NIKE's (NKE) CEO Mark Parker on Q4 2016 Results - Earnings Call Transcript

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Nike Inc. (NYSE:NKE) Q4 2016 Earnings Conference Call June 28, 2016 5:00 PM ET


Kelley Hall - VP, Corporate Finance and Treasurer

Mark Parker - President and CEO

Trevor Edwards - President, NIKE Brand

Andy Campion - CFO


Corrina Van Der Ghinst - Citigroup

Jim Duffy - Stifel Nicolaus

Lindsay Drucker - Goldman Sachs

Matthew Boss - JPMorgan

Omar Saad - Evercore ISI


Good afternoon, everyone. Welcome to NIKE’s Fiscal 2016 Fourth Quarter Conference Call. For those who need to reference today’s press release, you will find it at

Leading today’s call is Kelley Hall, Vice President, Corporate Finance and Treasurer. Before I turn the call over to Ms. Hall, let me remind you that participants on this call will make forward-looking statements based on current expectations and those statements are subject to 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, exchange rate fluctuations, order cancellations, changes in the timing of shipments, discounts and returns which may vary significantly from quarter-to-quarter. In addition, it is important to remember a significant portion of NIKE, Inc.’s continuing operations including equipment; NIKE Golf, Converse, and Hurley are not included in these futures numbers.

Finally, participants may discuss non-GAAP financial measures, including references to wholesale equivalent sales. References to wholesale equivalent sales are only intended to provide context as to the overall current market footprint of the brands owned by NIKE, Inc. and should not be relied upon as a financial measure of actual results. Participants may also make references to other non-public financial and statistical information and non-GAAP financial measures. Discussion of non-public financial and statistical information and presentations of comparable GAAP measures and quantitative reconciliations can be found at NIKE’s website,

Now I’d like to turn the call over to Kelley Hall, Vice President, Corporate Finance and Treasurer.

Kelley Hall

Thank you, operator. Hello, everyone and thank you for joining us today to discuss NIKE’s fiscal 2016 fourth quarter and full year results. As the operator indicated, participants on today’s call may discuss non-GAAP financial measures. You will find the appropriate reconciliations in our press release which was issued about an hour ago and at our website

Joining us on today’s call will be NIKE, Inc. President and CEO, Mark Parker, followed by Trevor Edwards, President of the NIKE Brand, and finally you will hear from our Chief Financial Officer, Andy Campion, who will give you an in depth review of our financial results. Following their prepared remarks, we will take your questions. We’d like to allow as many of you to ask questions as possible in our allotted time. So, we’d appreciate you limiting your initial questions to two. In the event you have additional questions that aren’t covered by others, please feel free to re-queue and we will do our best to come back to you. Thank you for your cooperation on this.

I’ll now turn the call over to NIKE, Inc. President and CEO, Mark Parker.

Mark Parker

Thank you, Kelley, and hello everyone. Fiscal year 2016 was a strong for NIKE. Let's take a look at the highlights. NIKE, Inc revenues grew 6% to $32.4 billion despite significant FX headwinds. On currency neutral basis, NIKE, Inc. revenues grew 12%. Gross margin expanded 20 basis points to 46.2%. Earnings per share rose 17% to $2.16. And we delivered ROIC of 29.7%. Year end is when we reflect on our success is over the last 12 months. And I am proud to say that there were many for NIKE. But more importantly, this is a key moment to look ahead. To focus on the opportunities in front of us. We just kicked off an amazing summer of sport. Lebron, Kyrie and Cavs made Basketball history coming back from an unprecedented 3 to 1 deficit in the finals to win the NBA championship. It was a total team effort to be sure but the storyline of Lebron bringing its championship back to his hometown Cleveland will be down as one of the greatest in recent history.

In Global Football, we saw a monumental win for Chile taking the Copa America Title for the second time in a row. In the European Championship after some remarkable moments were now down to the final eight. And we can't wait for Rio to watch the best athletes in the world under the brightest lights. As you know, the backdrop of our business is more dynamic than is ever been. But NIKE wins because we just don't adapt to these forces, we create and shape the change. We lead. For example, we are all seeing the growing power of sports. Participation is increasing all over the world. People are leading healthier, more active lives. At the same time, the rise in sport culture is bringing fitness and style together. Profoundly influencing what we all wear everyday. It's clear our amplify category offense is a model that works. We are growing the business across the entire lifestyle of sports, from performance to sportswear. And in retail our industry is in the early stages of unprecedented transformation. Mobile innovation and personal services are dominating the landscape. That's why we invest in integrating digital and physical retail seamlessly, giving our consumers better access to the products they want and while we are working even closer with our best wholesale partners who share our vision for the future of retail.

Manufacturing too is undergoing its own revolution. We are rethinking the fundamentals across our business. And how we make products, how fast we deliver them and what kind of impact they leave behind. With other innovators like Flex or HP, we are deploying projects across our source base to reduce cost and delivery time, improve quality, explore customization and enhance performance. As the global leader this is what we do. Through the power of sport, the transformation of our industry and the shifts in consumer preferences and expectations, we build the foundation for tremendous long-term growth for NIKE.

In the near term we know there are certain areas where we have work to do. But nobody is more demanding of our business than we are internally. And while outside of NIKE we face macroeconomic and geo political volatility, our complete offense gives us our greatest competitive advantage. It's how we drive profitable, sustainable growth in the near and long term.

The complete offense puts the consumer at the center of our business. Aligned by sport in the most important markets across multiple channels. This diversity is unique to NIKE and it's our competitive strength. We have the ability to leverage our portfolio and dial up or dial down the many dimensions of our business depending on the need. And in fiscal year 2016 we did just that. Putting a special focus on the areas that we make the biggest impact in the years ahead. Performance innovation, sport style innovation and digital.

Let's start with performance innovation with just a few of the highlights. The LunarEpic Flyknit, a revolutionary mid- height running shoe. Free run motion with the most natural ride ever. The Kobe 11, a low top that pushes what's possible with Flyknit. The Kyrie 2, a shoe to match the speed and cutting of Kyrie. The Mercurial SuperFly 5, .a fastest football boot ever, adaptive lacing, our first step into personalized performance. Our anti clock traction system which prevents the age old problem of mud sticking to cleats. Thermosphere Max which regulates temperature in cold weather. And our vapor kits with AeroSwift technology, the latest, fastest and most sustainable football kits ever. These are just a few of the highlights that show the breadth and depth of what NIKE delivers over the course of a year. Adding at the fiscal year 2017, we have a full pipeline of innovation on the way. We've never delivered such relentless flow of breakthrough products across all sports. What you saw in March is just beginning to deliver to consumers. And will continue throughout the year.

Now while our innovative products change the rules or performance, they also create a new static, a new look. NIKE has a way of aspiring an athlete even before they laced up their shoes. And athletes have always told us when look faster and strong they play better. We know that creating an emotional connection through product doesn't just happen by accident. It takes a steady flow of investment, inspiration and talent. Time and again the consumer votes for NIKE because we represent authenticity and thoughtful story telling. We obsess finishing in materials and color and we understand the power for both function and form. At the same time we bring performance benefits to sportswear. What we call sport style innovation. We deliver light weight breath ability and comfort to product for everyday life. And it drives the significant business for NIKE. We see great potential for innovation and growth ahead with sportswear.

Finally, I'll turn to digital services and experiences. More than any year before it fiscal 2016 saw NIKE deepen our commitment to serving athletes personally at scale. And that means more in person experiences through one to one appointments at retail or support through run clubs and training session. And of course it also means leveraging the power of our family of apps. This quarter the new NIKE+ app is in beta testing with a select audience as we prepare for the full launch later this summer. So far we've received very positive feedback on its simplicity and tailored features.

We are excited about the enormous potential for NIKE + to unite our digital platform and deliver personalized performance at tremendous scale. Through products, coaching and experiences. The investments we make in mobile and online experiences are paying off. With our business growing 46% in fiscal 2016. And we've continue to expand our global reach with going live in 20 new countries this year, now totaling over 40 markets around the world.

We are still in early stages of digital service but we continue to show the building meaningful relationships with consumers' drives growth and strengthen our brand in unlimited ways. So how will NIKE continue to lead in fiscal 2017? Within our complete offense where do we see the greatest opportunities for growth? Our focus will be continue to drive our potential across North America and Western Europe, to expand our leadership in China and across our emerging markets, to unleash the power of the Jordan brand across multiple categories. To accelerate our complete women's business. And to grow the young athletes business globally through premium products and extend our leading position in running, Basketball and sportswear. And specifically how will we get there. We invest in the transformation of the marketplace through and stronger executions with our best wholesale partners. Return the energy of style and performance in the long-term business momentum. And we drive a continuous cycle of innovation. We've never seen as much opportunities as we do today and I've never been more confident in the future NIKE is creating.

With that I'll turn it over to Trevor.

Trevor Edwards

Thanks Mark. I feel great about the results we delivered for the year. Once again illustrating the power of the NIKE brand portfolio. From our geographies and categories, from wholesale to DTC and across men's, women's and young athletes. In fiscal year 2016, NIKE proved yet again that the diversity of our business is one of our greatest competitive advantages. Let's take a look at the numbers.

On the constant currency basis, NIKE Brand grew 8% for the quarter. For the year revenue was up 13% with double digit growth in nearly all geographies. NIKE Brand DTC revenue was up 23% for the quarter. For the year, DTC revenue was up 25% driven by online growth of 51% new store and comp store growth of 10%. And finally Global Futures are up 11%. The growth throughout fiscal year 2016 is a direct a result of a deep relationships we have built with consumers. Our relentless focus on individual athletes around the world bolsters those connections year in and year out. Whether at retail, online or at live experiences, NIKE's unique ability to serve the global consumer to the length of their favorite sport is what drives such consistent growth for the NIKE brand. To see this growth in action, let's take a look at a few of our categories.

In Running, we delivered 10% growth for the year. With the category reaching $5.3 billion in revenue on a constant currency basis. Contributing to this growth was our Pegasus franchise and statement to power including the dry fit cool top, the AeroSwift short and the Power Speed tight. Q4 was also highlighted by key innovative footwear launch is led by the LunarEpic, a disruptive style that offers an amazingly smooth ride and remarkable soft like fit. Excitement is building for the LunarEpic med and the LunarEpic low which will launch in a couple of days. We also extended our NIKE free platform with the launch of the free run the free run Flyknit and the free run motion, which saw strong sale through for both men and women. At the same time there was incredible momentum with our NIKE inspired sportswear in Q4. This was highlighted by our global activation of the Air Max Day, where we engaged hundreds of millions of consumers create a massive scale end impact. By celebrating classic silhouettes and updating them with new technology, trends and pattern, we fuel the culture of sneakers around the world.

Finally, Q4 underscored the success of our running -inspired apparel. Our NIKE Tech Hypermesh line including the Wind Runner and the Bomber saw strong sell through thanks for its extra light, ventilated fabric that keeps athletes warm as the weather changes. By taking an iconic product and remixing it with groundbreaking innovation, the Hypermesh Wind Runner is the perfect embodiment of how NIKE drives leadership in sportswear.

Next let's take a look at Basketball which is increasingly its own portfolio with NIKE Basketball, NIKE Sportswear and the Jordan Brand. No matter the landscape this complete offense is our foundation that keeps us well positioned to always inspire and serve Basketball fans across the globe through innovative products at both performance and sportswear. As Mark said, we are thrilled for Lebron and the rest of the cast team for bringing home a championship for Cleveland. Lebron's MVP performance in which he was the first player in the NBA history to lead all players in points, rebound, assist, steals and blocks for entire final. That won't be forgotten soon. And consumers have responded. The shoe he wore in the finals, the Lebron soldier 10 has seen incredible sell through in the week since it was released.

And of course Kyrie who hit the series winning shot in game 7 continue to cement his place as one of the game's best players and the fan favorite. The Kyrie 2 has seen strong sell through across multiple color ways and we are excited about the future of the Kyrie signature line.

And I'd remiss if I didn't also give a shout out to Kevin Durant who had an amazing player himself. The initial launch last week of the KD9 with its Flyknit upper atop a full zoom airbag sold out completely.

In Jordan Footwear, we see continued momentum as the Air Jordan 30 and Jordan Ultra Fly drive excitement in the US and around the world. And on the Sportswear side, the Air Jordan Retro 12 celebrating Jordan's epic playoff performance in 1997 was one of the largest launches in the quarter. Also incredibly successful was the launch of the Air Force One Flyknit low which weighs 50% less than the original thanks to an all new ultra breathable NIKE Flyknit upper.

Before I close Basketball I have to mention an unforgettable moment from the quarter. Lebron last game, one of the games greatest went out in storybook style with 60 points and dominant final stretch. The Kobe 11 Momba Day ID shoe was the most successful ID launch ever with incredible demand in North America and Greater China. While the end of Kobe's playing career closes one chapter, we are excited what the future holds for Kobe and NIKE together. Ultimately, no brand can provide what we bring to the sport of Basketball. The power of performance and sportswear, true global reach, the world's best roster of athletes and an incredible pipeline of products to come over the next year and beyond.

Finally, to appreciate how our entire portfolio of categories comes to light, let's take a look at a key growth driver for us our sportswear category. NIKE Sportswear takes the lifestyle of sport and amplifies it across all our performance categories. For the year, Sportswear grew 22% and reached $8.1 billion, adding nearly $1.5 billion in revenue in this category alone. Our strong sportswear category puts us in a unique position to fuel passion for sport around the world. From the Roshe to the Huarache to the Foam Posit and many more. We have the innovative and stylish products that consumer continue to love. While consumer preferences can shift over time, no brand is better positioned to serve the consumer across our globally diversified portfolio from performance to lifestyle through our category amplified offense. This is the unique power of the NIKE Brand.

Let's now turn to a few of our key geographies. First, North America which delivered strong growth for the year with revenues up 8% driven by Sportswear, the Jordan Brand and Running. We continue to work more closely with our key wholesale partners such as Dick's Sporting Goods and the Foot Locker to deliver compelling retail experiences for our consumers. And our DTC business also has another strong year, up 17% including ongoing strength in For Q4, North America revenue was flat to prior year due to timing shifts related to delay delivery in fiscal year 2015 from the West Coast port congestion. As of the end of Q4, inventory levels in our full price in line channels are clean consistent with the goal we shared last quarter.

Looking ahead to Q1, we will continue to clear excess inventory through our factory stores and select third party value channels. At the same time, we remain focused on sustaining a healthy pull market in the end line channel and we are practically managing the flow of products into the marketplace with a focus on new innovative products for our consumers. As always we continue to focus on serving the consumer in this critical geography with brand proven time and time again it remains incredibly strong in North America.

We are confident that the actions we are taken will ensure that we are set up to deliver long-term profitable growth. Now let's turn to Western Europe where we've seen broad based demand with growth of 19% in the quarter and 14% for the year. Growth in the quarter and throughout the year was fueled by our continued efforts to transform the marketplace along the category offense. In Q4, all territories grew double digits and all key categories grew led by Sportswear, Global Football, Jordan Brand and Running. And our DTC business continues to perform well growing 26% in the quarter. In Q4, we also extended our partnership with one of the world's most storied football club FC Barcelona. And with the European Championships currently in force, we are excited about our line of national team kit which offer groundbreaking performance innovations such as engineered mid zones, enhanced fit and breatheability.

The momentum we've seen in fiscal year 2016 in Western Europe combined with the strength of NIKE Brand reinforces our view that there is tremendous growth potential in this geography. Our focus on the consumer will continue to build on that momentum as we head into the fiscal year 2017 and beyond. And finally in Greater China, we had a truly incredible year. Q4 revenue grew 23% and we posted full year growth of 27% with strong growth in nearly every category and across footwear and apparel. Full year growth was driven primarily by Sportswear, Running, Nike Basketball and the Jordan Brand. In DTC, we saw growth of 44% with continued strong growth online as well as in our stores. For our wholesale partner stores that have been re-profiled, they continue to outperform the rest of the fleet.

As we continue to transform the marketplace, we are starting to reach scale with our doors that we re-profiled along the category offense. We worked with our partners to tailor everything from concept to environment, from assortment to service and throughout the must win trade zones to deliver the best experience for our consumers. A great example of this is the opening of our Running store in Chung Du, a new concept in the marketplace that we plan to scale. This store significantly exceeded our expectations within the first few weeks, further illustrating how consumer responds when you relentlessly obsess serving the athlete. Ultimately we get to close that in fiscal year and start a new one in the best possible way with the summer Olympics. I can't wait for August and how powerful a moment it will be around the globe. The power of the world's great athletes coming together. The power of the reveal of the world's most innovative products and the power of connecting with consumers in even more personal ways to celebrate their passion and love for sport. It's the kind of global experience that promises to further accelerate our momentum and it makes me incredibly excited about what's in store. Thanks. Now here is Andy.

Andy Campion

Thanks Mark and Trevor. And good afternoon everyone joining us on the call. As we close fiscal year 2016 NIKE is better positioned than ever to continue delivering strong growth, expanding profitability and high returns on invested capital. While we are an increasingly dynamic macroeconomic environment, we have a management team with experience and a proven track record of working all of the levers within our business to deliver strong financial performance under a wide range of circumstances. Even more importantly, NIKE is the number rated brand by consumers in every major market and every key city around the world. From China to Europe and of course here in North America. That is perhaps the most important metric that I'll speak to you on this call. Because it is bestowed upon us by the consumers that we serve and it must be earned. NIKE Brand leadership with consumers is fueled by our authentic and relentless obsession with bringing inspiration and innovation to every athlete in the world. In fiscal year 2016, we brought that to life by executive our category offense like never before. And that drove strong double digit growth on a currency neutral basis.

We execute our offense through three primary dimensions. Brand, product and marketplace. As Mark and Trevor noted, from a brand perspective we are more deeply connecting with and inspiring consumers leveraging the most iconic moment in sport. And from a product perspective our groundbreaking, innovative footwear and apparel is enabling the world's best athlete to perform at unprecedented levels and make history in those moments. We then bring those innovative products to our billions of consumers around the world. From the Lebron Solider 10 and the Kyrie 2 the LunarEpic in running to Cristiano Ronaldo's Mercurial SuperFly CR7 boot. At NIKE we always start with performance innovation. But what even more is how we are redefining sports culture and leading a global shift in how people express themselves at work and at play. We do that by bringing what Mark refer to a sport style innovation to NIKE's un-rival portfolio of iconic products such as the Air Force One, Cortez and Huarache as well as to the creation of new icons like the Roshe and Air Max Thea. And instant classic from performance like Kobe signature product and the Flyknit Racer. That is something that only NIKE can do on such a global scale as evidenced by 22% currency neutral growth in NIKE Sportswear our largest category. While brand and product fuel our growth, we captured that growth in the marketplace. Globally consumer demand for athletic footwear and apparel is outpacing broader consumption. At the same time, the retail landscape is rapidly evolving.

For other brands, the speed of change in retail maybe challenging and create uncertainty. But at NIKE we've always believed that the best way to predict the future is to create it. That's why as we shared at Investor Day last October, we've been leading a transformation of the marketplace not simply reacting to trends. Over the past year we made significant investments in and the results have been extraordinary. grew double to triple digits in all six of our geographies led by Greater China. As we made great progress toward our goal of $7 billion in revenue by 2020. We are also investing to more seamlessly integrate digital and physical retail. And working more strategically with our strongest wholesale partners to shape the future of retail.

Our brand, product and marketplace strategies underscore NIKE's relentless focus on creating extraordinary value for consumers. And that allows us to continue to delivering sustainable, profitable capital efficient growth and value creation for shareholders. In fiscal year 2016, we once again delivered strong top line growth. Growing revenue 12% on a currency neutral basis. We also expanded profitability, growing earnings per share by 17%, outpacing our mid-teens goal despite significant FX headwinds. And we delivered returns on invested capital of 29.7%, up 160 basis points versus the prior year.

That powerful combination of growth, expanding profitability and strong return is what set NIKE apart in terms of their shareholder value creation. And while there were areas in which we did not execute as precisely as we had planned in fiscal 2016, those areas now represent opportunities to further elevate our game and deliver growth in fiscal year 2017. But before I share plans for fiscal year 2017, let's first reflect on our fourth quarter and full year fiscal year 2016 financial results in a bit more detail.

NIKE, Inc. Q4 revenue increased 6% , up 9% on a currency neutral basis. For the full year, NIKE, Inc. revenue increased 6% to $32.4 billion, up 12% on a currency neutral basis. All of our international geographies grew double digit with North America growing at a high single digit rate in line with our long term targeted rate of growth for that geography. NIKE Brand futures orders reflect continued strong demand across our global portfolio growing 11% on a currency neutral basis driven by a 4% increase in units with increases in average selling price contributing seven percentage point of growth. On a reported basis, futures grew 8%, reflecting the impact of the stronger US dollar against nearly all international currencies and in particular developing market currencies. Fourth quarter diluted EPS was flat to prior year at $0.49. Full year diluted EPS grew 17% to $2.16 driven by strong revenue growth, gross margin expansion and a lower effective tax rate.

Gross margin contracted 30 basis points in Q4 while expanding 20 basis points for the full year. For the quarter, margin contraction was driven primarily by inventory management in North America, higher labor costs and foreign exchange, which offset sustained increases in average selling price and the benefits of lower oil on materials cost. Four quarter demand creation increased 7%. For the full year, demand creation increased 2% as we strategically invested in digital consumer engagement and sports marketing while gaining efficiencies in traditional advertising.

Operating overhead increased 7% for the quarter and 8% for the full year. This reflected cost associated with our fast growing DTC business as well as strategic investments in consumer facing digital capabilities and operational infrastructure. The effective tax rate for fiscal year 2016 was 18.7%, 350 basis points lower than last year's rate primarily due to a higher mix of non US earnings which are generally subject to a lower tax rate. As of May 31, inventories were up 12% including a 6% increase in NIKE Brand wholesaling unit reflecting continued strong global demand.

Now let's turn to performance for a few of our largest operating segment. For the full year, North America revenue grew 9% on a currency-neutral basis. Growth was led by Sportswear, Jordan and Running. Growth also reflected continued momentum in our DTC business led by growing at 39%. For the quarter, North America revenue growth on a reported basis was flat to the prior year due in part to unfavorable comparison for the timing shipments across Q3 and Q4 in fiscal year 2015. Many of the orders planned for shipment in Q3 of fiscal year 2015 were delayed due to the West Coast port congestion and instead shipped in Q4. Excluding the impact of this timing shift, we estimate Q4 fiscal year 2016 North America revenue growth would have been in the mid single digit range. North America EBIT increased 3% for the full year as revenue growth and full price gross margin expansion were mostly offset by the lower off price margin associated with clearing excess inventory.

As Trevor discussed, NIKE inventory in the full price in line channels in North America is now clean. And as reflected in our futures orders we are also keeping in line supply tight to ensure a strong pull market. Accordingly, we expect the North America revenue will return to growth in Q1 with growth accelerating over the balance of the fiscal year. North America's gross margin will contract in Q1 as we complete the clearance of excess inventory with a return to gross margin expansion over the course of fiscal year 2017.

Looking to Western Europe where NIKE's portfolio of category is becoming increasingly un-rival from Global Football to Running to Sportswear to Women's Training as well as fast emerging categories such as Basketball and Jordan. In fiscal year 2016, every category delivered growth resulting in double digit growth in every territory. As a result, Western Europe revenue grew to nearly $6 billion, up 14% on a currency neutral basis. For the quarter, currency neutral revenue grew 19% led by Sportswear and Global Football as we approach the European Championships. On a reported basis, fiscal year 2016 revenue increased 3% reflecting FX headwinds while EBIT expanded 12% driven by SG&A leverage.

In our emerging markets geography our brand momentum continuous to build. And we created healthy pull markets. On a currency neutral basis, fiscal year 2016 revenue increased 13% led by SoCo, Mexico and Pacific, fueled by double digit growth in Sportswear, Jordan and Women's Training. Revenue in Brazil declined due to the challenging macroeconomic environment, however, our brand is strong in Brazil, our inventories are healthy and we continue to take share. For Q4, currency neutral revenue is up 12% with double digit growth in SoCo Korea Pacific, Mexico and Africa.

On a reported basis fiscal year 2016 revenue and EBIT were heavily impacted by the significant FX headwinds throughout the geography as a result fiscal year 2016 reported revenue decreased 5% while EBIT increased 9% reflecting gross margin expansion.

Fiscal year 2016 was another exceptional year for NIKE in Greater China. With currency neutral revenue growing 27%. China continues to be one of the world's largest and fastest growing market in terms of consumption. And NIKE is unequivocally the leading brand in China as we continue to fuel the Chinese consumers' passion for sport. Our category assortments tailored for the Chinese consumer continue to drive growth and increasing productivity and profitability for both our DTC businesses led by and our wholesale partners. Nearly all categories grew in fiscal year 2016 led by Sportswear, Running, NIKE Basketball and Jordan. For the quarter, currency neutral revenue grew 23% with double digit growth in both footwear and apparel in both DTC and wholesale and across nearly all key categories.

On a reported basis fiscal year 2016 revenue is up 23% and EBIT expanded 38%. In addition to tremendous revenue growth China delivered strong gross margin expansion and highly leveraged SG&A. In fiscal 2016, NIKE once again delivered another year of strong financial performance. While we are an increasingly dynamic macro environment particularly with respect to foreign currencies, our outlook for fiscal year 2017 is largely in line with a high level guidance that we shared last quarter. Specifically, for fiscal year 2017 we expect reported revenue to grow at a high single digit rate reflecting high single digit to low double digit growth on a currency neutral basis. Our rate of reported revenue growth will be more heavily impacted by FX headwinds in the first half of fiscal year 2017 primarily due to developing market currencies. For Q1, we expect mid single digit reported revenue growth, roughly three points below our reported rate of futures growth.

We expect gross margin for the full year to expand by 30 to 50 basis points in line with our long-term financial model guard rails. This reflects higher average selling prices, ongoing manufacturing productivity initiatives and continued strong growth in our business, as well as a favorable impact of lower oil on materials cost.

However, these benefits will be partially offset by continued labor cost inflation and FX headwinds. For Q1, we expect gross margin to decline approximately 100 basis points driven primarily by FX headwinds including year-over-year changes in our hedge rate. For total SG&A, we expect full year growth in the high single digit range in line with our reported fiscal year 2017 revenue guidance. For Q1, we expect mid to high teens SG&A growth significantly higher than the full year rate as we make strategic investments in demand creation around key sporting events such as the Olympics and European Football Championships. We expect other income to be approximately $20 million to $30 million on average for each quarter.

For fiscal year 2017, we expect the effective tax rate will be between 19% and 21%. As we look ahead to fiscal year 2017, NIKE is the leading brand in every major market. We have the most talented team, we have strong momentum across our diverse, global portfolio of businesses and we are on the offense as always.

And now we will open the call for your questions.

Question-and-Answer Session


[Operator Instructions]

Your first question is from Kate McShane from Citigroup.

Corrina Van Der Ghinst

Hi, good afternoon. This is actually Corrina Van Der Ghinst on for Kate. I was wondering if we could start with some of the category breakdowns that you gave. It looks like the Basketball category was actually up on an ex-FX basis. Can you just walk us through some of the dynamics of Basketball and how you're looking at it in the year ahead?

Trevor Edwards

Yes, absolutely. On Basketball I think overall we continue to feel great about the Basketball business particularly as its trend in going forward. What we have -- we certainly have is 2% increase in the fiscal year and what we see is energy for Basketball is really high, it is really an all time high and in Basketball we have a really great relationship with Basketball fans around the world. We have a great fit roster players and what we are seeing is just the sell is actually starting really pickup particularly in key zones, the Kyrie 2 did exceptionally well. The Kobe also did exceptionally well. And we are -- also our Jordan because it's a portfolio of performance and sportswear and also the Jordan business, that is also continue to help to drive our business. So we feel really good about the trajectory of the Basketball business. In particular when you think about what's happen in globally we are certainly seeing strong results around the world. Certainly China really delivers some incredible growth. Also coming out of the playoff, the Lebron 10, Lebron Solider 10 did exceptionally well, also did the Kyrie 2. So we are definitely feeling energized about the pipeline of products that we have come in through and we are certainly excited about way the players continue to playing and our ability to continue to drive connection with our consumers.

Corrina Van Der Ghinst

Great, thank you. And then just for a second question, with the environment maybe a little bit worse than when you gave your long-term guidance in October. Is there any change about in how you're thinking about the long-term growth?

Mark Parker

Actually no, there is not. We feel really good about where we are in general from a growth standpoint. We are obviously very focused on the actions that will get us to that goal and beyond for that matter. That's the basics of developing, keep a relationships with our consumers, obviously delivering the most innovative product and services and then further differentiating in an integrated marketplace. So these are things that I think ultimately are going to continue to drive profitable growth over the longer term. And we remain confident in those long-term projections that we laid out.

Andy Campion

Yes. I'll just add that obviously currency markets have become increasingly volatile over the past week. That said our expectations for fiscal year 2017 remain largely unchanged from a growth and profitability perspective. And that includes our best estimate based on the information that we have of late.


The next question is from Jim Duffy from Stifel.

Jim Duffy

Thank you. Couple questions. First, the outlook implies a pick up in North American revenue across the US. Can you speak to the factors that give you confidence in that reacceleration?

Andy Campion

Yes, obviously I can touch on that from a dimension perspective in terms of growth and Trevor can add some commentary on how he feels from brand and product and marketplace perspective. When you reflect on the fourth quarter for North America, I think it is important to note what I mentioned which is that the flat revenue growth was really more so a result of comparisons to prior year. We continue to see strong underlying momentum in the fundamentals that drive our growth and profitability. As you see in our futures orders, our futures orders are reflective of some of that. Dimensions, leading indicators in terms of consumer demand for the NIKE Brand such as grew 39% as I mentioned over the full year and actually north of 40% in Q4. So accelerated to some extent, so we continue to feel great about where we are going in terms of the transformation of that marketplace including through as well as through the relationship with our strategic wholesale partners and obviously how those dimensions capture growth relates back to the strong pipeline and product that Trevor and Mark touched on that we feel great about and are bringing to market currently.

Trevor Edwards

Yes. I'll just add that the brand remains incredibly strong in North America. From a full year revenue perspective it was up 8% and as Andy pointed out futures are up 6%. And was really led by some key categories of Sportswear, the Jordan Brand, Running and Global Football. They also really drove the business, going forward we continue to feel very strong about the marketplace, the consumer demand in the marketplace and the consumers' connection with the brand continues to be very strong. And we feel very confident about the pipeline of products that we have come in through. And as I touched on Basketball, that's a key area where we continue to see just great energy in North America. And we are looking forward to actually the products that are coming through and how they will sell through and connect with our consumers.

Jim Duffy

Thanks for that. And then on recent conference calls, some of your North American channel partners have made reference to imbalances in the price value equation. What are you seeing from average selling prices in the futures, and are you seeing any evidence that pricing may have taken a step too far?

Andy Campion

Yes. As I touched on in our futures we are actually seeing seven percentage points of the growth coming from average gross selling price increase. Now that's obviously an aggregated number. Average gross selling price continues to expand, full price average gross selling price in a mid single digits in North America. We really view that as a factor of the innovation we are bringing and creating increasingly premium value for consumers. Running a more complete offense bringing premium value at every price point versus trading with end price points. And then frankly one of the things we've been very focused on as we've discussed is really that supply and demand management at the intersection of those as merchandizing with assortments that are increasingly selling through a whole price.

Trevor Edwards

Yes. I think as Andy really touched on our pricing strategy always centers on delivering the right price value equation to our consumers. And certainly the strength of the brand and the ability on some of the technologies that we bring allow us the opportunity to charge the premium price. And we are certainly seeing strong take up from that from our consumers. So if you look across the categories from sportswear to Basketball to running, we are certainly seeing the consumer have really strong appetite for those products. You can take the Kobe 11 is a great example of when you give the right value to that consumer, they are clearly willing to pay the price. So again we continue to monitor it very carefully and our pricing strategy always reflects our ability to adjust as we think appropriately. But certainly we feel that the pricing continues to be strong opportunity for the brand.


The next question is from Lindsay Drucker from Goldman Sachs.

Lindsay Drucker

Thanks, good afternoon, everyone. Trevor, you've talked before about the importance of establishing healthy pull markets in periods where there's dislocations in inventory, and I know you've been working through the inventory dynamics in the US for a bit. Could you talk about when you expect the market to finally reach appropriate levels and for momentum to resume to where you think an underlying run rate is?

Trevor Edwards

Yes. Certainly. As it relates to the inventory level, certainly at the end of Q4 inventory levels in the full price channel were pretty consistent to what we discussed at the last quarter. As we go into the next quarter we expect clearly to remain in excess inventory through our factory stores and also through select third party value channels. But overall the inline full price market is clean and we continue to just make sure we maintain and sustain a healthy pull market and also to bring into new products and make sure that we are actively, proactively managing the flow of product into the marketplace.

Andy Campion

And Lindsay I'll just add that as we've discussed you have a couple of dimensions at the marketplace at a more macro level as Trevor talked about. The full price in line market and then the other dimensions where we do tend to address those inventory management efforts in NIKE factory stores and through third party value. The mix of that margin full price and half price obviously had a bit of an impact in Q4. And as I talked about will be part of the North America gross margin contraction in Q1. But as I noted, we expect gross margin to return to expansion in North America over the course of fiscal year 2017. So that's more of an answer to your question about how you see things normalizing.

Lindsay Drucker

Great. And then maybe just on Europe, where your organic revenue momentum is very strong. Could you talk about the drivers of margin behavior in that market? And just a quick follow up. For the LunarEpic, I noticed that you guys are trialing 30-day free and you can return dirt and all, which I'm excited to get involved in. And I was just wondering about maybe some of your marketing strategies on new products, if that's something we could see more broadly across the portfolio, or if it's really specific to this launch. Thanks.

Andy Campion

Sure. I'll touch on Western Europe first. The fundamental underlying drivers of our margin are pretty consistent in Western Europe. Western Europe is seeing continued increases in average gross selling price. All of our geographies benefit from some of the efforts we are undertaking in our supply chain. So that would be our manufacturing initiatives which are beginning to have an impact. We saw an impact from those in fiscal year 2016 that increasingly material. Obviously, our long-term perspective is where we are most bullish but we have shifted from plant and pilot program to more proliferation of automation in our manufacturing in Asia as well as we've actually begun production on inline running product with Flex. So those initiatives and then coupled with impact such as lower oil on our input cost particularly materials. Those are the drivers of expansion in Western Europe.

Trevor Edwards

Yes. And as relates to the LunarEpic, obviously we are excited about the continued launch of the LunarEpic. One of the things about that product is that when you actually put it on, it is just remarkable in terms of its feel. So in terms of the marketing strategy to launch the product and wanted to make sure that they drove trial and got people who are actually putting on their feet. Also given that it was a high job, we wanted to make sure the consumer could really see how and experience that product. That's what we continue to do. One of the things at the marketplace right now is certainly a high service marketplace and so the opportunities to give consumers the ability to actually use the product were just a key driver. And so I think you expect us doing that more in the marketplace.


The next question is from Matthew Boss from JPMorgan

Matthew Boss

Hey, thanks. So just to switch gears can you talk about trends you're seeing and just the runway remaining in China, specifically where you stand on the reset of the distribution points and just to think about the margin opportunity remaining over time?

Trevor Edwards

Yes. On China, China is really just a great example of -- we are certainly seeing really strong brand connection in that marketplace. And the work that we did few years back when we decided to really focus on the biggest growth opportunities and aligned the category offense against that. That's where we are seeing actually playback in the marketplace. In addition, we re-profiled the doors to make sure that we had the right assortments in the right doors delivering. That is actually now getting closer to scale. So we are seeing that continue to drive great results in the marketplace. And so overall the marketplace is very healthy and we still have a lot of room to grow despite the fact that we are certainly seeing these -- these certain tremendous growth numbers. We don't believe that they will sustain forever but we certainly do feel very confident about the growth that we are seeing in the marketplace today.

Mark Parker

I'd like add to the -- apart from better managing the fundamentals of the business as we reset the marketplace in China and the brand strength that Trevor referenced, we also have an incredibly strong leadership team in China that is really well equipped to continue to sustain the kind of momentum that we built since the reset in China. So feel very confident with all those factors kind of coming together to create one of the strongest performances that we see in any geo around the world.

Matthew Boss

Great. And then just a quick follow-up, as it relates to Basketball, your commentary in matches or checks points to very strong demand for the recent KD launch. Can you just talk about changes that you've made to the product? What we should be watching and judging you on as it relates to signature Basketball, and just overall your confidence in the category going forward?

Mark Parker

Yes. Let me jump on that. First of all, I think we have -- we've always talked about complete offense. And that goes for any categories as well. Certainly including Basketball where we have two obviously leading brands in Basketball. We also have spectrum that goes from performance to sportswear or we call it amplified performance or sportswear business. And we see the shift happening up and down that spectrum from performance to lifestyle or sportswear all the time. It's not so much of shift from one end of the spectrum to the other but was the shift by style preferences across that spectrum. I think the good news for us is that we are really well equipped with a very diverse portfolio that goes from clean, classic, authentic styles like the Air Force One for example or the Jordan style. Then we have modern classics on top of that where we bring new innovation into some of that classic style. New modern performance shoes as well like the Lebron and KD, Kyrie, these are all very strong products for us particularly with what's coming in the pipeline, we feel with the recent launches of KD and the upcoming Kyrie and certainly the Lebron shoe that we really feel like we are striking that right balance between performance innovation and product that really works well for everyday lifestyle. So very confident in the portfolio of product across Basketball.

Trevor Edwards

And the one thing I'd just add is also that the Jordan Brand also is another dimension and it plays in a very similar way and we certainly seen very strong demand for the Jordan brand both in performance and also in lifestyle retro product. So, again we feel very energized about the products that are coming through Basketball.

Mark Parker

Better equipped up and down the price points spectrum too as part of our complete offense. Feel very good about that Basketball.


The last question is from Omar Saad from Evercore ISI.

Omar Saad

Thanks for taking my question. I actually wanted to continue the conversation you were just having around performance versus sport fashion. Obviously, the Company has been great on the performance and innovation side, driven by the category offense, some incredible product over the last few years. But are you seeing a trend -- beyond basketball, but are you seeing a shift in consumer preference towards more of a sport fashion look or a sport fashion category, or is that more of an incremental kind of driver to the overall category growth? I know you talked a lot about also earlier in the call sportswear being a very strong category, so if you could elaborate on some of that stuff it would be great.

Mark Parker

Yes. What I just mentioned we see shift taking place month in month out, season in and season out along the lines of style preferences not so much moving to sportswear or performance per se. But just a type of styling that we are offering in performance and sportswear. So the selection isn't so much moving from one massive shift to another but it's more style specific. And we are seeing really the diversity of style across the spectrum from performance to sportswear with products that are highly priced in some cases that are doing incredibly well both in performance and in lifestyle. But we are seeing that up and down the price point spectrum. We are also bringing like I mentioned one of the things that differentiate NIKE I think from others is the amount of innovation that we are bringing into sport style. I think that's what differentiates NIKE in the end. We have an authentic product that is innovative across performance and sport style. We are not just creating a style just for fashion sake; we are bringing real performance, authentic innovation into those styles as well. So I think that ultimately differentiates NIKE from others out in the market.

Trevor Edwards

And one thing I'd just add which is while consumer preferences can sometime shift around; we think we have the brand as best positioned actually to serve the consumer across the spectrum from performance to sportswear. That's why we always talk about the portfolio of the NIKE Brand; this is really that when it comes into action. So right now we are just seeing our ability to leverage that portfolio to connect with our consumers with the right products with the right style at the right prices.

Mark Parker

Sometimes the innovation is more overt and expressive and on the other hand simpler and more restrained. And we are seeing that consumer choice up and down that spectrum. The point really is that NIKE is I think ultimately better positioned with compelling choices across that spectrum.

Omar Saad

And if I may, can I ask when can we start seeing some of these sport style innovations that you have coming in the footwear side or the apparel side? Is it out there in the marketplace now? Are there examples you'd point to? We would be interested that too.

Trevor Edwards

Yes. Actually we mean a lot of products are actually out in the marketplace right now. So take for example the Air Force One Flyknit, that's a great example of, a combination of new innovation grow to classic style. At the same time we are bringing items like the stock dart back into the marketplace, there are Roshe, the Prestos and then on the performance side you certainly have -- we have tech fleet and apparel or the tech NIKE in apparel is also great examples. All of these products are in the market today. And they certainly combined that ability to have both great style and performance having at the same time.

Mark Parker

And you will continue to see this flow of product continue through this next fiscal year of course.

Kelley Hall

All right. Thank you, everyone for joining us on the call today. And we will look forward to speaking with you again after Q1.


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

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