digitalcompetency, gaining and leveraging efficiencies across our portfolio, all thesethings have broaden our base of excellence and enabled another level of growth.We have a very clear vision of our strength and opportunities and we'repursuing both with vengeance.

Now, I will turn it over toCharlie for an update on the NIKE brand.

Charlie Denson

Thank you, Mark. Happy holidaysto everybody. Well, what can I say? Second quarter for the NIKE brand was verygood. Revenues are up, futures are up, margins are up and the quality of ourinventory and close-out levels is excellent. All-in-all we feel pretty goodabout today's results and about where we are in our growth plans.

I would like to start off todayby talking a little bit about our plans with retail and that is to buildworld-class destinations that deliver premium experience to the consumer. Weare doing that with our partners and in our direct retail locations, were weare seeing some very encouraging numbers.

Mark mentioned the House of Hoopswhich had a terrific opening and the running experience and NIKETown New York. I think theseare good examples of how we are elevating the consumer experience of retailwith superior merchandising, great service at the floor level, and a strongconnection back to the local community.

We are seeing very strong resultsin converting some of our women stores to do gender presentation and we areapplying several of these new elements in our new NIKE store format.

We are well along in thedevelopment phase of the new store and we would expect to see the firstlocations announced in the next 90 days. NIKEiD is gaining a lot of steam aswell. We opened NIKEiD Studios in both New Yorkand London,NIKETowns over the past couple of months.

In fact, reservations for asession with the NIKEiD design consultant are already booked clear throughJanuary. And the conversion rate for the NIKEiD studio and NIKETown New York alone is up toover 90%.

As part of our growth plan wesaid that digital was going to be a growth driver and it is. More than threemillion people visit our website each month. And that continues to grow.Increased traffic combined with very healthy conversion rates in Q2, increasedour revenue from digital 40% over last year. And we have a lot more ideas inthe [half run].

The US market continues to be a dynamicone, and a strong one for NIKE. Q2 revenues are up 7% over last year andpre-tax is up 9% as we outperformed in a very challenging market.

We see a lot of potential in ourkey categories, including some impressive momentum in running and training bothmen's and women. Men's training is where our fleet of football business leads.

It's also where NIKE connectswith some of the most exciting stories in American sports right now. Whetherit's Tom Brady of New England Patriots or Brad Farr were front and center. Weare also back on the field with our new NFL Glove Deal that started in weekeight of this season. And if it's the College Bowl season you are lookingforward to, NIKE has nine of the 10 BCS teams. 47 of 64 schools will be in NIKEuniforms and footwear, and 44 teams will be teeing up the NIKE football. That'sgood for NIKE and good for football. And for the ninth season in a row, NIKEwill have the national champion.

At a glance, the U.S.basketball market is underweight compared to its Supernova performance a fewyears ago, but I remained very confident in this business. We are bringinggreat new product to the game, like the LeBron 5 and the new Melo M4, the newsignature shoe for Carmelo Anthony. And we are all looking forward to the AirJordan 23 launch at the All Star Game in New Orleans.

We had a particularly strongsell-through in November here in the U.S. We increased share in everymajor category, with basketball seemed the biggest single jump, and we continueto expand our lead in the ever-important China market as well. Markmentioned apparel, where we continue to see strong sell-through in our NIKE Proapparel and in our fundamentals business, specifically the NIKE SportsEssentials around the world.

We continue to see momentumbuilding on the performance side of our apparel business around that world,focusing on iconic items, spreading color and continuing to push the innovationspectrum in both fabric technology, fit and construction.

The competitive uniforms you willsee in Beijingrepresent some of the biggest advancements we have seen in performance apparelin quite a while. The softness in our U.S. apparel business is reflectedin our sportswear segment, what we call the sports-inspired lifestyle.

We are addressing some of thesechanges now and you will start to see some of that product at retail thissummer. We are leveraging our category focus to create fewer styles that haveincreased relevance across the regions. That means clear product assortments,stronger footwear hook up, and more compelling merchandising at retail, and, ofcourse, we are always looking at the leverage we can pull to expand margins.

In every region, revenues,futures and pre-tax are all up. In the UKand what's in Europe, we are seeing thebenefits of a sustained brand strength and cleaner distribution. The Europeanteam has delivered their 10th consecutive quarter of revenue growth, and evenmore impressive profitability in a region is even stronger.

The T90 soccer boot continued tosell through extremely well, as we head towards the 2008 Euro Champ. We are setto launch the next big boot story in Mercurial SL, which is a carbon fiber bootthat was originally just a concept card. We were going to offer it to thepublic, but it has performed so well in initial wear-test that we are convincedit is going to be the next edition of our groundbreaking Mercurial [Filo].

As Mark said, our CEMEA region isreally clicking, with a record second quarter for most countries in the region.We are successful there because we are executing two things really well. First,we are very focused on brand and product alignment. And second, we are beingvery strategic in our commercial development. We are reaching consumers withthe right products and the right stories in the right places. So, CEMEAcontinues to be a great growth story for us.

And China is raking towards theOlympics. We feel very good about where we are with the Chinese consumers andwith the brand of retail. Our product is selling very well and at a pace thatreflects our confidence in the market and our discipline at managing inventorylevels, both into and coming out of the Olympics.

The new Beijing store that we opened in August issurpassing even our highest expectations and we are really looking forward tohaving one of our new concept stores open there before the games begin.

In Japan, revenue and futures are up,while inventories are down. The results are not dramatic yet. But ourfundamentals there look good. We are staying focused and patient in managingour distribution strategy and our brand position continues to be solid. I wouldsay I am guardedly optimistic, it's an incredibly important market for us andwe have the patience we need to make sure we get it right. In other words, Q2shows that we are pulling all the right levers and it's nice to have them.

Now, it's over to Don to take youthrough the numbers.

Don Blair

Hey, thanks, Charlie. Thestrength of our global business portfolio was again evident in our secondquarter financial performance. Both revenues and earnings per share grew at adouble-digit rate, driven by strong operating results across multiple brands,geographies and categories. In addition, we continue to deliver both growth andincreased capital efficiency, as both return on invested capital and cash flowgrew strongly versus the prior year.

To recap the results for NIKEInc., revenues for the quarter grew 14%, with 4 points of growth from theweaker dollar. On a reported basis, NIKE brand revenues grew 13%, as all fourregions and all three product types delivered revenue growth for the quarter.Revenues for the businesses we report as other is 16%. Futures order scheduledfor delivery from December, 2007 through April, 2008 grew over 13% versus lastyear, driven by robust growth in each of our international regions. Excludingcurrency changes, futures were up 10%.

For the quarter, pre-tax incomegrew 15%. Diluted earnings per share for the quarter grew 11% to $0.71,reflecting a higher tax rate than last year's second quarter, which was reducedby the recognition of a new international tax agreement.

Second quarter gross marginsexpanded 90 basis points versus the prior year, driven by better in-linepricing margins in footwear, better closeout management and faster revenuegrowth in high margin businesses.

Currency changes had a minimalimpact on gross margins for the quarter. Over the past two quarters of fiscal2008, we delivered $738 million of free cash flow from operations, paid out a$185 million in dividends and repurchased $614 million of NIKE stock. Even soour balance of cash and short-term investments totaled over $3 billion as ofNovember 30th, over $6 a share on a gross basis and nearly $5 a share net ofdebt.

Our trialing 12 months return oninvested capital was 23.5% up 240 basis points verses the end of the secondquarter of fiscal 2007. So with that recap of our consolidated performance, letme give you some color commentary on the results we reported earlier today.

In our European region whichincludes the Middle East and Africa, secondquarter revenues increased 18% with 10 points of growth from currency changes.Currency neutral footwear revenues increased 9%, apparel revenues were up 6%and equipment grew by 13%. After several years of weak market conditions in Western Europe we are very encouraged by the continuedpositive momentum across the region.

On a currency neutral basisvirtually every country in the EMEA region reported higher revenues. As a groupour emerging markets were up 30% driven by strong results in Turkey, Russiaand Greece.In Western Europe; revenues in the UKand Germany each grew at adouble-digit rate while revenues in France grew at a high single-digitrate.

Futures orders for the EMEAregion grew 13% in constant dollars reflecting continued growth in nearly everycountry in the region. Second quarter pre-tax income for the European regiongrew 37% to $230 million driven by revenue growth improved gross margins,SG&A leverage and stronger European currencies.

In the Asia Pacific region secondquarter revenues increased 17% including a five percentage point benefit fromcurrency changes. Currency neutral revenues for Footwear increased 16% andApparel grew 11%.

Asia's revenue growth was drivenby Chinawere revenues for the quarter increased 35%, on a currency neutral basis. Ourgrowth in Chinahas been driven by new store openings and double-digit comp store sales growthfueled by brand doubling investments around the Beijing Olympics, basketballand NIKE+.

In Japan we saw continued signs ofimprovement, second quarter revenues grew about 2% on a currency neutral basis.For the quarter pre-tax income for Asia Pacific grew 19% to $174 million,driven by strong revenue growth, expanding gross margins and strongercurrencies.

In the Americas region second quarterrevenues increased 19% driven by about five points of benefit from strongercurrencies and double-digit growth across all three product types. Excludingthe effects of currency changes revenue growth for the region was driven by theLatin American markets led by growth of over 20% in Argentinaand in Mexico.Second quarter pre-tax income for the Americas region grew 12% to $69million driven by revenue growth, gross margin expansion and favorable exchangerates.

Our business in the USregion delivered solid results in the second quarter. Revenues increased 7%versus the prior year driven by higher sales to most of our top accounts.Revenues from NIKE owned retail stores in the US grew 17% for the quarter. Compstore sales at NIKE first quality stores increased 6%.

US futures for the period fromDecember 2007 to April 2008 increased 1%. As we've said many times futuresgrowth maybe not be an accurate predictor of future revenue growth due to avariety of factors, such as shipment timing and growth in non-futures revenuesuch as retail, equipment, at-once and closeout sales.

For the full year we believerevenues for the USregion will grow closer to the mid-single digit growth rate that we expect forthe long term. Our footwear business in the US delivered an excellent secondquarter, as revenues grew 12% and gross margins expanded. Unit volume increaseddouble-digits driven by strong growth in the sportswear, Jordon and kidscategories and was partially offset by a slight decline in average price perpair.

US Apparel revenues were down 3%for the quarter as growth in performance apparel was more than offset bysoftness in basic sportswear products such as T-Shirts and Fleece.

Second quarter pre-tax income forthe USregion increased 9% to $307 million driven largely by growth in revenues andfootwear margins. Second quarter revenues from our other businesses grew 16%.Converse delivered a tremendous quarter as revenues advanced over 40% andpre-tax income grew by a third.

Revenues for NIKE Golf, ColeHaan, Hurley, and NIKE Bauer Hockey each grew double-digits. For the quarterpre-tax income for the other businesses was up 31% driven by strong revenuegrowth, expanding gross margins and SG&A leverage. Second quarter SG&Aexpense for NIKE Inc. grew 17% with four points of the growth coming fromchanges in exchange rates.

Excluding currency effects demandcreation grew 12% and operating overhead grew 14%. For the quarter demandcreation increased primarily due to investment in retail presentation with ouraccounts, brand events such as the NIKE+ holiday campaign and sports marketinginvestments in soccer and basketball.

The growth in operating overheadwas driven primarily by investments in strategic growth initiatives such asNIKE-owned retail, Chinaand Converse as well as normal wage inflation and performance basedcompensation. Other income for the quarter was about $1 million versus a smallother expense in last year's second quarter.

The combination of currency hedgelosses and the favorable translation of foreign currency denominated profitsfrom our international businesses increased year-over-year pre-tax income byabout $25 million for the quarter.

Our tax rate for the secondquarter of fiscal 2008 was 30.3% in-line with our estimated effective tax ratefor the remaining quarters of the fiscal year. This was a higher rate than lastyear's second quarter, which included a retroactive benefit from aninternational tax agreement. We are continuing to pursue additional global taxefficiencies and hope to continue to make progress in this area.

In addition to delivering strongprofitability for the quarter, we continue to drive capital productivity. Inthe second quarter of fiscal 2008, we improved our cash conversion cycle by 11days, driven by improved productivity metrics for inventory, accountsreceivable and accounts payable.

In particular, inventories are invery good shape. As we reported a 3% increase versus the end of last year'ssecond quarter. On a constant currency basis inventories actually fell 2%. Ourgoals for the full fiscal year remained largely unchanged excluding anticipatedgains on the sale of the Starter and Bauer businesses.

The second half of fiscal 2008,we now expect low double-digit revenue growth, driven by our business momentum,and the continued weakness of the US dollar. And we are forecasting grossmargin growth roughly in-line with our year-to-date results as the benefits ofclean inventories, continued progress on gross margin initiatives and favorableselling currencies more than offset the impact of sourcing cost pressures suchas higher oil prices, labor rates and stronger Asian currencies.

For the balance of the year, weexpect SG&A to grow faster than revenues, primarily due to acceleratingdemand creation spending over the balance of the year. This spending will beweighted more heavily towards the fourth quarter, driven by the Beijing Olympics and theEuropean Football Championships.

For the second half of the yearwe expect the weaker dollar will have a positive impact on our overallprofitability as positive translation benefit should more than offset currencyhedge losses. However, these currency hedge losses will likely result in anincrease to other expense in the second half of fiscal '08.

In summary, we delivered anothersuccessful quarter and remain on track to achieve our goals for the fiscalyear. Now, we'd be happy to take your questions.

Question-and-AnswerSession

Operator

Thank you. (Operator Instructions)

Our first question comes from the line of Jeff Edelman withUBS.

Jeff Edelman - UBS

Happy holidays and nice work!

Mark Parker

Hi, Jeff.

Charlie Denson

Hi, Jeff

Jeff Edelman - UBS

Charlie, question for you on domestic footwear, if we try todelve into it a little more. If we think about the retail component, thatprobably maybe added about 2.5 point of your US sales increase. So, we saw yoursales to your customers up just a little faster than futures. If that's thecase then we really didn't have that much of the shift in timing of shipmentsto account for the slower rate of growth in the futures. So, my question is: isthere anything else in there? Or: am I looking at it the wrong way?

Charlie Denson

Well, you mean: with respect to looking at futures versusthe revenue number?

Jeff Edelman - UBS

Yes. Because the larger part of your revenue growth clearlywas driven by your own retail stores. So, I think, you are backing out, maybesales to other customers were up 4.5% versus the 3% futures.

Don Blair

So, Jeff, without getting into the details of all the math,as you point out, there are a couple of things that are driving the differencesbetween the futures growth and the revenue growth as they have historically.Our own retail is definitely additive to the business. As we talked about, weare growing our retail business in the mid teens. So, that's helping. We arealso seeing faster growth in some of the at-once businesses, including thingslike auto replenishment. The thing that we do caution people on here though isthat, as we've seen with our USrevenue numbers in the last few quarters, there is some volatility on timingsacross quarters. And so, generally what we are saying is: we think this is amid single-digit growing market for us. We think that's the underlying businesstrend and that's what we would expect to see for this fiscal year.

Jeff Edelman - UBS

Okay, great. That's what I thought. And then just a followup on apparel: could you give us some sense of how much of the apparel businessin the USis really positioned really where you want it? And: how much of it is stillwork-in-process? Could you just give us some rough idea there?

Charlie Denson

Yeah, Jeff, this is Charlie. I think Mark and I both madecomment to a couple of different things. One would be that the performance sideof the business is really starting to pick up momentum and we are very pleasedwith the progress we are making, both using NIKE Pro as an example, the SportEssentials and our placement in the authentic performance oriented retail channels.So, we feel really good about that. I think one other things that we feel isstill a big opportunity for us is getting the sportswear or the sports cultureside of the business a little better positioned. We've spend quite a bit oftime working on that over the last year as we moved into the categoryorientation from an organizational standpoint, and you will see a launch of anew position for the brand around sportswear in apparel and footwear late nextsummer, early fall.

Jeff Edelman - UBS

Okay. Thank you.

Operator

Our next question comes from the line of Brian McGough withMorgan Stanley. Please proceed with your question.

Brian McGough -Morgan Stanley

Hi, guys.

Mark Parker

Hi Brain.

Don Blair

Hi, Brian

Brian McGough -Morgan Stanley

I guess, Mark, first, I mean: there has been a lot ofstrategic change at the company over the past six months, you had sale ofStarter, you had the Bauer announcement, acquiring Umbro. It seems like theportfolio is getting a lot more focused as it relates to growth in higher ROIbusinesses. And, I guess I am wondering: are the divestitures done? Or: couldwe see anymore that on earning an acceptable ROI right now? And then also just,when you look at the consumer trends out there: are there any areas where yousee the consumer right now that you don't currently touch with the NIKE brands,but where you're thinking acquisition can help?

Mark Parker

Okay. There are some good big questions there. First of all,I would just say that we are making some bold or more aggressive moves with theoverall portfolio than you might have seen in recent years. And, really, it'sall designed to optimize and leverage our overall potential as the company. Andit's not just about performance now it's about potential as well. So that isreally driving how we are evolving our portfolio and the sales of Starter brandand then Bauer, the acquisition of Umbro. And then, of course, as we've talkedabout before, the focus we have on the bigger growth opportunities within theremaining brands in the portfolio is really where we're focused on, onoptimizing our growth potential.

I would say right now specifically to your question that wedon't see any other specific divestitures on the horizon with current NIKE Inc.portfolio. We feel good about the performance of the other brands in theportfolio as evidenced by the Q2 performances led by Converse and as I saidCole Haan. But we also feel good about Hurley, NIKE Golf, and then certainlythe Jordanbrand and then of course the NIKE brand, all performing well, but this isreally all driven by our fixation and trying to optimize the overallperformances of the portfolio.

I will say: to-date, this year we are going to intensify ourfocus on being a better NIKE Inc. and that is looking at better leveragingopportunities, investments and competencies across the portfolio. So it's notjust about divesting and acquiring, it's about actually leveraging better whatwe have. And we have significant assets and competencies to leverage better, Ithink, over the overall portfolio. So, you'll see a lot more of that in thecoming years for us.

So, I really think that we're just starting to become, whatI would call: “a better NIKE Inc.” So I think we have really grabbed the reinson the Nike Inc. portfolio and you are seeing the results of that type offocus.

In terms of consumer trends back to year, I don't see anyradical shift in consumer trends these days that are dramatically affecting ourstrategy. I think the intensified focus on categories is being critical. And,frankly, I sit here today a year after we really started to increase the focuson the categories within the NIKE brand and see more opportunity for growththan ever have before. It's really become crystal clear that we have lots of roomfor growth and that focus on the categories in that connection with theconsumers actually helping tremendously.

Brian McGough -Morgan Stanley

If you see another brand that comes along that you want tobuy Mark: do you think you could handle two acquisitions at once, i.e., Umbroand another one?

Mark Parker

Well, that's not in the plans right now. I do feel likewe've got a lot to take advantage of right now, with the Umbro acquisitionassuming that goes through, as we do lots of upside opportunity there, and youknow very well all the opportunity we are focused on within the other existingbrands in the portfolio. That said there is opportunity I think beyond whatexists today for NIKE Inc. from the acquisition standpoint. I am not going tospeculate today as what those are specifically. But we do see acquisitionopportunities going forward. I don't think you are going to see anything in thenear future in terms of other acquisitions though.

Brian McGough -Morgan Stanley

Okay.

Mark Parker

But it would be foolish frankly not to investigateproactively other opportunities to diversify the portfolio and we will continueto do that.

Brian McGough -Morgan Stanley

And if I could just sneak in one more time sorry. To youCharlie, unfortunately you get a bit more of a negative question. But on the U.S.business, I mean: you had a great quarter. But when you look out, I mean:you've got retail square footage out there which is still growing prettyquickly, not yours but the overall industries, probably about twice the rate itshould. And I am wondering: just what your overall level of comfort with thestate of the U.S.market? Not even right now, but: where you think it's headed over the next yearor two? Do you think that we need to see another like big round of storeclosures at retail? What are your like: “big picture thoughts” on that?

Charlie Denson

Yeah, I think, well, I mean: the U.S. market from an economystandpoint is a little bit of headwind. I mean: I don't think that's any secretwith the raising energy costs and some of the other things that we talk abouton a macro standpoint. But when you think about over the next couple of years,I think, we have learned some valuable lessons maybe back in the late 90s andwhen this industry here specifically domestically went through a pretty radicalconsolidation and was a little bit over billed.

I think we are starting to evolve now, before we hit thattime period and I think some of the things that we are talking about and wetalk about this internally quite a bit is where does the US market head and howdo we continue to grow and I think, this evolution into a more categoryspecific set as destinations, enables us to get into a new and quite frankly amore positive growth mode for the industry, here in United States.

So, I think we are in the early days of that shift in thattransition. It's going to take some time, but I think I will use this analogyall the time when I am talking both internally and to our retail partners that25 years ago everybody thought, athletic footwear was part of the familyfootwear portfolio. And somebody -- there was a couple of people that had thevision that it could turn into an entire industry, and I think today if youthink of the basketball consumer, or the running consumer, or even thetraining, or the team athlete consumer. Those are all opportunities to continueto grow businesses that exist today and when you start to look at it that way,that's become a little bit more exponential.

Brian McGough -Morgan Stanley

Great! Happy holidays guys.

Pam Catlett

Thank you.

Charlie Denson

Thank you, Brian.

Operator

Our next question comes from the line of John Shanley withSusquehanna.

John Shanley –Susquehanna

Thank you and good evening folks.

Pam Catlett

Hi, John.

Charlie Denson

Hi, John.

John Shanley -Susquehanna

Charlie with the US futures up 1% versus the 7% of growth infutures in the year ago period: are we likely to see a continued growth inat-once business, that may change your whole way of looking at futures as aindication in our models of how we anticipate NIKE sales results in thisdomestic market particular?

Charlie Denson

No I don't think so John. I think when we look at the USbusiness right now. The weakness is really on the apparel side of the business.So, I don’t think it's really going to dramatically change any of the way weare operating currently. We continue to use the future's program as a greatindicator, but certainly not without the specific or exact barometer and it's agreat planning tool for both us and the retail community and it allows us toproduce the right amount of product to put them in a marketplace and continueto manage the marketplace and the inventory levels, so that everybody is in agood place.

John Shanley - Susquehanna

Can you give us a rough idea of how much of the business isfuture driven versus at-once in the footwear category in particular?

Charlie Denson

I don't have specific numbers, but it’s still primarily afutures driven formula for us and we see it continuing certainly in the nearterm and we would hope in the long-term. As long as we can continue to createthe demand for the brand and sell into demand, which has always been ourapproach and the formula that we have run here. We have to maintain adiscipline at managing the marketplace and making sure that we do keep thatdemand curve in the right place. But we don't see any big changes, significantchanges.

John Shanley -Susquehanna

That's good to hear. Also in the domestic footwear side ofthe business: can you give us an insight in terms of what retail channelsreally help drive that strong 12% gain that the company was able to generate inthe second quarter? And: are there other channels that you are looking at thatcould help maybe down the road to help you sustain topline growth in spite ofthe overwhelming market share position that NIKE enjoys in the US footwearmarket?

Charlie Denson

Yeah, I am delighted to be able to report again thatactually out of our top 10 accounts we were up with nine out of ten accountsand that's across the board in all channels and so we had a great quarter inthe US.We are very, very pleased with the performance across all of the channels and sowe are not, we don't feel compelled to look outside the current channels thatwe are operating in. We think that we can continue evolve those channels.Specifically into some of this category destination work that we talk sospecifically about and feel pretty good about the distribution network, that wehave and the availability of the NIKE brand both at price points and even ashigh as to the level of the collector. So, we feel pretty good about thedistribution and the strategies you have got in place.

Mark Parker

And one more point that may just help clarify a little bittoo in terms of understanding that futures numbers. Is that we are still seeingpretty good growth on the footwear side as Charlie indicated, the weak spot forus in the US has been a piece of the apparel business. The performance apparelhas done really well, the top end of our sportswear line has done well. It'sreally been that sport inspired part of the business that's been a little morechallenging.

Charlie Denson

The sports inspired piece of the sportswear business.

Mark Parker

Correct for apparel

Jon Shanley -Susquehanna

I assume the growth in the performance under the business hasbeen: is it on plan or above plan from what you initially anticipated?

Charlie Denson

I would say we are on or slightly above plan.

Jon Shanley -Susquehanna

That's great to hear. Thank you very much.

Mark Parker

Thanks John.

Operator

Our next question comes from the line of Bob Drbul withLehman Brothers.

Bob Drbul - LehmanBrothers

Hi happy holidays.

Mark Parker

Hi Bob.

Charlie Denson

Hi Bob.

Bob Drbul - LehmanBrothers

I guess the first question that I have is related to the US alittle bit. Can you talk about the US inventory position as it relatesto total NIKE both, on your books? And: what you think about it as retail? Andthen within the US business: can you just talk a little bit about the trend oforders in that 1% futures numbers like first half of the period, second half ofthe period?

Pam Catlett

I laugh at you Bob.

Mark Parker

I will take the second one.

Charlie Denson

Okay you take the second one first.

Bob Drbul - LehmanBrothers

That's only one question actually.

Charlie Denson

Yeah, well may be more useful to think about it for overallNIKE Inc. The futures number is actually slightly weighted towards the thirdquarter. So, the growth is little faster in the third and the fourth, but not ahuge amount.

Charlie Denson

And as far as the inventory levels both out at retail and inour system are good. Again, we feel very good and very confident about where weare. The USteam here is really, I think, learned and done a nice job at managing inventoryactually over the last four or five years and certainly over the last three.And so, I think they continue to get more and more scientific and specific downto the every even, the very specific door level and we feel still very good andvery confident.

Our outlet business is good. The outlet business overall inthe USis a little bit of a struggle and we would mire some of that, but we feel verygood about the performance of the outlet business. And the investments thatwe've made in the supply chain over the last four or five years are certainlypaying dividends even as we speak today. So, I would say that inventory levelsstill are very, very comfortable here in the US.

Bob Drbul - LehmanBrothers

And then my second question, Pam, would be: can you justgive us some of your mindset as you look to the Olympics? And, you talked aboutthe additional dollars you are going to spend in the fourth quarter headinginto it, but: how we should think about the dollar investment on theadvertising and marketing plans around the Olympics in total?

Don Blair

Yeah, Beijingis going to be the biggest single sporting event probably in years in mylifetime and certainly is a great opportunity for next brand. So, it's a bigevent, a big opportunity, and we will be rising to the occasion, shall we say.

That being said, also the European Championships are veryimportant and as I look at our soccer business right now, the second half ofnumber coming out of the categories, specifically soccer, are extremely strongand we feel very, very good about our ability to continue to grow that businesson a global basis and the focal point of that will be in Europe.So, between those two events, we're pretty bullish and we're going to be prettyaggressive.

Bob Drbul - LehmanBrothers

Great! Thank you very much.

Pam Catlett

Thank you

Operator

Our next question comes from the line of Virginia Genereux withMerrill Lynch.

Virginia Genereux -Merrill Lynch

Thank you. Maybe for Don, if you could just talk a littlebit sort of longer term about the respected impact on gross margin of kind ofmaybe the currency benefit and any input cost pressures you might be seeingheading into the next year. I mean, one thing I am asking: can we look back tosort of fiscal '04, '05? Is that indicative of the currency help, the currencybenefit you might see this time, you might see on the go forward? I know somehave said that we are not able to hold on to as much as that, because retailersare doing a lot of their own direct sourcing and they know the math on thatnow. But: you guys might have more ability to keep that?

Don Blair

Well, first of all Virginia I don't think this is an easyquestion to answer, because you know there is a lot of moving parts in grossmargin, it has to do with the mix of products by category, geography. There islots of input costs, our supply chains are lot more efficient than they werefour years ago. So, I think where we start the conversation really is that weread a lot of the macro-elements. We manage the levers that we can control andare goal is to keep margins moving ahead and grow those margins over time. Thatdoesn't mean any one quarter necessarily, but that's the long-term strategy.

I think what you are seeing right now for this year and thisquarter is that we're definitely getting some benefit for selling currencieslike the strength of the Euro. As you know we hedge anywhere from 12 to 18months in advance of the transaction date, so we're going to see that benefitcome into our numbers over this fiscal year and next.

We are definitely seeing pressure from Asian currencyappreciation the Thai Baht, the Renminbi. But, at the same time those are themacro factors. The things that we are working on Lean manufacturing, wecontinue to get benefits from that. We get benefits from a tighter supplychain. We've got lower air freight numbers this year and that we've taken somesurgical price increases.

So, the nature of the equation is: what we are trying to dois manage our financial model. And I know the reference you are talking aboutas to: how you handle FX gains? And: what gets passed back to retailers andconsumers and so on? We try to do that on very surgical basis. We look at modelby model pricing. We look at trading terms of all of our accounts and what weare trying to do is make the right decision in the circumstances. So, I can'tgeneralize to tell exactly what it will look like.

Mark Parker

Yeah. I'll just jump in here too and say that, I think weare better prepared than ever before really to manage the margin side of ourbusiness between the inventory management tools we have with the supply chaininvestments we've made. Just more discipline around that. Completely expandingthe Lean manufacturing and realizing the benefits of that across footwear andnow into apparel, materials consolidation efforts, the SKU management, SKU andstyle management. Don said surgical price increases, and then leveraging thatall across the portfolio. So, it's really frankly feels not completely, notarrogant about this, but frankly a lot more confident in our ability to managethe margins going forward even with some challenges.

Virginia Genereux -Merrill Lynch

That's great. So I know it's hard to ask on the big callhere. But it sounds like: even if input costs, Don and Mark might get more,might exert more pressure sort of six months out conceivably, that you guysfeel continued confidence in your ability to drive the gross margin up in a materialin a faction to deliver margin expansion, total operating margin expansion.

Charlie Denson

Yeah, I mean, I think, your last phrase there was theoperative phrase which is we manage the whole P&L and the balance sheet. Sowe are trying to do here is work all the levers and operating margin expansionis the plan and that's what we need to do to achieve our operating model.

Virginia Genereux -Merrill Lynch

Right. And then Don, sort of, follow on to that. It soundslike: I just want to make sure I understood your commentary about SG&A,about rate of SG&A. You said: SG&A, with demand creation, was probablygoing to be up ahead of revenue? Should it grow, if SG&A was up sort of 17%this quarter? Is it going to be double digits February and more than that may?I am asking, you said it was, sort of: more second, more sort of fourth quarterloaded I think?

Don Blair

Yeah, I definitely would expect to see more growth in thefourth quarter than in the third. That's what I had said earlier, and it'sreally driven demand creation investments around Beijing and Euro Champs.

Virginia Genereux -Merrill Lynch

Okay. It probably grows double-digit even in Feb?

Don Blair

I wouldn't want get into given guidance of that level.

Virginia Genereux -Merrill Lynch

All Right. Happy hols, everybody!

Don Blair

Thanks Virginia.

Operator

Our next question comes from the line of Omar Saad withCredit Suisse.

Omar Saad - CreditSuisse

Thanks. Good evening.

Pam Catlett

Hi, Omar.

Omar Saad - CreditSuisse

I wanted to ask couple of questions. One kind of biggerpicture question for Mark entirely, and then may be a little bit more oftechnical question, financial question for Don.

Mark as you think about the relevance of this brandglobally. I mean: this is the brand, talking about the NIKE brand. It's a brandeverybody knows pretty much everywhere. How do you think strategically aboutyour marketing plan for next year and long term? Do you feel like you aregetting to a point where this has really transformed into a consumer brand? Or:perhaps you can be a little bit more strategic, or focused, or picky aboutwhere you spend your demand creation dollars? Or: do you think long term youstill kind of going to be pursuing the same sort of marketing spend, marketingapproach?

Mark Parker

Well, yeah, I mean: the brand is obviously the most valuablething we own, and it doesn't show up on the balance sheet. But what we aredoing as we laid out last February is trying to reorganize the company alongthe lines of the categories to really deepen the focus and the connection wehave on specific consumers.

And, as I said a little earlier, I have never been as moreoptimistic I should say the ability to turn the insights we get from that butits deeper connections into really relevant product and communications, verybullish on the potential of the NIKE brand to grow as broad as we are aroundthe world. I think we are getting deeper and more specific within each of thepieces of our business.

And I think the category alignment is really showing us howmuch more we can grow in those pieces of the business. But thechallenge/opportunity is: actually knowing what leverage the pool wear aroundthe world to optimize that potential.

The other thing I would add is that we continue to look atthe broader portfolio and looking at those leverage to pool. So, we are notputting all the pressure to grow on the NIKE brand itself. But again, I havenever been as bullish on the potentials of the NIKE brand. Now that we'veactually “dialed down” more tightly from a customer standpoint throughcategories.

And again you'll see that come alive in I think even higherlevels of innovation, edgy or more relevant communications and consumerexperiences at retail and so on and so forth. But, we really feel very goodabout where we are and the move we are making to make ourselves even morecompetitive.

Don Blair

Yeah, and Omar I would just add one thing to Mark's commentsaround this consumer experience piece. Because I believe on longer-term, theconsumer and brand loyalty is going to be built on the foundation of arelationship. And I think that customer experience piece is going to becomemore and more important.

And I think some of the things that we've talked over thelast couple of years and we've introduced the Nike+, which is that digitalcommunity, that virtual community, that consumers are participating in or someof the things we've learnt around our Joga.com experience. Those are going tobe as important. And when we talk about marketing in the future, I think thatwill encompass a lot of those types of things as well.

Omar Saad - CreditSuisse

Is it a possibility that you could pull back on some of themore traditional areas of marketing and re-focus some of those dollars to putit in some of those new areas?

Mark Parker

It's not only a possibility, it's a current reality. We areactually shifting some dollars out of, may be more conventional mediums indemand creation and marketing traditional TV advertising for example, andshifting to more surgical and frankly more relevant areas of communications andconnecting points to consumers. And that would include retail as well. In ourindustry, I think we really need to lead the transformation of the industry toa venue that is or venues that are much relevant to consumers from anexperiential standpoint. So, we're seeing that happen right now.

Don Blair

Yeah. That migration is in already pretty much full speed.

Omar Saad - CreditSuisse

Understood, understood thank you. And then Don: can I askyou a quick question on the financials?

Pam Catlett

Okay, but then we are going to have to pick up the pace,because we are getting to our time and we want to get a couple of more people.

Omar Saad - CreditSuisse

Understood, thank you Pam. Corporate expenses, it looks theyare up, if you look at the segment model, the segment P&L looks like theyare up significantly year-over-year. I think $335 million versus $232 millionlast year. Can you talk about what’s driving that?

Don Blair

Yeah there is a whole variety of different things that landat the corporate center, but some of them that we are investing in would beretail infrastructure, some of the category go-to-market processes and just howwe developed product and innovation. So, just really how we classify thenumbers.

Omar Saad - CreditSuisse

Understood, thank you.

Pam Catlett

Thank you, Omar.

Operator

Our next question comes from the line of Brad Cragen withGoldman Sachs. Please proceed with your question.

Brad Cragen - GoldmanSachs

Yes well and thank you. And thanks for the insight into thebreakdown on Chinabetween comp growth and door growth. Can you just lend some perspective interms of: where you are in terms of the door opportunity in China? And: how many you areopening at the run rate right now?

Mark Parker

Well, the run rate continues it's flattening out at aboutthe rate that we've been on over the last year and half which is in the 500 to600 door range per year. We feel confident around that number. It hasn't shownany signs of slowing down as we start to really get into the tier-2 cities.Most of our time and efforts have been spent around the big three over thefirst couple of years and we're in some of the tier-2 cities, but now we'vereally started to expand there and I would see that level maintaining itselfdefinitely through the Olympics.

Brad Cragen - GoldmanSachs

Okay. And then on the One Star launch with Target: can youjust put in perspective how you're segmenting the Converse distribution? And:how that strategy is different from what you were doing with [start ups]?

Mark Parker

Well, first of all we are working with Targets, which is anaccount retail partner that we highly value. I am very happy with therelationship with Target. One Star is essentially a sub-brand of Converse asopposed to the Converse brand proper. So there is an exclusive relationshipwith the One Star brand in apparel and in footwear with Target here in the United States.And I would just say that we're very bullish on the relationship, feel like weare really ready to come out at the gates here and really two phases the firstpart of January and then fully in the first part of February.

The product line which I've seen is incredibly strong interms of I think the design and also the value for the price. Target is -- runsa very strong and disciplined operation and obviously has some marketingstrength as well. So they're going to put some real energy behind the One Starbrand and that launch soon here in coming weeks and then we expect that tocontinue to build throughout the year and beyond. So very bullish on therelationship with Target and where we think that will go for Converse or OneStar.

Brad Cragen - GoldmanSachs

Great, thank you.

Pam Catlett

Thank you, Brad. We have time for one last questionnaire. Iapologize to anyone we've missed but we -- one more person.

Operator

Our last question comes from the line of Jim Duffy withThomas Weisel.

Jim Duffy - ThomasWeisel

Thank you, nice job and happy holidays.

Pam Catlett

Thank you Jim

Jim Duffy - ThomasWeisel

Just a couple of quick ones. I want to be sure I am clear onthe gross margin guidance. Don when you talk about the rate of increaseconsistent with what it was in the first half of the year: do you mean on ayear-over-year basis?

Don Blair

Yes.

Jim Duffy - ThomasWeisel

Okay and then final point of clarification: what was thedemand creation number for the quarter?

Don Blair

$557 million.

Jim Duffy - ThomasWeisel

Very good, thanks very much, have a great Christmas.

Don Blair

Thank you.

Pam Catlett

Thank you Jim and thanks every one for joining us. We lookforward to speaking again soon. Happy holidays.

Operator

This concludes today's teleconference. You may disconnectyour lines at this time. Thank you for your participation.

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