EXHIBIT 99
NIKE, INC.
FY07 Q2 Earnings Conference Call Transcript
Moderator: Pamela Catlett
December 20, 2006
Operator
Good afternoon, everyone. Welcome to the NIKE fiscal 2007 second quarter
conference call. 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 the presenters
of this call will make forward-looking statements based on current
expectations and those statements are subject to certain risks and
uncertainties that could cause actual results to differ materially. These
risks and uncertainties are detailed in the reports filed with the SEC
including Forms 8-K, 10-K, and 10-Q. Some forward-looking statements concern
futures orders that are not necessarily indicative of changes and 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 Incorporated'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 future
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 website. This call might also include a 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.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Thank you, and good afternoon, everyone. And a happy holidays to all of you.
Thank you for joining us today to discuss NIKE's fiscal 2006 second quarter
results. We issued our results about an hour ago. If you need to reference
results, as the Operator indicated, you can find the press release on our
website which also includes the reconciliations between GAAP and non-GAAP
reported items. Joining us on today's call are NIKE, Inc. CEO, Mark Parker;
NIKE Brand President, Charlie Denson; and NIKE, Inc. Chief Financial Officer,
Don Blair.
We're changing things up so we can maximize our time for your questions,
which means both Mark and Don have brief prepared remarks. Charlie will be on
hand for the questions period to give you his perspective and insight on the
NIKE Brand. Now it's my pleasure to introduce NIKE, Inc.'s CEO Mark Parker.
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Good afternoon everybody. Thanks for joining us today.
We're halfway through our current fiscal year, which is a great time to talk
about where we are and, more importantly, where we're headed.
On our last call I reminded you of my priorities for the company-specifically,
to generate top-line revenue, to leverage our costs and resources, and to
extend our leadership in the industry.
So, how are we doing? In a word, I would say good. For the first half of
fiscal year '07, we've added nearly $680 million in incremental revenue. In
Q2 revenue grew 10% \with all NIKE brand regions and Business Units
increasing revenue over the prior year, and the other brands in the NIKE, Inc.
portfolio grew by 21%. And, global futures are up 7%, our strongest futures
number in a year. And, we've continued to return cash to shareholders with a
19% increase in our dividend and share repurchases of over $600 million
year to date.
The U.S. region continues to be a workhorse. Second quarter revenue increased
8% based on strong footwear increases and even stronger apparel performance.
Our EMEA region grew revenues 6% driven by strong performance in apparel,
equipment, and retail. Our central European markets grew more than 30%.
In Asia Pacific, consumers continue to respond to the brand across the region.
Revenue in the region grew 15% over last year, and over 30% in China. I also
want to call out a recent survey of brand power conducted by The Wall Street
Journal. That study named NIKE as the new consumer icon, and put NIKE among
the 10 most admired companies in Asia. It's a strong validation of the
authentic and relevant position NIKE has with Asian consumers.
We're working hard to elevate our competencies in every region. We continue
to make deep connections with consumers, deliver innovative product, and
raise the bar in presentation at retail. These competencies continue to pay
off around the world.
Revenue drivers are also strong throughout the portfolio. Overall, revenue
from our Other businesses grew 21%, with PTI up triple digits over the year.
Converse is a great story. Revenue is up nearly 50%. Dwyane Wade was named
SI's Sportsman of the Year and Footwear News named Converse "Brand of the
Year" for 2006. Cole Haan revenues are up 9% over prior year, thanks to Dress
Air product, strong retail performance, and a visit by Gordon Thompson to the
Oprah show. In NIKE Golf revenues increased 6% over prior year, continuing a
run only Tiger Woods could match.
The NIKE brand had a lot of big wins in key categories this quarter. NIKE+ is
turning out to be huge. In less than 6 months NIKE + users have logged more
than 3 million miles and there over 3 million Plus-ready shoes in the global
marketplace and we expect that number to double by year end. Clearly, our
confidence in this concept is proving to be accurate. In soccer, we launched
the game's first signature collection with the world's dominant player,
Ronaldinho. In college football, NIKE will be represented in 28 of the 32
college bowl games and for the 8th straight year a NIKE team will become
national champion. Finally, Air Force 1, one of the most popular shoes in
history, is set to launch a new generation of Air Force product at this
year's NBA All-Star Game.
We're exercising the fiscal and operational discipline it takes to drive
healthy margins. We are making progress on reducing the rate of inventory
growth. It is still not where we want it to be, but I am confident we'll
bring it inline with revenue by year-end. We have arrested the rate of
decline in gross margins. We secured a big advantage with a more favorable
long-term tax agreement in Europe. In short, we are pulling all the right
levers to meet our long-term revenue and earnings goals, and to drive
shareholder value.
Don will share some specifics with you in just a moment, but overall, we are
pleased with our progress in delivering healthy and consistent growth. We're
pleased, but not satisfied. We see long-term and immediate opportunities to
grow. We're challenging ourselves and the industry to bring innovation and
vigor to the marketplace. The industry can really benefit from change and
leadership, and we're committed to both.
Internally we're taking steps to strengthen every aspect of our business. As
you know, one of my priorities is to get after fewer, high-return
opportunities, and we're doing that. Specifically, we have identified key
categories that represent extensive growth opportunity.
These key categories are kind of like the Power Plays in sports. We're
aligning every competitive advantage we have in our offense to attack and
beat the competition. You'll hear more about this when we get together in
February. We believe our category focus and segmentation will create a
stronger NIKE and a stronger, more diverse, and differentiated marketplace.
These are exciting times for NIKE and our industry. The brand is strong, the
company is growing, and we are accelerating our commitment to become even
stronger, more focused, more competitive, and more influential. I am
extremely confident about the future for NIKE, Inc. We are widely regarded as
the innovation leader in the industry, but the NIKE I know is also the leader
in passion, talent, commitment, and competitive fire. I wouldn't trade places
with anybody. Now, I'll turn it over to Don to give you some financial
highlights.
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
Thank you, Mark. We're very pleased with this quarter's strong growth in
revenues and earnings per share. On an operating basis, we continued on the
upward path we outlined for you earlier in the year; more on that in a moment.
In the second quarter we also concluded a new 10-year agreement with the
Dutch tax authorities. This agreement will significantly improve our cash
flow and reduce our effective tax rate in fiscal 2007 and in future fiscal
years. This benefit and the operating trends in our businesses around the
world, leave us well positioned to deliver strong EPS growth for the year.
Reported revenues for the quarter grew 10%, as once again all three of our
product business units and all four of our geographic regions delivered
revenue growth for the quarter. Excluding the impact of the weaker dollar,
revenues grew 9%. Our worldwide Apparel and Equipment businesses were
particularly strong, each posting 11% growth and together adding $140 million
of incremental revenue for the quarter. In addition, the businesses reported
as "Other" grew more than 20% and delivered over $90 million of incremental
revenue for the quarter, contributing nearly 3 points to our overall revenue
growth. Futures orders scheduled for delivery from December through April
2007 grew 7% versus the prior year. Excluding the impact of currency changes,
Futures orders were up a little over 5%.
Consolidated gross margins for the quarter were 10 basis points lower than
last year's second quarter, continuing the trend of sequential improvement in
the year-over-year comparisons. Currency changes did not have a material
impact on consolidated gross margins. SG&A increased 16% for the quarter,
driven by new accounting rules requiring expensing of stock options and
higher demand creation spending. Excluding stock option expenses, which were
$28 million for the quarter, we continued to deliver operating overhead
leverage. Earnings per share for the second quarter increased 12%, as double
digit revenue growth, a lower tax rate and fewer shares outstanding more than
offset demand creation investments and stock option expenses.
In the first half of fiscal 2007 we delivered $377 million of Free Cash Flow
from Operations and paid out $157 million in dividends. During the quarter,
we also announced an increase in the per share dividend rate from 31 cents to
37 cents a quarter, effective for the dividend paid in January 2007. Year-
to-date we've repurchased over 7.5 million shares of NIKE stock at a cost of
$603 million. For the 12 months ended November 2006, our Return on Invested
Capital was 21%. With that recap of our consolidated performance for the
quarter, I'll now give you some additional perspective on our results.
In our European Region, which includes the Middle East and Africa, revenues
grew 6% for the quarter, with three points of growth coming from currency
changes. Excluding currency changes, all of the markets in the region except
the UK and France posted higher sales. The emerging markets in the region
grew over 30%, driven by strong results in Russia, South Africa and Turkey.
Excluding currency effects, Footwear revenues declined 1% for the quarter,
due primarily to weakness in the UK and France. However, we are seeing some
signs of improvement, as European Footwear and Apparel futures orders for the
next five months both increased versus the prior year.
Second quarter pretax income for Europe declined 18% to $159 million,
reflecting lower gross margins and increased demand creation spending versus
relatively low levels last year. We expect the profit picture in Europe to
get better over the balance of the year as our gross margin comparisons
improve and demand creation declines versus the heavy World Cup investment in
last year's fourth quarter.
In the Asia Pacific Region, revenues increased 15% in the second quarter,
driven by strong growth across all business units; currency changes had only
a minimal impact on overall revenue growth. While most countries in the
region reported double-digit sales growth on a currency neutral basis, China
and Korea each grew about 30%. Revenues in Japan were up just over 1%.
For the quarter, Asia Pacific pretax income grew 21% to $140 million.
Revenue growth and gross margin improvements more than offset demand creation
investments in the Just Do It campaign in China, the launch of NIKE+ in Japan
and sports marketing across the region.
The Americas Region reported 4% revenue growth in the second quarter, with
about 1 point of growth coming from stronger currencies. Excluding currency
changes, double digit growth in nearly every market in the region offset
softer results in Brazil and Canada. Pretax income for the quarter grew 4% to
$60 million, driven primarily by higher revenues and improved gross margins,
partially offset by higher demand creation spending versus relatively low
levels last year.
Our largest region, the US, continued to deliver solid growth in Q2.
Revenues grew 8% for the quarter, driven by higher sales to most major
wholesale accounts; overall sales at NIKE-owned Retail stores grew 11% for
the quarter. Comp store sales at NIKEtown stores increased slightly for the
quarter. Our US Footwear business grew 8% for the second quarter, reflecting
mid-single digit growth in units and continued expansion in average price per
pair. In the US, we've continued to outpace the growth of the overall market
behind the success of our Performance Running, Jordan and Sports Culture
lines. Apparel sales in the US grew 10% for the quarter, driven by 26% growth
in NIKE branded Performance Apparel. Our US Equipment business returned to
growth in the second quarter. Revenues rose 2% in the quarter as we
continued to transition our bag and sock businesses from commodity styles to
a more profitable performance positioning.
For the quarter, pretax profits for the US Region were essentially flat at
$266 million. The growth in revenues was offset by lower Footwear and Retail
gross margins, and demand creation investments focused on American Football,
LeBron and NIKE+.
For the quarter, revenues from our Other businesses grew 21% to $527 million
as every business in the group posted higher revenues. Converse led the way,
as strong momentum in the US and internationally drove revenue growth of
almost 50%. Second quarter pretax income for the Other businesses grew 136%
versus the prior year quarter, reflecting higher revenues and improved gross
margins.
Consolidated SG&A spending for NIKE, Inc. grew 16%. Currency changes
contributed 1 point of SG&A growth for the quarter, while stock option
expense accounted for 3 points of growth. Second quarter Demand Creation grew
27% versus relatively low spending levels last year, driven by advertising
campaigns behind NIKE Air, LeBron, NIKE Pro and NIKE +. Operating overhead
for the quarter increased 10%, with 4 points of growth due to the change in
accounting for employee stock options. The remaining 6 points of operating
overhead growth were due primarily to wage increases and the cost of new
NIKE-owned retail stores, partially offset by savings from the timing of
funding of the NIKE Foundation. In the second quarter, other income and
expense was in line with the prior year and currency changes did not have a
significant impact on pretax income growth.
Our effective tax rate for the second quarter was 27.2%, an improvement of
nearly 8 points versus the prior year. In the second quarter, we concluded a
tax agreement with the Dutch government that is effective for our fiscal
years from 2006 through 2015. This agreement resulted in a retroactive
benefit related to fiscal 2006 and the first half of fiscal 2007, which we
recognized in our second quarter results. For the balance of fiscal 2007, we
expect an effective tax rate of about 33.5%, bringing our estimated full year
rate to about 32.5%. We believe the 33.5% rate to be sustainable for fiscal
2008 and forward, and will continue to work toward realizing additional tax
opportunities in the future.
We continue to return cash to our shareholders in the form of dividends and
share repurchases; a total of $776 million year to date. Even so, our
balance of cash and short-term investments totaled $1.9 billion as of
November 30, over $7 per diluted share on a gross basis and nearly $6 per
diluted share, net of debt.
As of November 30, worldwide inventories were 15% higher than a year ago.
The rapid weakening of the dollar at the end of our second quarter had a
significant impact on the growth in inventory, both in absolute terms and in
relation to revenue growth. On a currency neutral basis inventory grew 11%,
while revenue grew 9% on the same basis. Close-out inventories grew about 2%
in constant dollars.
The rate of constant dollar inventory growth has been slowing since the third
quarter of fiscal 2006. While inventories are not yet where we want them to
be, we do not believe they will have a material negative impact on our
results and we continue to expect the rate of inventory growth to fall below
the rate of revenue growth by the fourth quarter of this fiscal year.
Accounts receivable as of November 30 were 10% higher than the prior year, in
line with our revenue growth for the quarter. On a currency neutral basis,
accounts receivable grew 7%, versus constant currency revenue growth of about
9%.
Our operating outlook for fiscal 2007 remains essentially unchanged from our
previous conference call. Assuming stable exchange rates, we expect top line
growth at a high-single digit rate for the balance of the year.
We expect FY07 gross margins to be at or slightly below FY06. Gross margins
for the third quarter should be essentially in line with the prior year,
while we're looking for some growth in the fourth quarter.
We expect SG&A to grow at a low double-digit growth rate for the year,
reflecting low double digit to mid-teens growth in the third quarter and
fourth quarter SG&A spending at or slightly below prior year levels. Stock
option expense for the balance of the year should be about 14 cents per
diluted share, incurred fairly evenly over the next two quarters. Excluding
charges for expensing stock options, we expect to grow SG&A at or below the
rate of revenue growth, driven by operating overhead leverage.
Interest income should continue at levels similar to the first half of the
year.
We project increasing other expense in the second half of fiscal 2007, as
foreign currency hedge losses increase, assuming continued dollar weakness.
As I mentioned earlier, we expect a balance of year effective tax rate of
about 33.5%, bringing us to a full year rate of about 32.5%.
So, with this quarter in the books, we continue to expect to deliver a very
good year in fiscal 2007. And now, we'll be happy to take your questions.
Operator
Thank you. We'll take our first question from Bob Drbul from Lehman Brothers.
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Hi, Bob.
Bob Drbul - Lehman Brothers Analyst
I guess the first question that I have is on the inventory. As you work the
inventory down in line with revenues over the remainder of the year, do you
expect any more margin pressure than sort of what we've seen so far in terms
of your plans for third and fourth quarter? I mean, what are the risks around
the margin side of it and getting that inventory down and in line with your
outlook?
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
Well, we've assumed, Bob, the inventory outcomes that I just described in our
guidance around gross margin, so those gross margin expectations include the
fact that we think our inventories are going to be growing at a much slower
pace in the back half of the year and really one of the keys to that is the
expansion of our outlet network. We've been talking about this for the last
couple of years but the outlet network gives us a lot of flexibility and the
ability to liquidate close out inventory much more profitably. So at this
point we feel that we've incorporated that in our forward gross margin
guidance.
Bob Drbul - Lehman Brothers Analyst
Okay, and in terms of currency and in terms of how currency has impacted the
business or expected to impact the business, when you make the comment around
the inventory, would that be a real dollar reported number or would that be
constant dollar in terms of the progress that you would expect to make?
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
Well, we would expect to make progress in constant currency. I can't predict
where the real currency is going to be and I think this quarter was a great
illustration of that. We're going to make progress in constant dollars and I
believe based on where the currencies are likely to be we'll see it on a real
dollar basis as well but I can't predict that with any real certainty.
Bob Drbul - Lehman Brothers Analyst
Great. Thank you very much.
Operator
We'll go next to Robby Ohmes with Banc of America Securities.
Robby Ohmes - Banc of America Securities Analyst
Oh, thank you very much. Hi, everybody. Couple of quick questions. On the U.S.
future number, can you just tell us, roughly, the ASP versus unit component
of that and I apologize if you said that already. And then the other question
is can you give us the weighting of the futures window when you look at that
number? Is it pretty consistent over the next six months or is it weighted
towards the first half or the back half? And then the follow-up question is
just comment -- a little more commentary on the apparel strength and how
sustainable you think that is and what will drive that. And then on the
footwear side what are the key products we should focus on as we look to
spring '07. Thanks.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Wow!
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
I may have to ask you to repeat some of those. First of all, the futures
information, as we look forward on the futures we are seeing average selling
prices ease. We have definitely seen quite a lot of average selling price
expansion but the driver of futures going forward is primarily units and
we've seen the average selling price ease. Front half, back half, third
quarter is a little faster growth than the fourth and what was your second
question?
Robby Ohmes - Banc of America Securities Analyst
It was on the apparel business.
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
Yes.
Robby Ohmes - Banc of America Securities Analyst
It's been super strong and just what's driving that and what could continue
to drive that growth as we look into calendar '07?
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Well, let me comment on that. The apparel growth, we've actually been very
pleased with where we are with apparel here in the last, actually, this year-
to-date, particularly on the performance side of the business which is up
significantly and that's driven a lot by the increases in the NIKE Pro
business. We've had some healthy increases in basketball in the apparel side,
led by USA basketball and we're very bullish on what's coming up with the Air
Force One and the Air Force 25; both sport culture and performance stories
that we have against basketball here in the next six months.
And then another big initiative for us, which really hits the market in April
is what we call Premium Sport Essentials, which is really elevating our basic
performance product in a very significant way. So the reaction to that and
frankly, the women's fitness line is another one I'd point out, has been very
very positive in all of our sales meetings around the world here over the
last three to four weeks.
And on the footwear side, we're very bullish on performance here, coming into
this next quarter. A lot of that will be driven by, in basketball the Air
Force 25, which is inspired by the Air Force One; a stronger core running
line; updates to both the Air Max 180 and 360; a new woman's dance line which
has been received incredibly well. We have some product in football, or
soccer, globally. I mentioned the Ronaldinho signature collection, which has
gotten also great response. Of course, Lebron is out there now and doing
quite well. NIKE Plus continues to be extraordinary and we see that just
accelerating as we add more styles to NIKE Plus over this next 6 to 12 months.
NIKE Free, we have a whole new collection coming out here later in the spring,
a new Kobe signature shoe, a line of summer hoops basketball product. And
then a considered design collection in our outdoor footwear line with a new
collection in boots which has done incredibly well for us; a new sandal line;
and then finally, a big emphasis on a Zoom Air collection that will premier
in the fall season. So we've got a lot of ammo coming on both the performance
and culture side in both footwear and apparel.
Robby Ohmes - Banc of America Securities Analyst
Sounds terrific. Thanks a lot and I notice you didn't say anything about low
profile. Is that because there's nothing going on there?
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Absolutely not. I mean, I should say there's a lot going on there. We've had
significant increases in our low profile, what we call Metro, the Metro slice
of sport culture and footwear, and we've seen significant increases continue
here over the past two years and we expect that to continue here through the
spring into fall. The response to the new collection has been exceptional. So
actually we're very bullish on that piece of the sport culture collection
from NIKE.
Robby Ohmes - Banc of America Securities Analyst
Sounds great, guys. Thank you very much.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Thanks, Robby.
Operator
We'll go next to Margaret Mager with Goldman Sachs.
Margaret Mager - Goldman Sachs Analyst
Hi. Thanks and happy holidays to all of you.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Thank you, Margaret.
Margaret Mager - Goldman Sachs Analyst
I have a couple questions. First of all, I missed the number on the demand
creation increase in the quarter and if you could talk about where that is on
a year-to-date basis and where you expect it to come out on a full year basis.
Because I would expect that to be the bigger swing factor in the second half
of the year in terms of boosting EPS growth rate. So if you could talk to
that. And I'm also curious about what are the big campaigns that you'll be
running. Mark, you just walked us through a ton of product things that are
happening, but where are the marketing dollars going to be placed against in
any sort of meaningful way in the next two quarters? And then if I could, on
the gross margin, could you talk about how the weak dollar impacts the gross
margin versus the other expense down to the EPS level? I get that one a lot
from investors. And the other factors that have been influencing your gross
margin recently, like rising raw material costs, where does that stand?
Thanks.
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
Okay, the demand creation for the quarter was up 27% and our expectation for
the year is that we're going to be at or slightly above the rate of revenue
growth for demand creation and that for overall SG&A. If you take out the
impact of the stock options, we think we're going to be at about the rate of
revenue growth. We are going to be leveraging operating overhead as we
continuously target and we're going to be doing some investing in demand
creation, but the net of all of that is that we're going to be growing SG&A
at about the rate of revenue growth. I think the way I articulated it was at
or slightly below the rate of revenue growth; okay?
Margaret Mager - Goldman Sachs Analyst
Yes.
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
The phasing of the demand creation, on a year-to-date basis, demand creation
is up about 23% and what you have to bear in mind, I know you know this
Margaret, is last year we were very light in the first three quarters. We
spent quite a lot against the World Cup in the fourth quarter so what we're
seeing is fairly significant growth in the first three quarters of the year
and we're going to expect to see a fairly significant decline in demand
creation spending in the fourth quarter.
I'm going to, if I can, jump over your question about the campaigns and hand
that one off to Charlie, but as far as gross margin is concerned, the FX
impact on gross margin for this year is pretty modest. As you know, we're
largely hedged at this stage of the year. We did have some optionality in our
hedging position, so there were probably a couple of pennies in the quarter
and there may be a couple of pennies over the balance of the year, but it's
really not material for this year. And if you think about the other drivers
of gross margin as we said we were going to do. We've taken quite a few steps
that we controlled to work on offsetting some of the macros. We do still see
pressure coming out of Asia around labor costs. We've seen some currency
appreciation in Asia, and there's still a little bit of oil flowing into the
cost structure.
Balancing that on the other side is that we've made great progress in Lean
manufacturing. We're currently at about 30% of our footwear product is coming
off of lean lines, and so we're really feeling good about that. We've done
quite a lot of work in terms of engineering products for improved
profitability. As we've said to you folks before that when we launched
products and then we work the profitability equation and we've done that with
the Metro product for example. So as you saw, our gross margin results for
this quarter were only down 10 basis points. So we've been able to work
through offsetting some of those pressures and we're feeling pretty good
about our ability to continue to drive the margins over the long haul. So I'm
going to turn this over to Charlie to talk a little bit about the texture on
demand creation.
Charlie Denson - NIKE, Inc. President of NIKE Brand
Thanks, Don. Hi, Margaret. I guess maybe before I answer the question I do
have one prepared remark for everybody and that is to wish everybody a happy
holidays and a very prosperous New Year.
As far as the demand creation and the energy that we'll be stirring up a
little bit in the second half, we're actually pretty excited about a couple
things. Mark mentioned a little bit about the Air Force One, Air Force 25
campaign that will be a focal point for NIKE basketball and the USA. The
center piece of that will be around the All Star game with some intermittent
launches of product both at a macro level and at a micro level, between now
and then as we ramp this thing up, but I have to admit it's one of the more
exciting focus campaigns we've put together in quite some time.
And I think the other thing that's exciting about it is not just NIKE only.
When we talk about what's going on in Las Vegas, at the All Star game, some
of the energy that we're driving behind the Jordan Brand, the Converse Brand,
and the Starter Brand is going to really -- I think it's going to be a lot of
fun. I think the other thing that the basketball focus gives us is this
chance to really talk about performance and culture together, and I think the
Air Force One, Air Force 25 is probably one of the best examples of using the
old to influence the new and vice versa, and so we're very excited about that.
We've got a lot of the product on some of the key NBA players right now.
That's the USA.
And as we move over to Europe, we are talking about a Just Do It campaign
built around basically two sports. It will be soccer or football in early
spring and then as we move forward both in Europe and the USA into the spring
season, again, referencing some of what Mark talked a little bit about this
Performance Sport Essential package that we're pretty excited about and that
will be marketed together with some of the new Free footwear product, and so
you'll see those efforts going on both in spring and late spring across the
pond so to speak.
And then finally, over in Asia, one of the things Japan will jump on is the
Air Force One bandwagon. It's a very influential and important franchise for
that marketplace over there and what we'll see some of that activity take
place alongside the USA calendar in Japan, and China, we'll continue to build
off the successes that we've just had at the Asian games. In Doha where we
outfitted 21 out of the 28 Chinese Olympic Federations and I think they won
over 160 Gold medals at the Asian games. So a little bit of a prelude to
Beijing and we'll continue with that Just Do It campaign that we're going to
stick with all the way up into the '08 Olympic period, and so the Asian game
performance will be a focal point of that. That's kind of a round the world
summary of some of the demand creation spend we'll be doing.
I think the last thing that I would just say going into fall, NIKE+,
again, will be important to us as well as this new concept that I think we'll
probably get a chance to show you a little bit more about in February, which
we call the Zoom Air initiative and we talk about low profile and how
important it is in some parts of the world. This is a new and exciting new
approach to both technology and performance as well as aesthetic and sport
culture.
Margaret Mager - Goldman Sachs Analyst
Okay, well, we're looking forward to February and in the meantime, have a
wonderful holiday.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Thank you, Margaret.
Operator
We'll go next to John Shanley with Susquehanna Financial.
John Shanley - Susquehanna Financial Analyst
Good afternoon, folks.
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Hi, John.
John Shanley - Susquehanna Financial Analyst
The market, Charlie, our research panel data shows that Air Force One sales
year-to-date in the U.S. are down about 20%. Are you anticipating that you
may be able to reverse this trend with the introduction of all of the new Air
Force One and 25 shoes that you have coming out for this upcoming spring
selling season?
Charlie Denson - NIKE, Inc. President of NIKE Brand
Well, I guess the short answer would be yes, so remember the Air Force One is
really a controlled and allocated number, almost on a month, well, not almost;
it is on a monthly basis. So we really measure how much product we put out
into the marketplace and we do it even right down to the door level. So we
actually, some of that throttling down was in anticipation of this launch,
and the idea that we're building off of both the new version of the Air Force
One which you'll see, you've seen a lot of permutations, I think you are
going to see a lot more and I think you're going to see some price elasticity
in that and then I think with the new Air Force 25, it really starts to build
a new franchise on top of the old one.
John Shanley - Susquehanna Financial Analyst
Can you give us a sense in terms of how big the Air Force One shoe is in
comparison to the rest of the NIKE Brand and maybe something in terms of what
it contributes to your bottom line?
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Well, I want to go back to a comment you made about the Air Force One sales
being down. That's not what we're seeing. In fact we've seen some good
increase on Air Force One over this past six months or so. That being said,
to Charlie's point, we're trying to keep a reign on that and manage the
marketplace because this is a very important franchise product for NIKE and
we intend to keep it that way. We will see some very exciting activity around
that shoe, both culture based as Charlie said, and performance based, not
just leading up to the All Star game but throughout the year. So we're
actually very bullish on where we stand and where we are going over this next
year plus, I should say, for that Air Force One, Air Force 25 product.
John Shanley - Susquehanna Financial Analyst
Okay. Fair enough.
Mark Parker - NIKE, Inc. President and Chief Executive Officer
So put that out there and as far as, I mean it's a very significant, I'm not
going to give you a number here but it's a very significant piece of our
urban based sport culture product line. We feel like it's -- we have control
on that in the marketplace, the numbers are under control. That being said,
we feel like there's significant upside opportunity, not just in terms of
growth in pair-age but also growth in the average price per pair around that
franchise. You're going to see some pretty interesting things going on in
terms of that product and how we interpret it and how we push premium levels
around that product over the next 12 months.
John Shanley - Susquehanna Financial Analyst
We've seen indications that we're getting up into the stratosphere with that
product with some of the alligator and some other products that's coming in
January it should be real exciting.
On another question, Don, on inventories; again this is the fourth quarter of
inventories outpacing the rate of sales growth. Can you give us a sense of
where the inventory overhang is mostly centered? Is it in the United States
and is the game plan to use the outlet stores as the main way of bringing
those inventory levels into balance with sales?
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
John, there's inventory in several spots, but some of it's in the U.S. Some
of it's in Europe. There are a number of different approaches we use, as you
know, a lot of different channels. We usually use a blend of both our own
retail stores as well as third party close out channels.
John Shanley - Susquehanna Financial Analyst
Okay. How many outlet stores do you have in the U.S. and Europe now, Don?
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
I'll have to look that one up for you, John.
John Shanley - Susquehanna Financial Analyst
Has it been growing?
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
Yes.
John Shanley - Susquehanna Financial Analyst
In terms of the number of those units?
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
We have been adding outlet stores and our model really is that we want to
ideally close out, we think, between 70 and 80% of our own close outs. We
think that's the most efficient and profitable way to close out product. In
most markets around the world we're not to that level yet, so we think
there's opportunity for us to close out more of our own excess product and do
it profitably so that's why we've been adding outlet stores.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
John, we have as of the end of the quarter 264 factory outlet stores.
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
Worldwide.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Worldwide.
John Shanley - Susquehanna Financial Analyst
The question was, Pam, on how many in Europe and how many in the U.S.
specifically?
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
We'll have to do a little digging on that one.
John Shanley - Susquehanna Financial Analyst
Fair enough. Thank you.
Operator
We'll go next to Virginia Genereux with Merrill Lynch.
Virginia Genereux - Merrill Lynch Analyst
The factory store count is in your 10-K.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Thank you, but I don't have everything memorized. Thanks for pointing it out
Virginia.
Virginia Genereux - Merrill Lynch Analyst
I know, I didn't mean for you, I meant to Shan man. And you do the domestic
and international. I'm looking at it.
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Thanks.
Virginia Genereux - Merrill Lynch Analyst
Anyway, my two questions are and happy holidays to all of you all.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Happy holidays.
Virginia Genereux - Merrill Lynch Analyst
First Don maybe is higher pricing helping to sort of alleviate the margin
pressure given all of the input cost increases and why couldn't you raise
prices a bit considering the run we've had in oil and things?
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
There is a piece of pricing in some of the offsets, Virginia, and that's
really been the U.S. We really haven't seen any significant amount of pricing
in other markets and we talked about this before, but the way we do this is
pretty surgical based on individual products and individual categories so
this is not a business where you can take pricing across-the-board. It's
really trying to make sure that you've got the right value proposition for
each category and each consumer demographic and each geography. So there are
places where we've had the opportunity to do that selectively and the U.S.
has been the place where really there's been kind of some movement, but it
really isn't 100% of the product line by any stretch of the imagination.
Mark Parker - NIKE, Inc. President and Chief Executive Officer
I'll add we'll continue to look at those opportunities over this next 3 to 6
months and beyond, obviously. I should point out that our over 100 dollar
footwear sector for NIKE is up over 20% over this last quarter, which is a
great sign and we want to do everything we can to keep that moving in that
direction.
Virginia Genereux - Merrill Lynch Analyst
That's helpful and thank you, Mark. So it sounds like you could be at the
earlier, there could be additional pricing action?
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Like I said, we continue to look at that and we do see some opportunities so
we'll make sure that we take advantage of that wherever we can.
Virginia Genereux - Merrill Lynch Analyst
Right. And secondly if I may, just wondering what you all think, and Charlie
I'd love to hear from you too, on owned retail, and I ask this because Adidas
and Puma are opening their own stores, their own retail sales are up like,
running up like almost 40% year-over-year, opening a lot of their own stores
and I think a lot of their own full price stores. So you guys have talked
about outlet and that makes a lot of sense Don, on the clearance, managing
your own close outs, but what about full price owned retail, and maybe
anything you've learned from sort of the goddess, the catalogue businesses
that you all talked about. Is that an opportunity for you guys and how do you
think about the channel conflict if at all?
Charlie Denson - NIKE, Inc. President of NIKE Brand
Virginia this is Charlie. Let me take that one first and Don and Mark can
chime in, but owned retail has always been -- has not been our preferred path
of distribution. That being said, I think we own a lot of retail and we
manage a lot more of it and so we've actually started to build a fairly
decent competency around our ability to execute there. I think when you think
about places outside the United States, we've taken a much stronger and a
little bit more aggressive approach on the owned and certainly the partnered
model where we've built partnerships with people and built NIKE only or model
Brand stores and as far as the consumer is concerned those are NIKE stores
and whether the financial arrangement is different or not, and I think that's
proved to be a very effective tool for us and I think as you look and think
about Western Europe and the United States, we have an opportunity to do some
more retail.
I think what we want to do is continue to operate it well and we want to
continue to use it as a, I think, as a leading indicator or influencer in
developing new retail concepts and what I think is going to become probably
more important than ever in the future is this thing that we're calling the
consumer experience and how the consumer interacts with the Brand at point-
of-sale and after the point-of-sale and I think the NIKE Plus example is a
great one as far as how it's changing the landscape of running and it's
happening after point-of-sale, and we're developing a much deeper and more
meaningful relationship with consumers in a whole new world and I think the
retail environment is going to be part of that.
Mark Parker - NIKE, Inc. President and Chief Executive Officer
I will add too that we're committed to be a better retailer, to be a better
retailer vertically. Really, with the intent to be a better wholesale partner,
and to put ourselves in a better position to more effectively lead and manage
the marketplace, so that's really important to us. I mean, we can't really
lead as effectively as I think we need to if we don't increase our
competencies around retail. So you're going to see an increasing commitment
to that from NIKE in the quarters ahead, fiscal years ahead, and you'll also
see more of a commitment from NIKE in the E-commerce channel. This is a big
opportunity for us. It's currently underdeveloped so we see significant
opportunities to grow that piece of our marketplace.
Virginia Genereux - Merrill Lynch Analyst
Well, your women's catalogue looks great. Thank you very much.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Thank you, Virginia, and if I could just interject to answer the factory
outlet question so we can all sleep at night, the U.S, we have 96 factory
outlet stores, Europe 62, Asia 37, Americas 20, those are NIKE Brand at the
end of Q2 and the subsidiaries group have 49 which should equal 264.
Operator
We'll go next to Kate McShane with Citigroup.
Kate McShane - Citigroup Analyst
Hi, thank you. What is driving the better futures in Europe? Is it any kind
of improvement in the UK and/or France and if things aren't improving in the
UK because of the continuing price war there, what is NIKE's long term
strategy for that country?
Charlie Denson - NIKE, Inc. President of NIKE Brand
Kate, this is Charlie. Well, the futures numbers in Europe, I think, I would
say we're not pleased or happy with. I think we both -- we all feel that we
have a lot more opportunity out of the Western European marketplace. They are
being affected probably the most by France and the UK and I think one of the
things that we've talked about with the UK is the challenging marketplace
there. I would just say today that retrospectively, that marketplace was
probably worse off than maybe we thought and that certainly, the overall
consumer confidence traffic patterns at retail have hindered our ability to
turn that thing around a little bit quicker.
I think that being said, we're going to continue to do what we said we have
been doing which is moving distribution and working on Brand presentation
into a place where we feel confident is a long term position for us both on a
business basis and a Brand basis. And I think the other thing is it's
important to continue to remind everybody how important the UK marketplace is
overall with respect to the European market. We're going to continue to
invest in it. We think we can do a lot better job around product. That goes
for both footwear and apparel and right now, nobody's winning in Europe.
There's nobody -- we're not getting beat from a Brand standpoint. I think
it's just a tough environment and we think we can turn it around but it's
going to continue to take a little bit more time.
I think the other thing that we said is that the European marketplace is
still a great growth opportunity for the Brand and when you look at the
landscape across Western Europe and Central Europe, that group continues to
deliver growth for us, even despite the fact that their number one size
market in the UK has been an under performer now for going on nine, ten
months and so I think that team continues to find ways to deliver the growth.
France is a totally different environment. Still challenging from a
distribution standpoint but I think we've just underperformed as a Brand
there and we've changed our management team out there. We feel great about
the group that's in there and we're starting to see some positive signs out
of France, and so it's work in progress, but still pretty bullish on the
European marketplace.
Kate McShane - Citigroup Analyst
Okay. And then just switching gears very quickly, can you update us on the
Starter Brand and if there are any near term plans to expand that Brand
further into other Wal-Mart stores here and/or internationally?
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Well, actually, Starter is represented in about 80% of the Wal-Mart locations
in the U.S. on the apparel side. We've been challenged a bit to really get
the footwear piece of that business up and going with Wal-Mart, but we're
continuing to commit to that and we think there's significant upside on the
footwear front moving forward. We also have a commitment that we're making
with Payless with a new Brand that we're coming out with called Tailwind and
we see a significant upside on that opportunity for NIKE and for Payless as
well, so that's coming up here soon, early in this next year. So we see -
and then we just signed a fairly significant deal with NASCAR relative to the
Starter Brand, so we see some upside there as well. So it's a big opportunity
for us and we're committed to sticking with it.
Kate McShane - Citigroup Analyst
Okay, thank you very much.
Operator
We'll go next to Jeffrey Edelman with UBS.
Jeffrey Edelman - UBS Analyst
Thank you. A follow-up question on Europe. Charlie, would you discuss a
little bit what's happening in terms of mix, low profile versus performance
and how that's influencing the average selling price and what kind of unit
trend are we seeing?
Charlie Denson - NIKE, Inc. President of NIKE Brand
Yes, Jeff, the low profile silhouette is still the dominant silhouette in
Europe. We introduced the Air Max product worldwide here the last year and I
think it did remarkably well in the U.S. It did very well in Asia, China,
Japan, et cetera, and most of Europe, it did not do as well as we had hoped
or expected and I think the reason was because the strength and the dominance
of that low profile silhouette in the footwear business. So we see it
continuing. That being said, I think Mark touched on it a little bit earlier.
Our Metro business, our low profile business is up dramatically, and--.
Don Blair - NIKE, Inc. Vice President and Chief Financial Officer
Over 350%.
Charlie Denson - NIKE, Inc. President of NIKE Brand
So that's pretty dramatic, and we continue to do some things around that
business that have been received very well this spring and I think we
mentioned this concept that we're building around Zoom and the performance
execution of that opportunity will really be targeted and I think it's going
to be a little bit more successful for fall, and so it's still a pretty
dominant, it holds a pretty dominant position in that market.
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Let me just add too, obviously, we were a bit late to that party, but fully
committed to realizing not just the low hanging fruit that we've picked up
here over the last two years or so, but to really now bring innovation to
that segment, and what you'll see coming here in the late summer, fall with
the Zoom pack will be a good indication of where we think we can take that
from a real innovation standpoint.
Jeffrey Edelman - UBS Analyst
Okay, so is this helping the average selling price stabilize or do we still
see it down a little while longer?
Mark Parker - NIKE, Inc. President and Chief Executive Officer
I think it's starting to stabilize. I don't -- I think we're through most of
it but it's starting to stabilize a little bit.
Jeffrey Edelman - UBS Analyst
Good, and then just one other point. Charlie, in the last call, you talked
about trying to give a little more support to some of the mall-based
retailers and generate some excitement. Could you talk a little bit about
what you're doing and what kind of experience you've had?
Charlie Denson - NIKE, Inc. President of NIKE Brand
Yes. I don't want to -- we're working on a few things that I'm going to hold
my powder on a little bit, but I think one of the biggest challenges that we
face right now in the U.S. as good as that business is and has been is the
ability to create energy and profitability in the mall and I think it's not
something that we're ignoring and we're actually working with some of the
partners, actually all of our partners in the mall and primarily the big ones,
the obvious ones and trying to build new concepts and some new directions for
them to pursue that both is enabling us from a Brand standpoint and building
on the successes we've had.
I think one of the things that I mentioned earlier is this whole consumer
experience piece and we really feel strongly about what our opportunities are
here and we've got some things that we've been working on that we're pretty
excited about that have yet to be introduced to the retail marketplace and
maybe we'll give you a little bit more insight on that in February and then
this idea around a category focus that we're building on from an
organizational standpoint has a lot of retail opportunity as we establish a
much deeper and broader relationship with each of these different consumer
types.
Jeffrey Edelman - UBS Analyst
Okay. Great. Thank you. Happy holidays.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Thank you. We have time for one more question.
Operator
We'll take our final question from Omar Saad with Credit Suisse.
Omar Saad - Credit Suisse Analyst
Thanks. Mark, is there any chance I can get you to elaborate on the comment
you made at the beginning about focusing on fewer high return opportunities?
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Yes, actually, one of my favorite topics as people around here will tell you.
We see that there's a smaller percentage of our business that often, almost
always represents a higher percentage of return, so in other words not all
opportunities are created equal. So very simply, our focus is to really make
sure that we're lining up against the biggest growth opportunities and we
talked a lot about that relative to the category dimension of our business
and we also look at it from the geography or the geographical segment or the
dimension of our business.
So as you look geographically, as you look categorically and in a different
consumer segments and even down to price points you can see that there's some
fairly significant upside opportunities where we're under penetrated, so what
we're really focused on is how do we, I often call this the optimization
scheme, we're in a giant optimization scheme, unlimited opportunities in a
sense, but limited resources, so how do we get the most out of those
resources that we have to invest against the opportunities? So that's really
what's driving a lot of the focus in the organization around categorical
segmentation, the old what we used to call segment to grow, but really more
effectively differentiating the marketplace so we can grow the market.
So that we are focused on our core categories, Charlie has mentioned this
before as have I. Certainly, running basketball, soccer, worldwide, the women
's business is significant. We see upside opportunities in more on the
periphery, but pretty significant upside around skate and the action sports
area, so really what we're trying to do is line up our resources and our
assets against those bigger opportunities and try to increase the
optimization scheme. And I mentioned before E-commerce as a retail channel,
one of the fastest growing retail channels on the planet and we are under-
penetrated so that's another good example of a channel based opportunity
where we have a lot of upside. So it's really, again, all about lining up
against where the biggest opportunities are, and you'll hear a lot more about
this when we get together in February.
Omar Saad - Credit Suisse Analyst
Okay, great. And then also wanted to ask you about -- with the strength in
your balance sheet and the amount of cash you have on hand, looking at the
Converse business, I mean, it's obviously a business that's worth a lot much
more today than it was when you brought it in. You've done a great job there.
It's growing quite well. How do you think about potentially -- given the
success of that deal, how do you think about potentially looking at other
acquisition possibilities?
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Well, we are looking at other acquisition opportunities. There's nothing
specific on the agenda right now that we can talk about. We are hunting,
that's a part of what we do. We have cash and we're obligated to try to get
the most use out of that cash. Acquisitions are one of the ways we can put
that cash to use, but there are no specific acquisitions on the radar screen
right now, but I will add that quickly that we're actively looking.
Omar Saad - Credit Suisse Analyst
Okay. Is there a specific way you think about it that you can share with us?
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Well, taking a more proactive view, I think in our history, I think it's safe
to say that we've been a bit more reactive on the acquisition front so we're
actually taking a much more proactive view looking again back to the previous
question you had on how do you optimize your growth opportunity, so we're
looking at under penetrated segments where we think we can add some value
with NIKE Brand competencies that might be added to an acquisition to help
accelerate growth potential, so it's really looking at under penetrated areas
and areas that have more upside that we don't necessarily want to go after
with the NIKE Brand, so that's about as much as I'll say on that.
Omar Saad - Credit Suisse Analyst
Excellent.
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Yes.
Omar Saad - Credit Suisse Analyst
Very very much appreciated.
Mark Parker - NIKE, Inc. President and Chief Executive Officer
Yes.
Pamela Catlett - NIKE, Inc. Vice President of Investor Relations
Okay, thank you, everyone, for joining us. We appreciate your time and
interest and we look forward to seeing all of you in February here in
Beaverton. Take care.
Operator
Thank you, everyone. That does conclude today's conference. You may now
disconnect.