UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 18, 2003
NIKE, INC.
(Exact Name of Registrant as Specified in Charter)
Oregon 1-10635 93-0584541
____________ ____________ ____________
(State of (Commission (I.R.S.Employer
Incorporation) File Number) Identification No.)
One Bowerman Drive
Beaverton, Oregon 97005-6453
(Address of Principal Executive Offices)
__________________________
(503) 671-6453
(Registrant's telephone number, including area code)
___________________________
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
The following exhibit is furnished with this Form 8-K:
99. Transcript of earnings release conference call on December 18, 2003
Item 12. Results of Operations and Financial Condition.
On December 18, 2003, NIKE, Inc. held a public telephone call to
discuss its first quarter earnings press release. A copy of the
transcript of the conference call is attached hereto as Exhibit 99.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NIKE, Inc.
(Registrant)
Date: December 22, 2003
/s/ Donald W. Blair
____________________
By: Donald W. Blair
Chief Financial Officer
Exhibit 99
NIKE, Inc.
Q2 '04 Earnings
December 18, 2003
PAMELA CATLETT
Director of Investor Relations
Good afternoon, everyone. We're pleased you're joining us this
afternoon to discuss Nike's fiscal 2004 second quarter results. For
those of you who need to reference our press release, you'll find it
on our website, www.nikebiz.com/investor. You'll also find expanded
information on the website about some of the highlights we'll be
discussing today. Participants in today's call are Charlie Denson and
Mark Parker, Co-Presidents of the Nike Brand, and Don Blair, our Chief
Financial Officer. Each of today's participants will provide brief
prepared remarks which will also be available on our website
immediately following the call before we then conclude with a
question-and-answer period.
Before I turn it over to Don Blair, let me remind you that on this
call we're going to make forward-looking statements based on our
current expectations, and these 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
we file with the SEC, including Forms 8-K and 10-Q. Some
forward-looking statements concern futures orders that are not
necessarily indicative of total revenues for subsequent periods due to
cancellations and the mix of futures and at-once orders, which may
vary significantly from quarter to quarter. In addition, it's
important to remember a significant portion of our business, including
equipment; most of Nike Retail, Nike Golf, Converse, Cole Haan, Bauer,
and Hurley, are not included in these futures numbers.
During this conference call we may discuss non-GAAP financial
measures. A presentation of comparable GAAP measures and quantitative
reconciliations can also be found at Nike's website, again
www.nikebiz.com under the Investors heading. In this call we may also
discuss non-public financial and statistical information, which is
also publicly available on that site.
Now here's Don Blair.
DONALD W. BLAIR
Vice President and Chief Financial Officer
Thanks Pam. On our last conference call, we told you that the second
quarter would be the most difficult growth comparison of the year. So
we feel very good about the growth in revenue and profits we've just
reported.
- Our revenues grew 13% in the quarter, including about six
points of growth from currency and about two points from the
Converse acquisition. Excluding these factors, our business
grew just over 4%. As you may recall, last year we
accelerated about $66 million of product shipments from the
third quarter into the second quarter in advance of our
supply chain systems implementation in Europe. In addition,
we were just beginning to feel the impact of lower shipments
to Foot Locker in the US. When you net out all the puts and
takes, we're very pleased with the top-line performance of
our businesses in the second quarter.
- Our consolidated gross margin for the quarter was 42.3%, up
210 basis points versus the second quarter of fiscal 2003. On
a net basis, foreign currency movements accounted for only
about 30 basis points of the improvement. Excluding the impact
of currency, gross margins increased in nearly every one of
our businesses. The largest driver of the gross margin
improvement was wholesale Footwear, where higher product
margins, lower air freight, in-line pricing margins and fewer,
more profitable closeouts drove about 130 basis points of the
consolidated gross margin improvement. Gross margins for
wholesale apparel, wholesale equipment, and Nike Retail also
advanced, driving about 30 basis points of the improvement.
The balance of the growth came from our subsidiaries.
- Our diluted earnings per share for the quarter grew 16% versus
the prior year, bringing year-to-date diluted earnings per
share growth to 19% before last year's accounting change.
- Our return on invested capital as of the end of the second
quarter was up three points versus the prior year. For your
reference, we've posted our Return on Invested Capital
calculation on our website.
- We continued to generate strong cash flows in the quarter and
to deliver a large amount of that cash to our shareholders.
For the quarter, we repurchased over $100 million of stock and
we paid out $37 million in dividends. In addition, on November
24th we announced that we're raising our quarterly dividend to
20 cents a share, a 43% increase over the previous rate.
Once again, it was the depth and breadth of our portfolio of global
businesses that enabled us to deliver these results against difficult
comparisons, so let's talk about the results in our key businesses.
This quarter our international businesses maintained a healthy rate of
growth, delivering 12% revenue growth and over 14% growth in pretax
income.
- In our Europe Region, which includes the Middle East and
Africa, revenues grew 9% in the quarter as footwear was up 8%,
apparel grew 10%, and equipment advanced 4%. Stronger
currencies accounted for nearly 15 points of growth. As I
indicated earlier, we estimate that $66 million of revenue
moved from the third quarter to the second quarter last year.
This shift in product flow reduced our second quarter revenue
growth this year by about nine points. If we remove the
effects of currency and shipment timing, revenue would have
grown about three percent in the Europe Region.
Gross margins in the Europe Region expanded by 320 basis
points versus the prior year and accounted for a full
percentage point of our consolidated margin improvement.
Stronger currency was a key factor, driving 120 basis points
of the improvement in Europe alone. Lower levels of closeouts
and higher closeout margins accounted for most of the gross
margin upside, more than offsetting higher per unit
distribution costs as we processed fewer units through our
fixed distribution infrastructure. Pretax income for the
Europe Region advanced 12% in the quarter. As in the past, our
segment disclosure of regional pretax income is currently
available on our website.
- In the Asia Pacific Region, our business continued to grow
strongly in the second quarter. Revenues increased 18% for the
quarter, with about 5 points of the increase coming from
stronger currencies in the region. For the quarter, footwear
reported 21% growth, while apparel grew 15% and equipment
advanced 11%. Japan, China and Korea again drove the growth,
although revenues grew in most countries in the region.
For the quarter, Asia Pacific gross margins increased 170
basis points versus the prior year, accounting for 30 basis
points of the gross margin improvement for Nike, Inc. The Asia
Pacific margin increase was largely the result of higher
in-line margins across footwear, apparel and equipment. Pretax
income for the Asia Pacific Region grew 18% in the quarter.
- In the Americas Region, revenues grew 17% for the quarter,
with about eight points of the increase coming from currency
effects in the region. For the quarter, footwear reported 25%
growth while apparel grew 3% and equipment advanced 5%. On a
country basis, the revenue increase was driven by strong
growth in Brazil, Argentina, and Chile.
For the quarter, gross margins in the Americas Region fell 130
basis points year-over-year, reducing the consolidated Nike
gross margin by ten basis points. Less favorable currency
rates in Mexico and Brazil accounted for 200 basis points of
the regional gross margin decline. Pretax income for the
Americas Region grew 10% in the quarter.
As pleased as we are with the performance of our international
regions, we're equally pleased with the strong results from our US
Region. Revenue for the second quarter advanced 5% over the prior
year, while pretax income grew 12%. Year-to-date, pretax income is up
7% on a 1% increase in revenue.
In the US Region, gross margins for the quarter were up 210 basis
points versus the second quarter of fiscal 2003, driving an
80-basis-point improvement in Nike Inc.'s consolidated gross margin.
Virtually all of the region's gross margin expansion came from higher
wholesale footwear margins, driven by higher in-line product margins,
lower airfreight costs, and fewer, more profitable closeouts. SG&A
spending for the region grew about 10%, driven largely by double-digit
increases in demand creation spending.
US footwear sales increased 5% in the quarter as sales to Foot Locker
declined 8%, while sales to other accounts advanced 6%. However, as
we've indicated in a press release issued in November, we're now
reaching and expect our business with them .........For US footwear as
a whole, average selling price per unit increased mid-single digits,
as the mix of over-$100 performance product grew and closeouts fell.
US Apparel revenues rose 8% in the quarter, as continued growth in
performance apparel and licensed product more than offset lower sales
of active life apparel and lower close-outs.
Reflecting the continued strength of the Nike Brand, comparable sales
for Nike-owned retail operations in the US grew over 8% on a
comp-store basis for the quarter, led by double-digit sales growth at
Niketown stores.
Revenues from our other businesses grew 54% for the quarter, with 28
percentage points of the increase due to the acquisition of Converse.
Revenues for Nike Golf, Cole Haan, and Hurley each grew about 30% for
the quarter, and sales at Bauer Nike Hockey advanced 15%. For the
quarter, our other businesses reported $7 million of pretax income
versus about breakeven last year. Better bottom-line results at Nike
Golf and Cole Haan plus the addition of Converse drove the
improvement.
Consolidated SG&A spending grew 18% in the second quarter. About eight
percentage points of the increase was due to changes in exchange rates
and the acquisition of Converse. For the quarter, demand creation
spending increased 25% to $341 million. Changes in currency exchange
rates and the addition of Converse accounted for about ten points of
the growth. Investments in basketball in the US, football in Europe,
and the Rugby World Cup in Asia were key drivers of the remaining
growth.
In the second quarter, operating overhead increased 15% to $562
million. Changes in currency exchange rates and the addition of
Converse accounted for about seven percentage points of that growth.
Other expense for the quarter totaled $14 million, with about half due
to foreign currency losses, mostly from Europe. These losses were more
than offset by favorable translation of foreign currency denominated
profits reported by our international regions. For the second quarter,
the effect of netting these foreign currency losses and the favorable
translation of foreign currency denominated profits was an additional
$30 million of pretax income or about $.07 per diluted share for the
quarter. Our effective tax rate for the quarter was 34.8%, our current
estimate for the full-year rate.
As of November 30th, worldwide inventories were 15% or $205 million
higher than a year ago. The acquisition of Converse accounted for $48
million of the increase, while inventory in our Europe Region
increased $115 million. The increase in Europe was due to currency
changes, which added $67 million to the balance, and comparisons to
unusually low inventory levels last year, as we drew down inventories
in advance of the supply chain systems implementation. Inventory in
our US region was down versus the prior year.
At the end of the second quarter, accounts receivable were $115
million or about 6% higher than the prior year due. Stronger foreign
currencies accounted for $150 million of growth, and the acquisition
of Converse added $43 million to the quarter-end balance. Without
these factors, accounts receivable would have declined about 4%.
For the quarter, we generated $418 million of cash flow from
operations and we used $341 million of cash in investing activities,
including the acquisition of Converse. In other words, we financed the
Converse acquisition with a portion of one quarter's operating cash
flow. Cash used by financing activities totaled $105 million,
including $101 million of share repurchases.
As we entered this fiscal year, we told you that we expected to report
full-year results broadly in line with the financial model we've
talked about before: high single-digit revenue growth, expanding gross
margins, and mid-teens earnings per share growth. With the first half
of the year in the books and the continued strength of foreign
currencies, particularly the euro, we should be able to exceed these
goals.
Let's begin with the revenue outlook. Today we reported a 9.7%
increase in futures orders for the next five months. Although we
reported futures growth of 10.5% last quarter, we told you that those
numbers included four to five points of growth from changes in our
seasonal order pattern in Europe. So on a comparable basis, the
futures we've reported today reflect a significant sequential
acceleration of orders. Assuming the current strength of the euro
continues, we expect to deliver double-digit revenue growth for the
year.
As discussed earlier, last year's fiscal second quarter was stronger
than normal and the third quarter weaker than normal, as we pulled
shipments forward in advance of our supply chain implementation in
Europe. In addition, the change in the seasonal pattern of orders in
Europe should pull a higher percentage of Spring revenues into the
third quarter versus the fourth. As a result of these factors, we
expect revenue growth in the mid to high teens for the third quarter,
with high single-digit growth for the fourth quarter.
Our first half gross margin performance has been very encouraging. We
expect to see gross margin continue to track ahead of prior year
levels over the second half of this fiscal year, although we're not
yet willing to project the same level of year-over-year growth as
we've seen so far. At this point we do not expect to see SG&A leverage
for the full year, as we continue to invest in demand creation and
operating overhead to drive revenue growth and gross margin
improvement. However, we do expect to generate significant expansion
in pretax profit margins for the full year, as improvements in our
supply chain and product cost management continue to drive better
gross margins.
In summary, we're very pleased with our results so far this year and
we feel we're in a great position to continue to deliver strong profit
growth over the balance of fiscal 2004. With that, I'll turn the floor
over to Charlie Denson.
CHARLES D. DENSON
President, Nike Brand
Thanks, Don. Good afternoon and happy holidays to everyone. I don't
think it will come as a surprise to any of you that we're very pleased
with the financial results Don has just reviewed. The first six months
of this fiscal year have been very successful and we're pleased that
the focus we've placed on delivering consistent revenue and earnings
growth is paying off. While we're happy with our performance to date,
we're even more excited by the renewed energy and momentum we've seen
across the entire industry. I'd like to focus my comments today on
three areas:
- the rebound of the athletic footwear and apparel industry,
especially here in the US;
- Nike's leadership in innovation, brand presentation, and
product; and
- execution of our operational model which positions the company
well for future growth.
We've spent the better part of the last two years talking about the
fact that we are more than just a US-based footwear business, that we
are a multi-dimensional, multinational company that has the diversity
and adaptability to deliver consistent financial performance and
earnings growth. This quarter won't be any different. But unlike the
past couple of years where we have stressed our growth
internationally, this quarter I'm pleased to say we are seeing the
industry here in the US, at its healthiest state in over five years.
This is the first time in a long time where we can confidently talk
about a positive outlook for our US business and the industry as a
whole.
What's our definition of a healthy industry? It's a marketplace that
is driven by product, marketing, and service. Just as importantly,
it's a stable industry in which retailers are differentiating
themselves through presentation, product assortments, and brand
awareness. It's a market in which Nike and its retail partners are
managing tighter, cleaner inventories and using their increasing
profitability to invest back into the industry, creating new levels of
interest and excitement.
With this momentum comes success and recognition. While we're pleased
with this, we are by no means satisfied, and we have a lot more to
accomplish.
As we review some of the progress we've made over the past 18 months,
we have to start with our product. After improving our core offerings
at key price points, it was felt by many that we had lost our ability
to create new, innovative, and exciting product-the kind of product
that defines industry leadership and demands premium price points. We
talked about the need to run a "complete offense," an offense that not
only included key price points, but optimized innovation and
technology, marketing campaigns, distribution strategies, and brand
presentation at retail.
Whether it's Nike Air or Nike Shox, Sphere technology, or our next
edition of the Swift Suit, product innovation is where we always
start, and Mark will talk more about that in a minute, but it's the
"complete offense" that sets our business and our brand apart. We are
starting to find our rhythm. We're back focusing on the fundamentals:
product, communication, distribution and brand presentation that built
this brand and this business, and we're really looking forward to the
next 12 months.
As we head into the back half of this fiscal year, we intend to stick
to that game plan. It's the same game plan we've reviewed with you
each quarter for the past three years and the one that has delivered
an expanding top line, 14% compounded annual growth rate in second
quarter diluted earnings per share, strong cash flows, and a very
strong balance sheet.
Let me hit on a couple of reasons why I think this is sustainable.
First of all, our management team. We have talked a lot about the
overall performance the last couple of quarters, but as you all know,
results are produced from the performances of people. Our senior team
has now been intact for over three years. I call this out because they
are an experienced, aggressive, and disciplined team that understands
this business. Our results have continued to come with the ongoing
development of our management group and the teams that they lead.
The second reason for sustainability is discipline in our investments,
ensuring that we are investing for growth in areas like systems --
where our supply chain investments are already beginning to show
returns in inventory management, time to market, and gross margin
performance; investments in new markets like Brazil, India, and
Russia, where we will look for growth over the next ten years; and
investments in athletes like LeBron, Carmelo, Wayne Rooney, Serena and
the Chinese National Basketball team, where we can build product
concepts and collections that generate new businesses for the brand
around the world.
Discipline is also about what you don't do. We've resisted the
temptation to over-distribute product when the brand is hot, as it is
today, or invest in sports marketing relationships when the
cost/benefit equation doesn't work. In short, we've honed our
operational model and delivered consistent financial growth as a
result.
We believe our portfolio of businesses is stronger today than it's
ever been. We're intent on growing our business profitably by
executing on specific geographic and categoric growth opportunities
across that portfolio. One place that demonstrates the focus well is
our Asia Pacific region. As the fastest growing country in the fastest
growing region, China continues to be a dynamic market in which we are
building a solid operational foundation to support our long-term
growth targets.
In China we're building a performance position for the brand in
basketball and football-soccer, to those of you in the US. We're also
encouraged by the women's opportunity, and we're expanding our retail
distribution, and laying a strong foundation for brand presentation to
the consumer.
At the same time, our largest market in the region, Japan, is
delivering strong results while remaining a hotbed for developing
trends that resonate around the world. We've established a strong
position in baseball and invested in distribution and retail
presentation, and Japan is on track to deliver it's most profitable
year since 1997.
Operationally, our European business is growing at a measured - and we
believe healthy pace - in what is a challenging economic environment.
Our results for the quarter are affected by some of the supply chain
shipments we orchestrated a year ago, as Don alluded to earlier. At
the same time our financial results have been terrific, as the strong
business we've built over the last nine years has allowed us to enjoy
the benefits of a strong euro.
Over the past few years, the international businesses in our portfolio
have driven the majority of our growth in revenue and profits as we've
evolved our US business to a more profitable model. As I said up
front, the industry in the US is in the best shape it's been in years
and we're poised to lead it. Our US footwear futures growth
accelerated this quarter and we're on track to deliver great results
in the second half of this fiscal year. We've just come back from our
back-to-school sales meetings and feel we have one of our strongest
and most complete product lineups in recent years. Our apparel
business has not yet fully hit its stride. We've made some great
progress in our performance apparel. Going forward I'm confident we'll
see continued improvement in that business as well.
As you can probably tell by now, we're feeling pretty good about the
track our business is on as we keep our sights on building upon our
success as a company. As we enter what is sure to be one of the most
exciting run of sporting events and performances in recent years, we
are confident that we are in a unique position within our industry. As
we look to the future, we believe that tomorrow's business success
will be fueled by our ability to execute that "complete offense" I
spoke about-one that includes strong marketing campaigns, distribution
strategies, and brand presentation to the consumer. At Nike this all
starts with a commitment to performance, both as a brand and in our
product. I'd like to introduce the person who carries that vision as
much as anyone, my Co-President Mark Parker.
MARK PARKER
President, Nike Brand
Thanks, Charlie. Good afternoon everyone, and happy holidays. Based on
the numbers we've reported today and what you've already heard from
Don and Charlie, I think you'll understand why we're in an especially
festive mood around here. The US footwear market is at the best we've
seen in the last five years, which is certainly good news for the
entire industry. I believe Nike is in the best position to capitalize
on the opportunities that arise from a surging market. In fact, 2004
has the potential to be the most exciting year in Nike's history.
The overall market is gaining strength and excitement, so it's obvious
that the brand that has the greatest market share is in position to
gain the most. But it's much more than that. Nike is at its best when
we have three key elements in perfect alignment: unparalleled product
innovation, amazing athlete performance, and insightful brand
communication. The good news is that we are putting ourselves in an
excellent position to execute on this alignment like no other time in our
history.
First and foremost is our relentless commitment to creating
performance products that lead the industry. As you know, it all
begins with the product. Charlie mentioned Nike Shox, and I'd like to
add my own observation here. I truly believe that only Nike has the
ability to create a completely new cushioning technology in our
industry and have it become second only to Nike Air in less than four
years. It's a remarkable testament to our commitment to product
innovation and commercialization.
Equally gratifying to me is that as successful as Nike Shox is, our
designers continue to create remarkable performance product using the
Air technology, further solidifying Air as the industry pacesetter. In
2003, both of Nike's cushioning platforms earned deserved recognition
by Runners' World, which bestowed its coveted Editor's Choice Award on
the Nike Shox TL and the Nike Air Zoom Elite. In 2004, the new product
pipeline is brimming with examples of Nike's unique understanding of
what footwear and apparel athletes need to compete at the highest
level.
Those of you who cover Nike on a regular basis are aware of the major
advancements we unveil during the Olympic Games. Well, Athens will be
no exception when it comes to inspired Nike-athlete product design and
performance. But unlike in years past when the focal point of our
design efforts was the Games, in 2004 we look at the Olympics as one
of a series of world athletic venues where we can showcase our
performance products.
Let me give you a few examples. During the upcoming Copa America and
Euro Champs football tournaments, we'll unveil the Total 90-III,
which I believe will set the standard for soccer boot technology. The
NCAA basketball tournament in March will showcase the new Air Huarache
2K4.
The second element that's lining up well for Nike is our association
with the world's top athletes. This association is critical to our
success, both for the invaluable performance insights and product
design inspiration we gain from them. One of the most current examples
I can give here for the Nike brand would be LeBron James, whose
much-anticipated Nike Air Zoom Generation shoe launches this Saturday.
LeBron and Carmelo Anthony are exciting, young NBA stars who have
captured the attention of the media and fans in a very short period of
time. We're building a long and mutually beneficial relationship with
both of them, and I'll get back to LeBron in just a minute.
Beyond basketball, Nike's partner athletes and teams will be taking
the regional, national and international athletic stages in a nearly
continuous stream of events in 2004. In a couple of weeks, we'll ring
the new year with all eight universities in the Bowl Championship
Series wearing Nike footwear, equipment, and licensed apparel. In
mid-January, Serena Williams will make her Nike debut at the
Australian Open.
This Spring we expect Nike partner schools will once again dominate
the men's and women's March Madness brackets. Tiger Woods will embark
on another memorable trip to Augusta and the NBA playoffs will tip
off. In summer, the Euro Champs and Copa America will command the
attention of football fans worldwide, while Lance Armstrong will seek
his unprecedented sixth straight Tour de France victory. Oh yeah ...and
then there are the Summer Olympic Games in Athens.
In 2004, more than any other time in our 31-year history we will have
the means and opportunity to showcase Nike's advanced performance
products on a local, regional, and international level like never
before. Which leads me to the third element of the alignment: Nike's
unique ability to communicate with our consumers and to connect with
them on a passionate, emotional level. From Battlegrounds Basketball
events to our Women's Fitness campaign in Asia to the current Gridiron
campaign here in the U.S., we're constantly exploring new ways to
reach our consumers and to tell them stories about our footwear,
apparel and equipment in ways only Nike can. Battlegrounds was a great
example of how we brought excitement to the basketball market, and
we'll continue to fuel that market with LeBron James amongst many
others.
As in previous basketball initiatives, with LeBron we will continue to
communicate directly with the hoop-crazy consumer through a 360-degree
brand campaign. And again, we'll be bringing both footwear and apparel
products to market that are inspired by this unique young man.
Earlier this week we launched a new television ad, which is part of
the integrated campaign that supports his footwear and apparel lines.
If you haven't seen it on TV, you can view it on our web site,
nikebasketball.com, where you also can check out the entire online
experience.
Our integrated, "360-degree" campaigns make it possible for a global
company to be nimble enough to tell stories to consumers in a way that
is relevant regionally - and locally.
The Summer Olympics will be another great platform to spotlight and
showcase these stories, and we're planning to make the most of that
opportunity. Eight years ago, when Michael Johnson thrilled the world
in his gold Nike spikes, it was a tremendous moment for the Nike
brand, but there was no retail connection for consumers. Until
recently, in fact, the products and concepts that we've designed for
the world's elite athletes have not been commercialized at retail to
their full potential.
That will change next summer. Nike will of course be creating our most
technologically advanced footwear and apparel for Marion Jones and
many of the world's Olympic-medal hopefuls. At the same time, Nike
will be delivering to retail a set of performance products that are
inspired by, and share a number of technological advancements with,
the footwear and apparel worn by Olympians across many sports
categories. And we'll be doing it on a scale that's really
unprecedented for Nike.
I see opportunities to grow our business in footwear and apparel by
leveraging attributes of Nike's performance positioning to drive
greater consumer interest and demand. It's not about performance
versus active life. It's about performance helping to drive a distinct
brand point of view across both sport and active life consumer
categories, and you'll see that come alive this Summer. This is an
excellent example of the "complete offense" term you've heard me use
before, where we can be attacking the market on many fronts
simultaneously.
Even more gratifying to me, given my background in product and design,
is that the Nike Advanced R&D pipelines in Footwear, Apparel &
Equipment are full of product innovations that we'll be bringing to
market over the next several years. We've received very positive early
feedback from retailers who've seen our Fall '04 product offerings. In
many ways, we're seeing Nike Design at it's very best ever. Our
partner athletes as well as our customers should be very excited to
see what we have in store for them in the months and years to come. I
know I am.
I'd like to sum things up by bringing us back to the next nine months.
I see amazing possibilities for us to showcase our performance product
and our brand on many stages, across the regions, around the world. If
we execute as I believe we can, 2004 could and should be a watershed
year for Nike. Finally, I'd like to again wish everyone a very happy
holiday season and open things up for any questions you may have for
Don, Charlie or myself.
QUESTION AND ANSWER SESSION
___________________________
Robby Ohmes with Banc of America Securities: A couple of quick
questions. The first question is can you give us a sense-you were
talking about the $100-and-over category looking better. Can you give
us a sense from a futures perspective how that looks for you guys?
Second, you gave us the net impact of currency to EPS. Can you tell us
the net impact of Converse to EPS in the quarter? Then finally the
last question is on LeBron and the launch coming up. Can you tell us
where it's going to be? We know it's going to be at Finish Line, but
are there other people that are going to have it like say Foot Locker,
for example?
Parker: Let me take the first part of that question. The $100-plus or
the performance category for Nike from a futures standpoint looks very
positive. In fact, our performance category of footwear from a futures
standpoint is really turning the corner, including the USA where
that's been maybe more of an issue than in anyplace else. So we're
actually quite pleased with where we're going with the performance
side of the business and see that continuing really Fall '04 based on
the feedback we've been getting from the recent sales meetings, as
Charlie and I mentioned in our earlier remarks.
Ohmes: Is it a basketball pickup or is it evenly spread between
running and basketball being strong in the $100-and-over category?
Parker: No, it's actually spread across not only running and
basketball, but we're seeing it start to pick up in training and in
football as well.
Ohmes: Wow. That's great.
Blair: Robby, the impact of Converse in the quarter, it was slightly
profitable but not enough to move the needle at all, not even a penny.
Ohmes: Not even a penny.
Blair: Not even a penny in the quarter
Denson: Robby, I'll take the LeBron distribution. Right now the
LeBron shoe will be distributed similar to the other marquee shoes
that we have put into the market over the last probably six to twelve
months. I don't believe Foot Locker is scheduled to have the shoe at
this launch date for right now.
Ohmes: Great. Thanks a lot, guys.
Margaret Mager with Goldman Sachs & Co.: Happy holidays to you.
Congratulations on another great quarter. I have a bunch of questions.
Catlett: Pace yourself!
Mager: All right. I won't be a hog here, even though like one. Let me
ask you about the close-outs, Don, the impact in the past couple
quarters. You mentioned close-out levels are down and close-out
margins are up. If you had to isolate that, is it a big impact or a
little impact? At what point will you just not be able to continue to
drive close-outs lower and close-out margins higher?
Blair: First of all, it is a fairly significant impact, which is one
of the reasons we called it out. As far as where we are in the
footwear zone, our business is very clean on the footwear side. I
think we still have some opportunities in apparel and certainly we can
continue to squeeze the supply chain across the board. But I think
we're very clean right now from an inventory standpoint and I think
we're in great shape. The other point I want to make here is one of
the reasons why the close-out margins are up is that we have a larger
factory outlet store network outside the US. We really haven't been
building new stores in the US, but outside the US we have. That raises
our SG&A but it also raises our gross margin. That's one of the
benefits of building that outlet network is higher close-out margins.
Mager: So close-out levels-if your inventory is very clean,
year-over-year you're obviously getting favorable comparisons. How far
along are you on that? Is that something that continues into the
second half and into fiscal '05? That's what I'm kind of trying to get
at with the close-outs.
Blair: I think your point that we're getting to the point where the
inventories are very clean is a good one. I wouldn't say that in every
market around the world it's all the way to bright, but I think in the
US particularly we're getting to the point now where we're probably
close to the end of that.
Mager: That's helpful, thanks; then if I could, a follow-up. On the
announcement that came out inter-quarter regarding your warmed-up
relationship with Foot Locker, I think the word "select" was
emphasized in your release and talked about on the Foot Locker
conference call as well. Can you just talk about what that means, how
you're going to control the distribution with Foot Locker and across
the market so that we don't end up in an over-saturated position at the
high end?
Denson: Yeah, Margaret, I'll take that. As we've said, it wasn't just
a Foot Locker issue. It's really a USA distribution philosophy and
where we're going. I feel comfortable and confident at the track that
we're on. I emphasized it in my prepared remarks in the sense that
brand presentation and some of the things that are going on right now
at retail that are actually part of the ingredients for I think the
overall success of the industry is something we've always felt very
strongly about and talked about over the last couple of years. As we
move forward in our relationship with Foot Locker-and it's certainly
better than it was - I think Phil was quoted somewhere recently as
saying it was probably overblown up front and it's probably being
still overblown right now to some degree. We feel very comfortable
with where we're at with our relationship and the progress that we're
making towards that. They've had a great launch of a new concept that
we built with them, the "20" program around basketball and training.
We launched that program last week with media and in-store. The early
read on that product at those key price points of $80 to $100 has been
very strong. We're very pleased with that, and I think that opens up a
lot of opportunities going forward as well.
Mager: Can you cherry-pick markets geographically, like for example
the major urban markets where they might have the best presence? Can
you get that detailed on your strategies with them?
Denson: Oh, sure, absolutely, and we will. We will continue to. We
know how many pair per door of any allocated product we actually put
in the marketplace, so we can get very microscopic with respect to
that part of the strategy.
Mager: That's helpful, thanks, and congrats again.
Virginia Genereux with Merrill Lynch & Co.: Thank you all so much. I
guess two questions. First, Don, may I ask, you guys commented on the
US footwear environment being better that it's been in five years. I'm
not obsessed with this, but some are asking. US futures, the up 1%,
which I actually think is great, can you comment either on the
increase over the period on maybe the footwear/apparel dynamic,
whether you're up with Foot Locker? Can you give us any additional
color there? Because your revenues have been coming in a little better
maybe than your futures the last couple quarters.
Catlett: You're asking about some of the interplay of footwear and
apparel futures for the US, Virginia? I'm not sure we understand.
Genereux: Yes, ma'am. Last quarter you guys talked about I think
apparel being still down.
Catlett: Yes. The up 1% in the US reflects positive improvement and a
positive number in footwear; and improvement in apparel but still
negative sequentially.
Denson: Both major businesses are trending up from last quarter.
Apparel is still down year on year.
Genereux: Charlie, may I ask are futures accelerating over the
period? That would be my assumption.
Denson: Yeah. We don't break it down by month, but the quarterly
reports would certainly indicate an acceleration.
Genereux: Okay, great. Then if I may on SG&A, Don. It sounds like
SG&A was up 12% constant dollars. You isolated the currency for us, I
think.
Blair: What I did is I pulled out the impact of Converse and currency
because both of those are not apples-to-apples comparison and the
impact of that is seven points on the 15% growth. Excluding currency
and Converse, we're up 8%.
Genereux: Is that sort of the pace? Can you give us any flavor, the
pace at which we should expect SG&A to grow for the rest of the year?
This quarter were you doing more on the demand creation side? Can you
give us any color there?
Blair: I'd rather not make a projection for the year, but one thing I
would point you to in terms of my comments. The increase in demand
creation was very significant in this particular quarter, and there's
a couple of reasons for that. One is we were investing this year. Also
last year we had invested most of last year's demand creation in the
first quarter against the World Cup. The increase you're seeing this
quarter of overall SG&A, the biggest percentage growth came in demand
creation for the reasons I just gave. I think from an operating
standpoint that's about where we've been, in the high single digits.
Without making a forward projection, I just want to focus on demand
creation and operating overhead in my comments.
Genereux: Thank you all, and nice work.
Jim Duffy with Thomas Weisel Partners: Hi there. On the gross margins,
if I remember correctly you'd spoken about Q2 and Q3 being the lowest
gross margins for the year, with Q1 and Q4 being the highest. The Q2
gross margins are certainly impressive. Can we expect those to be at
least sustainable through the rest of the year?
Blair: Again to go back to the commentary I made earlier, we do
expect that we're going to see year-over-year improvement in gross
margins. With respect to the seasonal pattern, yes, the first and the
fourth quarters tend to be highest; second and third, somewhat lower.
I think the best way to think about it is just year-over-year
improvement. As I said, we're not quite ready to call the back half of
the year at the same rate as the front half of the year. For example,
one of the items that benefited us a bit in the second quarter is that
we didn't have the airfreight we had last year because of the port
strike. That was a benefit in our year-over-year growth in the second
quarter. We won't see that level of benefit again in the third and
fourth quarter. I think my point is there's a seasonal pattern to the
gross margin. Yes, we expect that to continue; yes, we expect to be
better than the prior year in the back half; yes, but not at the level
we've seen in the front half for the reasons I gave.
Duffy: Okay, very good. Can you help us get our arms around how to
model for the currency? You've talked about what the benefit has been
in the first couple of quarters. Should we expect that you're hedging
on the operating income line and you're seeing a benefit from I guess
sourcing in dollar-denominated Asian currencies?
Blair: Well the benefit in the margin line in the product purchases
we talked about is only 30 basis points for this particular quarter.
For the rest of the P&L, the trend lines you see in the real dollar
numbers are the trend lines. What happens in our P&L is that when we
hedge, we get a loss coming through on the other expense line. The way
to think about it going forward is look at the line items in the P&L
and just look at the trend that you see based on how-we're reporting
at spot rate. If we're hedged, you're going to see either a loss or a
gain on the other income and expense line.
Duffy: But it seems the gain kind of offset the other income.
Blair: Yes, it will. Over the balance of the year if the euro gets
even stronger, what you tend to see is the reported numbers on revenue
and gross margin and SG&A, they all increase. Then you take a loss on
the other income and expense line because you have a hedge contract
out there.
Duffy: Gotcha. One more question, if I may. What's the status of the
relationship with Footstar at this point?
Blair: Right now our situation with Footstar is status quo. They're
current in their payments. At this point it's pretty much the status
quo.
Duffy: Very good, thanks. Nice quarter.
Jeffrey Edelman with UBS Warburg: Charlie, one question on the futures
and sales in the US. I figure your own retail stores probably added
about two points of the increase. Can you give us some sense of where
the other swing factors were to the difference between the futures
number and the reported sales number?
Denson: Yeah, Jeff. I think you would be right. Our retail business
is trending very well right now and would probably take up some of it.
Then most of it is in the other businesses that we traditionally talk
about, which are non-futures businesses: the equipment business; some
of the golf business, although I don't think that's actually in the
USA number. NTS, which is our licensed products area, would be another
one that's been a very strong performer that would be part of that
upside.
Edelman: Then second, you mentioned that you've been very, very
diligent about your distribution to make sure it's not
over-distributed. With the roll-out of additional product to Foot
Locker-I assume that'll probably grow in time-would we expect to see
any change in the other distribution that you've got or is this just
going to be a net plus?
Denson: I wouldn't say it's going to be a net plus. We look at the
overall. There's not a big change in the overall size of the market,
obviously. How we distribute it has changed over the last couple of
years and it will probably continue to evolve. We're not looking to
put a net-plus amount of product back into the marketplace as we move
back into certain levels of distribution with Foot Locker.
Edelman: Okay. Thank you.
Dennis S. Rosenberg with CS First Boston: Hi, guys, and happy holiday.
With the Olympics coming and with the European Soccer Championship
coming, could you talk about demand creation spending in upcoming
quarters? Which quarters will be most affected by that and to what
extent?
Parker: I think the overall year-to-year demand creation spend will
roughly be equivalent. We really want to grow our demand creation in
line with our revenue growth. You're not going to see major increases
in overall demand creation spend year to year as a percentage of
revenue. That being said, I think you'll see some uptick around the
Olympics, particularly around the first quarter of next year.
Rosenberg: What about for the football championships?
Parker: Yeah, likewise. I think you'll see a little bit. We actually
trade it between the last quarter of this year and the first quarter
of next year.
Denson: Yeah, it'll mostly be fourth quarter of this year, Dennis. We
don't expect to see a large uptick, to Mark's point, in Europe. It
should track pretty much consistent. We've moved dollars around, so on
an annual basis you won't see a big uptick.
Rosenberg: Is that the same with the Olympics or will we see a big
uptick in the first quarter next year?
Denson: I don't think you'll see a big uptick. Again, we'll move
dollars around. As you've watched us do this over the last couple of
years with these major events becoming bigger and bigger pieces of the
puzzle, if you go back on an annual basis, the numbers pretty much
stay in line. It's just a matter of moving the dollars around within
the quarters.
Parker: I'll just add. One of the comments I made in the prepared
remarks is how we're trying to capitalize from a commercial standpoint
on these types of events. Just to put an exclamation point on that, we
feel very bullish on our plans right now between footwear and apparel
and equipment around those events in terms of really turning them into
commercial opportunities for Nike.
Rosenberg: Okay, good. Given these events, would you expect those two
events to spur an uptick in European sales? Do you think that would be
the catalyst to get Europe really moving?
Denson: If you look at the futures numbers right now coming out of
Europe, they're still pretty positive. I think we have to get through
some of the supply chain comparative issues that we're dealing with
right now before it'll really sort itself out on an annualized basis.
Obviously the European Championships are a bigger event in Europe than
the Olympics, even with the Olympics being in Athens. It's an
incredibly important event. We're very excited, to Mark's point, with
the new product assortments that we've got being introduced. Not only
is there the new football boot and that series being introduced for
the tournament, but we've got a new ball that has already been
approved and will be in play next fall with the English Premier League
and the Spanish Premier League. I'm very excited about our position in
football right now for this Summer going into the Championships. It is
hosted in Portugal, we have the home team, and Portugal is going to be
one of the favorites going into the tournament.
Rosenberg: What are the starting dates for the Olympics and for the
football championship?
Denson: The football championships I think start about the second
week in June. The Olympics I believe start in the first week of
August.
Rosenberg: Great. Thanks a lot.
John Shanley with Wells Fargo Securities: Good afternoon. Charlie, I
wonder if you could fill us in a little bit more on that pretty
sensational improvement in the footwear margins in the domestic
business. Was it across most channels of distribution or were there
some really outstanding channels that performed really well for you?
What's the likelihood of the rate going forward in terms of the
different channels?
Denson: John, I want to make sure I understand. You're talking about
the gross margin performance at retail or at wholesale?
Shanley: At wholesale.
Denson: We really look at it more categorically than we do by retail
channel. For us, I think we're seeing improvement in the margin line
across most of the categories. I think to Mark's earlier point, it's
not just basketball and running. We're actually seeing it across a
much wider and broader section of the product line. We're very
comfortable and confident that that part of the business is in good
shape. As far as the people that are benefiting by that, you've seen
as many of the retail releases as I have. Obviously the athletic
specialty and more of the premium branded retailers are the ones that
are profiting probably the most by it.
Shanley: Do you think that's likely to continue going forward or do
you think there'll be more parity between the other channels?
Denson: I'm a little biased in my opinions, but I don't think there's
going to be parity. I think it'll continue.
Shanley: Super. I wonder if you can also help us factor in when we're
likely to see the Foot Locker business starting to become a more
normalized business. We're just trying to figure when we would model
increased revenue coming in from Foot Locker over and above what you
may have done over the last couple quarters. Would that be in the back
half or would we be in fiscal '05 before we'd see the lion's share of
that?
Denson: Well, yeah. I think you're going to see a little bit of it in
the back half. I think they've already publicly stated that they're
moving some of their buy-dollars back into our brand, so you would
expect to see some of that. You really need to go to them I think and
talk to them more about that. As we've said, we're going to pursue
their business as aggressively as we've always have and we're going to
do it where we both agree on what the expected outcome of those
businesses and those decisions are. I just go back to this new program
that we just launched with them. We're both quite frankly very excited
about it. It's some new product that's in the marketplace at key price
points in that $80 to $100 zone that really is exciting product.
Shanley: Yep, sounds like it. I know we've talked in the past. You've
given us a little bit more specificity in terms of the domestic
futures. I know you just said footwear is positive. Is it much more
positive than it has been running? I'm trying to just quantify it a
little bit to try to factor it into our models.
Denson: It is accelerating. We feel good about the trend lines that
we're on. You aren't going to get me into pinning me down on a number!
Shanley: I wouldn't do that!
Denson: But it is accelerating, I'll say that much for it.
Shanley: The apparel is improving. Are there certain parts of the
apparel product that's really helping? You're getting your regular
Nike-branded apparel back on track or is it being done by some
specialized product categories?
Parker: Actually parts of the apparel business that are working well
right now are women's, both on the performance and active side; the
performance product overall. Then the part of the business we're
really working on trying to improve right now is more of the branded
apparel business in more of that value channel. We see that actually
picking up starting really more in Fall, the beginning of next fiscal
year, and improving steadily throughout the year.
Shanley: Okay, great. Thanks a lot, guys.
Robert Drbul with Lehman Brothers: Good afternoon. I guess the first
question would be within the futures numbers here in the US, can you
give us a little bit of a sense how they're trending by channel? I'm
just curious to see if the moderate business is getting any better for
you guys.
Denson: I'm not going to get into specific channel numbers; in fact I
don't even have them in front of me, so I won't get into any specifics
there, Bob. But I would say that our premium business is what's
driving the brand and the business, and that's where we're having the
lion's share of our success.
Drbul: Within the European business, the UK business, has it
gotten any better?
Denson: Just a little incrementally. It is improving, although it is
improving slowly.
Drbul: Is it still negative for you?
Denson: No, no.
Drbul: Then one final question. When you talked about how well the
industry's doing at its healthiest level sort of in the last five
years, when you think about most retail space as a healthy industry
leads the capacity additions, it seems like we're starting to see some
accelerated growth in the sporting goods channel. How comfortable are
you guys with what's going on with some of the growth there?
Denson: I think relatively comfortable for now. You've got some
pretty exciting formats out there that I think are leading the charge,
which we feel great about, but it's a lot of square footage.
Fortunately it's not all dedicated to our product types, although
we're getting a bigger and bigger footprint in most of those
operations as we go along and we have success in some of our new
businesses in equipment areas. But at this point in time we're
comfortable.
Drbul: Okay, great. Thank you. Happy holidays.
Catlett: We have time for one more questioner.
Noelle Grainger with J.P. Morgan: I made it. Happy holidays. Two
questions; first is a quick one. Don, can you give us any sense, can
you quantify the impact that the airfreight piece had of the
non-currency I guess 200-basis-point margin expansion, since that's
probably not going to continue?
Blair: You know, Noelle, I don't have the exact number on my
fingertips here. My sense would be that it's around half of the
improvement in the US.
Grainger: Half the US, okay.
Blair: Half the US footwear number.
Grainger: Then the second question would be in terms of performance
premium, you've talked about that really driving and picking up the
US. Can you comment on what you see happening in Europe? Are we kind
of moving from retro to performance over there as well? Can you just
elaborate on the categories of strength?
Denson: Yeah, Noelle. I'd say right now I'd categorize the business
in Europe right now as we're hitting kind of a little bit of one of
those plateaus. There's a lot of different variables going on right
now in that marketplace, probably the biggest one being that it's
starting to act more and more like a single marketplace versus a
collection of countries, so I think that's having some effect on it.
We're still very bullish on our opportunities in Europe. The running
silhouette is still very strong. We continue to make some great
progress around soccer. Our business over there in that category is
still growing at a nice healthy rate. We're seeing some strong
interest in some of the new women's collections. Our apparel business
over there in general is still in pretty good shape.
Grainger: What about retro product?
Denson: I'm sorry, I didn't understand. Retro has never really had
the impact in Europe that we've seen in the US, and I don't expect to
see that. Their what we term as "active life" business is very strong.
I would expect that you would continue to see some of the trends in
that zone continue to come out of the European marketplace as well as
Japan.
Parker: We don't really see retro or classic footwear softening in
Europe.
Grainger: Okay, great. Thanks very much.
PAMELA CATLETT
Thank you, Noelle, and thanks, everyone for listening. We wish all of
you a very happy holiday season.