EXHIBIT 99
NIKE, INC.
Moderator: Pamela Catlett
March 21, 2006
4:00 p.m. CT
Operator: Good afternoon everyone; welcome to Nike's fiscal 2006 third
quarter conference call. Today's call is being recorded. For those of
you who need to reference today's press release, you'll find it at
www.nikebiz.com. Leading today's call will be Pamela Catlett, Vice
President of Investor Relations.
Before I turn it over to Ms. Catlett, let me remind you that
participants of this call will make forward-looking statements based on
current expectations and those statements are subject to certain risks
and uncertainties that could cause actual results to differ materially.
These risks and uncertainties are detailed in the reports filed with the
SEC, including Forms 8-K and 10-Q. Some forward-looking statements
concern futures orders that are not necessarily indicative of changes in
total revenues for subsequent periods, due to the mix of futures and "at
once" orders, exchange rate fluctuations, order cancellations and
discounts, which may vary significantly from quarter to quarter. In
addition, it's important to remember, a significant portion of NIKE,
Inc.'s 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. A
presentation of comparable GAAP measures and quantitative
reconciliations can also be found at Nike's Web site. This call might
also include discussion of non-public financial and statistical
information which is also publicly available on that site,
www.nikebiz.com.
Now I'd like to turn the call over to Pam Catlett, Vice President
of Investor Relations.
Pam Catlett: Thank you and good afternoon everyone. Thanks very much
for joining us today to discuss Nike's fiscal 2006 third quarter results.
We issued our results about an hour ago, and for those of you who need
to reference the press release, you can find it on our Web site at
Nikebiz.com.
Most of you know that we've been evolving our conference calls to
streamline our communication and approximately address the topics that
are most important to you. Towards that end, we have posted a
supplemental presentation on our Web site, which contains highlights
from our quarter.
Joining us on today's call will be NIKE, Inc., Chief Executive
Officer, Mark Parker, followed by our Chief Financial Officer, Don
Blair, who will give you an in-depth review of our financial results.
And finally, you'll hear from Charlie Denson, President of the Nike
Brand. Following each of their prepared remarks, we'll then take your
questions.
As for questions, just a reminder that we would like to allow as
many of you to ask questions as possible in our allotted time. So we
would appreciate you limiting your initial questions to two. In the
event you have a additional questions that are not covered by others,
please feel free to reque, and we will do our best to come back to you.
I appreciate your cooperation with this.
Now, it is my pleasure to introduce NIKE, Inc., CEO, Mark Parker.
Mark Parker: Thanks, Pam, and good afternoon everyone. We had some
great wins in the third quarter here, wins that kept the NIKE Brand top
of mind for consumers in key categories, such as running, basketball,
soccer, and our emerging strength in presence in women's fitness and
dance to name a few. Our portfolio is also strong with Brand Jordon and
Converse in particular creating exceptional results.
We're very pleased with the performance of the NIKE Brand and our
NIKE, Inc. portfolio, both for the quarter and year-to-date. The
strength of our product pipeline brand portfolio and global reach is
enabling us to balance continued challenges in markets such as Western
Europe and Japan, with strong momentum in other key markets and Regions.
As a result, we're continuing to deliver profitable growth in line with
our long-term targets.
My focus is to keep sharpening our ability to innovate for growth
and execute for profitability. Innovation continues to drive our
performance. The Air Max 360, for example, has been a tremendous
success this past quarter, driving momentum in our global footwear
business.
While real innovation helps us connect with consumers, focused
execution delivers our profitability and return for shareholders. As
CEO, I am strongly committed to delivering long-term value for Nike
shareholders. To do so, we must invest in our business to create
sustainable, profitable growth and drive productivity gains to fund
those investments, and deliver current profitability. Our performance
so far this year has been an outstanding example of our commitment and
ability to strike that balance. We've continued to invest in
sustainable profitable growth in emerging markets such as China, Russia,
Brazil and India, in NIKE Brand drivers, like World Cup, Air Max 360 and
women's fitness, and other parts of our Brand portfolios, such as Brand
Jordan and Converse. But, at the same time in Q3, we've driven leverage
across our entire business to improve our SG&A efficiency by 110 basis
points, and a return on invested capital by 30 basis points.
You've heard us say many times - Nike has no shortage of
opportunities. Prioritizing those opportunities with the strongest
potential for growth is a primary focus. We're looking at growth from
multiple perspectives: by brand, by category, by price point, geography,
channel and product type.
We'll continue to innovate and grow from the core of our business.
The NIKE Brand has tremendous growth potential across categories and
geographies. Our third quarter's successes in running, basketball,
soccer, Nike Pro apparel, women's dance and other categories demonstrate
how we can continue to reinvent, reenergize and reshape markets,
consumer segments and product categories. When we drive ourselves, Nike
drives the industry.
Our product pipeline is robust. We have many other Air Max-type
opportunities in the works. In other areas, we're just beginning to tap
the potential of Nike iD, for example, to create unique experiences for
consumers, and drive e-commerce growth. We're focused on how to build
and better leverage our own retail capabilities on a global basis, as
well as elevating the presentation of our brands at retail. And there's
equally great opportunity in our portfolio - Converse, Cole Haan, Hurley,
Starter, and of course, Brand Jordan and Nike Golf.
As we carefully choose our growth opportunities, ensuring
disciplined execution across our organization is another priority for me.
This summer, we're completing our supply chain implementation. All Nike
brand regions and businesses will operate off one system platform,
improving information flow and supply chain efficiencies. Ninety-seven
percent of all NIKE Brand footwear is not bought within the futures
window, and our footwear pre-builds are down from 30 percent to less
than three percent. We'll continue to drive supply chain improvement
through efforts such as lean manufacturing processes/practices, material
consolidation, and style and SKU productivity. These gains will help
offset margin pressure over time.
Realizing our potential has everything to do with unleashing the
power and passion within Nike. We're looking harder at how to best
align people against opportunities, evaluating our processes, improving
our management systems and focusing on developing our leadership.
Personally, I'm incredibly excited about the future of this company and
the focus and energy that we have to continue growing our brands, and
delivering strong performance. We have challenges, but challenges have
always made us better and stronger. Expect to see us continue to drive
brand energy through product innovation and close connections with
consumers. That's what Nike has always been about. At the same time,
we'll continue to deliver long-term improvements in gross margin, drive
SG&A productivity and maximize the overall profitability of our
portfolio. Innovation and execution will drive growth and profitability.
With that, I'd like to turn it over to our CFO, Don Blair.
Don Blair: Thanks, Mark. On our last conference call, I said that
delivering consistent financial growth depends on our ability to make
adjustments to our financial model as market conditions change. I
described the challenging conditions in Western Europe and Japan, and
the gross margin pressures we faced. And I told you we're taking steps
to invest behind those businesses that have strong momentum, to
accelerate those businesses that have slowed, and to adjust our spending
to fund those initiative, and deliver our financial goals for fiscal
2006.
Our third quarter results reflect the success of those efforts. As
expected, our revenue growth in Western Europe and Japan was weaker than
we would like to see over the long term and our consolidated gross
margins fell year-over-year. However, our businesses in the U.S.A., the
emerging markets of Russia, China, and Latin America, and our non-Nike
branded businesses continue to grow very strongly. And our operating
profit margins grew year-over-year, as we delivered 120 basis points of
SG&A leverage for the quarter, more than offsetting the decline in gross
margin. As a result, we posted another record quarter, for revenues and
profits.
Our revenues for the quarter grew nine percent to a record $3.6
billion. Excluding the impact of the stronger dollar, our revenues
would have grown 12 percent for the quarter, as each of our regions
delivered revenue growth on a currency-neutral basis. Revenue growth
for the quarter was significantly higher than the futures growth we
reported last quarter, as revenue from non-futures sources, particularly
at-once footwear and apparel, company-owned retail stores, and our other
businesses, has grown faster than our futures businesses. In addition,
for the third quarter, strong demand in the U.S., Asia, and Americas
regions pulled some revenues forward from the fourth quarter.
Net income for the quarter was $326 million, up 19 percent versus
the prior year, and diluted earnings per share were $1.24, 23 percent
above fiscal 2005. In addition to the strong revenue performance, the
growth in net income was driven by significant SG&A leverage, partially
offset by a lower gross margin and a higher tax rate. Earnings per
share also benefited from a three percent reduction in diluted shares
outstanding.
Consistent with our expectations, third quarter gross margins fell
50 basis points, to 43.6 percent. The erosion in consolidated gross
margin was largely driven by lower footwear margins, the result of
higher input costs such as oil, and higher discounts in Europe and Asia.
Foreign exchange had a minimal impact on gross margins for the quarter.
The decline in gross margin was more than offset by tight expense
management as we delivered 120 basis points of SG&A leverage for the
quarter. As we've indicated earlier, SG&A leverage will be a key
component of our financial model over the next few years and we're
committed to delivering that leverage for fiscal '06 and beyond.
Futures orders scheduled for delivery from March through July grew
three percent, versus the prior year. Excluding the impact of currency
changes, futures grew over five percent.
In the first three quarters of fiscal 2006, we delivered $698
million of free cash flow from operations. We repurchased $518 million
of Nike stock over the first nine months of the fiscal year, and paid
out $211 million in dividends. For the 12 months ended February 2006,
our return on invested capital was 23.7 percent, up 30 basis points
versus February 2005.
So with that perspective on our consolidated performance, I'll now
give you some additional depth on our results.
In our European region, which includes the Middle East and Africa,
reported revenues declined by five percent in the third quarter.
Excluding currency effects, regional revenues grew by four percent. For
the quarter, equipment revenues were up 12 percent while apparel
revenues advanced eight percent, driven by products and marketing
focused on the Football World Cup and increased penetration of
performance apparel, including Nike Pro base layer product.
Excluding the impact of currency, European footwear revenues were
flat for the quarter, and up one percent year-to-date, reflecting strong
growth in the emerging markets in the region, and softer results in
Western Europe. We believe we're holding our own in a very competitive
market in Western Europe. That said, we think Western Europe remains a
tremendous growth opportunity for us, so we're certainly not satisfied
with that level of growth. As Charlie will tell you in more detail,
we're confident that we're taking the right actions to generate
sustainable, profitable growth in Europe for Nike and for our retail
partners.
On a currency-neutral basis, futures orders for Europe accelerated
slightly versus the previous quarterly release, to three percent,
reflecting some improvement in footwear and continued strength in
apparel.
Gross margins in our European region declined 110 basis points for
the quarter, reducing our consolidated margin by approximately 30 basis
points. Most of the gross margin decline was driven by footwear, the
result of higher input costs, primarily oil, and growth in customer
discounts, partially offset by a relatively small FX benefit.
Reported third quarter pre-tax income for the European region was
$209 million, a decline of five percent, versus fiscal 2005. Excluding
the effects of currency translation, pre-tax income increased four
percent, driven by constant dollar revenue growth and slightly lower
SG&A spending.
In the Asia Pacific region, revenues increased 13 percent in the
third quarter. Excluding the impact of weaker currencies in the region,
revenues advanced 17 percent. The growth was broad-based as every
product business unit and country in the region posted higher revenues
on a currency-neutral basis. For the quarter, Footwear grew 23 percent,
Apparel advanced 10 percent, and Equipment grew 11 percent. China was,
again, the primary driver of the region's revenue growth, as our
business there grew over 40 percent on a constant currency basis.
Although the Japanese market remains highly promotional, we did see
some improvement in the third quarter, as revenues increased at a mid
single digit rate, on a currency-neutral basis. In January, we launched
a new footwear product line designed to strengthen our position at lower
price points, and these products have shipped well and appear to be
selling through at a strong pace. Sales of apparel continue to be
somewhat disappointing, but we're working hard to improve our product
lines for this market and expect to see improvement over time.
For the quarter, Asia Pacific gross margin fell 80 basis points,
reducing our consolidated gross margin by 10 basis points. However,
pre-tax income for the quarter grew 19 percent to $120 million, as SG&A
leverage more than offset the lower gross margin.
The Americas region continued to deliver outstanding results in the
third quarter, as revenues grew 41 percent. Strong currencies in the
region contributed 11 points to that growth. While Argentina and Brazil
were the largest contributors to the revenue increase, every country in
the region grew for the quarter, and all but one grew in double digits.
Gross margin for the third quarter increased 160 basis points versus the
prior year, and pre-tax profit for the region increased 69 percent to
$39 million.
And that brings us once again, to the U.S. region, which delivered
another remarkable quarter. The U.S. team added $175 million of revenue
for the quarter, a 14 percent increase, driven by broad based growth
across most major wholesale accounts. Nike-owned retail also performed
strongly as comp store sales increased five percent for the quarter.
For the quarter, overall Footwear revenues grew 18 percent, and
Apparel revenues increased six percent. Equipment revenues were down
three percent. A significant contributor to our third quarter growth in
both footwear and apparel was the Jordan Brand, which posted wholesale
revenue growth of over 50 percent.
The outlook for the U.S. remains strong, as futures orders for
delivery from March through July rose six percent versus the year-ago
period. Consistent with the past few quarters, U.S. Footwear was the
most important driver of our growth in revenue and profits in the third
quarter. Wholesale unit sales increased over 11 percent, and the
average price per pair grew at a mid single digit rate. For our current
futures orders, both units and average price per pair continue to be
above prior year levels.
Our Apparel business in the U.S. also posted strong results for the
quarter, driven by a double-digit increase in sales and performance
apparel, including Nike Pro, which more than doubled. Outside the U.S.
Nike Pro apparel revenues more than tripled in the third quarter.
Gross margins in the U.S. declined 60 basis points for the quarter,
reducing our consolidated gross margin by 20 basis points. The decline
was principally due to higher input costs for footwear products.
For the quarter, pre-tax profits for the U.S. region grew 10
percent to $286 million and strong revenue growth more than offset lower
gross margins.
For the quarter, revenues from our Other businesses grew 17 percent,
to $454 million, contributing two points to our consolidated revenue
growth. While each of these businesses posted higher revenues for the
quarter, the increase was driven by growth of over 25 percent at
Converse, and double digit growth for Nike Golf. Pretax income for the
Other businesses was $44 million, up 90 percent versus fiscal 2005 and
adding five points to our consolidated pretax income growth for the
quarter. Our hockey business posted a loss for the quarter, as we
continue to invest in a rebranding initiatives, and marketing around the
Winter Olympics.
Consolidated SG&A spending for NIKE, Inc., grew five percent in the
third quarter, driving 120 basis points of profit leverage versus the
prior year. Demand creation grew 15 percent versus the prior year
quarter, reflecting heavier advertising spending behind the Air Max 360
launch, the Winter Olympics, and the Football World Cup, as well as
sports marketing investments in the U.S. and Asia. These increases were
partially offset by about four percentage points of positive currency
benefit.
Consistent with our expectations, we delivered significant
operating overhead leverage in Q3, and spending fell one percent overall.
Excluding the impact of currency changes, operating overhead grew one
percent in the quarter. Drivers of the growth were investments in our
rapidly growing non-NIKE Brand businesses, new retail stores, and
severance payments to our former CEO Bill Perez, partially offset by
lower spending for travel and IT. People-related costs for the Nike
brand were flat year-over-year, excluding Nike Retail.
For the third quarter, we reported net interest income of $8
million, versus essentially no net interest in the prior year quarter.
The improvement was due to both higher levels of invested cash, and
higher interest rates. Other income and expense was $11 million of net
income for the current year quarter, versus $10 million of net expense
in the prior year quarter. The largest factor in the improvement was
the swing from foreign currency hedge losses in fiscal 2005, to foreign
currency hedge gains in the current year. The combination of the
improvement in these foreign currency hedging results, and the
translation of foreign currency denominated profits from our internal
regions had no material effect on our pre-tax income growth for the
quarter.
Our effective tax rate for the quarter was 35.7 percent, bringing
our year-to-date rate to 35 percent, consistent with our current
estimate for the full year. Our balance sheet continues to reflect the
financial strength of the company. As of February 28, our balance of
cash, cash equivalents, and short-term investments, totaled $2 billion
or about $8 per diluted share, while our total interest-bearing debt was
about one-third of that amount.
As of February 28, worldwide inventories were 16 percent higher
than a year ago. Since inventory grew faster than revenues and futures,
let me explain the key drivers. About half of the worldwide increase
represents higher inventory in transit, due to early orders particularly
of launch products, such as Football World Cup footwear, apparel and
equipment. Inventory levels also increased to support the expansion of
company-owned retail stores. Worldwide close-out inventories were flat
versus the prior year. On a regional basis, the U.S. was the largest
single contributor, accounting for over a third of the worldwide
increase. A significant portion of the year-over-year change in the U.S.
inventory position was driven by the timing of product receipts, and
growth in both futures and non-futures demand. Overall, the inventory
of Nike products on our books and at retail in the U.S. remains very
clean.
Outside the U.S., in-transit inventory also represents a
significant portion of the year-over-year growth. While footwear
inventories are somewhat higher than we would like, particularly in
Europe and Japan, at this point we do not believe that they will have a
significant negative impact on the company's future growth and
profitability.
Accounts receivable management remains an area of strength for the
company. The accounts receivable balances as of February 28 were only
two percent higher than the prior year, well below the nine percent
revenue growth we reported for the quarter. As a result, our cash
conversion cycle was two days better than the prior year.
We're very pleased with our results for the third quarter fiscal
2006. And we're on track to deliver strong profit growth for the year.
For NIKE, Inc., we expect to deliver high single-digit revenue growth
for the full year, with five to seven percent growth in the fourth
quarter reflecting our current futures, the strong shipping performance
in the third quarter, and the stronger dollar year-over-year. We
anticipate that gross margins for Q4, could be around 100 basis points
below the prior year as we continue to experience higher costs related
to input prices and capacity requirements.
For SG&A, we've delivered 110 basis points of leverage so far this
year and remain committed to delivering leverage for fiscal 2006 as a
whole. In the fourth quarter, we anticipate that demand creation growth
will accelerate versus the third-quarter rate, as we invest behind
revenue opportunities such as the Football World Cup, China and Nike Pro.
On the other hand, we expect fourth quarter operating overhead spending
to be essentially flat with the prior year, driving overall SG&A
spending six to eight percent above the prior year. Fourth quarter
interest income and other income should be relatively consistent with
third quarter levels.
As we usually do at this time, we're now developing plans for our
next fiscal year. Assuming stable foreign exchange rates, we believe we
can grow fiscal 2007 revenues at a high single digit rate. We expect
continued pressure on gross margins as higher input costs offset our
ongoing gross margin improvement initiatives. At this point, we believe
that gross margin could be flat to down for fiscal 2007. However, we
expect to deliver SG&A leverage for the year, driven primarily by
operating overhead growth well below the rate of revenue growth.
Finally, we expect other income and expense to be a modest net
expense for fiscal 2007. This item represented a fairly significant net
income item for fiscal 2006, due to the benefits of our foreign exchange
hedges. Overall, our profit growth should accelerate over the course of
the fiscal year. In the early part of the year, we'll be facing our
most difficult gross margin comparisons and the heaviest investment in
demand creation driven by the Football World Cup. As the gross margin
comparisons become less difficult and the level of demand creation
investment eases in the second half we should see more rapid profit
growth.
For the first quarter of fiscal 2007, we expect to deliver high
single digit revenue growth. Gross margins should be well below the
first quarter of fiscal 2006, as we expect continued pressure from
higher input and capacity costs. And while we're targeting to deliver
SG&A leverage for the full year, we do not expect to see much, if any,
in Q1, as higher demand creation spending should largely offset
operating overhead leverage.
Beginning in the first quarter of fiscal 2007, we will also begin
to recognize the cost of employee stock options as a non cash expense in
our income statement. Previously, stock option expense had been
disclosed in the footnotes to our financial statements.
There are several variables that could change the amount of the
charge that ultimately hits our P&L. At this time, we expect a $0.35 to
$0.40 charge to earnings in fiscal 2007 for stock option expense. This
amount is larger than the pro forma impact disclosed for fiscal years
before 2007, due largely to accounting rules, for options granted to
employees eligible for accelerated vesting upon retirement. As a result
of implementing these rules, the annual charge has increased, and we
expect about 40 percent of the annual expense to be recorded in the
first quarter of our fiscal year.
So in summary, we're on track to deliver a very good year for
fiscal 2006, and strong growth again in fiscal 2007.
So with that, I'll turn the floor over to President of the NIKE
Brand, Charlie Denson.
Charlie Denson: Thank you, Don. Good afternoon everyone. Thanks for
joining us. Pardon me for my voice, while I'm struggling with my early
season cold today.
The NIKE Brand had another strong quarter - both in the way we
connected with consumers, and the results we delivered to shareholders.
From global product launches in technology with the Air Max 360 to
basketball with LeBron, Kobe, and Air Jordan XXI signature models being
introduced, to our strong presence in Torino, we continue to connect
consumers with the NIKE Brand. As Don said, we achieved revenue growth
of nine percent, and delivered 23 percent pretax income growth. We feel
pretty good about our ability to deliver results in an ever-changing
environment.
Several segments of the business are leading the way, again,
demonstrating our ability to manage our portfolio and connect with
consumers in a diverse and compelling way. Key product launches and the
Winter Olympics were only some of the highlights.
We are seeing great growth stories in areas like performance
apparel, led by our Nike Pro product, which more than doubled in the U.S.
and is off to an exceptional start in Europe. Our women's fitness
business is really starting to gain momentum, achieving a 19 percent
growth for the quarter. The low-profile Sports Culture footwear product
is selling well in both Europe and the U.S.A. and we were just getting
ready to ship our World Cup product in both performance and sports
culture to football crazy kids the world over. This product will be the
focal point of our "Joga Bonito" campaign, our biggest global campaign
ever. We're approaching $1.5 billion in revenue, and our statement
level football boot category, has seen a 100 percent year-on-year
increase.
It's amazing to consider that when the U.S. hosted the World Cup in
1994, we were only doing $40 million in soccer. And today, we're
competing for global brand leadership. Those are only a few of the
success stories from this past quarter. It's the new innovations in the
pipeline that Mark referred to that are giving us more confidence, as we
look to the future.
Before I talk more broadly about my priorities for the NIKE Brand,
let me give you my perspective on our recent management changes. I'm
more excited than ever about my role and the potential for our Company.
Most of you know that Mark and I have a tremendous respect for one
another and have a great working relationship. He's one of the most
effective leaders I've ever worked with, and the renewed sense of energy,
passion, and focus from people here is incredible. As for myself,
having worked with the NIKE Brand for over 27 years, I couldn't be more
excited than to have the opportunity to lead this organization. The
people who work on the brand are incredibly creative, intelligent and
inspiring, and have always been the source of my own personal energy and
contribution. With the strategies we have in place and the great new
innovations we have coming, I do have the best job in the world.
Now, let me give you some perspective on my top priorities. I
think you'll see that they sync particularly well with Mark's for the
broader portfolio. First and foremost, my top priority is to ensure the
continued health of the NIKE Brand on a global scale, from a product,
consumer and retail perspective.
Today, I'm pleased to say that around the world, our brand is
stronger than ever, and there's more to come. We talk consistently
about our growth capacities, our ability to manage the portfolio and our
commitment to innovate. We will continue to balance our investments
with our results, leveraging our success to fund our growth initiatives.
Remember, it was strength in Europe and Asia that allowed us to make
some of these investments in the U.S. several years back, while managing
financial results through the broader portfolio. Now, we have the U.S.
and the Americas fueling some of our initiatives in other regions, and
we are building capacity in places like China, Russia, Central Europe
and India. We are leveraging resources to fuel growth in places like
Nike Golf, Brand Jordan, and our sports culture and action sports
businesses. We're committed to continue to drive a large part of our
future growth from our core business, where we get the optimum amount of
leverage and profitability.
All of this supports the long-term health and future of the NIKE
Brand, which leads me to my second priority, to improve the growth
trajectory in Western Europe and Japan.
Let's start with Europe. Are we currently happy with our numbers
coming out of Europe? At first glance, not at all. Are we confident in
our strategy to grow? Absolutely. Let me give you a little perspective
on this.
The Western European market is probably the most challenging market
in the world right now, driven by both macroeconomic and industry-
specific conditions. In the U.K. especially, we're seeing retail
consolidation, an overall lack of energy and intense promotional
activity. And across Western Europe, it's a highly competitive
landscape. As we look forward, we continue to see tremendous potential.
The consumer interest in sport continues to be strong. We are seeing an
increase in participation, particularly from women. Central and Eastern
Europe are emerging economies, and the per capita penetration is still
only 60 percent of the level we see here in the U.S. So the long-term
opportunities are still numerous making Europe one of the biggest growth
markets for the NIKE Brand.
The path to achieving this growth should be familiar to you. It
will be built on premium, compelling product that is connected to
athletes, both on the field and off, and presented at retail through
distribution that is exciting and emerging for consumers.
We are also investing in this growth by ensuring we have the
appropriate infrastructure in place to support it. As an example, we
are adding both warehousing and distribution capacity in our central
distribution facility in Belgium to ensure our on time delivery across
the continent.
Japan, too, is a difficult market, but not as many of you may see
it. I recently returned from a trip to Asia, and increasingly view the
current challenges as specific to our industry, as opposed to some of
the broader issues in Europe. The market has become increasingly
promotional as competitive product has been pushed into the marketplace,
through discounting and short term sales efforts, compromising brand
integrity. As most of you are aware, the Japanese consumer is one of
the most discerning in the world, and spending time in the key
influencer shops, we continue to be positioned well and much better than
the competition. This doesn't show up in the current market share
results but can be one of the most - the best leading indicators for the
future.
Our footwear business has weathered these conditions pretty well
with strong performance around the Air 360 launch and the new product
introduced in the mid-tier performance zone. In January, we launched a
new line of footwear products aimed at more modest price points, and
we're taking steps to improve our apparel offerings, specifically to the
Japanese market. You won't see this on our reported numbers, but I'm
increasingly confident that our strengthening competitive position with
the Japanese consumer will become more visible as we progress through
FY '07.
Third on my priority list is to grow emerging markets. As I stated
earlier, our ability to invest and grow in key areas is something we
have prioritized. The emerging economies of China, Russia, Brazil and
India have all delivered strong results. In China, our business remains
particularly robust and very profitable. Q3 was no different as we grew
over 40 percent and continue to build a strong brand position. Our rate
of door openings in China remains robust with world-class retail
presentation. And we will run our first ever, "Just Do It" campaign
later this year. We continue to position the brand in markets such as
Turkey, Poland, Russia, Brazil and Argentina, for long-term success,
adding infrastructure and resources that will deliver long-term results.
And then, my next key priority is to grow across the sport
performance and sport culture landscapes. Our core business is still
one of our biggest growth opportunities, and we will continue to ground
the brand in a sports performance focus. Performance businesses, such
as soccer, cricket, dance, and action sports represent new business for
the NIKE Brand, as well as the traditional sports of American football,
basketball, running and cross training. A great example here is Nike
Pro, our first layer apparel initiative which has been a huge
performance story in our apparel business this year. We've gained
significant traction both on and off the field in the U.S. leading with
our college football and major league baseball product. And we're
particularly proud of our Pro business in Europe, which is on track to
exceed the size of our U.S. business in '07.
That said, Sports Culture has garnered an increasing interest from
consumers as sport becomes more than just participation, and has now
transcended into a more complete lifestyle, building off of a very
successful position in this area, with franchises like the Air Force 1,
the Dunk and the Cortez, we're in a great position to do so much more.
We have recently promoted Sandy Bodecker to the newly created role of VP
of Sports Culture. Sandy is one of our most talented executives, and it
was integral in building our position in football and in skate. You
should expect to see a significant increase of focus here, taking
advantage of our rich sports history and our connection with youth
culture. Most important is that our product will remain rooted in
sports, and will leverage core Nike Technology and innovation in a way
appropriate for this full sports culture consumer.
I hope that gives you a good sense as to where my focus is for the
NIKE Brand and our product priorities. However, underlying all of this
is my strong commitment to manage these growth plans with a keen focus
on profitability. As Mark and Don have noted, our financial model has
entered a phase where SG&A leverage needs to be a bigger contributor to
earnings growth. We're pulling the levers at the NIKE Brand level to
make that happen. We're excited about the long-term margin
opportunities, as we improve our supply chain and increase our lean
manufacturing capabilities.
We remain focused on capital efficiency and reducing our working
capital needs to drive returns higher for the broader portfolio. We're
pleased with our results this far, and we expect to continue to show
progress in the future.
So with that, we'll open it up to questions.
Operator: And if you'd like to ask a question today, please press star
one on your touch-tone telephone at this time. If you're on a
speakerphone, please make sure your mute function is turned off to allow
your signal to reach our equipment. Once again, it is star one to ask a
question today. And we will pause for just a moment to allow everyone a
chance to signal.
Our first question comes from Bob Drbul with Lehman Brothers.
Bob Drbul: Hi. Good afternoon.
Mark Parker: Hi, Bob.
Don Blair: Hi, Bob.
Pam Catlett: Hi, Bob.
Bob Drbul: I guess, the - two questions, really, the first one is just
a bigger picture question for Mark, can you talk a little bit of any of
the changes that you've really put into place, since you were named the
CEO?
Mark Parker: Sure. Well first of all, it's only been about a month-
and-a-half, so there's not a lot of changes that have been put in place
over the last five weeks or so. That being said, I guess let me just go
back to the comment I made before when I last got on the phone, and that
is I don't see a significant or a radical change in our overall strategy
as a company. We have had a strategy in place for the past five years
that has delivered consistent results. And many parts of that strategy
will stay intact, and we expect to continue to deliver consistent
results that are inline with our long-term financial model.
That being said, I think you've got a taste from some of the
comments today that it's not business as usual. So we are sharpening
our focus on certain pieces of our business. I made some of the
comments in my opening remarks, but really getting better focused on
some of the bigger opportunities we have in front of us, closing some of
the gaps we have in the market geographies around the world and making
sure that we have the best talent in this company against the biggest
opportunities. So you'll continue to see that happening, but maybe at a
higher level than where we've been in the past.
We also have demonstrated, I think, year-to-date our ability to
manage between the top and the bottom line, and leverage expenses quite
well, so I'm very proud of that, and that we will continue that focus.
But, I also will say, that we will be driving with more intensity the
top line. We really feel that revenue growth is important for our
ongoing model, so you'll see more intense efforts against some of those
biggest opportunities.
Bob Drbul: OK. And the second question is just - is also broadly
speaking, is can you really discuss your ability to improve
profitability in Europe and Asia with some of the headwinds and the
challenges that you face with currency. And I guess, the question stems,
really, can you talk about the limitations to use currency, and invest
in product and the battle that you have underway with market share,
especially Western Europe but also in Japan.
Charlie Denson: Yes, Bob, this is Charlie. Hey, I think, I mean the
headwinds - I mean it's not like we didn't forecast them. We've done a
lot of work to date on continuing to focus on some of the issues or
opportunities we have in our supply chain operations, lean manufacturing,
and things like that. So we're still focused on, you know, continuing
to fight the headwind.
That being said, I feel like that headwind is going to be out there
for a while, and we're going to continue to deal with it, whether it's
through gross margin work or looking at the SG&A and operational side of
things to make sure that we deliver the profitability that we're looking
for.
Bob Drbul: OK. And Don, just one final question, on the inventory
levels, when you look at, you know, looking out let's say three more
months, what level of inventory would you expect at the end of the
fiscal year, given the levels that you had at the end of this quarter?
Don Blair: Bob I really don't want to try to speculate on a specific
number, but what I will tell you is that we feel we're taking the right
steps to work through the inventory. As I said, a large portion of this
is in transit inventory, so we think it is timing related, but, you know,
really this is about managing the whole market, and we're going to
continue to do that. So we're confident we're going to work through
this without adverse consequences to our profitability as a company.
Bob Drbul: OK. Great. Good luck.
Don Blair: Thank you.
Mark Parker: Thank you.
Operator: We'll go next to Jeff Edelman with UBS Securities.
Jeff Edelman: Thank you, good afternoon.
Mark Parker: Hi, Jeff.
Jeff Edelman: I guess, Don, the first question for you, if we look at
your gross margins, sequentially, you know, you're up a little bit in
the third quarter. It looks as if you will be up a little more in the
fourth quarter. Can we interpret this as your starting to get the
benefit of some of the new pricing on new products to offset some of the
product costs that you're experiencing? Or is there something else
that's playing into this?
Don Blair: Well if I can interpret your question, I think what you're
saying is on a currency neutral basis, third quarter was a little better
than the second, is that where you're coming from?
Jeff Edelman: Correct.
Don Blair: Yes.
Jeff Edelman: On the gross margin side.
Don Blair: Right. Well we have taken some strategic actions on pricing.
I wouldn't characterize it as very broad scale or wide spread. And as I
said earlier, it's very surgical in the sense that you've got to look at
individual products, and individual markets, and make the decisions to
maximize the overall profitability of the business. So we've made a few
price changes particularly in the U.S., but I wouldn't call it very
broad scale. The initiatives that we have in place around margin are
really more in the area of product costing and supply chain, as opposed
to pricing. Generally, we're not of the belief that there's a lot of
pricing flexibility out there. There is some in pockets, but generally,
what we're working is the cost side of the equation to make sure that
we're producing compelling product at the most efficient prices we can
and that we're keeping our supply chain tight, and using that to drive
the margins.
So I think, as far as expectations are concerned, you know, we're
still going to have some headwinds, but we're going to keep working
against the levers we control to keep driving against improvement over
time.
Jeff Edelman: Right. OK. And then, Charlie, could you sort of give us
a sense of how much volume you're kind of walking away from some of the
accounts that you felt had a disruptive posture on pricing in Europe?
Then, also, how important are filling orders for World Cup during the
current quarter?
Charlie Denson: Yes, on the first one Jeff, the - I mean I'm not going
to venture to give you any kind of a specific number around what we're
walking away from. We continue to look at the marketplace as a whole,
and the distribution strategy as a Western European distribution
strategy. So right now, we are feeling the effects of some of this to
some degree, but I wouldn't, you know, categorize it as catastrophic.
And we feel confident in our ability to manage through it. If you look
at, you know, our numbers right now, compared to anybody else in that
marketplace, we're performing in the relative same amount of space, so
to speak.
And then, on the second part of your question, the fill in orders
for World Cup, there is certainly some opportunity. We have, you know,
we traditionally do not take a forward-looking position around that fill
in business in those key events. But I would say there is some
opportunity on both the apparel and equipment side.
Jeff Edelman: Great, thank you.
Operator: We'll go next to Omar Saad, with Credit Suisse.
Omar Saad: Thanks. Hoping that you could take a couple of minutes and
elaborate on some of the impressive profitability improvements in the
other brand segment, and how much that was driven by, you know, the
solid top line growth, leveraging expenses and what some of the other
factors are in play there?
Mark Parker: Well it's all of the above. Certainly as we've talked
about before, a lot of these businesses are really much smaller scale
than the NIKE Brand. So as they grow, there are profit improvement
opportunities as we leverage overhead. We also have been making some
pretty significant gains in gross margin in several of the businesses.
We've really worked the supply chain and continue to tighten how we buy
product, and how we flow product. So if we look across those businesses,
it's really a combination of growth and leverage, as well as some of the
things that we're doing to improve margins.
Omar Saad: Is - are there any of the brands within that group that
stand out among the crowd?
Mark Parker: While certainly from the standpoint of the size of
contribution, I called out Converse and Nike Golf, both of those
businesses are getting to be a pretty significant scale. We've got
great brand momentum in both places, some terrific products coming out
in both cases. And, you know, we've really worked very hard on the
supply chain and the profit improvement initiatives. So on both of
those businesses, great revenue growth, great brand momentum and
improving gross margins.
Omar Saad: Great, great. Thanks. If I could just ask one more quick
question. In term - Mark, I think you mentioned some commentary around
building and leveraging your own retail, in conjunction with efforts to
elevate the brand. I was wondering if you could just elaborate on that,
especially the elevate the brand side of it, how do you think about that?
Mark Parker: Well we think there's always opportunity when we get out
there, to put our brand in the best light possible, in terms of really
drawing attention to some of the great products and concepts that we
have. So we're very committed to working with our existing retailers to
make that happen. And that being said, we also see an opportunity to
expand a bit on our own in that respect. We have been through different
models, you know, China is one of the bigger examples of late in an
emerging market.
We think that our presentation at retail and how we present the
brand or the brands is absolutely critical to our ongoing growth and
brand management. So you'll see us continuing to focus, perhaps a bit
more on that, in the quarters, and years ahead.
Charlie Denson: And one point I'd also make there is we've used a
number of different models in terms of developing retail around the
world. There are places we do it ourselves, particularly flagship
locations, Champs d'Elysees in Paris is a great example of that. We've
had some great partnerships with franchise retailers in Europe. We have
more informal NIKE Branded relationships with retailers in central
Europe, China, Korea. So there's a lot of different models we've used,
but I think one of the aspects that's consistent is elevation of retail
presentation is a critical part of the strategy going forward.
Omar Saad: Excellent. That's helpful. Thanks.
Operator: We'll go next to Virginia Genereux, with Merrill Lynch.
Virginia Genereux: Thank you. Just a quick one, Don. Does your
comment, that you guys expect SG&A leverage in fiscal '07 include the 37
to 40 cents of option expense?
Don Blair: The comment I made referred to SG&A excluding the option
expenses. Off the top of my head, I'm not quite sure how that math
would work, but my comment related to SG&A excluding options.
Virginia Genereux: Thank you, sir.
Don Blair: Yes.
Operator: We'll go next to Margaret Mager with Goldman Sachs.
Margaret Mager: Hi, another great quarter. So congrats on that, and
congrats to Mark and Charlie on your respective promotions.
Mark Parker: Thank you, Margaret.
Charlie Denson: Thank you, Margaret.
Margaret Mager: All the best to you in the years ahead. With regard to
- - I have a couple of questions, actually. The guidance for the first
quarter, fourth quarter, and the first quarter, are you actually looking
for EBIT to be down excluding ESO?
Don Blair: Well Margaret, you know, I am very reluctant to give EPS
guidance. In fact, I'm more than reluctant I'm unwilling to give EPS
guidance. Certainly, what I did, though, is laid out where we expect
some of the key line items of the P&L.
You know, I think the key for '07 is that we do expect to continue
to generate strong profitability and we're going to do that by growing
the top line and growing our profit margins and I think if you look at
our results, particularly the third quarter, but year-to-date, I think
we've demonstrated our ability to do that.
Margaret Mager: OK. With regard to the outlook for SG&A for fiscal '07,
and your expectation that you'll leverage - you'll have some leverage.
What is the view on the demand creation portion of that? Will that be a
flat percent of revenue or down, or what is the view there?
Don Blair: Our thinking for '07 is pretty much in line with our long
term articulation, which is that we believe that demand creation overall,
generally, will grow inline with revenue. That doesn't mean that every
year it's going to be exactly the same, or that, you know, the numbers
will be precisely the same. It might be a little higher, a little lower.
But generally our focus on leverage is around operating overhead, not
demand creation.
Margaret Mager: I understand that. I'm just wondering what you're
thinking for the upcoming fiscal year, if there's any, you know, if we
assume flat for demand creation versus '06, is that correct?
Don Blair: Well without getting into a model building conversation
Margaret, really, it's in '07, we see as pretty much inline with our
long term model.
Margaret Mager: OK. And then one of the things in this quarter that
was very striking was the differential between orders at the end of last
quarter, and the actual revenue growth that you achieved this quarter,
which is, you know, spectacular particularly in the U.S. You did
mention that at-once business is quite strong. Can you elaborate on
what is going there? And why that business is strong and is that, you
know, a trend that's likely to continue? Thanks.
Don Blair: Yes. If you look at the last three or four years, we've
actually over delivered against the futures number on the top line,
relatively consistently. And what we've seen over time is that we have
had growth in the at-once portions of footwear and apparel businesses.
Particularly on the apparel side, there are products, Nike Pro is a
product that has a large at-once component to it. We've put a number of
styles on auto replenishment. We do some of that in the footwear space
as well. So those tend to drive revenue growth above futures.
Our retail stores are also obviously not driven by futures. And
then, that other business category that we talked about has been growing
double digits, and none of those groups are reporting futures. So, you
know, the growth of the other businesses, the growth of retail, the
growth of the at-once businesses, all of those over the last three or
four years have shown, you know, a positive spread over the futures.
Futures is always going to be a critical part of our business model,
but I think what you're going to find overtime is we're going to see
some acceleration in those other pieces of the business.
Margaret Mager: OK. Well good enough. Great. And I look forward to
further questions, down the road.
Mark Parker: Thanks, Margaret.
Pam Catlett: Thanks, Margaret.
Operator: We'll go next to John Shanley with Susquehanna Financial.
John Shanley: Good afternoon, folks. Charlie, I wonder if you could
kind of walk us through the U.S. forward order position. You've done so
well in the U.S. marketplace in the last couple of quarters, with
forward orders up six percent, and that's essentially less than it's
been for the last seven consecutive quarters. Is there something
changing in terms of the level of forward orders that you get of the
retail that's coming in later that are causing forward orders not to be
as robust as they had been in previous quarters?
Charlie Denson: No, not really, John. We're very comfortable with
those numbers at that level today. So I don't think it speaks to
anything specific. We've had a great response to the Max 360 launch and
the basketball programs that I alluded to up front. I think it's going
to be another good year for the U.S. market, and the NIKE Brand, you
know, as we look out over the future, and I think - I mean I'm
comfortable with those numbers. I think right now, under the
circumstances, and the growth numbers that we've had, and our ability to
deliver on the back side of these at-once opportunities, we're in a
pretty good shape.
John Shanley: It would seem that with all of the strength that you have
in the various marquee and limited availability product, plus the Nike
Pro that you alluded to in terms of its strength, that your forward
orders would be a lot stronger, particularly in lieu of some of the
weakness that some of your major competitors have had in the marketplace.
And I'm just kind of curious as to why it wouldn't be more robust than a
six percent gain?
Charlie Denson: Well I think - I guess I would just respond to that,
with then I guess there's maybe a little bit more opportunity out there.
John Shanley: OK, fair enough. Don, I've got another question on the
inventory. I know you've explained it pretty in depth, but it seems
that a 16 percent build in your inventory, and a forward order up only
2.9 percent for the overall company is the in transit merchandise that
you have currently anticipated any different or significantly different
than the in transit products at the end of the third quarter of '05?
Don Blair: The amounts are very different, John. The - as I said, half
the growth in overall inventory came from in transit. If you're talking
about the composition, the composition of the product flow always
changes.
John Shanley: Yes, I'm not worried about that. I'm talking about the
dollar amount, do you think it's substantially different.
Don Blair: Dramatically. The growth in in transit is half of the
growth in overall inventory. So the point I was making is that close
outs are flat.
John Shanley: Right.
Don Blair: So the increase in inventory is product that is on the water,
or, you know, in a consolidator in Asia, and it's really earlier
ordering, and earlier deliveries against product, a lot of it launch
product.
John Shanley: So that's different than what it was at the end of the
same period of a year ago.
Don Blair: Absolutely. A lot more of it is, you know, product that's
still on the way here because it was earlier out of Asia.
John Shanley: OK. All right, fair enough. Thanks a lot. I appreciate it.
Don Blair: OK.
Operator: We'll go next to Robby Ohmes with Banc of America Securities.
Robby Ohmes: Thanks. A couple of quick questions. Just I missed the
revenue guidance for the fourth quarter, and there was a comment, I
think, you guys said, about pulling revenues from the fourth quarter
into the third quarter. If you could give us a little more
clarification on that. And then, just the other question, the - can you
just review - the sort of lack of operating margin leverage in the U.S.
business on the 18 percent revenue gain. Can you give us the breakout
again, you know, sort of the pressures there, gross margin versus SG&A
and what the drivers are to the lack of that operating margin expansion?
Thanks.
Don Blair: Well the explanation for the product that was shipped a
little bit earlier in the third quarter versus the fourth was that in
three of our regions, there were products that normally, we would have
expected to be shipped in March or April that ultimately ended up being
shipped in February. So that is pretty simple rationale for that, but
really reflecting some strength in demand for those particular markets
and that particular product.
I'm sorry, your second question again?
Robby Ohmes: Well just on the first question.
Don Blair: Lack of operating leverage in the United States, yes.
Robby Ohmes: And then, sorry, and just on the first question was that -
did that add two points to the top line growth rate? Or, you know, can
you give us a rough guidance?
Don Blair: No. I'm not able to give you a number on that, Robby.
Robby Ohmes: OK and then, great...
Don Blair: And then with respect to the U.S., it's really the gross
margin erosion, and as I said earlier, it's really footwear driven, and
it's basically input costs. It's oil, and labor costs in Asia. There's
been some suggestion that there's been a higher discount in the United
States. We haven't seen that.
Robby Ohmes: And when do you think you'll anniversary these input cost
pressures?
Don Blair: Well if you can tell what the price of oil is going to be, I
can probably answer that question. But at this stage, it takes a little
while for product costs to come through because we have product
agreements with our factories that are seasonally based, and, you know,
it's really hard to say because it's a fairly significant variable
equation. The thing I would keep pointing to here is that we have a lot
of levers that we manage in gross margin, and we're going to stay
focused on those.
Robby Ohmes: And just a quick final question, 360 degree Air, can you
characterize that launch relative to your expectations and relative to
the launch of Shoxs a few years ago, how well it did? Thanks.
Charlie Denson: Yes, actually, very, very pleased with the launch of
360, not only for that one model but the effect it's had on the larger
Air franchise. The sell-throughs started out incredibly strong and
continue to be very strong, particularly here in the U.S.A. You'll see
more attention being put on this whole initiative in the summer season
here after World Cup in Europe. And that will, you know, start to see
some effect outside the United States even more so.
Pam Catlett: OK. We have time for one more question.
Operator: Very well. Our last question will come from Kate McShane
with CitiGroup.
Kate McShane: Hi, good afternoon.
Pam Catlett: Hello.
Mark Parker: Hello.
Kate McShane: You had mentioned during the call, that you had seen some
traction in the Japanese market, with some of the lower priced product
that was introduced there. Were there any other new higher priced
products that were introduced such as Air Max 360? And did you see
traction with those products?
Charlie Denson: Yes, this is Charlie. Yes. As a matter of fact, the
360 launch was executed in Japan as well. And we felt really good about
that launch. And more specifically, we did some things in the
marketplace in Japan that really create a lot of excitement in that
energy group that really sets the tone going forward around the history
of Air, and launching shoe wall that can - that actually created quite a
bit of stir in that community and that marketplace. And it went through
the history of an offering of, I think, there was what was it Mark, like
30 different shoes, 36 shoes? That was incredibly excited, and
something that you will probably see a little bit more of as we go
forward in that marketplace.
We really like our position in Japan. We think that, you know, the
market has been tough. It has been promotional. And I think that
there's been a lot of discussion around who's winning the market share
battle. You can cut market share numbers any different way to make them
say whatever you want. We're still the number one footwear and apparel
company in Japan. And we've got those numbers that we're looking at
that say that.
So we feel good about the future, and what we're doing, both on a
long-term basis, the way we're managing the brand and what's coming over
the next 12 to 18 months.
Kate McShane: OK. Thank you very much.
Pam Catlett: Thank you. And thanks everyone for joining us. We
appreciate your time and interest. We'll talk to you soon.
Operator: Ladies and gentlemen, this does conclude today's conference.
We thank you for participation once again. And you may disconnect at
this time.
END