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NIKE, Inc. (NYSE:NKE)

F1Q09 Earnings Call

September 24, 2008 5:00 pm ET

Executives

Pamela Catlett - Vice President, Investor Relations

Mark G. Parker - President, Chief Executive Officer, Director

Charles D. Denson - President, Nike Brand

Donald W. Blair - Chief Financial Officer, Vice President

Analysts

Robert Drbul - Barclay’s Capital

Robert Ohmes - Merrill Lynch

Jim Duffy - Thomas Weisel Partners

John Shanley - Susquehanna Financial Group

Kate McShane - Citigroup

Sam Poser - Sterne, Agee & Leach

Operator

Good afternoon, everyone. Welcome to Nike's fiscal 2009 first quarter conference call. For those who need to reference today’s press release, you’ll find it at www.nikebiz.com. Leading today’s call is Pamela Catlett, Vice President, Investor Relations.

Before I turn the call over to Ms. Catlett, let me remind you that participants of this call will make forward-looking statements based on current expectations and those statements are subject to certain 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, change rate fluctuations, order cancellations, and discounts, which may vary significantly from quarter to quarter.

In addition, it is important to remember a significant portion of Nike Incorporated’s business, including equipment, most of Nike Retail, Nike Golf, Cole Haan, Converse, Hurley, and Umbro are not included in these future numbers.

Finally, participants may discuss non-GAAP financial measures. The presentation of comparable GAAP measures and quantitative reconciliations are found at Nike's website.

This call might also include discussion of non-public financial and statistical information which is also publicly available at that site, www.nikebiz.com.

Now I would like to turn the call over to Pamela Catlett, Vice President, Investor Relations.

Pamela Catlett

Thank you and good afternoon, everyone. Thank you for joining us today to discuss Nike's fiscal 2009 first quarter results. As the operator indicated, participants on today’s call may discuss non-GAAP financial measures. A comparative presentation of reconciliations between GAAP and non-GAAP reported items can be found in our press release, which as you know was issued about an hour ago and can be found on our website, nikebiz.com.

Joining us on today’s call will be Nike Inc. CEO Mark Parker, followed by Charlie Denson, President of the Nike Brand, 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, as usual we will take your questions and, as many of you know, we’d like to allow as many of you to ask questions as possible in the allotted time. Consequently, we’d appreciate you focusing your initial questions to two and in the event you have additional questions, please do re-queue if others do not cover them.

With that, thank you very much for your cooperation and it is now my pleasure to introduce Nike Inc. CEO Mark Parker.

Mark G. Parker

Thanks, Pam and welcome, everybody, to the first quarter earnings call for fiscal year 2009. Q1 again demonstrated the strength of our brands and our business. We continued to gain share in key markets and delivered growth in revenue and profitability. That said, we’re not stopping to celebrate and we’re not complacent and we are clear on what’s needed to deliver our goals through fiscal year ’09 and beyond.

Let’s go to the numbers first -- Nike Inc. revenue was up 17% to $5.4 billion. That’s 28 consecutive quarters of year-over-year growth. Gross margins were up 240 basis points. Reported global futures are up 10%, which marks 31 consecutive quarters of futures increases. And diluted EPS was down 8% from Q108, influenced by a one-time tax benefit that contributed to $0.20 per diluted share last year.

As I’ve said in the past, Nike will continue to invest in growth opportunities that offer the greatest potential for return. These Q1 results are in line with our ability to leverage those investments, our brands, and our resources across the portfolio.

We can’t talk about results or opportunity without considering the broader environment. While there is financial uncertainty in some sectors, our results continue to warrant confidence in the power and flexibility of our businesses. We recognize the impact from prices, inflation, and currency fluctuations and we realize that no one is immune, all of which reinforces my commitment to our simply and consistent strategy, manage for continued growth by leveraging the competitive advantages that we control, namely innovation, focus, and consumer relevance.

Innovative product is at the core of Nike and practically speaking, it’s where consumers cast their vote on your brand. We landed in Beijing with new footwear and apparel for all 28 Olympic sports. We launched Fly Wire technology in the hyper dunk and Zoom Victory Spike. We launched Lunar Light Cushioning in the Lunar Racer. We launched new Swift apparel and we are seeing consumers all over the world embrace these innovations and others.

By any objective analysis, we lead in product innovation in our industry and we’ll keep that front and center going forward always.

Seeing that innovation become reality, a profitable reality, requires focus today more than ever -- focus on maximizing the potential for growth, focus on leveraging our SG&A and other resources, and focus on creating value for shareholders.

We are just coming off a summer that created tremendous global excitement in sports and we are moving into the season of championships in team sports. That puts Nike in a great position to move through the year capitalizing on that energy.

We are also focused on leveraging our resources across the portfolio. Our supply chain is one of Nike's greatest competitive advantages. [Lead] manufacturing, material sourcing, digital efficiencies -- it all helps us get to the right products to the right places at the right time at the right price and that’s good for our consumers, our retailers, and certainly our gross margins.

Of course, we focus on deploying capital thoughtfully and returning cash to shareholders. Over the last 10 years, we’ve repurchased $5.5 billion of stock. As we complete our current $3 billion program, we will begin a new $5 billion repurchase program over the next four years.

I can assure you that this management team is focused on leveraging the entire Nike portfolio to meet our goal of $23 billion in revenue by the end of fiscal year 2011.

We are relevant with consumers because we understand each other. They know we create innovative products and experiences. They value that performance and authenticity and that’s why we continue to gain market share. That’s why we’ve reclaimed our rightful spot atop the running category.

When I look at China and the Beijing Olympics, I see a great example of how Nike leverages our innovation, focus, and consumer relevance. I spent a lot of time in China before and during the Olympics. I’ve never been more impressed with our ability to execute on all levels. Our products were the most compelling and advanced. Our stores and messages were inspiring and our Nike stores did more than just set sales records. They were destinations for hundreds of thousands of Chinese consumers.

By every measure, the Olympic Games achieved its promise for China, for sport, and for Nike. We were the clear winner in Beijing and the choice of Chinese consumers. More importantly, now that the torch has been extinguished, the deep consumer connections and experiences we’ve built set the stage for a strong, sustained, long-term growth in China.

And what’s happening in China right now is happening in every emerging market for Nike around the world, including Brazil, India, Turkey and Russia. People are embracing Nike as the authentic leader in sports.

But it’s not all about the Nike brand at the Olympics. Our affiliate business has also delivered a strong first quarter as they continue to grow and become a larger part of the Nike Inc. portfolio. Converse continues to deliver exceptional results. Revenue was up 32%. Our One Star product in Target is performing beyond our expectations, and inventory is lean and the business is executing extremely well.

Hurley is gaining some serious top and bottom line momentum. Revenue was up 38%, the biggest quarter ever for Hurley. The brand really showed its strength at the recent action sports retailer show in San Diego. Action sports, as you know, is one of the fastest growing segments in our industry and with our Nike Inc. portfolio, specifically Hurley, Converse, and the Nike brand, we are well-positioned to go after that growth.

In total, our ongoing affiliate business has posted overall revenue growth of 20% and pretax income growth of 19%. So growing revenue, market share, and gross margins, growing futures, growing brands -- I think this shows the power of leadership and a sound strategy in our industry.

I know what Nike needs to do to grow. It’s the same thing our industry needs to do, and that is obsess on the consumer. They give us the insights we need to drive innovation in everything we do -- product creation, assortment planning, merchandising, all the way through the retail experience. Everything is always sharper when we stay connected to the consumer.

And we connect with consumers through our category offense, a strategy Nike got out in front of early and is now accelerating. It’s the key to the innovation, focus, and relevance I mentioned earlier and it’s driving the work we are doing with our retail partners, segmenting and differentiating our brand and their stores in the market place.

I believe the future of our industry is based on a more intimate relationship with this category-based consumer and Nike Inc. is able to create and realize that future better than any other company. We have never been more sharply focused and as deeply aligned as we are right now. Our ability to leverage our assets and core competencies across our portfolio of brands gives us the flexibility to continue to invest in new opportunities, whether it’s a new technology, a new category, or a new brand.

I see tremendous potential throughout our industry and as the leader, we are clear and confident on how to turn that potential into real growth and value for our shareholders, and we’ll continue to do so.

So now here’s Charlie with some more news on the Nike brand.

Charles D. Denson

Thanks, Mark. Good afternoon, everyone. Well, the Nike brand is off to a solid start for fiscal year ’09. It’s been an amazing summer, our little summer of sport, and we’ve been busy.

We started with the NBA Finals, where Paul Pierce led the Boston Celtics to their first title in 22 years. We watched Tiger’s amazing Monday play-off win at the U.S. Open, and then Cesc Fabregas and Fernando Torres led Spain to their first Euro title in 44 years. Rafael Nadal and Roger Federer put on the greatest show ever at Wimbledon. It put tennis back on the front page and it took Rafael to the number one ranking in the world, only to be followed by Roger’s U.S. Open title, his 13th Grand Slam victory and just one short of tying Pete Sampras’ record. And of course, the biggest show on Earth, the Beijing Olympics.

We had a heck of a summer for ourselves as well. On the quarter, the Nike brand generated record revenue of $4.8 billion, up 18%. Every region increased revenue. Global footwear was up 19% and global apparel was up 18%, and all six of our key categories saw revenue increases year over year, so a really solid performance by the Nike brand in the first quarter.

I am very confident in our ability to build on the success of Q1 and I will give you three reasons why. First, our category offense -- as Mark said, it’s at the center of our growth strategy for the brand and we are just beginning to see the depth of its true potential. Let’s take running for an example -- 18 months ago, Nike held a number of two or three spots around the world with the core competitive runner. Respectable for most but unacceptable for Nike. By diving deep and focusing exclusively on the performance-minded runner, we generated strong revenue increases across all product platforms in all regions.

Revenue from the running experience in Nike Town, New York, is up 45%, and we held a little 10K run we called The Human Race. Over 800,000 people showed up. It was the biggest running event in history and something only Nike could do.

We have created some real energy in running and we did it by connecting completely with the athlete. It was all enabled by Nike Plus, which starts to give you a sense of the importance of social networking as part of our brand experience. That’s the category offense at work. We’re applying that same intensity to all six of our key categories.

Okay, confidence builder number two -- it’s retail. We’re getting a really clear view of how to change the game in retail and we are starting to see results in stores now. Our retail revenues are up 18% around the world and in the U.S., we saw a 6% increase in comp store sales for inline stores.

I just mentioned the running experience in New York, but you’d also have to add the Boot Room in Nike Town, London, where revenues are up 40%. And on the digital side, e-commerce and customization continue to grow. There’s more in retail but I’m going to come back to that in a minute.

And finally, let me tell you a little bit about Beijing -- this was by far our most successful single event ever, on multiple fronts. The presence and messaging of the Nike brand was the best I’ve ever seen. Chinese consumers really connected with what Nike is all about -- innovation, authenticity, individuality, a passion for sports. They did really get it and we set sales records in stores all over China. In fact, I was in our store on the Wang Fu Jing Road in Beijing. It was so crowded I couldn’t even see the floor. These Olympic Games were the most watched Olympics in history and so our investment in Beijing is paying off, not just in China but it’s impacting our business all over the world.

One last thing on Beijing -- I mentioned about eight months ago that this Olympics had the potential to reignite basketball around the world. I think that’s exactly what happened. We saw the best basketball tournament ever played. It was a global tournament and it had global stars -- great for the game and great for Nike. It was a microcosm of what is going on with basketball worldwide and by the way, eight out of every 10 players on every team, men’s and women’s, were wearing Nike shoes. I can confidently say that we now have two global team sports -- soccer and basketball, and we lead in both.

Okay, real quick, let’s look at the regions, starting with the U.S. -- the region performed extremely well in a very tough retail environment. Futures were up and our total revenue is up 8%. Our retail revenues increased 16%. We saw very strong performances in running, action sports, and basketball. Apparel revenue increased 9%, with strong advances in training apparel, and double-digit growth in both running and basketball apparel.

Sportswear apparel remains a work-in-progress. We are excited about the response to our new Mercer Street store in New York City. It’s a great example of sportswear as a brand extension to our authentic category positioning. We see a lot of momentum in a rising average selling price. Consumers are embracing our new technologies and the benefits that they are providing.

Overall, there’s a lot of visible growth opportunity in the U.S. Consumers are a bit cautious but they are passionate about those products and brands that deliver exceptional performance. We continue to be the brand of choice.

Over in Europe and EMEA, we’re off to a strong start with football and running leading the way into the future. On a constant dollar basis, revenue was up 5% as we continue to grow in the key countries. In Germany and the Alpine countries, revenues were up 11%, which speaks well to our strategy at the European Championships. Turkey and Russia are up over 30% and in the U.K., our revenues climbed 5%.

We are seeing some tough economic conditions in Spain, Italy, and France, where we are staying focused on connecting with consumers and managing our distribution and our inventories.

In the Americas region, first quarter revenues grew by 19% and futures are up 24%. Football, running, women’s training, and sportswear all had strong double-digit growth. In Brazil, after taking over the previously licensed apparel business, our football apparel business is up over 60% and our sportswear continues to sell well. There’s lots of momentum building in the Americas.

And then finally, back to Asia, revenue was up 26%, including growth in every major country in the region. Japan continues to trend up, with revenue growth of 2% and futures are up at 4%. And in China, revenue increased over 50%. I’ve already talked about the Olympics but just in case I haven’t convinced anyone yet of our success and staying power in China, I’ll just say one more thing -- our futures orders there are up nearly 50%.

Okay, so let’s go back to retail. Our strategy here is based on one thing. The Nike at retail is a mirror of the Nike brand but it’s not about doors -- it’s about experiences. The Nike brand always leads with innovative product and that pipeline is the best product we’ve ever seen. Fly Wire technology alone is going to reset the standard of performance in multiple categories. That’s a compelling story.

The Nike brand is all about this category focus. Any retail execution we do will be driven through the lens of core consumers in our six key categories, and the Nike brand creates a sense of community. You heard Mark talk about how relevant it is to the consumer. Community is a big part of it. Put those together and you get the running experience at Nike Town, New York, or you get the boot room in London. You get a category focus that drives the entire consumer experience all the way through retail.

These are the advantages we bring to our retail definitions and to our wholesale partners. This is how we define and scale new concepts and we’ll continue to invest in the people, the processes, and the structures necessary to create distinction and separation for the Nike brand.

So Q1 is in the books. We exceeded expectations because we put more innovative product into the market and we got the product to more people all over the world than ever before. Our brand is strong and we are laser focused on leveraging resources and managing our business well to deliver long-term sustainable growth. These are the reasons we feel confident that we can continue to deliver results in these interesting times.

So now here’s Don to give you the details on our financial performance.

Donald W. Blair

Thanks, Charlie. Well, as you’ve heard from my colleagues, we think Q1 is a great start to fiscal 2009. All of our brands posted higher revenues for the quarter and our gross margin grew 240 basis points. While first quarter earnings per share declined as a result of planned SG&A investments and the comparison to last year’s one-time tax benefit, we are right where we expected to be at this point in the year.

On balance, we are very happy with the strength of our brands and the performance of our businesses. Over the past several years, you’ve often heard me talk about our commitment to investing for the future while also delivering growth in revenue, earnings, and cash flow.

In the dynamic global environment in which we compete, our focus on managing all of the levers of the Nike Inc. P&L and balance sheet has allowed us to achieve that goal and is a strength we believe distinguishes our company. To paraphrase Mark, today’s results reflect our ability to leverage our investments. We’ve invested in our brands to drive top line growth and we posted double-digit revenue growth on a constant currency basis. We’ve invested in emerging markets and this quarter, China grew over 50%, Russia grew over 40%, and Brazil grew 30%. We’ve invested in our multi-brand portfolio and revenues from our continuing other businesses are up almost 20%.

We’ve invested in our supply chain to optimize our efficiency and our gross margins grew strongly despite Asian cost pressures. And we’ve invested in Nike brand retail, which grew 14% in constant dollars, highlighted by a 6% increase in comp-store sales for inline stores.

In short, revenues up, futures are up, gross margins are strong, and consumers continue to seek the Nike brand experience around the world.

In today’s environment, managing our business to invest for the future and deliver growth today means we remain relentlessly focused on healthy top line growth, keeping our inventories tight, and driving a more rigorous focus on cost management throughout the organization. We think we’ve made the right investments and we will continue to leverage them to fuel our growth.

We do not know where every macroeconomic variable will land but we do know that if we stay focused on the levers we can control, we will put ourselves in the best possible position to deliver our financial goals for this year and into the future.

Now on to the quarter -- in Q1, Nike Inc. revenue grew 17% to over $5.4 billion. Currency changes contributed about seven points of that growth. Excluding currency changes, Nike brand revenues grew 11%.

On a currency neutral basis, Nike brand footwear and apparel futures orders scheduled for delivery from September 2008 through January 2009 grew 9%, up from 8% growth on our last call and driven by accelerated growth in orders for U.S. footwear.

Diluted earnings per share for the quarter declined 8% to $1.03, reflecting SG&A investments this year in comparison against last year’s one-time tax benefit. Adjusted for the prior year tax item, EPS would have increased 12%.

Gross margin for the quarter grew 240 basis points to 47.2%, somewhat higher than we’d expected. We anticipated any of the factors that drove the year-on-year improvement -- better exchange rates, effective sourcing cost initiatives, retail expansion, selective footwear price increases, and a shift in mix to higher margin styles. The upside came primarily as a result of higher margins in our other businesses and less rapid cost inflation in Asia than we expected.

SG&A for the quarter grew 29%, including five points from currency changes. On a currency neutral basis, demand creation grew 39%, due primarily to investments in the European football championships and the Beijing Olympics. Operating overhead grew 14% on a constant currency basis, driven by investments in infrastructure to support key growth drivers, such as owned retail, emerging markets, and our other businesses.

On the ground activities around the summer sporting events and increased stock-based compensation expense also contributed to operating overhead growth.

Net interest income for the first quarter was $10 million, $14 million below last year due primarily to lower interest rates.

Our effective tax rate for the first quarter was 28.5%, 13.5 percentage points higher than Q1 last year, when we benefited from the one-time utilization of past foreign losses.

The strength of our balance sheet also continues to be a true point of difference for Nike, particularly in the current financial climate. For the quarter, we generated $249 million of free cash flow from operations, up 10% year-on-year. A key driver was working capital, which reflected a six-day improvement in the cash conversion cycle.

While we continued to invest in our business, we also returned a significant amount of cash to our shareholders. During the quarter, we repurchased $430 million of stock and paid out $113 million in dividends. We expect to complete our current share repurchase program later this year, about 18 months early.

Earlier this week, our board authorized a new four-year, $5 billion share repurchase program to begin as soon as our current program is completed. This step reaffirms our confidence in the strength of our cash flow and our long-term growth potential.

Our return on invested capital for the 12 months ended August 31st was 23.2%, 70 basis points below the prior 12-month period, primarily due to the positive impact of the one-time tax benefit on the year-ago figure.

With that recap of our first quarter performance, let me now give you some additional perspective on results across our operating units, starting with the U.S. Our U.S. region posted excellent results, as revenue grew 8% to $1.8 billion and gross margins improved strongly over the prior year. Pretax income increased only 1% as increased demand creation spending partially offset the growth in revenues and margins. The strength of the Nike brand in the U.S. is evident by the continued strength of our top retail destinations. Seven out of our 10 largest wholesale partners delivered year-over-year revenue growth with renewed energy from athletic specialty accounts.

Revenues at Nike owned retail stores in the U.S. grew 16% for the quarter, while comp store sales at Nike inline stores increased 8%. Our e-commerce business grew more than 30%.

U.S. footwear revenues increased 9% for the quarter, significantly outpacing the market. The growth was driven by the running, soccer, and women’s training categories within the Nike brand and brand Jordan, which expanded its position as the number two footwear brand in the U.S.

U.S. apparel revenues grew 9% for the quarter, driven by double-digit growth in performance products, partially offset by continued weakness in sportswear.

Turbo U.S. futures grew 3% versus the prior year, powered by strong growth in footwear, partially offset by lower apparel futures, primarily sportswear.

In our European region, which includes the Middle East and Africa, first quarter revenues grew 20%, including 15 points of growth from currency. On a currency neutral basis, most countries in the region posted higher sales with footwear and equipment delivering year-on-year growth. The emerging markets in the region drove the majority of the growth, partially offset by weakness in Southern Europe.

For the first quarter, pretax income for Europe grew 17%, reflecting revenue growth, gross margin improvement, and stronger European currencies. Pretax income growth was tempered by large demand creation investments around the Euro Champs and Olympics.

The Asia-Pacific region reported revenue growth of 36% in the first quarter, including 10 points of growth from currency. On a currency-neutral basis, every product type and most countries in the region grew. Revenues in China expanded more than 50%, fueled by retail expansion and highly integrated product brand and retail execution around the Olympics.

For the quarter, pretax income for the region grew 15% to $186 million, as revenue growth and higher gross margins more than offset investments in demand creation and China infrastructure.

In the Americas region, first quarter revenues grew 26%, with currency changes accounting for approximately seven points of growth. On a currency-neutral basis, growth was balanced across all product lines and countries.

For the quarter, pretax income grew 18% to $69 million, driven by higher revenues, improved gross margins, and overhead leverage. First quarter revenues from the businesses we report as other grew 7% and pretax income declined by 9%. These reported growth rates reflect the sale of the Bauer and Starter businesses and the acquisition of Umbro. For our continuing businesses, Converse, Cole Haan, Hurley, and Nike Golf, revenue grew 20% and pretax income grew 19%. In its first full quarter as part of the Nike portfolio, Umbro broke even.

As we consider the outlook for the balance of the year, we remain confident in our ability to manage our business through times of economic uncertainty. At this point, our financial outlook for fiscal 2009 remains largely unchanged. For the second and third quarters, we continue to expect high-single-digit revenue growth. Revenue growth in the fourth quarter will likely be lower, reflecting comparisons against strong sales at the end of last year as we ramped up to the Olympics and Euro Champs. For the full year, we expect high-single-digit revenue growth within our long-term target range.

We began the year expecting modest growth in gross margins. Needless to say, we are very pleased by our strong results for the first quarter and now believe gross margins for the full year could be 100 basis points above the prior year. We expect balance of year growth to be lower than first quarter levels due to change is product mix and comparisons against strong margins last year. In addition, while the most grim forecast of oil prices, labor costs, and exchange rates have not yet been realized, we remain somewhat cautious in our gross margin outlook for the year.

We expect the growth in SG&A to decelerate significantly over the balance of the year as we return to more normalized levels following planned investments in the Olympics and Euro Champs over the last two quarters. For the full year, we expect low-double-digit growth in SG&A, reflecting low- to mid-teens growth in the second and third quarters, offset by a year-on-year decline for the fourth quarter.

SG&A growth for the year will be driven by higher demand creation spending and infrastructure investments in emerging markets, retail, and our other businesses. As we have indicated earlier, we are continuing to focus on tightening and leveraging our core operating overhead expenses.

We anticipate interest income to continue to track below prior year levels, reflecting the decline in short-term interest rates, while other income for the year should improve, driven by smaller hedge losses.

At this point, we estimate our fiscal 2009 effective tax rate will be at or slightly below 28.5%.

So in summary, we are very pleased that we delivered another excellent quarter of profitable growth and we are committed to continuing to do so for the rest of fiscal 2009 and beyond.

Now I’ll turn the call back to the Operator so we can take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Robert Drbul with Lehman Brothers.

Robert Drbul - Barclay’s Capital

It’s actually Barclay’s Capital now, but thank you. Congratulations on a very good result, you guys. I guess if I might be able to squeeze in a question-and-a-half, Pam, Don, the first question is just around the international businesses, seemed very strong, can you help us get comfortable with the currency going forward in terms of the strengthening dollar and how things are hedged out for the rest of the year?

And then the other half-a-question would be on the oil prices -- with oil prices moderating, what would be the expectation in the gross margin guidance? How have you planned that in the hundred basis points for the year going forward?

Donald W. Blair

Well, first of all to address currency, our outlook at this point for the balance of the year is broadly consistent with where we are right now. That doesn’t mean that there isn't going to be some volatility but as far as this particular year is concerned, the guidance we’ve given you is that we are broadly going to be roughly where we are today. Now, as far as our hedging is concerned, we are largely hedged against our transactional exposure, against the major currencies for fiscal ’09. We do expect that in the long run, we are probably going to see some dollar strengthening and so in the last six to nine months, we’ve been doing some extended hedging out into fiscal ’10 and ’11, so at this point we have some protection for ’10 and ’11. We have a great deal of protection against fiscal ’09, so we are largely hedged for ’09 and we are putting hedges out into ’10 and ’11.

And the way that we think about this is hedges are really intended to give us time to adjust our business model, so what we are also doing is with the expectation that we are going to see some dollar strengthening, we are working the other elements of the P&L around product and looking at cost structures and so on. So it’s something that is definitely on our radar screen.

Oil, what I would say is at this stage, oil comes into our cost structure over an extended period of time so we had expected this to flow in on a relatively quicker basis than it did. That’s why our Q1 numbers were pretty strong and what we are expecting over the balance of the year as we are still going to see some cost pressure out of Asia but we definitely think it’s coming in a little slower than what we expected.

Robert Drbul - Barclay’s Capital

Great. Thank you very much. Good luck.

Operator

Our next question comes from the line of Robert Ohmes with Merrill Lynch.

Robert Ohmes - Merrill Lynch

Thank you. My question is on -- is a regional question. I was hoping you could give us an update on your partnered stores in terms of the numbers you have in China, Russia, and Eastern Europe and some rough guidance on how rapidly you expect to grow those regions, the partnered store numbers, over the next year or so. And then related to that, your inventory levels, if you could sort of comment on inventory levels in China and post the Olympics, both yours and competitors and if you see any sort of shorter term inventory issues post-Beijing, and also inventory builds in Russia and Eastern Europe as well. Thank you.

Charles D. Denson

I’ll talk a little bit about the store growth. We will continue to see the store growth expansion on a pretty consistent basis. We don’t see it really slowing down too much. We had a little bit of an acceleration to get some extra stores open just prior to the games in China but it’s a pretty well-oiled machine now and as we’ve talked many times about the success that we’ve had in the core cities and we are now starting to branch out into the tier two, tier three cities and would expect to continue the expansion levels at relatively the same pace that we’ve been on over the last couple of years. So we have the capacity and the capability to do that and we’ll continue to do that with our partners.

With regard to Russia and Central Europe, we continue to see a pretty robust environment in both areas where we are seeing some great growth coming out of Russia, Turkey, places like that and we are really following a lot of the same model that we are following in China with partnership, mono-brand type retail stores. So I would say that we would start to see a little bit, although I am going to be very cautious here, but a little bit of an acceleration in places like Russia where we can really start to build some of our capabilities and capacities. It’s in its much earlier stage of growth than China is overall.

(Multiple Speakers)

I’m sorry, Rob, I forgot. The inventories in China coming out of the Olympics, we feel very good about them. We are in good shape. We are building, continuing to build our factory store outlet program in China, that it will continue to be an assist in our ability to manage our inventories over the long haul and so we feel pretty good about coming out of the Olympics. We knew that there would be a little bit of a build-up going into the games. We certainly did that. As we noted in the prepared remarks, we broke all of our records at retail so it was a huge success for us on the ground in all the stores, whether it was in Beijing or out into the geographies, and so we feel very confident that we are in a good place to continue to grow in China. And I think the futures orders numbers reflect that as well.

Robert Ohmes - Merrill Lynch

And is there any concern about your competitors and their inventory position sort of pressuring the market near-term?

Charles D. Denson

Well, I’m going to leave that question for them to answer.

Robert Ohmes - Merrill Lynch

All right, good enough. Hey, thank you very much.

Operator

Our next question comes from the line of Jim Duffy with Thomas Weisel Partners. Please proceed with your question.

Jim Duffy - Thomas Weisel Partners

Thanks very much. Nice quarter. Something I’m hoping you can address -- there’s been some concern in the investment community that at the end of the Olympics, the party is over in China. You know, your futures suggest this isn't the case but can you maybe speak to it a little bit, how you can sustain the momentum in China?

Charles D. Denson

We’ve talked about this quite a bit going into the games and actually over the last couple of years, our destination was not the Olympic Games. In fact, we actually tried to position that more of a launching pad than a destination. I think, as I like to say, once the circus leaves town we were going to be there for the long haul and we’ve committed to that.

We have a completely well-thought-out and positioned branding campaign that continues now well beyond the Olympics, continuing to stay connected with the consumer and one of the things that we are seeing coming out of the Olympics which we did anticipate was just completely accelerated interest around sport that fuels both participation as well as association, and I think those things are starting to pay themselves out. I mean, it’s early days but we feel very confident that the Chinese consumer and the Chinese athlete has a more robust appetite than ever.

Mark G. Parker

I’d add that the retail execution for Nike in China is really some of the best in the world. Personally, incredibly impressed being in Beijing during the games and seeing the execution we had at retail was really phenomenal and I think it’s really setting the pace for Nike retail in other parts of the world.

And I couldn’t agree more with Charlie that the appetite for sports in China is tremendous and really feel like the Olympics went a long way to kind of reinforcing our brand strength in that market, so a great accelerator for us and we are very bullish on Nike in China post the Olympics.

Jim Duffy - Thomas Weisel Partners

Great. I look forward to further success.

Pamela Catlett

Thank you, Jim. As the Operator brings in the next person, I want to just clarify one number that was stated -- the retail comp number that Don and Charlie both spoke to for the U.S., the number is 8% growth.

Operator

Our next question comes from the line of John Shanley with Susquehanna Financial Group.

John Shanley - Susquehanna Financial Group

Thank you and good afternoon, everybody. Pam, you just saved me a question so thank you very much for that U.S. comp.

Pamela Catlett

I must have known you were next.

John Shanley - Susquehanna Financial Group

At any rate, Charlie, you mentioned in discussing Europe that some of the countries in the CEMA region did extremely well and some of the countries in Western Europe, surprisingly enough, the U.K., did well in addition. I wonder if you could break out for us, just give us an overall regional comparison in terms of how the first quarter developed for the CEMA region versus the rest of Western Europe in aggregate.

Charles D. Denson

I think essentially Europe continues to be very strong growth and I think Don went through some of the numbers up front as well. I think where we’ve seen the softness is really along the Mediterranean -- Iberia, Southern France, Italy. What’s probably the biggest challenge right now in Spain and Portugal where we’ve seen some significant softness.

I think but one of the things, and obviously as we watch this, one of the things that I would just say we’ve kind of done some due diligence here in the sense that the brand is in very good shape, that we are looking at some overall economic conditions that are slowing down, maybe a little bit faster than in some of the other parts of Europe. And so we aren’t as concerned around the brand as we are just keeping an eye on the business, the mechanics, the inventories, and all the things that we do in a slower economic state.

John Shanley - Susquehanna Financial Group

Is there a possibility that eventually Eastern Europe could be as big or maybe even bigger than Western Europe for you guys?

Charles D. Denson

Well, when you look at the overall capacity, I mean, certainly from a population standpoint, I think the buying power still has a ways to go. We’ve got some countries lining up to get into E.U. but then there’s some issues there too as well. But the other thing I guess I would say that makes me feel pretty confident and comfortable is the appetite for sport from a consumer standpoint is every bit as big in Eastern Europe as it is in Western Europe.

John Shanley - Susquehanna Financial Group

Okay, fair enough. My other question is to you, Don -- you mentioned in your prepared remarks that U.S. footwear futures were one of the key drivers for the 9% increase in overall future numbers, and the U.S. futures in total were up 3%. Can we assume from that that the footwear segment of the U.S. futures markets were up substantially more than 3%?

Donald W. Blair

Yes, you can infer that. That number that you quoted, the 9%, that’s actually U.S. footwear growth in the first quarter. That’s revenue growth in the first quarter but your conclusion is correct -- U.S. footwear was up significantly more than 3%.

John Shanley - Susquehanna Financial Group

Would you be so good enough to share with us what --

Donald W. Blair

Not that good. As you know, John, we traditionally don’t get to that level of granularity. You just needed me to say that.

Pamela Catlett

He knows.

John Shanley - Susquehanna Financial Group

He knows and you can’t hurt from trying, though. Thanks a lot, appreciate it.

Operator

Our next question comes from the line of Kate McShane with Citigroup.

Kate McShane - Citigroup

Thank you. Good afternoon. Just following up on John’s question in Europe with some of the macro concerns in Europe, is it possible that we can see similar type of market share gains that we’ve seen in the U.S. from Nike and are you seeing that at all so far?

Donald W. Blair

Well, certainly the opportunity is out there. We feel great about the -- that’s why I talk so much about our brand position in these markets because the brand numbers, the brand recognition studies that we do on an ongoing basis continue to show a very strong brand position so there is some opportunity there. I think it depends on how long and how severe some of these conditions go on and then what goes on in some of the local market places. But we would like to think that we can take advantage of that.

Kate McShane - Citigroup

Okay, and then just unrelated to that, you mentioned that Umbro broke even during the quarter. Can you update us on where you are with integrating that acquisition and is the guidance for Umbro still expected to be $0.10 dilutive this year?

Mark G. Parker

Yes on the $0.10 dilutive expectation for the year. That’s where we sit right now. Actually, I feel incredibly good about the progress we’ve made over the last few months in really getting Umbro to a better position. Obviously, as we said, we are really working to try to leverage their history and heritage in the world of football, which is deep and rich, as you know. We have, practically speaking, we’re jumping in and helping to shore up the leadership team there and feel really good about where we are there and some critical positions. We’ve done a lot to help them on the operational global sourcing capability side of the business, really helping them accelerate the global distribution, expansion opportunities that they’ve got.

Product wise, incredible progress from where they’ve been to where they are now, both on the footwear side of the business, particularly on the performance side and also in the apparel side of the business.

So we really feel like we really put a great team together on the Nike side to go in and work with the talent that’s already there at Umbro to try to shore up the areas that are going to help Umbro realize their potential here going through the year and obviously out into the future. So great leverage opportunity. Again, I continue to look at Umbro like I do Converse. Converse has a tremendous amount of opportunity, as Umbro does, so it’s applying the competencies, capabilities that we have to help them leverage that and we’ve made great progress over these last 90 days or so.

Kate McShane - Citigroup

That’s great. Thanks so much.

Operator

(Operator Instructions) Our next question comes from the line of Sam Poser with Sterne Agee.

Sam Poser - Sterne, Agee & Leach

Good afternoon, everybody. I just have a follow-up on the average selling prices in the U.S., if you could give us some idea of what kind of growth that you saw and a little bit of color as well on your channels of distribution within the U.S. and where your major strengths were.

Charles D. Denson

Our average selling price, we’re not going to give out specific numbers but the good news is that they are up and we feel really good about some of the new premium performance product that has gone into the marketplace. We’ve referenced a product like the Hyper Dunk and the Zoom Victory, which are specifically products that were featured in the Olympic Campaign. But we’ve also seen some great response to some of the more premium apparel products, the iconic products that we put into the marketplace, which is a great indicator for us and so I think those are the types of things that we use as indicators in regard to what the consumer’s appetite is for new innovation and continues to give us a lot of confidence going forward because our innovation agenda is still pretty well -- the pipelines are still pretty full with things coming down the road.

There was a second question too?

Pamela Catlett

Retail, how the --

Charles D. Denson

Oh, the channel -- sure. I think, well, our sporting goods channels continue to do extremely well and we’ve seen some really nice progress coming out of both the athletic specialty channel, as well as some of our own retail. So I think you guys obviously follow the U.S. retail numbers as well as anybody and you’ve seen some of the progress that they’ve made and we are very excited about some of the new environments that we are working on, both that you’ve seen that we mentioned in the Nike Town stores, as well as some of the things that were going on with our partners, with a category focus.

So you know, no big news flash coming out of the commentary. I think it’s pretty consistent with what you guys have seen across the landscape over the quarter.

Sam Poser - Sterne, Agee & Leach

Could I just have a quick follow-up on -- as far as the ASPs and how they may have affected the futures numbers, maybe as a percent or was there any impact there?

Donald W. Blair

I actually don’t have that one close to hand but my belief is it’s pretty consistent with the quarter.

Sam Poser - Sterne, Agee & Leach

Okay. Thank you very much.

Pamela Catlett

Thank you, Sam. Operator, unless -- do we have anymore in the queue?

Operator

No, we do not.

Pamela Catlett

Thank you, everyone, for joining us and we look forward to speaking again soon.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

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Source: Nike F1Q09 (Qtr End 8/31/08) Earnings Call Transcript

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