Nike, Inc. F3Q08 (Qtr End 02/29/08) Earnings Call Transcript

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Nike, Inc. (NYSE:NKE) F3Q08 Earnings Call March 19, 2008 5:00 PM ET


Philip H. Knight – Chairman of the Board of Directors

Mark Parker – President and Chief Executive Officer, NIKE, Inc.

Charlie Denson – President, NIKE Brand

Pamela Catlett – Vice President, Investor Relations

Don Blair – Vice President and Chief Financial Officer


Kate McShane – Citigroup

Brad Cragin - Goldman Sachs

Robert Drbul - Lehman Brothers

Robert Samuels - JP Morgan

John Shanley - Susquehanna Financial Group

Brian [McGoth] - Morgan Stanley

Omar Saad - Credit Suisse

Virginia Genereux - Merrill Lynch


Good afternoon everyone. Welcome to NIKE’s fiscal 2008 third quarter conference call. For those of you who need to reference today’s press release, you will find it at

Leading today’s call will be Pamela Catlett, Vice President Investor Relations.

Before I turn the call over to Ms. Catlett let me remind you that portions of this call we will make forward-looking statements based on current expectation 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 8K, 10K and 10Q.

Some forward-looking statements concern future orders that are not necessarily indicative of changes in total revenues for subsequent periods due to the mix in futures and at-once orders, exchange rate fluctuations, order cancellations and discounts, which may vary significantly from quarter to quarter. In addition, it is important to remember that a significant portion of Nike, Inc. business including equipment, most of NIKE retail, NIKE Golf, Converse, Cole Haan, NIKE Bauer Hockey, Hurley and Exeter Brands Group are not included in these futures numbers. Finally, participants may discuss non-GAAP financial measures. The presentation of comparable GAAP measures and quantitative reconciliation’s can also be found at NIKE’s website. This call might also include discussion of non-public financial and fiscal information which is also publicly available on that site

Now I’d like to turn the call over to Pam Catlett, Vice President Investor Relations.

Pam Catlett

Thank you. And good afternoon everyone. Thank you for joining us today to discuss NIKE’s fiscal 2008 third quarter results. As the operator said we issued our results about an hour ago and if you need to reference them you can find our press release which includes the reconciliation’s on our website at

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 we will take your questions. As many of you know, for questions we would like to allow as many of you to ask questions as possible in our allotted time so we would appreciate your focusing your initial questions to two and in the event you have additional questions that are not covered by others please do feel free to re-queue and we will do our best to come back to you.

Thank you very much for your cooperation on this and now it is my pleasure to introduce NIKE, Inc.’s CEO Mark Parker.

Mark Parker

Thanks Pam and welcome every body to our third quarter call. Q3 shows that NIKE continues to be a strong, consistent performer that delivers shareholder value and long-term growth opportunity.

Net revenue for the quarter was up 16% with increased in every NIKE brand region and each of our other businesses.

Diluted earnings per share grew 35%. Our return on invested capital grew 340 basis points to 24.3%. Worldwide futures were up 9% on a constant dollar basis.

Don will detail the numbers in just a minute.

As we finished Q3 as our industry’s most relevant choice for consumers, retail markets in some parts of the world are uncertain as consumers and retailers wrestle with higher energy prices and fears of recession. In this environment the strength of brands and the product offerings is even more powerful.

We also finished Q3 as the industry’s most relevant choice for investors. We all know that the financial markets are in flux and that makes having a strong brand, a diverse portfolio and solid growth strategy to drive cash flow especially valuable.

It has been one year since we shared our goal of reaching $23 billion in revenue by fiscal 2011. Our Q3 results validate once again that we are delivering on that growth strategy. We remain confident but we don’t take anything for granted.

As we move into Q4 and beyond, we are completely focused on growing revenue in our key businesses and geographies and on leveraging our resources to create opportunities for the future.

One example of a key business is football. This business has been a key driver for the NIKE brand over the last decade and it shows no sign of slowing down. During the third quarter our NIKE Brand in the football business grew at a double-digit rate on its way to another record year.

This month we took another major step forward with the addition of Umbro to our portfolio. This brand is a perfect match for NIKE and it is a great example of how we are applying our financial resources and operational capabilities to businesses with the greatest growth potential. And, by the way, extending our lead as the world’s number one football company.

We have a new Umbro CEO in place, Matthew Cook, who comes up from his role as General Manager of NIKE, Italy. Matthew, a native Englishman, has a tremendous passion for football and he has been instrumental in expanding NIKE football in Europe. There is lots of potential here.

During Q3 we also finalized the sale of Starter, we are finishing the sale of Bauer Hockey and we are seeing solid performance throughout the rest of the portfolio.

Converse continues its amazing growth trajectory. Revenues are up 29% on the quarter, the sixth consecutive quarter that revenue has increased over 25%. At a Converse One Star product launch we launched at over 1,600 target stores generating numbers that are well above planned. So we are very excited about the future of Converse.

Hurley delivered its biggest quarter ever with revenues up 33%. They are really getting the product and merchandising right and that is connecting with our core consumer and with the broader action sports market.

Cole Haan ahs been very strong especially in our wholesale business and we see a lot of potential with Cole Haan Sport, integrating a lot of NIKE technology into that line.

NIKE Golf delivered another solid quarter driven by growth in the U.S. and international markets. The Golf apparel business continues to do extremely well and we are excited about our new footwear and club launches which continue to bring innovation to the golf course.

In Q3 the subsidiary businesses contributed over $600 million in revenue, up 15% over last year.

So I really like where the business portfolio is right now. We see tremendous opportunity in our mix of brands and in our six key NIKE brand categories. My focus is on managing the portfolio to maximize the potential for growth in revenue and profitability.

We are continually finding new ways to leverage talent and functional resources, really bringing a new level of integration to the portfolio. Specifically we are looking for ways to better align and more fully leverage our supply chain, IT platforms and support functions to drive operational efficiency. We see a lot of upside potential in optimizing and sharing these resources.

I am very bullish on the prospects for our existing portfolio of businesses and of course we continue to explore new brands and companies that complement our portfolio.

I also talked about key geographies and the most important ones right now are the U.S. and China. Here in the U.S. we continue to grow in a difficult market by driving innovation and excitement into the market place. Over the last 12 months we have gained over 3 points of footwear market share in the U.S. pushing our total close to 40%.

Our performance apparel products like NIKE Pro and Sport Essentials continue to deliver strong growth. The area where we still have some work to do is in sportswear apparel specifically on the more basic end of the business. We are very focused on realigning our product, market and retail positions. One way to do that is to bring more direct influence on the Pure Performance side of NIKE into sportswear. A great example is our product for the Beijing Olympics. I think it is the most dramatic and compelling mix of performance and sportswear concept that NIKE has ever created. I am very confident in the direction and the commitment of our apparel team and in the potential of our apparel business.

In China we have said that NIKE will reach $1 billion. Not in two years but by the end of this fiscal year. I’ve got to revise my thoughts on that point. As we speak today, NIKE China is over $1 billion for the trailing twelve months and that is just the NIKE brand. We will have more news on that at year end.

I want to close by saying I believe there is tremendous opportunity in our industry. It is important to look through the cyclical pressures and focus on the long-standing powers in place. The price of oil is not as powerful as the global passion for sports. This is true for NIKE and our industry. The universal values and benefits of sports, the premium consumer experience and the power of innovation will always triumph over circumstance.

Now I’ll turn it over to Charlie for an update on the NIKE brand.

Charlie Denson

Thanks Mark. Good afternoon every body. Okay, so Q3 we saw a lot of solid performance around the brand and around the world. We talk a lot about the NIKE brand being more than just a brand. It is a global portfolio of businesses. This quarter demonstrates again how geographic reach and diversity can drive sustainable, profitable growth.

The U.S. economic environment is top of mind for all of us and I’ll talk about that in a minute but I’d like to start with our international business.

First of all think of this. NIKE’s international business accounts are roughly 60% of brand revenues. That international business grew 24% over last year. International futures for the next five months grew at a mid-teens constant dollar rate. So we feel pretty good about the health of the business around the world.

In our European business, football leads the way. Revenue was up 10% on a constant dollar basis. Footwear and apparel increased in both revenue and margins to drive very healthy profit growth. This also yielded market share gains in footwear and apparel in all of the big five Western European countries.

I said football leads the way and it does. We launched our newest and most innovative football boot ever, the Mercurio Vapor 4. It is the lead product in our Mercurio franchise and it has led to great sell throughs throughout the campaign. In July we will follow that up with the Mercurio SL, the lightest football boot ever made. We signed the French national team last month, which is just the latest in a long string of relationships with key players, teams and organizations throughout the world.

Starting in 2011, this addition represents yet another confirmation that NIKE is the number one brand in football.

Within the EMEA region we saw an 11% increase in revenue for the UK. We’ve had a steady hand there cleaning up distribution and managing inventory and pricing and that market is responding the way we thought it would.

Our sub-region of central European countries delivered double-digit revenue gains in every single country led by Russia, Turkey and Poland. We delivered all this growth will keeping an intense focus on inventories. We feel very good about our inventory levels in the region especially in footwear. As you know, clean inventory is a key to profitability. It keeps the market place healthy and positions the brand for strong sale throughs coming off our strong futures orders.

In the Asia Pacific, lets talk about Japan first. I characterize our progress there as steady. We continue to grow revenues and futures, but I have higher expectations of ourselves in this very critical market. We are applying the same disciplined approach to managing and creating the Japanese market as you have seen us do in other key markets, focusing on innovative products and premium consumer experiences that differentiate NIKE in the market place. The revenue growth could be better, but the quality of our business continues to improve.

China continues to break records in almost every metric. Third quarter revenue is up almost 50%. We are close to 50% gain year-on-year to date. Our retail accounts opened almost 900 new doors in Q3 bringing our total to nearly 3,500. These stores are selling a lot of product as comp store sales continue to be strong.

As Mark mentioned, we are the first brand in our industry to reach $1 billion in revenue in China. We did it almost a year ahead of our original expectations. We don’t see that as our goal, but we do see it as a pretty good start.

Okay back to the U.S. We look at the macro environment in the U.S. and know that conditions are tough but NIKE continues to increase revenues here, gain share and grow the business. Footwear and apparel revenue are both up. Once again, our revenue growth in the quarter was broad based. Our business with 9 of our top 10 accounts grew. In fact, for the first time in a third quarter, U.S. footwear revenue surpassed $1 billion.

We have been very successful at surgical pricing strategies that are increasing margins on key models and our inventory levels are really clean, below our rate of increase in revenue. I think these are great indicators of our ability to manage profitability even within a challenging environment.

1% futures growth is softer than we’ve seen in several quarters, but we feel pretty good about the quality of our business in the U.S. You’ve heard us say many times that we are focused on sustaining our full demand model. I am very pleased that we are staying true to that approach, successfully navigating the current environment with an eye towards long-term, healthy, sustainable growth.

Mark mentioned apparel. I like where our performance product is right now. We’re looking at double-digit revenue increases in men’s training, women’s training as well as running. U.S. apparel revenue is up overall but I do think we could do even better. Specifically we are cleaning up some inventory in sportswear. We are moving a lot of that to our factory stores. It is worth recalling that we have expanded our factory store portfolio over the last 18 months and this continues to help us effectively manage inventory delivering profitability while maintaining that brand integrity in the market place.

You know we are planning on generating quite a bit of excitement for our fourth quarter. Specifically, we just launched a complete men’s training initiative this spring in the U.S. that centers around the concept of dynamic training. Part of that is our partnership with Spark, which is creating a new performance standard to drive and measure athletic performance for competitive athletes.

You are also going to see a lot of activity around Team USA Basketball that brings together marquee athletes from around the NIKE portfolio and brand.

We have the European Championships coming up and a great momentum in football so we will start rolling out a strong campaign in April led by the new T90 Laser 2, one of the most innovative and accurate soccer boots in the world.

And of course we are heading to Beijing with a whole arsenal of communications. Some around familiar themes like “Just Do It” and others that are unique to these games and the great NIKE athletes we will all be watching compete. Basically we are executing the biggest campaign we have ever done, twice.

We are very confident in our timing of this. Now is not the time to hide in the weeds. We are on the offense. But with tremendous focus on innovative products, stories and experiences when we get aligned like we are now we know we will not only capture consumer’s imaginations but revenue and share as well.

We are also staying on plan for our new retail executions. We are working on the NIKE store concept. We are starting to secure locations and expect to have several locations up as we move into fall. The House of Hoops concept in New York is doing very well and we are working very closely with Footlocker as we plan the expansion of this concept in the next few months.

We are also working on a new concept with The Finish Line as well. So stay tuned.

Last quarter we told you about the revamped running space in our NIKE Town New York which continues to generate very solid results. Revenue from that running experience is up 35% and it is driving more than just sales. Overall store traffic is up 14% another example of our category focus starting to pay dividends.

We are going to take what we did for running in NIKE Town New York and we are going to do the same thing for football in NIKE Town London. We call it the Boot Room. It will be the world’s pinnacle expression of NIKE football. That will be up and running for the Euro Champs this summer.

It is important to understand that our retail plan is not just about getting a new format out. It is about improving our connection with the consumer and creating a better experience with the brand at retail. All the work we are doing in this space is making us a much better retailer and a better wholesaler partner. It is also making us a much more connected brand and a much stronger company.

So Q3 was a pretty strong quarter. I think it shows the power and flexibility of the NIKE brand. We have a big bank of levers and we are able to pull them to create and leverage growth opportunities in any market around the world. I feel very confident that we can continue to execute our plan and deliver the profitable and sustainable growth we’ve talked about over the last several years.

With that I’m going to turn it over to Don.

Don Blair

Thanks Charlie. I agree completely with my colleagues and am very pleased with the results of our fiscal third quarter. We have continued to deliver against our financial goals in the face of market uncertainty.

Here is a recap of NIKE, Inc. results for the third quarter.

Revenues for NIKE, Inc. and the NIKE brand grew 16% for the quarter with 6 points of growth from the weaker dollar driven by growth across all four regional businesses. The businesses reported as “other” reported revenue growth of 15%. Futures orders scheduled for delivery from March 2008 through July 2008 grew over 11% versus last year driven by robust growth in each of our international regions. U.S. futures grew 1%. Excluding currency changes futures were up about 9%.

For the quarter, diluted earnings per share grew 35% to 92 cents driven by strong revenue growth, expanding operating profit margin, a lower tax rate and fewer outstanding shares.

Earnings per share for the third quarter were somewhat higher than anticipated as we elected to shift demand creation spending from the third to the fourth quarter to invest more heavily in integrated marketing programs behind the European Football Championships and the Beijing Olympics.

EPS for the third quarter also included a 4 cent gain from the sale of Starter.

Third quarter gross margins expanded 90 basis points versus the prior year driven primarily by improved in line pricing and margins in footwear and better off price margins. The impact of currency on gross margins was minimal.

Over the first three quarters of fiscal 2008 we have delivered $1 billion in free cash flow from operations, paid out $300 million in dividends and repurchased $952 million of NIKE stock. Our balance of cash and short-term investment totaled nearly $3 billion as of February 29, or approximately $6 per diluted share on a gross basis and $4.50 a diluted share net of debt.

Our trailing twelve month return on invested capital was 24.3%, up 340 basis points versus the end of the third quarter of fiscal 2007.

With the recap of our consolidated performance, let me give you some more details on the results we reported earlier today.

In our European region which includes the Middle East and Africa, third quarter revenues increased 23%. Excluding currency changes, revenues advanced 10% as both footwear and equipment grew double-digits and apparel advanced 8%. Currency mutual revenues for the emerging markets in the region were up 34% as every country in the group delivered double-digit revenue growth.

The balance of the region grew at a mid-single digit rate driven by strong growth in the UK, Germany and northern Europe.

Futures orders for the EMEA region grew 9% in constant dollars reflecting continued growth in nearly every country in the region.

Third quarter pre-tax income for the European region grew 31% to $334 million driven by strong revenue growth, improved gross margins, SG&A timing and stronger European currencies.

In the Asia Pacific region, third quarter revenues increased 27% including a 7 percentage point benefit for currency changes. Currency neutral revenues from footwear increased 22%, apparel grew 19% and equipment advanced 15%.

While revenue increases were broad based across the region, Asia’s growth engine continues to be China. For the quarter revenues in China increased 50% on currency neutral basis and we have now exceeded $1 billion on the trailing twelve month basis.

Our growth in China has been driven by new store openings and new store sale through appealed by brand building investments around the Beijing Olympics and the “Just Do It” campaign.

Our results in Japan, as Charlie said, continue to demonstrate improvement as our revenues there grew 4% on a currency neutral basis. As we noted on previous calls we continue to believe there is enormous opportunity for profitable growth in Japan and we won’t be satisfied until we begin to see meaningful acceleration.

For the quarter pre-tax income for Asia Pacific grew 46% to $193 million driven by strong revenue growth, expanding gross margins, SG&A timing and stronger currencies.

In the America’s region third quarter revenues increased about 20% driven by about 10 points of benefit from stronger currencies. Excluding the effects of currency, revenue in the region was driven by the Latin America markets led by growth of over 15% in Argentina, Brazil and Mexico.

Third quarter pre-tax income for the America’s region grew 23% to $52 million driven by revenue growth, gross margin expansion and favorable exchange rates.

In the third quarter our U.S. business delivered solid results which were all the more remarkable given the uncertainties in the market place. Revenues increased 5% versus the prior year driven by higher sales in nearly all of our top accounts.

Revenues from NIKE owned retail stores in the U.S. grew 13% for the quarter driven by new store openings, 3% comp store sales increases at both first quality and factory outlet stores and strong growth in our digital business.

Our footwear business in the U.S. delivered an excellent quarter as revenues grew 5% and gross margins expanded 2 points. The revenue growth was driven largely by a higher average price per pair as unit volume was basically flat.

Most of the average selling price gain was through surgical price increases taken for the spring season and a shift in mix to higher priced sportswear and away from kids products.

U.S. apparel revenues increased 10% for the quarter and growth in performance categories such as running, men’s training and women’s training were partially offset by softness in basketball products.

Third quarter pre-tax income for the U.S. increased 17% to $347 million driven largely by revenue growth, expanding footwear margins and lower SG&A spending driven largely by the timing of demand creation.

Third quarter revenues from our other businesses grew 15%. Converse delivered another tremendous quarter as revenues advanced 29% and pre-tax income grew 24%.

Revenues for Hurley, Cole Haan and NIKE Bauer Hockey each grew double-digits. For the quarter pre-tax income for the other businesses increased 16% driven by strong revenue growth and expanding gross margins, partially offset by higher operating overhead investments and infrastructure.

Third quarter SG&A expense for NIKE, Inc. grew 13% with 4 points of growth coming from changes in currency exchange rates. Excluding currency effects, demand creation grew 3% and operating overhead grew 12%.

On previous calls we’ve indicated that our demand creation spent for this fiscal year would be heavily focused on the fourth quarter. That certainly played out in our results for the third quarter and year-to-date. In Q4 we could expect that demand creation could be 1/3 higher than prior year levels driven by marketing campaigns focused on the Beijing Olympics, the Euro Champs and men’s training in the U.S.

The growth in third quarter operating overhead was driven primarily by investments in strategic growth initiatives such as NIKE owned retail, NIKE China and our rapidly growing other brands such as Converse.

Excluding these investment areas, operating overhead grew about 5% on a currency neutral basis.

Other income for the quarter was $5 million versus $10 million in last year’s third quarter. Other income in the current year was largely comprised of the $29 million gain from the sale of the Starter brand offset by currency hedge losses.

Other income from the prior year consisted mainly of the gain from the sale of our Oregon distribution center.

The combination of currency hedge losses and the favorable translation of foreign currency denominated profits from our international businesses increased year-over-year pre-tax income by about $29 million for the third quarter of fiscal 2008.

Our tax rate for the third quarter of fiscal 2008 was 30.6 percent, 170 basis points below the prior year. We expect the effective tax rate for the fourth quarter to be a bit lower than the third quarter, bringing the last three quarters of the year very close to our previous guidance of about 30.3%.

In addition to the strong profitability for the quarter, we are also very pleased with our continued improvements in capital productivity. As of the end of the third quarter of fiscal 2008 our cash conversion cycle was 7 days lower than the prior year quarter driven by improved profitability metrics for inventory, accounts receivable and accounts payable.

Thanks to strong focus by our sales, operations and finance teams, inventories and accounts receivable continue to be in very good shape as both grew 10% versus the end of last year’s third quarter, well below the comparable growth rates of third quarter revenues. Inventory growth was also below the rate of futures orders for the next five months.

As Mark indicated earlier, we remain on track to achieve our financial goals for the fiscal year. Excluding the realized gain on the sale of Starter, the expected fourth quarter gain on the sale of Bauer Hockey and results for Umbro our expectations for the full year remain largely unchanged.

For the fourth quarter we project low double-digit revenue growth driven by our business momentum and the continued weakness of the U.S. dollar and we are forecasting acceleration in gross margin growth as the benefits of clean inventories, continued progress on gross margin initiatives, and favorable selling currencies more than offset the impact of source and cost pressures such as higher oil prices, labor rates and stronger Asian currencies.

As we have discussed earlier, we expect SG&A to grow substantially faster than revenue in the fourth quarter due to investments in demand creation and continued operating overhead investments in our growth businesses.

For the fourth quarter we expect the weaker dollar should continue to have a positive impact on our overall profitability as translation benefits more than offset currency hedge losses. However, these currency hedge losses will likely result in an increase to other expense in the fourth quarter of fiscal 2008 before considering the expected gain from the same of Bauer Hockey.

The guidance I have just given you excludes the anticipated impact of the sale of Bauer Hockey and the acquisition of Umbro. In the fourth quarter we expect to close the sale of Bauer Hockey and report a gain on the transaction. While we have closed on the Umbro acquisition we are still finalizing the purchase accounting.

Although we have not yet completed the accounting from either of these transactions we expect that together the two will represent a modest benefit to our fourth quarter earnings per share.

As we usually do at this time we are now developing plans for fiscal 2009. This year there is a somewhat greater level of uncertainty about the macro economic outlook in which we will have to operate. That said we remain committed to managing every aspect of our PNL and balance sheet to deliver growing earnings and cash returns to our shareholders while building our business for sustainable, profitable growth.

For fiscal 2009 as a whole we are targeting high single-digit revenue growth and continued EPS leverage. We expect the EPS growth for the year to be relatively more heavily weighted towards the last three quarters of the year as we continue to focus demand creation on the Euro Champs and the Beijing Olympics early in the year.

In addition, our tax rate for the year will most likely be similar to our FY 08 fourth quarter rate, well above the first quarter of fiscal 2008 which reflected a significant one-time tax benefit.

In summary, we continue to drive toward achievement of our financial goals for fiscal 2008 and remain committed to delivering profitable growth again in fiscal 2009.

With that we would be happy to take your questions.

Question-And-Answer Session


Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question please press *1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press *2 if you’d like to remove your question from the queue. If you are using speaker equipment it may be necessary to pick up your handset before pressing the * key.

One moment please while we poll for questions.

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

Kate McShane - Citigroup

Hello? Hi. Can you hear me? I’m sorry I’m saying Hi a couple of times. For the fourth quarter you have indicated that the growth in demand creation then would be over 1/3 and I may have missed it but did you guys comment on how much you expect overhead to be up in the fourth quarter and can you remind us what break down is between demand creation to overhead and your SG&A?

Don Blair

We did not provide guidance directly on operating overhead and with respect to demand creation operating overhead let me look through some pages here and I’ll give you that number in a second. But it is roughly 2/3, 1/3. Roughly 1/3 demand creation and 2/3 operating overhead.

Kate McShane - Citigroup

And my follow-up question is on the NIKE Spark. You just announced earlier in March the advertising you’d be doing around the launch of these new products. Have you seen the spending in the third quarter for that or will that also be a fourth quarter impact in SG&A?

Charlie Denson

Kate this is Charlie. That’s going to be a fourth quarter impact.

Don Blair

Kate just some numbers here. Demand creation for the quarter was about $500 million and operational SG&A was $895 million.

Kate McShane - Citigroup

I appreciate that. Thank you.


The next question comes from the line of Brad Cragin of Goldman Sachs.

Brad Cragin - Goldman Sachs

Yes hello. I was wondering if you could talk about what you are seeing in the U.S. market. Clearly some pretty impressive results given the U.S. market. Can you address the price value equation that you guys have referred to in some of the other markets and just talk about what your comfort level is with some of the ASP increases that you have there and whether you guys continue seeing any upward movement in that going forward?

Charlie Denson

Brad this is Charlie. Right now…well I’ll talk about the U.S. market place in general first. I think that is the best way to approach it. I think what we are seeing and is something we are comfortable with and have seen before is in uncertain times people tend to go with the things that they know best and feel most comfortable with and we’ve seen some of our market shares start to increase. I think you’ve seen some of the quarterly numbers come through recently and we’ve benefited. We’ve had some great product in the market place and it continues to do well especially on the footwear side of things. So we feel very good about the overall health of the business. I referred to it in my prepared remarks as well that the discipline around inventory management and even in times of uncertainty making sure that we don’t put too much product in the market place and that we are continuing to maintain that pull market that we so often refer to.

As far as average selling price in footwear specifically I think it is up a small amount but somewhat inconsequential in the overall numbers.

Mark Parker

And as far as the price value relationship is concerned, we did take some what I call surgical price increases in the United States. As we discussed before we looked at this on a style by style basis and we have monitored the sell throughs very carefully and we feel very good about where we are in terms of the pricing and the demand curve.

Brad Cragin - Goldman Sachs

Great. I would imagine that part of that is a function of the premium consumer experiences that you guys have been making incremental progress on. Could you just address your sports culture and women’s fitness category and just talk about what may be coming down the pipe in terms of continuing to build those experiences forward?

Charlie Denson

Yeah. I think the sportswear piece right now…I’ll start with footwear…is a very strong part of our business. We have a lot of high performing what we call icon styles, Air Force One, The Dunk, a couple of them that are being worked on now and will be launched over the next year; Cortez specifically. It has been a very successful formula for us and we feel very good about that in the future as well and you will see even more of that.

The other idea is as we continue to build out this category emphasis throughout the organization and actually into the market place I keep reminding people that we haven’t actually delivered our first product line generated from that organizational shift. So you’ll start to see some of that as we move into this fall and then on to next year. I’m very excited about some of the things that are starting to percolate within the category organizations here both from a product standpoint and a consumer standpoint.

Brad Cragin - Goldman Sachs

Great. Thank you.


The next question comes from the line of Robert Drbul with Lehman Brothers.

Robert Drbul - Lehman Brothers

Hi. Good afternoon. The first question that I have is just on Asia and on China specifically. In terms of the sustainability of the business or sort of if you had to look over the next 6-9 months how do you really see that playing out from a top line perspective? When you look at how good those numbers are, just how long can that continue?

Charlie Denson

Robert this is Charlie. We have spent a lot of time talking about this internally. I think as we gear up for Beijing one of the things that we have been focused on for two years plus is the idea that we are going to be there when everything else leaves. We have positioned ourselves in the market place and with the Chinese consumer with that specific intent. I think you are pretty familiar with some of the campaigns that we have been running. We have been running a “Just Do It” message in China now for two years plus and I expect that to continue through the Olympics and well into next year. So we really feel good about where we are at in China. We are keeping an eye on the inventories both at retail and wholesale. I think the team there has done a fantastic job of managing the opportunity and the challenges that has come at them. One of the other things I really feel good about is the team we have on the ground. They continue to deliver on expectations and beyond and I think we are in great shape going through there.

Then I think as you move through to broader Asia to your point, we still feel very bullish on Japan long term and we are starting to see the quality of the business improve. It has been a slower journey than we had anticipated or quite frankly are comfortable with, but we still see the long term opportunities there. Post Beijing Japan is going to be well positioned for an acceleration of growth.

Robert Drbul - Lehman Brothers

Great. Thank you very much. Good luck.


The next question comes from the line of Robert Samuels with JP Morgan.

Robert Samuels - JP Morgan

Hi good afternoon. Just talking…going back to the question about the domestic business. What are you currently seeing with regards to inventory at retail and what are your retailers telling you about their expectations for the consumer for the remainder of the year?

Charlie Denson

It is something we have actually gotten a lot better at over the last 3 or 4 years, just our connectivity with most of our major retailers and having a much higher level of transparency into the inventory of that retail. Again, we watch it very, very close and probably even closer today than we have ever watched it because of the level of uncertainty I think that everybody has in the U.S. market. So I feel very good about where we are at. We continue to take share and our sell throughs are strong and we are gaining ground on every body. So we’re not going to take the pedal off and we are going to keep the pressure on. We’ve got some great product coming down the pike that Mark referenced in his notes. I think that some of the performance product that we’re coming out with this summer around Beijing and the European Championships is not some of, I think it is the greatest performance product offering this company may have ever had.

Robert Samuels - JP Morgan

Great. Could you just talk a little bit about trends you are currently seeing in your full price stores as well as the outlet stores?

Mark Parker

Overall trends….our in line stores are reflective actually. Those are reflective of the general market. I think on the in line stuff we are actually outperforming some of the trends that you see. I think that is based on a lot of what we are doing with respect to some of the consumer experiences that we talked about. The NIKE Town Running experience has been very popular and successful. NIKE ID launched in NIKE Town New York and NIKE Town London and we’ve seen great response to that as well.

So we’ve increased service levels and again as we continue to build out our own retail plan like I said in the prepared remarks it is more than just about a format. It is about that entire consumer experience. Some of the things that we are continuing to explore and learn are already paying dividends in the market place.

Charlie Denson

And Robert I would also just go back to the comment I made that both in line and factory outlet store comps in the U.S. were up 3% for the quarter so we are up on both concepts.

Robert Samuels - JP Morgan

Great. Thank you.


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

John Shanley - Susquehanna Financial Group

Thank you very much and good evening folks. Charlie I wonder if you could comment on the promotional environment that is going on in the U.S.? Do you see that as stabilizing? And you mentioned that you are building more outlet stores. Is that helping to stabilize the NIKE product versus some of the competitors out there which seem to be promoted a little bit more heavily than the NIKE brand is currently being?

Charlie Denson

Yeah. I think it certainly puts us in a much better position to manage that. We feel good about the strategy of expanding our outlet footprint over the last 18 months. It is something we talked about a year or year-and-a-half ago and I think the timing now is going to be even maybe better than expected. Our sell throughs throughout both in line and factory outlet stores continue to be strong. Some of that is based on again being the go-to brand in times of uncertainty and part of it is I think attributed to just the product assortments we have in the market place.

With respect to the promotional activity us versus the rest of the market place we are going to stay above the fray.

John Shanley - Susquehanna Financial Group

That’s good to hear. Charlie where are you in terms of the number of stores specifically in the U.S. that you currently operate? Both outlet as well as in line regular stores?

Charlie Denson

I don’t have that number. Pam’s got it.

Pam Catlett

Total NIKE Brand stores, John…this is not U.S. specific we will have to break that down separately but you can presume the majority are in the U.S. as are the factory outlets. 331 is the total number of stores. We did not add any net new factory stores in the quarter. We’ve added 14 factory stores in total since the end of last fiscal year.

Mark Parker

You should not presume that most of those are in the U.S. About half of those are in the U.S. We’ll get the exact number to you.

John Shanley - Susquehanna Financial Group

Half of the 331?

Mark Parker

Yes. Approximately.

John Shanley - Susquehanna Financial Group

Great. Thank you very much.


The next question comes from the line of Brian [McGoth] with Morgan Stanley.

Brian [McGoth] - Morgan Stanley

Yeah great thanks. Hey guys. I just have one question for Don. Don I was hoping you could just talk for a minute about the trade off between margins and your cash cycle. So in this quarter you had gross margins up. Your cash cycle was up about 9 days at least how I calculate it. So your operating asset turns improved while the gross margins improved. I think that made NIKE the only one anywhere near the industry that did that. But in a rising cost environment you have your payables which are near peak. You have your receivables which have gone down a lot over the past two years and I’m just wondering if you can keep your gross margins heading higher without having to flex on your balance sheet as we head into the next year or two?

Don Blair

Brian I think it is always tempting in a tough financial environment to use the balance sheet and let the receivables string out and let your payables head out. What we would obviously prefer to do is make sure that our factory partners maintain profitability and our accounts maintain profitability the old fashioned way of running a tight supply chain and running product that sells through a slow margin. So one of the things that we have resisted even at a time when money was cheap was letting the balance sheet grow. So we’re going to stay focused on keeping the supply chain tight, the inventories tight and making sure that the payment terms both with our suppliers and our customers stay in the line with our policies.

Brian [McGoth] - Morgan Stanley

Is there anything else you can do or are doing to help your partners over in Asia continue to stay profitable even at a time when they are continually being hit with increased labor costs and raw material increases?

Mark Parker

Absolutely. A lot of the things we do in terms of manufacturing practices and how we design and develop products and how we run our supply chain have benefits both for us and for them. So the strategy is really make the whole pie bigger and then every body’s slice gets bigger; not redistribute the same pie. So we’re always trying to make sure the business itself is more efficient and that is how every body is better off.

Brian [McGoth] - Morgan Stanley

Great. Thanks a lot.


The next question comes from the line of Omar Saad with Credit Suisse.

Omar Saad - Credit Suisse

Hi thanks. Want to just follow-up on the last question if I could. In terms of cost inflation, commodity prices rising, wage inflation in the Far East, can you talk about from taking a longer term perspective what you think the impact will be, how you are planning for it and how we should think about it given just how broad your sourcing base is and the kind of products you source?

Charlie Denson

Well I think that certainly as we have discussed before there are macro economic factors and ebb and flow and to some degree you can’t control those. You can manage them. Oil and labor costs and so on fall into that category. I certainly think over time we are going to see long term increases in labor costs in Asia and energy costs I think are going to go up and down but generally I don’t think we’d expect to see major reductions that last for long periods of time. So the way we operate our model is we work the levers we can control. There are several broad areas. One is reducing product costs through things like lean manufacturing and raw material consolidation and style productivity. Those things help us drive the profitability of our products by making sure that we are buying raw materials in larger quantities which improves our leverage in negotiations, that we are amortizing tooling more effectively and that we are using less labor in the product through lean manufacturing techniques. So that is one approach that we take.

A second approach that we take is keeping the supply chain tight. That means we have less working capital tied up and the factory does as well and every body sells products through a full margin and maximizes profitability.

There is also obviously managing mix and making sure that we are taking price increases at the right spot. So we’re going to work out levers. We’re going to deal with the macro economics as they come and our goal is to keep moving the gross margin higher.

Omar Saad - Credit Suisse

Okay. Philosophically you talked a little bit about surgical price increases and in a long term inflationary environment especially with respect to wages which I think a lot of us are pretty comfortable with. Obviously a lot of the commodity costs are going to be more volatile over time. Do you think we should be thinking about a rising cost environment that aligns with the rising cost environment we might see over the next few years…is that apparel and footwear has historically been a pretty deflationary segment of this market. Do you think you could see a change over time?

Charlie Denson

I think it has to be focused on specific consumer proposition. If the product is absolutely compelling and you have got great product and value is about what you pay and what you get, so it really has to be specifically targeted to styles and consumers and we would never assume that you could take inflationary increases across the board. We just think it needs to be much more surgical.

Don Blair

Heavy emphasis on the word surgical in this case.

Omar Saad - Credit Suisse

Thank you.


The next question comes from the line of Virginia Genereux of Merrill Lynch.

Virginia Genereux - Merrill Lynch

Thank you. Let me ask first if I could about some of these soccer endorsements guys and the sort of somebody characterized it as sort of a scorched earth policy of bid increases that you guys are sort of leading. How do you think about sort of paying a lot more for some of these National team endorsements? I mean obviously you can certainly looking at the financial model but what are the benefits to that in your all’s view to securing some of these teams and maybe some of the more mature markets and paying a big price for them?

Charlie Denson

Hi Virginia. This is Charlie. Hey, well I think one of the cornerstones of this brand has always been our ability to show up, I guess is a way to say it, on the field of play. What it does from a credibility standpoint, authenticity standpoint, and even in exposure and marketing standpoint has always been a pointed to base since I think Bill Knight gave his first pair of shoes away. We continue to believe in it. We continue to see the benefits of it. It does move the market place. Especially I think you are probably referring to our latest signing of the French National team. What it means to us…to have one of the big five national teams down in the brand is a monumental defining moment in our ongoing pursuit and our ability to claim the number one position in the biggest global sport in the world.

For us it is not just about looking at it in a very specific focused way. It has multiple direct and indirect benefits to the brand. That being said we don’t just go about it with a scorched earth approach. We do look at the benefits of the commercial opportunity in regards to the French situation I think I am very excited with regards to that one because not only does it give us access to the French National team but it gives us access to the entire French amateur football academy and operation throughout the country which we do not have today. So it has a big commercial upside with respect to that opportunity.

So overall it is a big brand plan and is something we obviously feel very confident and very comfortable with.

Mark Parker

Virginia this is Mark. I just wanted to add that the word surgical here is maybe relevant again. We are being on the offense I think in terms of the key sports marketing assets that we are looking at. Better leveraging by the way. We’re really trying to be sure that we are dialed in on which ones we are looking at and more dialed in on how to best leverage those opportunities both on a brand and commercial sense.

As Charlie said, our connection to the world’s top athletes and teams remains a fundamental platform that we lean on to grow our business and our brand.

Virginia Genereux - Merrill Lynch

Thank you Mark. If I may, maybe for Don, Mark and any body else. On sort of overhead and your comment a couple of years ago that other overhead was going to grow past the rate of sales and there was a very lean year in fiscal 2006 and I know currencies are obviously inflating things pretty big here but as we look forward Don how should we think about other overhead? I know investing in loss of initiatives, but is it possible that other overhead the rate of growth there can sort of come back to half the rate of revenues? Is that still something we should be thinking about?

Don Blair

Well I appreciate your good memory Virginia. That was probably about seven years ago and the business was a very different structure then. We actually are leveraging a lot of our wholesale overhead. One of the things that Mark has talked about pretty consistently is focusing resources. We have been really focused on making sure we are investing in strategic initiatives and that is things like emerging markets and development of retail and those things have had a tangible impact on revenues and gross margins. So what I would say to you is we still believe that it is important for us to make sure that we are driving productivity in overhead type functions so that we can invest in our strategic priorities and so we are going to continue to do that. So as I called out in the script, we are seeing much slower growth than revenue in our core wholesale businesses but we are investing very heavily in some other parts of the business.

Virginia Genereux - Merrill Lynch

That’s great. Don the areas that are requiring a little more, and I understand the mix point makes a lot of sense, the areas that are requiring a little more SG&A investment are obviously direct to consumer.

Don Blair


Virginia Genereux - Merrill Lynch

What else would you say?

Don Blair

Emerging markets. Also the other businesses that we reported. Mark talked about the growth at Converse. We think that business still has tremendous growth opportunity and we are investing pretty heavily in it. So that is another example.

While I have the floor real quickly I just wanted to say with respect to sports marketing the strategy is definitely not scorched earth and we don’t see ourselves as leading the market higher here. What we are doing, as Mark said, is surgically looking for the things that are going to drive the business.

Virginia Genereux - Merrill Lynch

That’s all fine. I didn’t mean to….I was trying to goad you with scorched earth…

Pam Catlett

That’s alright Virginia.

Operator we have time for one last question.


Our final is a follow-up from Brian [McGoth] at Morgan Stanley.

Brian [McGoth] - Morgan Stanley

Great. Thanks a lot. I don’t want to beat this whole sourcing thing in the head, but I’m going to ask anyway. I’m going to assume that the companies that are going to do best in a rising China cost environment are those that ultimately have a sales organization that is greater than a sourcing organization. China, I think is less than 1/3 of sourcing for Nike overall. I think that the industry is closer to 85%. We know how fast China is growing for you, I think at a rate of 3 or 4 times the rate of your sourcing organization. So I guess is this the right way to look at it and as time goes by and as we see your local sales organization in China continue to ramp that spread will just continue to compress?

Mark Parker

I think there is a couple of pieces that are the best and accurate analogy. One of them is currency. The RMB strengthens that makes product more costly but it also means that sales in China are more valuable. So there definitely is a benefit as we get a natural hedge.

The second thing is clearly the economic growth in China not only drives labor costs but also fuels the growth of our business. So yes the bigger footprint we have in China that certainly helps offset the pressure that comes out of the sourcing side.

At the same time we are going to continue to work a diversified sourcing base and work the gross margin levers.

Charlie Denson

I will add Brian I think when we talk about our business in China we usually talk about the NIKE brand. We actually have a significantly larger footprint there with Converse, and now Umbro added, in addition to NIKE Golf, of course. So the footprint we have in China is actually quite large so we can leverage that on both sides in both sourcing and the revenue potential.

Brian [McGoth] - Morgan Stanley

Great. Thank you both.

Pam Catlett

Thanks everyone for joining us.

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