EXHIBIT 99
NIKE, INC.
FY07 Q3 Earnings Conference Call Transcript
Moderator: Pamela Catlett
March 22, 2007
Operator: Good afternoon, everyone. Welcome to NIKE's fiscal 2007 third
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
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, 10-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 website. 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 over the call to Pam Catlett,
Vice President of Investor Relations.
Pam Catlett: Good afternoon everyone. Thank you for joining us today
to discuss NIKE's fiscal 2007 third quarter results. We issued our
results about an hour ago. If you need to reference them, you can find
our press release which includes reconciliations between GAAP and non
GAPP reported items at our website at www.nikebiz.com.
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. 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. CEO,
Mark Parker.
Mark Parker: Thanks, Pam and thank you all for joining the call today.
When I took this job 15 months ago, I said NIKE's focus was on
generating top-line revenue and profitability. Our 3rd Quarter
performance shows that we're keeping that promise. Net revenue is up
9% over third quarter last year, the 22nd consecutive quarter of year-
over-year revenue growth. We're able to deliver that kind of
consistent performance because we create the most innovative and
compelling product in the industry. NIKE+ runners have logged more
than 10M miles and all of our performance running shoes will be Plus-
enabled by Holiday. Bowerman performance running shoes grew 11% in Q3.
The Air Jordan 22 launched at the All-Star Game in Las Vegas. NIKE Pro
is growing from its US roots across Europe and Asia. 10R, our
Ronaldinho signature line, is seeing very solid sell-through. March
Madness is setting the stage for our new NIKE Pro-inspired basketball
uniforms. AF1 is white hot. Converse launched the new Wade 2.0 shoe.
The Tailwind Collection landed in Payless. Cole Haan is expanding its
Dress Air and handbag lines. Hurley is building on the strength of its
iconic board short. NIKE Bauer Hockey is #1 in sticks and is launching
the much-anticipated Vapor 40 skate.
Coming up, you'll see the first generation of NIKE Sport Essentials
apparel hit retail April 2nd. New generations of NIKE Pro apparel
along with Shox, Free, and Considered footwear. For Back to School an
innovative collection of low-profile, high-performance Zoom Air
Footwear and lots of surprises throughout the year ahead as we ramp up
to the Summer Olympics in Beijing. That's just a small glimpse of what
we're doing.
Our revenue numbers tell us consumers are excited about the brand. Our
Futures numbers tell us that retailers are, too. Q3 Futures are up 9%,
the third consecutive quarter that constant-dollar Futures have
increased. But, to steal a line from Don, we don't want just any
growth. We want the good kind-the profitable, sustainable kind. We
continue to optimize every corner of the business, and leverage our
costs across the portfolio. That drives the good growth we're looking
for diluted EPS is up 10% at $1.37 Gross margin is up 60 basis points
over last Q3 at 44.2% and Inventory grew at a pace lower than both
revenue and Futures.
Shortly before our Investor Meeting in February, I attended the World
Economic Forum in Davos. I came away more impressed with how well NIKE
is positioned to grow in the changing global economy. Specifically,
power continues to shift to consumers. They demand more from brands
today. They expect a company to share their values and to provide
experiences that go beyond the product. I think NIKE has a huge head
start. Connecting with consumers is something we do intuitively. It's
what allows us to create and deliver the premium consumer experience
that really sets NIKE apart from the rest of the industry.
Finally, a word on retail and that word is change. Consumers want a
more compelling and relevant experience wherever and whenever they shop
in the mall, on the high streets of the world, or on-line. We're going
to give it to them. We're grabbing the opportunity to lead working
with our retail partners to take NIKE and our industry someplace new,
where consumers have experiences that are physical and digital and
mobile. When a consumer has a NIKE experience, there will be no doubt
that it reflects and inspires the way they live their lives. I won't
get into specific dates or executions, but you can expect to see some
of these new NIKE concepts at retail this calendar year.
You know our vision, $23B in revenue by FY '11. We stated that six
weeks ago. So far, so good.
Our new category alignment is already creating deeper, more focused
connections with consumers. We're bringing those insights into the
product creation process and that will extend our leadership role as
the most relevant and innovative company in the industry. With that
I'll turn it over to Don.
Don Blair: Thank you Mark. Overall, we're pleased with our financial
results for the third quarter. We delivered good revenue and earnings
per share growth, our futures growth accelerated and our inventory
position continued to improve. With three quarters of the year in the
books, we believe we're well positioned to deliver strong growth in
revenue and earnings per share for the full year.
Reported revenues for the quarter grew 9%, 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 6%. On a constant currency basis,
Footwear increased 4%, Apparel was up 5% and Equipment grew 9% versus
the prior year. In addition, reported revenue from our Other
businesses grew 15% and contributed 2 points to our overall revenue
growth. Futures orders scheduled for delivery from March through July
2007 grew 9% versus the prior year, with the growth concentrated in the
back half of the futures window driven by strong growth for the fall
season. Excluding the impact of currency changes, Futures orders were
up 8%. Consolidated gross margins for the quarter increased 60 basis
points over last year's third quarter, continuing the trend of
sequential improvement in our quarterly comparisons. Changes in
currency exchange rates added about 30 basis points to consolidated
gross margins for the quarter.
SG&A increased 14% for the quarter. Excluding the effects of currency
changes and stock option expenses, SG&A increased 10% driven in part by
investments against our strategic growth priorities.
Earnings per share for the third quarter increased 10%, as growth in
revenues and gross margins, combined with a lower tax rate and share
count, more than offset investments in SG&A. Excluding the change in
accounting for stock options, diluted EPS would have increased 16%.
In the first three quarters of fiscal 2007 we delivered $716M of Free
Cash Flow from Operations and paid out $250M in dividends. Year-to-
date we've repurchased over 8.4 million shares of NIKE stock at a cost
of $694M. For the twelve months ended February 2007, our Return on
Invested Capital or ROIC was 21%. Stock option expenses reduced our
ROIC by just over one percentage point. 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 15% for the quarter, with nine 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 advanced 4% for the quarter, due primarily to
strength in emerging markets and Northern Europe, partially offset by
weakness in the UK and France. For the quarter, Apparel revenues grew
10% and Equipment revenues grew 9%. Futures orders for Footwear and
Apparel grew 7% in constant currency, a significant acceleration versus
recent quarters and an early indicator that the strategies we've
discussed on previous calls are now taking hold. Third quarter pretax
income for Europe grew 18% to $247M, reflecting leverage from lower
demand creation spending as well as stronger European currencies. We
expect the profit picture in Europe to continue to improve in the
fourth quarter as demand creation declines from the prior year's world
cup levels and operating overhead growth eases.
In the Asia Pacific Region, revenues increased 11% in the third quarter,
driven by strong growth across all business units; currency changes
contributed 3% of that growth. While most countries in the region
reported double-digit sales growth on a currency neutral basis, China
was again the primary driver of the region's revenue growth as we
continue to expand both the number of doors selling NIKE product and
sales through existing doors. This was partially offset by lower sales
in Japan, where currency neutral revenues were down 3%. Despite
sustained softness in revenue, we are seeing some positive signs in our
Japanese business - higher gross margins, improving sell through at
retail and improving futures order trends. As you know, we always
loathe to call a turn, but we remain cautiously optimistic about the
outlook for Japan. For the quarter, Asia Pacific pretax income grew 6%
to $126M as revenue growth and better gross margins more than offset
SG&A investments in China, Korea and Japan.
The Americas Region reported 5% revenue growth in the third quarter,
with virtually no impact from currency changes. Double digit growth in
most markets in the region offset softer results in Brazil. In the
third quarter, pretax income grew 6% to $41M, driven primarily by
higher revenues and improved gross margins, partially offset by mid-
single digit growth in SG&A expenses.
That brings us to the USA, which delivered modest growth in Q3 against
a very strong quarter last year. Revenues grew 2% for the quarter as
softness in some mall-based accounts partially offset solid growth in
sporting goods and regional accounts. Sales at NIKE-owned Retail
stores in the USA grew 9% for the quarter and comp store sales at
NIKEtown stores increased 2%. Futures orders scheduled for delivery
from March through July 2007 increased 8% over the prior year.
Our US Footwear business grew 2% in the third quarter, lapping 18%
growth in last year's third quarter. This year's increase reflected
mid-single digit growth in units and a lower average price per pair,
driven by changes in product mix. In the US we continue to gain share,
driven by strong growth of Performance Running products including NIKE
Plus, and Sport Culture products including both urban basketball and
lifestyle models.
Apparel sales in the US grew 1% for the quarter, driven by double digit
growth in NIKE branded Performance and Team Apparel, partially offset
by softer revenue from at-once Apparel. The rebound in US Equipment
continued as third quarter revenues rose 11%, driven by new sock
offerings for spring.
For the quarter, pretax income for the US Region declined 2% as the
growth in revenue was offset by lower gross margins and mid-single
digit increases in SG&A.
For the third quarter, revenues from our Other businesses grew 15% to
$523M. NIKE Golf led the way, as strong consumer response to new
product introductions drove revenue growth of more than 25%. Revenues
at Converse, Hurley and Exeter also grew over 20%.
Third quarter pretax income for the Other businesses grew 53% versus
the prior year quarter, reflecting higher revenues and improved gross
margins.
Earlier this month, we announced a program to replace some Sumo Squared
drivers to ensure compliance with NIKE design specifications. We
expect this program to have only a short-term impact on NIKE Golf
results.
Consolidated SG&A spending for NIKE, Inc. grew 14%. Currency changes
and stock option expense each contributed 2 points of SG&A growth for
the quarter. Excluding the impact of currency changes, third quarter
Demand Creation grew 6%, driven by advertising campaigns behind Force
Basketball, NIKE+ and Just Do It in the Asia Pacific Region. Operating
overhead for the quarter increased 18%, with 4 points of growth due to
the change in accounting for stock option expenses and 3 points due to
currency changes. Key drivers of the balance of the increase were
investments in growth drivers such as emerging markets, non-NIKE brands
and owned retail, as well as normal wage inflation and performance
based compensation.
In the third quarter, other income totaled $10M due mostly to a gain on
the sale of our Oregon footwear distribution center, partially offset
by foreign currency hedge losses. The combination of foreign currency
hedge losses and the favorable translation of foreign currency-
denominated profits from our international regions increased year-over-
year pretax income by about $9M for the quarter. Our effective tax
rate for the third quarter was 32.3%, an improvement of 3.4 points
versus the prior year. The lower tax rate was due largely to the
European tax agreement that was finalized in the second quarter of
fiscal 2007 as well as the retroactive reinstatement of the U.S.
research and development tax credit, signed into law in December 2006.
As I noted earlier, we continue to generate excellent cash flow and
return a significant amount of that cash to our shareholders. So far
this fiscal year, we've paid out $955M to our shareholders in the form
of dividends and share repurchases. Even so, our balance of cash and
short-term investments totaled $2.3 billion as of February 28th, nearly
$9 per diluted share on a gross basis and nearly $7 per diluted share,
net of debt.
One of the key drivers of cash flow and returns on capital is inventory
management. As promised, our inventory growth continued to slow in Q3.
As of February 28th, worldwide inventories were 7% higher than a year
ago and up only 4% on a currency neutral basis; both of these growth
rates were about two points below the comparable revenue growth rate.
While we have made great progress reducing the rate of inventory growth,
we intend to continue this focus through the rest of the year to ensure
inventories are clean heading into fiscal 2008.
As of February 28th, accounts receivable were 8% higher than the prior
year; this marks the 6th consecutive quarter in which accounts
receivable have grown at or below the rate of revenue growth.
Our financial outlook for the fourth quarter of fiscal 2007 remains
essentially unchanged. Assuming stable exchange rates, we expect top
line growth at a high-single digit rate for the fourth quarter and
fiscal year.
For the fourth quarter and the fiscal year, we expect gross margin to
be at or slightly below the prior year. The fourth quarter estimate is
a bit lower than we expected 90 days ago, primarily due to faster
movement of close-out inventories. The customer response to our Fall
product lines has been very strong and we're focused on ensuring that
our supply chain is positioned to deliver to demand and that our in-
line channels are prepared to deliver full margin sell-through of fresh
product. We do expect to see the benefit in subsequent quarters, as
gross margins return to year-on-year growth in the first quarter of
fiscal 2008.
We expect SG&A expense for the fourth quarter to be flat to up slightly
as we anniversary last year's World Cup spending and growth in
operating overhead eases.
Stock option expense for the fourth quarter should be about 7 cents per
diluted share. Excluding charges for expensing stock options, we
expect to grow fiscal 2007 SG&A at or slightly less than the rate of
revenue growth, driven by operating overhead leverage.
Interest income should continue at levels similar to the first three
quarters of fiscal 2007.
As you know, we do not normally give guidance for Other Income and
Expense, since this line of the P&L is usually volatile and has been
particularly so this year. Based on what we can foresee now, we expect
10 to 15 million dollars of other expense in the fourth quarter, as
continued weakness in the dollar drives foreign currency hedge losses.
As in previous quarters, these hedge losses will be largely offset by
currency translation benefits across other lines of our P&L.
We expect our effective tax rate in the fourth quarter to be about
33.6%, bringing us to a full year rate roughly on par with our third
quarter rate.
As we usually do at this time, we are now developing plans for our next
fiscal year. You are of course familiar with our long term financial
goals of high single digit revenue growth and mid-teens growth in
earnings per share. To achieve these goals, we'll continue to manage
every line of our P&L and leverage our balance sheet as appropriate.
At this point we expect more consistent earnings growth from quarter to
quarter than in fiscal 2007.
For the first quarter of fiscal 2008, we expect to deliver high single
digit revenue growth and some improvement in gross margins. SG&A
should grow at or slightly below the rate of revenue growth and our tax
rate will most likely be below the rate of the first quarter of fiscal
2007.
In summary, we continue to drive toward achievement of our financial
goals for fiscal 2007 and are confident we'll deliver profitable growth
again in fiscal 2008. With that, we'd be happy to take your questions.
Operator: Thank you. The question-and-answer session will be
conducted electronically. If you wish to signal for a question, you
may do so by pressing the star key followed by the digit one on your
touch-tone phone. Again, that is star - one on your touch-tone phone
to signal for any questions. And if you are using a speakerphone,
please make sure that your mute function is turned off to allow your
signals to reach our equipment. Again, star - one for any questions
and we'll pause momentarily.
Our first question will come from Robby Ohmes with Banc of America.
Robby Ohmes: Thank you. Hi, everybody. Nice quarter. Just a couple
of really quick questions. First, I was hoping we could get a little
more detail on Europe. And in what - how much is it turning, just the
overall environment out there: footwear versus apparel, technical
product versus lower price point, non technical product, you know, just
more detail would be terrific.
And then, the other question I had was just a little more on the retail
side. When we were out at your investor day, you talked about
partnering with key people in the U.S. on presentation and then
Footlocker was at our conference last week. And they mentioned that
they were going to be doing some special things with you guys, if you
could comment on that that would be terrific as well. Thanks.
Charlie Denson: Robby, this is Charlie. I'll take the Europe piece,
first. And then we'll talk a little bit, I may ask you to repeat the
second part of that question, just to make sure I'm clear on what you
want to know and what I'm going to tell you.
But for Europe, you talked a little bit about the technical versus non
technical and we're obviously very excited about the numbers that we're
releasing here against the European futures picture. Like Don said in
his prepared remarks, we're not ready to announce a complete turnaround,
but we're very optimistic about what we've done to date, and the
quality of the business and where the brand sits.
And so, I think, with that, you know, when you break down Western
Europe versus Central Europe, Central Europe continues to be a great
growth engine for us. Our Northern European business is very strong,
and we're seeing some good growth out of Italy, Spain and Germany as
well.
The U.K. and France, as Don stated, is still a little bit of a struggle,
but a lot of the indicators are starting to point in the right
direction. And we're looking forward to those results over the next
six months. So that would be my, I guess, overall summary for Europe.
Robby Ohmes: And just sorry, just quickly on Europe, so beyond what
you guys are doing, do you feel that there's an environment change
going on over there, the beginnings of an environment change in some of
the tougher markets like the U.K.
Charlie Denson: Yes, I think that there's certainly still the interest
in sport, and the interest in the product and what we're doing. We
haven't lost any momentum from a brand perspective. We're still
putting a lot of product into the marketplace. It's just, you know,
some of the promotional activity is starting to subside. And the
health of the marketplace is starting to come back. So I - like I said,
I'm reluctant to announce a turnaround, but I feel good about the
directional arrows.
Robby Ohmes: That sounds great. And then the question, because I
probably should be super clear on this, the question was, you know,
your retail strategy, I think, what you brought up on investor day was
two fold, one was doing your own stores, and one was doing more things
with key retail partners. And if you could give us a little more
detail on the - what you're doing with key retail partners. And I had
mentioned Footlocker, because they had mentioned at our conference that
they were expecting to do some potential presentation things with you
guys, I believe on the footwear side, you know, relatively soon, you
know, certainly this year, and I think, for back to school. And if you
could give us any more on that, that would be great.
Charlie Denson: Yes, I mean we're currently working on plans with
several of our major retail partners. And I'm not going to go into any
specifics yet, because I want to kind of keep my powder dry here. But
I will say this: that I'm very optimistic and I'm very excited about
some of the things that we are talking about. And I know that the
partnership groups that we're working with have been very excited, and
embrace the discussion, with as much energy and excitement as we have.
So I'm going to hold steady for now, and as some of these plans come
into focus, we'll be out talking about them.
Mark Parker: Yes, I'll just jump in and add that our strategy in terms
of the marketplace is to segment or differentiate our key retailers
more effectively. And a lot of that will, actually, fall inline with
what we're doing with the category based organizations. So we want to
go deeper and be more compelling and more relevant with our category
based presentations. And I think you'll see that be a more effective
tool for us to differentiate our retail partners. And that will drive
some of the concepts that you'll see later in this calendar year.
Robby Ohmes: Terrific. Thanks a lot, guys.
Charlie Denson: Thanks, Robby.
Operator: And our next question will come from Jeff Edelman with UBS.
Jeff Edelman: Two questions. One, Charlie, I've been visiting a lot
of retailers here in Europe, this week and it appears as if the trend
towards athletics seems to be or let's say the performance seems to be
picking up a little more than, I guess, all of us would have thought.
Is this what we're seeing in your waters? And is this something which
has some staying power? And I also got the sense that the average
selling price is also starting to lift.
Charlie Denson: Yes, Jeff, I would agree with your comments and your
observations. We're starting to see a lift in some of the performance
product, overall, and I think that's encouraging to us. With that -
along with that, we've actually made some significant progress in the
low profile area that we talked about for the past year-and-a-half.
And so that part of the business is up considerably year-on-year, and
we're pretty excited about that. But I would agree that we are
starting to see a little bit more emphasis on the true performance
product.
Jeff Edelman: OK. Great. And then shifting back to the U.S. if we
think a little bit about the increase in sales vis-a-vis the orders,
and what you talked about in terms of gross margin for the upcoming
quarter in terms of increased close out inventory is this channel
specific? Is it trying to get something more in balance? Could you
give us a little more insight there, please?
Charlie Denson: Yes, I think it's not channel specific because, you
know, we're really not - we don't spend a lot of time and efforts
around segmenting the business across the channels, maybe as much as we
used to five or six years ago. But what I would say is that we feel
very confident about both our inventory positions, especially in
footwear, as well as our inventory positions at all of our major retail
partners. And I think with the numbers that we're releasing today,
going into fall, we feel like right now there's an opportunity to take
advantage of the marketplace for early summer. And make sure we're
very clean and we're very healthy going into what we think is one of
our best product lines ever for next fall.
Jeff Edelman: OK. And then, just a quick follow up. Is the closeout
inventory more than it was last year, same, less or what have you?
Don Blair: Jeff, we don't - we're not in a problem position with close
out inventory here. As Charlie said, what we're really trying to do is
make sure we've got clean channels and clean inventory on our books.
And really, it's a question of how fast we move through it. So we're
really trying to make sure we've got good turns in the fourth quarter,
and we're ready to go for fall.
Jeff Edelman: Great, thank you.
Operator: And our next question will come from Bob Drbul with Lehman
Brothers.
Bob Drbul: Hi, good morning. The question that I have is for Don, can
you talk a little bit more, quantify the impacts on the overhead and
the factors that you talked about, just like what were the biggest ones,
and maybe just put a little numbers around some of those factors on the
overhead increase this quarter?
Don Blair: Well I would rather not have to do a reconciliation here
but if you want to talk about major elements of this, certainly the
currency and the options are two very large pieces of the equation.
About a third of the balance is investments in some of the growth areas
I spoke to which is emerging markets, our non NIKE brands, and NIKE
retail. Then there's about a third of it that would be some timing
issues. And I'd say the remaining third is more like normal
inflationary aspects of operating overhead. So a way to think about it
is take the currency and the options off the top, and then you've got
three main drivers of the balance.
Bob Drbul: OK. And then, just a quick follow up question. On the
gross margin outlook, are you seeing - I mean can you talk a little bit
about the trends around labor pressure, and wage pressure in China, and
is that at all changing for you guys on the outlook?
Don Blair: We are continuing to see some headwind out of labor costs
in Asia. We are certainly seeing the pressure of oil ease. And the
major headwinds would be labor and currency exchange rates in Asia and
balancing against that are some of the initiatives that we talked about
at the investor day; which is things like lean manufacturing, raw
material consolidation. So, you know, if we look at what we saw in the
third quarter, and what we expect to see going forward it's very
similar to what we discussed in the investor meeting. We've got some
continued headwind, but we've got some things that are - some arrows in
the quiver that we continue to push. And that way we want to come out
in the right spot.
Bob Drbul: Thank you.
Operator: Our next question comes from Omar Saad with Credit Suisse.
Omar Saad: Thank you. I wanted to ask, it looks like you've kind of
slowed down the share repurchase here, a little bit, this past quarter,
and the cash is building a little bit more. Given that context, I
wanted to see if we got any update on your strategies for the cash.
Don Blair: There really isn't a significant change in the strategy.
As we've always said, we have a balanced approach to this. We want to
make sure we invest appropriately in our existing business to drive
growth. We want to make sure that we are opportunistic around good
acquisitions, should they appear on the horizon. And we're going to
return cash to shareholders in a planned filled way on both dividends
and repurchase.
On the repurchase side, we run a valuation grid and we have a target on
how much cash we're going to deploy and usually execute that in concert
with market conditions. And, you know, that's really what drives our
share buyback.
So I think, as we said at the last investor meeting, we think over the
next couple of years you'll see consistent growth in dividends. You'll
see growth in share buyback. You'll see investment in our existing
business, and so it's really a balanced approach to how we use the cash.
Omar Saad: OK. And if we could get a quick update on the realignment,
kind of where you are in that process, I know something you've been
working on for a while. It sounds like you're making a lot of progress,
you know, in terms of the investments and a lot of the changes, and how
things are going with that.
Mark Parker: You're talking about the category alignment, right?
Omar Saad: Absolutely, yes.
Charlie Denson: Yes, I'll jump in there. I think, actually, we made
some very, very good progress. The last couple of weeks, we spent time
going through it. We've got leadership teams in place. We've got -
we've been going through the first runs at the full year category
strategies. And we're aligning the company both from a supply chain
standpoint, and a retail standpoint, to embrace this change.
So the progress - I'm very pleased with the progress to date, and I'm
really looking forward, you know, to the next 12 months as we start to
see some of this alignment work its way into the way we're actually
coming to market both from a product standpoint, a marketing standpoint,
and a retail brand retail presentation standpoint.
Omar Saad: Should we expect to see anything come running through the
P&L as you go through this process? And as we think about how we model
the expense side of the equation?
Don Blair: No. I think, Omar, we look at this over a longer timeframe.
And essentially, what we're doing is running the model on the P&L based
on all of the levers in the P&L. And I think, in that context, I
wouldn't expect this to materially change our financial model.
Omar Saad: Great, thanks.
Operator: John Shanley with Susquehanna Financial.
John Shanley: Thank you and good afternoon guys.
Mark Parker: Hi, John.
Charlie Denson: Hi, John.
John Shanley: Charlie, the company's difficulties in the U.K. and
France have been going on for some time. I wonder if you can comment
in terms of what seems to be the central issue in terms of the
difficulties in that market, and why you feel optimistic that the
situation is going to turnaround in the next six months or so.
Charlie Denson: Well I think, I mean a lot of the things that we've
been talking about is the - you know, the overall brand presentation,
the promotional nature of the marketplace, and what's been going on.
It's -- obviously it's a little bit tougher to implement change there,
as it is in the United States. And so we have a new distribution
policy in place today. It's taken longer to get that implemented than
maybe it would have taken in some other markets around the world, so I
think that's challenging, but it is starting to take effect. And I
think, if you do spend some time in the U.K. marketplace over the next
couple of months, you'll actually start to see some of the effects of
that change in place.
I think, the other thing is when I think about France, we had a - we
have a significant amount of business at Decathlon and, you know, we
made some changes there. And I think that when we look out over the
horizon, that business is now in a position to start to grow at a much
healthier rate, in a much healthier way. And so those two things I
would, you know, add to the mix.
And then, I think, the third piece which is, again, cautious optimism,
is the role that Foot Locker may play in both those countries, and
their opportunities for growth whether it's in the U.K., France, or
across Western Europe. Definitely an important account for us, you
know, that runs across the Western European landscape.
And then, I guess the final piece that we started to put in place is
the strategy with JJB specifically, where we got shop and shop concepts
going in. I believe we have 15 of them in place now, and we would like
to see as many of those shops in place over the next six to 12 months
John Shanley: It sounds very exciting. Is the U.K. and France still
your two largest markets or largest components of the EMEA region?
Charlie Denson: Well certainly, the U.K. is number one. France is,
you know, France, Italy and Spain are relatively - they kind of go back
and forth as far as overall size.
Mark Parker: But John, I would note that in aggregate, the emerging
markets are larger than those markets that you just described.
Charlie Denson: Individually.
Mark Parker: Right.
John Shanley: Individually, OK. Turning to the U.S. for a second, the
sales results, footwear and apparel, obviously were a little on the
light side, but the thing I really want to focus in on is the two
percent decline in the operating profit. If you look at the U.S.
business excluding what you indicated was a problem side of the
business, the athletic specialty stores, was it a much different story,
would operating profits have actually been positive? Would sales have
been richer if we were able to exclude the mall based athletic
specialty stores?
Don Blair: Well, John, I think if you look at the overall profit
equation in the U.S. region, at two percent revenue growth and, you
know, we talked a little bit about some of the margin drivers in the
U.S. region. The combination of those two things means that even very
modest growth in SG&A, which is where the U.S. region is running, it is
going to make it difficult to grow the profitability. But we don't
believe that the U.S. is a two percent growth market. You know, we're
convinced that market is going to accelerate over time and the
profitability is going to come with that.
John Shanley: Yes. What I was really trying to get to is to look at
the mall based retail accounts, versus the rest of your U.S. retail
clients. Can you give us some differentiation in terms of what kind of
a negative impact the mall based guys may have had on your business in
the third quarter?
Don Blair: Well, as we said, there was a little bit of softness with
certain mall based customers. That's not across the board. We had
some mall based customers that did well. And we don't really get into
discussing results by specific customers,
John Shanley: No. I'm not looking for individual customers. I'm
looking at channels of distribution, whether there was a substantial
difference, so we can evaluate how well you did in the other segments
of your distribution process.
Charlie Denson: John, this is Charlie. I think, you know, it's no
secret that the mall based athletic specialty guys have had a pretty
tough year. So we, you know, obviously are a big part of their
business. And so I think we've experienced some of that as well.
I think we still have a great relationship. And like I said earlier,
I'm very excited about the things that we're talking about, as they are
as well. And so the good news is everybody is embracing an opportunity
to change and go forward. So that, I'm very excited about.
John Shanley: OK. And then, just summarizing, would you say that it's
fair for us to determine or ascertain that in the future you're likely
to see faster or better growth in the U.S. accounts outside the
regional mall, would that be a fair assessment.
Charlie Denson: Well I wouldn't be as quick to jump to that conclusion.
John Shanley: That's encouraging. So you do think that the mall based
guys could come back.
Charlie Denson: Yes, I think there's a great opportunity for them.
Mark Parker: I'll second that. And I'd say that we're very focused,
as you've heard some of our remarks, on bringing back the health to
that particular channel. And some of the things we have going in terms
of retail differentiation, stronger high level partnerships with some
of those key accounts, we think, will actually help to turn that.
John Shanley: Super. That's great to hear. Thank you very much.
Operator: And our next question will come from Virginia Genereux with
Merrill Lynch.
Virginia Genereux: Thank you. My first question, if I may, is on
other brands. You know, Don, I guess, you talked about Golf, Converse,
Hurley, Exeter were all up in excess of 20 percent and I feel like
they're most of it; was hockey down? So sort of growth, not only the
quarter, which I'm not so concerned about, but how should we think
about the growth rates they have going forward? Which in the portfolio
do you feel like, what is sort of the growth opportunity still there?
And then, secondly, you know, margins they were up, you know, over -
been up over 500 bps year-to-date, but that's still - they still run
below, you know, the NIKE brand, obviously. What are you - can margins
in other brands sort of approach the mother ship levels?
Charlie Denson: Well let me take the granular part of the question,
and then I think Mark can speak to some of the growth opportunities we
see in the other brands. But with respect to the third quarter, the
hockey business was comparing against an Olympic year last year, where
we did quite a few jerseys around the international hockey teams.
And so if you look at the core equipment business year in, year out,
we're having a tremendous year at NIKE Bauer hockey. We've got some
great new products in the skate space. As Mark said, we've taken over
leadership of the stick business which is a very important element of
that hockey equipment business. So we feel great about where NIKE
Bauer hockey is going right now from a business standpoint.
Obviously, there are some businesses of different sizes in that
portfolio. You know, the hockey business is relatively small.
Converse, Cole Haan, NIKE Golf, those are the bigger entities in that
pool. And, you know, I think, in terms of the margin opportunity,
these businesses are all significantly smaller scale than the mother
ship. And so as they grow, and as we turn those businesses, we are
seeing improvements in profitability. Where that ultimately lands, I
can't necessarily give you a destination. We think there's a lot of
profitability expansion in those businesses for quite a while yet.
Mark Parker: Yes, and I'll just simply add, you know, as we said at
the investor meeting, that 25 percent of our growth over this next
three to four years will be coming from the affiliates or the
subsidiaries. And we definitely feel very confident that that will be
the case. Led, as Don said, by NIKE Golf and Cole Haan and Converse,
really are the bigger drivers of the portfolio from a subsidiary
standpoint.
And we're just starting, really to leverage, I think some of the
competencies, some of the sort of functional excellence, and systems
and what not from NIKE in through our subsidiaries. And we think
that's going to give us some good upside there.
And then, I think, I'd point out too that I think that the focus on key
product opportunities, at what we've talked about with the NIKE brand,
and then stronger management within the leadership subsidiaries is also
driving some of that confidence in that part of our portfolio.
I just spent some time, recently, back in New York with the Cole Haan
team and came away more confident too in the potential that brand
represents in the portfolio. And it's very obvious to see what
Converse is doing, really impressive performance this year, with we
think, lots more potential, both in the sports culture side of their
business and more so, even moving forward, too, in performance and
international will be a bigger part of their business as well. So
again, our confidence is quite strong with that part of our portfolio.
Virginia Genereux: Thank you, Mark. And if I could follow up, maybe
Mark and Charlie, you gave us some great geographic color. Charlie,
you said you were very excited. You thought you had some of the best
line up of product for fall. You whipped some of that off, Mark. But
if you guys can just go through again, you know, what do you think is
driving the strength for all, you know, in the way of - and where are
you in those various platforms? Thank you.
Mark Parker: OK. I'll try to keep this short.
Virginia Genereux: Yes, I'm sorry.
Mark Parker: No, actually, my confidence in the product side of the
equation here, which for me is ultimately the most important thing we
do in terms of effecting top line growth, and again, the consumer
connection, we're as strong now as we ever have been.
That being said, I think there's a real renewed sort of energy and
focus around product that's driven in part, by this more intense focus
on the - at the category level. So I think you'll see product
offerings getting even that much stronger from NIKE in the seasons
ahead, just as a general comment.
You know, specifically, I mentioned, you know, we have - on some of
these calls I talked about complete offense. And, you know, it's
across categories. It's across geographies. It's up and down price
points. It's across the genders. And really our strength is that we
have a diversified portfolio in a complete offense sense, that allows
us to sort of push and pull the levers that really are most relevant at
the time.
So more recently we've seen some tremendous success. We've been a
little late to the party, as we said before, in the low profile metro
area in terms of sport culture. The urban part of that business is
also very vibrant, beyond what you're seeing with the Air Force One
success. There's a much stronger product and more complete product
offering in both metro and urban part of sport culture, and that's
resonating around the world. So we feel very good about that.
A very, very big focus on performance, the performance side of our
business, both in footwear and apparel. And I think, you'll see in the
months ahead, I mentioned some of the concepts that will be coming to
market here.
For back to school, we have a Zoom Air collection of performance low
profile product, which is a great combination of performance and style,
something, I think, will really resonate in the markets for NIKE around
the world. NIKE Pro is - we're in the new generations of NIKE Pro and
again, that's a very strong focus in the international markets as well
as here in the U.S. And we're really looking at a 365 day focus on
that team and training and pro piece of our business, so that's
starting to pick up even more.
Shox, Next Generation, some things I can't talk about there, that are
actually very exciting in the Shox plus other category. Free - New
Generations of Free. Considered product, which is our sort of
sustainable product is actually getting a lot of great response, that
we see that business accelerating and expanding going forward.
And then we have, I mentioned the sport essentials category of apparel
coming up in early April, April second. And that's just the beginning
of a long term commitment, an ongoing commitment to what we call the
essentials, or the fundamentals, key apparel items, and styles in our
apparel collection. Big, big growth opportunity in apparel.
We just got a recent business review in apparel, and I frankly have
never been as excited and confident in our ability to grow our apparel
business as I am today. And a lot of that is led by the leadership
team that we have is stronger and more connected across the regions,
than we've ever had. And very, very focused on the key growth
opportunities by category, by product type, by country. We're dialing
down and getting much more surgical and focused on where those
opportunities are. And the leadership there is very impressive.
So very bullish on the apparel side of our business as well. Charlie,
you want to...
Charlie Denson: See, you wound him up again.
Virginia Genereux: Yes, he chewed up the scenery there.
Charlie Denson: No I think - I don't - I agree with Mark on the
apparel side. I think we've - this new sports essentials program
that's going into the States, and a little bit in Europe. We've had
first reads out this first week, and early read sell throughs have been
fantastic, and are exceeding our expectations.
So I think that's just the tip of the iceberg and we've got some good
things coming there too.
Virginia Genereux: That's great. Thank you all for the time for
questions.
Pam Catlett: Thank you.
Operator: Our next question comes from Margaret Mager from Goldman
Sachs.
Margaret Mager: Hi. Nice quarter. A couple of questions, though, and
I'd like to focus on the U.S. market, where the orders were up seven
percent last quarter, and the revenues came in up two, and now your
orders are still up eight. Can you talk to those numbers please? And
would we expect the revenues in the U.S. to be once, again, be in the
low to mid single digit range, despite the high single digit orders?
What's the disconnect there?
And if you could also talk about, what's your perspective regarding the
issues in the mall based athletic channel? Why is it soft, and what do
you think is the growth rate for the U.S. market, since you made it
clear, you do not think it's a two percent growth market. So I'd like
to focus on your perspective on the U.S. as number one question.
And then, Don, I'd also like to hear from you, you talked about a more
consistent earnings per share growth rate by quarter going forward. I
just want to make sure I understand that comment, especially in the
context of fiscal '08, as you progress through the four quarters of
that fiscal year, you will start to approach spending for the Beijing
Olympics. Can you talk about the historic lumpiness of demand creation
spending that has always been a big factor in the lumpiness of your
quarterly earnings growth and why would that be changing? Thanks.
Mark Parker: OK. There's a lot in there. There were some timing
elements of the U.S., Margaret, that, you know, I don't think is
something that you should extrapolate. I think, what I would expect to
see is just a more normal level of volatility between futures and
revenue. And as you know, there's really not always a predictable
relationship for any one quarter. It's really - futures are really a
much better indicator of overall strength of the business. So I think,
if you think about it that way, the two percent number in the U.S. we
don't think is representative of the growth trajectory we're on in the
U.S. We think it's kind of a mid to single digit growth rate, mid to
high single digit growth in the U.S. and that's really what I think
will be more indicative of the growth going forward.
I'm going to let Charlie speak to the mall based retailer piece of this.
But just to give you a quick view, '08 is not baked yet. We don't have
all of our plans locked in place. We actually have two items of spend
in fiscal '08 that will affect the very end of the year, that's the
European championships as well as the Beijing Olympics. But at this
stage, we're not ready to give you real specific guidance around
individual quarters, but what we do expect is not to have the level of
growth rate volatility that we have this year.
Charlie Denson: And Margaret, this is Charlie. I'll jump in on the
mall-based, you know, outlook, I think one of the reasons why I think
we have struggled in the mall, as well as the mall environment is,
again, I don't think we've done a good job creating levels of
differentiation or as good a job as we should have or could have done
and certainly as well as we will do.
And I think one of the things that we talked about, I think, during the
day that we had everybody out, was this idea around creating points of
differentiation targeted around specific consumers/categories that we
talked about while you were out here.
And, you know, Mark alluded to it a little bit earlier, and I think Don
may have touched on it a little bit in his prepared remarks. I think
our ability to continue to grow the marketplace in the U.S. really lies
much in the way that we are approaching the new - the new approach to
the business. And if we can continue to differentiate and grow through
this category strategy, which I believe very confidently that we will,
I believe the U.S. marketplace will continue to grow, you know, at the
rates that Don has alluded to over the next several years.
One of the things that you look at when you walk the mall today is a
lot of sea of sameness. And quite frankly, not as sharp of consumer
insights that we need to provide, going into both the product and the
marketing and the merchandising processes that we're focusing on going
forward.
So I've been around this place a long time. I'm as excited about this
new direction that we're taking right now as I've ever been. So, you
know, you're going to hear that from me pretty regularly over the next
16 to 24 months.
Margaret Mager: OK. Thanks. And why did you not buy back more stock
in the quarter? What do you look at to decide how much you will or
will not buy in a quarter?
Don Blair: You know, Margaret, we don't want to get into all of the
models that we use on this thing. But as I've talked about before, we
have a set of targets around how much we want to invest over a period
of time. It's not specifically a fiscal year, and that number evolves
over time. But what we do is we buy according to a perception of both
intrinsic evaluation as well as market conditions.
So if we have a fast run up in the stock, that may mean that our
purchases would slow down until we reassess where we think the market
trading range is, and then we'll reset the grid.
Margaret Mager: OK.
Don Blair: I know that may not give you an exact answer, but that's
generally how we approach it. We're basically looking at it on a value
- - we have an intrinsic value perspective on the stock. We believe that
the company has a lot of value and then we buy based on the perception
of trading range, and value grid.
Margaret Mager: Yes, that's helpful. Thanks. And good going this
quarter. And good luck in the upcoming year.
Mark Parker: Thank you, Margaret.
Pam Catlett: Thank you, Margaret.
Margaret Mager: OK. Take care.
Pam Catlett: We have time for one more question.
Operator: Our final question today will come from Jim Duffy with
Thomas Weisel.
Jim Duffy: Thanks. And thanks for taking my call.
Pam Catlett: Hi, Jim.
Jim Duffy: In Don's prepared remarks, I think there was some mention
of moderation in average selling prices in the U.S. market. Can you
speak to the factors behind that? Is it a channel mix shift, or is
there some fashion element driving that?
Don Blair: It's really a product mix change. And, you know, that's
normal - there's an ebb and flow to average selling price, normally
with seasons but in terms of which, you know, product categories and
which models are selling is what's driving the ASP. This is not an
across the board reduction in price. It's not a change in target price
points; it's really a mix change.
Jim Duffy: Would you expect that mix to continue, mix shift?
Don Blair: At this point, I don't have a perspective out beyond the
futures window.
Jim Duffy: OK. And then, one more question, if I can sneak it in.
Nice improvement on the inventory, as you had advertised. Can you
speak to the geographic specifics of that? Was the improvement
concentrated in one particular geographic market? Or was it more
balanced across all regions?
Don Blair: All of our regions are making great progress on inventory.
And so we saw improvements pretty much across the board.
Jim Duffy: Very good. Well done.
Pam Catlett: Thank you. And thank you everyone for joining us. We
look forward to speaking with you again, soon.
Operator: Thank you everyone for your participation on today's
conference. You may disconnect at this time.
END