UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 18, 2004
NIKE, INC.
(Exact Name of Registrant as Specified in Charter)
Oregon 1-10635 93-0584541
____________ ____________ ____________
(State of (Commission (I.R.S.Employer
Incorporation) File Number) Identification No.)
One Bowerman Drive
Beaverton, Oregon 97005-6453
(Address of Principal Executive Offices)
__________________________
(503) 671-6453
(Registrant's telephone number, including area code)
___________________________
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
The following exhibit is furnished with this Form 8-K:
99. Transcript of earnings release conference call on March 18, 2004
Item 12. Results of Operations and Financial Condition.
On March 18, 2004, NIKE, Inc. held a public telephone call to
discuss its third quarter earnings press release. A copy of the
transcript of the conference call is attached hereto as Exhibit 99.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NIKE, Inc.
(Registrant)
Date: March 19, 2004
/s/ Donald W. Blair
____________________
By: Donald W. Blair
Chief Financial Officer
Exhibit 99
NIKE, Inc.
Fiscal Third Quarter 2004 Results
March 18, 2004
PAMELA CATLETT
Director of Investor Relations
Good afternoon, everyone. We're pleased you're joining us this afternoon
to discuss Nike's fiscal 2004 third quarter results. For those of you who
need to reference our release, you'll find it on our website,
www.nikebiz.com. You'll also find expanded information on the website
about some of the highlights we'll be discussing today. Participants in
today's call are Charlie Denson and Mark Parker, Presidents of the Nike
Brand; and Don Blair, our Chief Financial Officer. Each of today's
participants will provide brief prepared remarks, which will also be
available on our website immediately following the call.
Before I turn it over to Don, let me remind you that on this call we're
going to make forward-looking statements based on our 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 we file with the SEC,
including Forms 8-K and 10-Q. Some forward-looking statements concern
futures orders that are not necessarily indicative of total revenues for
subsequent periods due to cancellations and the mix of futures and at-
once orders, which may vary significantly from quarter to quarter. In
addition, it's important to remember a significant portion of our
business including equipment, most of Nike Retail, Nike Golf, Converse,
Cole Haan, Bauer, and Hurley are not included in these futures numbers.
Finally, during this conference call we may discuss non-GAAP financial
measures. A presentation of comparable GAAP measures and quantitative
reconciliations can also be found at Nike's website. In this call we may
also discuss non-public financial and statistical information, which is
also publicly available on that site, www.nikebiz.com.
Now here's Don.
DONALD W. BLAIR
Vice President and Chief Financial Officer
Thanks, Pam. As you'd expect, we're very excited about the results we've
just reported, which once again illustrate the strength of our portfolio
of global businesses.
STRONG RESULTS
Our revenues grew 21% in the third quarter, including the benefits of
stronger international currencies, the Converse acquisition, and shipment
timing changes in Europe. On a more normalized basis, we estimate our
revenues increased about 6% in this year's third quarter. Diluted
earnings per share for the quarter grew 57% versus the prior year,
bringing year-to-date diluted earnings per share growth to 29% before
last year's accounting change.
- The U.S. Region continued to strengthen, as all three of our product
business units posted revenue growth for the first time in seven
quarters and the region continued to deliver expanded year-over-year
pretax profit margins.
- In Europe, our third quarter revenues grew 36% and our pretax
profits more than doubled. As we've discussed on earlier calls,
these results benefited from the weaker dollar and timing changes
related to last year's systems implementation and changes to this
year's spring footwear selling season. Even excluding these factors,
we estimate that Europe posted low single- digit revenue growth and
delivered expanded pretax profit margins for the quarter.
- In the Asia and Americas Regions, revenues advanced at a double-
digit clip, even excluding the favorable impact of currency.
Revenues in our other businesses grew over 60%. Without Converse,
these businesses still grew 30%.
Our consolidated gross margin for the quarter was 42.1%, up 140 basis
points versus the third quarter of fiscal 2003. On a net basis, foreign
currency movements accounted for about 50 basis points of the
improvement. Higher margins from Nike Retail, wholesale close-outs, and
inline products accounted for the remainder of the increase.
As we've discussed before, we believe that the visibility provided by our
new supply chain systems and increased management focus will enable us to
improve gross margins by reducing overall supply chain costs. One area
where we've begun to make tangible progress is in reducing customer
claims and charge-backs, particularly in the U.S. Region. So far this
year, we estimate that these efforts have added over $15 million to our
bottom line. We believe that there are more such opportunities to be
identified and harvested, both in the U.S. and around the world.
As proud as we are of our revenue and profit performance, we're equally
pleased by the strength of our balance sheet. Our regional teams continue
to do a great job managing accounts receivable and inventory, as our
overall days sales outstanding and days in inventory measures both
improved significantly. As a result, we've generated strong cash flow
growth this year and increased our return on invested capital to 21%.
Let's get behind some of those numbers.
REGIONAL OVERVIEW
This quarter, our international regions continued to drive our growth,
delivering a 31% increase in revenue and a 54% increase in pretax income.
European Region
In our European Region, which includes the Middle East and Africa,
revenues grew 36% with about 21 points of growth coming from stronger
currencies. As we've discussed in the past, we estimate that about $66
million of revenue, primarily footwear, moved from the third quarter to
the second quarter last year. In addition, our spring footwear selling
season began in January this year versus February in 2003. As a result,
we estimate that we've moved about $26 million of revenue from Q4 to Q3
this year. If we remove the effects of currency and shipment timing, we
estimate that revenue would have advanced about 1% in this year's third
quarter.
For the quarter, footwear revenues advanced 48%, reflecting a currency
benefit of 23 percentage points and the shifts in product flow discussed
above. We estimate that excluding all of these factors, footwear revenue
would have increased about 3% for the quarter. Apparel grew 19% for the
quarter and equipment advanced 34%.
Gross margins in Europe expanded by 200 basis points versus the prior
year and accounted for 60 basis points of our consolidated margin
improvement. Stronger currency was a key factor, driving 160 basis points
of the improvement in Europe. A lower proportion of closeout sales versus
the prior year drove the balance of the improvement. Pretax income for
Europe more than doubled in the quarter to $173 million. As in the past,
our segment disclosure of regional pretax income is currently available
on our website.
Asia Pacific
In the Asia Pacific Region, our business continued to grow strongly in
the third quarter. Revenues increased 21% for the quarter, with about 10
points of the increase coming from stronger currencies in the region.
For the quarter, footwear revenues advanced 15%, apparel revenues grew
30%, and equipment revenues rose 26%. Although revenues advanced in most
countries in the region, Japan and China were key growth drivers, posting
revenue growth of 27% and 71%, respectively.
For the quarter, Asia Pacific gross margins increased 30 basis points
versus the prior year, resulting in a minimal impact on the gross margin
improvement for Nike, Inc. Currency movements added about 80 basis points
to gross margins, but this was more than offset by lower profitability of
close-outs. Pretax income for the Asia Pacific Region grew 8% in the
quarter, as investments in demand creation and supply chain systems
implementation drove higher SG&A.
The Americas
In the Americas Region, revenues grew 26% for the quarter, with about 11
points of the increase coming from currency effects in the region.
For the quarter, footwear revenues grew 29%, apparel revenues advanced
21%, and equipment revenues were 15% higher. Every country in the region
posted higher revenues, even excluding currency impacts.
For the quarter, gross margins in the Americas Region fell five full
points year over year, reducing the consolidated Nike gross margin by 20
basis points. Currency movements were the largest factor, as less
favorable exchange rates in Mexico, Brazil, and Argentina more than
offset the stronger Canadian dollar. Higher distribution costs and lower
inline and closeout profitability also reduced gross margins in the
region. Third quarter pretax income for the Americas Region fell $2
million to $16 million.
USA
Our U.S. Region continued to post positive results as revenue for the
third quarter advanced 4% over the prior year while pretax income grew
13%. Year to date, pretax income is up 9% on a 2% increase in revenue.
In the U.S. Region, gross margins for the quarter were up 180 basis
points versus the third quarter of fiscal 2003, driving a 70-basis-point
improvement in Nike Inc.'s consolidated gross margin. Wholesale gross
margins grew for all three product business units as a result of higher
inline and close-out margins and lower supply chain costs. Retail gross
margins also expanded. SG&A spending for the region grew about 5%.
Despite a 25% decline in sales to Footstar, U.S. footwear sales increased
1% in the quarter, driven by a 4% increase in average price per pair.
U.S. apparel revenues rose 7% in the quarter, as continued growth in
sports performance product more than offset lower sales of active life
apparel. Licensed apparel sales were flat in the quarter. U.S. equipment
sales increased 13% for the third quarter, led by higher sales of socks
as well as basketballs and baseball equipment.
Reflecting the continued strength of the Nike brand, comparable store
sales for Nike-owned retail operations in the U.S. grew 1% for the
quarter, led by 8% sales growth at Niketown stores and double-digit comp-
store growth at our two Goddess stores.
OTHER BUSINESSES
Revenues from our Other businesses grew 68% for the quarter, with 39
percentage points of the increase due to the acquisition of Converse.
Revenues for Nike Golf, Cole Haan, Bauer Nike Hockey, and Hurley each
grew about 30%. For the quarter, our Other businesses reported $3 million
of pretax income versus a loss of $13 million last year. Better bottom-
line results at Nike Golf and Cole Haan and the addition of Converse
added profitability for the quarter. These gains were partially offset by
the timing of demand creation at Bauer Nike Hockey and losses related to
a small skate subsidiary to be wound down over the next few months.
FINANCIAL HIGHLIGHTS
Income Statement
Consolidated SG&A spending grew 18% in the third quarter. About eight
percentage points of the increase was due to changes in exchange rates
and the acquisition of Converse. For the quarter, demand creation
spending increased 14% to $308 million. Changes in currency exchange
rates and the addition of Converse accounted for over eight points of the
growth. Increased account marketing and endorsement expenses in the U.S.
as well as investments in our "Speed" initiative in Asia were key drivers
of the remaining growth.
In the third quarter, operating overhead increased 20% to $584 million.
Changes in currency exchange rates and the addition of Converse accounted
for about nine percentage points of the growth. Increased accruals for
incentive-based compensation added about five points of growth, while
higher bad debt reserves in the U.S. and Europe accounted for another two
points of operating overhead growth.
Other expense for the quarter totaled $17 million, with about half due to
foreign currency losses, mostly from Europe. These losses were more than
offset by favorable translation of foreign currency denominated profits
reported by our international regions. For the third quarter, the effect
of netting these foreign currency losses and the favorable translation of
foreign currency denominated profits was an additional $41 million of
pretax income or about $.10 per diluted share. Our effective tax rate for
the quarter was 34.8%, our current estimate for the full-year rate.
Balance Sheet
As of February 29th, worldwide inventories were 10% or $148 million
higher than a year ago. The change was almost entirely due to the
acquisition of Converse, which accounted for $45 million of the increase;
and changes in currency exchange rates, which accounted for another $98
million of growth. Excluding changes in currency exchange rates,
inventories grew 1% in Europe and 5% in Asia. Inventory in the U.S. fell
6%.
At the end of the third quarter, accounts receivable were $82 million or
about 4% higher than the prior year. Stronger foreign currencies
accounted for $132 million of growth, and the acquisition of Converse
added $55 million to the quarter-end balance. Without these factors,
accounts receivable would have declined about 5%.
Year to date, we've generated $971 million of cash flow from operations
and used $463 million of cash in investing activities, including the
acquisition of Converse. Cash used by financing activities totaled $230
million, including $126 million in dividends and $241 million of share
repurchases.
EARNINGS PROJECTIONS
At this point we believe we're positioned for another good earnings
report in the fourth quarter.
Revenue
Let's begin with the revenue outlook. Today we reported a 10% increase in
futures orders for the next 5 months, in line with the figures we
reported last quarter. Third quarter revenue growth was unusually high
due to the timing of shipments in the prior year and seasonal changes
this year. Since these timing issues are largely behind us, we expect
revenue growth for the fourth quarter will be much more in line with our
futures direction.
Margin Expansion
We do not expect to see SG&A leverage in the fourth quarter, as we begin
marketing campaigns built around this summer's global sporting events:
the Tour de France, the European Football Championships, and the Summer
Olympics in Athens. However, we do expect to continue to expand our
pretax profit margins versus the prior year as improvements in our supply
chain, more profitable close-out management, and foreign exchange
continue to drive better year-over-year gross margins. As we discussed in
the past, our gross margins tend to follow a seasonal pattern, with the
highest gross margins reported for the first and fourth quarters.
Therefore, we expect to see fourth quarter gross margins broadly in line
with the levels of the first quarter of this fiscal year.
Financial Goals
As we began to assemble our plans for fiscal 2005, we returned to our
long-term financial goals: high single-digit revenue growth, expanding
profit margins, and increased capital productivity and cash flow.
Assuming a stable foreign exchange environment, we believe we can grow
worldwide revenues in the mid- to high-single digits. Better foreign
exchange hedge rates will enable us to be more competitive in Europe and
Asia and to grow our overall gross margin. Significant investments in
demand creation will continue as we drive our business behind this
summer's global events and our marketing partnerships with the world's
best athletes and teams. But we'll continue to target operating overhead
leverage by holding the rate of growth below the rate of revenue growth.
Finally, under the assumption of a stable currency environment, we would
expect our hedge losses to decline year on year.
For the first quarter we expect revenue growth will be in the mid-teens,
as this quarter should benefit from a number of factors, including the
acquisition of Converse, favorable exchange rates, and improved momentum
in the U.S. Gross margins should also benefit from better hedged exchange
rates. At the same time, our demand creation spending will be focused on
the first quarter as we invest behind the summer's global events.
Therefore, even with accelerated revenue growth, we do not expect any
appreciable leverage on SG&A expense in the quarter.
IN SUMMARY
We're very pleased with our results so far this year and we feel we're in
a great position to continue to deliver strong profit growth over the
balance of fiscal 2004 and into fiscal 2005. With that, I'll turn the
floor over to President of the Nike Brand, Mark Parker.
MARK PARKER
President, Nike Brand
Thanks, Don. Good afternoon, everyone. About three months ago I told you
that I believed calendar 2004 had the potential to be the most exciting
year in Nike's history. If the results of our past quarter are any
indication, this could be a watershed year for Nike, as we've just posted
the most successful third quarter with respect to revenues and gross
margins in our company's 32-year history.
Clearly we have been reporting solid results over the span of several
quarters because we are better communicating and connecting with our
consumers, delivering innovative products, and creating compelling
marketing to support that product-and operating our company more
efficiently. Innovative products and marketing are not new for Nike;
neither is our goal of running the company more efficiently. Yet our
revenues are strong, our gross margins are trending up, and our average
price per pair is increasing. This validates the proven consumer appetite
for $100-plus performance footwear. We are pleased that the U.S. footwear
industry as a whole is seeing an increase in average price per pair
following Nike's lead. It's more than momentum or the ephemeral hot
streak that can sometimes boost temporarily one brand or another. Those
are the vagaries of business and of changing consumer tastes.
Sustained Achievement
Why is Nike achieving on such a high level over a sustained period of
time? Over the past three years we have continued to fine-tune a
strategic and sustainable business model that clearly works for us. It
works because it's based on a successful diversification of the Nike
business portfolio across multiple brands, geographies, categories, and
distribution channels-and it works because we are even more focused on
our consumer. By patiently and strategically investing in our business
model, we are now capitalizing on improved business operations, economic
conditions, and consumer trends.
How are we further differentiating ourselves as a market leader so we're
in a stronger position to emerge and grow the market? In many ways, all
roads lead to the importance of being consumer focused. That manifests
itself in listening to consumers, creating communications that resonate
with consumers, and designing innovative products that appeal to
consumers. It also means creating a business environment that facilitates
our ability to do all these things more efficiently.
International Authenticity
The emerging economies of Russia, Brazil, India, and China all have a
strong potential impact on the global economy in general, on our
industry, and on Nike more specifically. Our drive and ability to be
authentic and relevant to the unique cultures and tastes of each country
or region will differentiate ourselves in the marketplace as well as
mixing what's relevant in one culture with what resonates in another to
lead the consumer in new directions. Our diversification across
geographies has been a key factor in mitigating the dampening effect of
any one particular country or region in the world.
Nike's international business is now the majority of our Nike brand
portfolio, and Asia is projected to continue to be a significant growth
driver for our brand and business in the coming years. Our focus in Asia
and around the world is not on any one athlete or country, product, or
category. It's more about building a diversified, long-term sustainable
business supported by real brand and product strength.
China is a great example. Nike first entered China more than 20 years
ago, primarily through the factories that manufacture our footwear and
apparel. Over the years we've immersed ourselves in the culture. When we
opened up the first Nike office in China in the 1990s, we better
understood the overall business, sports, and culture of the country. At
the same time, we began to invest on both a local grassroots and broader
business level. For instance, in basketball we started local school
programs and partnered with the men's and women's Chinese national
basketball teams. We hosted events supporting brand initiatives like
"Freestyle" and "Battlegrounds" and tailored these for the Chinese
basketball fan. We carefully grew our basketball business in China by
being connected, insightful, creative, and culturally relevant. We've
applied some of that same strategy successfully to grow other sports and
our business overall. Whether in China, the U.S., or elsewhere, our
success has never been contingent on a single athlete's or team's
endorsement.
I don't have time to detail what we're doing in the other emerging
economies, but I think you get the idea. Perhaps the best description
I've heard for our ability to be a multi-local company came from an
analyst who said, "Nike goes native better than any other company." I
view that as another way to say that Nike is focused and connected to the
consumer, wherever he or she lives, works, or plays.
Footwear Restructure
A more in-depth focus on the consumer was the impetus for restructuring
our footwear organization more than a year ago, which really enabled us
to enhance both our sport performance and our active life product line.
Since that reorganization, as I mentioned earlier, we've seen our gross
margins improve steadily and our average price per pair has been trending
up, with performance sport products leading the way. This trend will
continue to drive profitability for the entire sector. I should also add
that the innovation pipeline from our Advanced R&D groups has never been
as full of compelling new concepts and technologies.
We are now taking what we learned from the footwear restructure and
applying that to our apparel division. We believe that this will make us
even more focused and competitive. For example, our women's apparel
business continues to grow in all regions in both active life and sport
performance products across all channels.
We're accelerating deliveries to meet retail demand following our more
active lifestyle based White Label launch in the U.S. and Japan. We'll be
launching the highly anticipated new Sun Sport and Sun Tech product in
all regions in fiscal quarter four to continue building on brand
excitement at retail.
New Opportunities
Our intensified consumer focus and its impact on our operating business
model will become yet more evident later this summer during the 2004
Olympic Games. As some of you already know, during six of the past seven
Olympic years Nike has outperformed the S&P 500 by an average of 21%.
This was despite historically not having a strong retail product tie-in
to the Games. But in this Olympic year, more than any time in our history
we'll bring Olympic-inspired products to market to capitalize on the
excitement generated by Nike partner athletes and national teams at the
Games. In the months ahead, the Summer Olympics will be just one in a
series of very high-profile international athletic platforms where the
Nike brand will showcase and spotlight product stories.
We're obviously very happy about our sustained performance over the past
few quarters and proud of the hard work and dedication by our employees
and leadership teams that are behind the very positive results. But we
also feel there are many more opportunities ahead to further strengthen
the Nike brand and the broader Nike, Inc. portfolio of brands to continue
to grow the business. The good news is we have a strong and very
competitive leadership group whose depth and versatility make it possible
to attack market opportunities in different ways while maintaining a
flexible and adaptable operating model. We'll continue to challenge our
leadership team to find new ways to evolve and improve our business
model, and of course seek all opportunities to be yet more consumer
focused and connected.
With that, I'll now pass it over to Charlie Denson.
CHARLES D. DENSON
President, Nike Brand
Thanks, Mark. Good afternoon, everyone. What I really want to know is
what's the score of the Syracuse game, but we'll get to that in a minute.
At the risk of stating the obvious, we are very pleased with the results
we've reported to you today. We're pleased not only with the quality of
these results, but also with the brand and the business performance that
has generated them. With nine months under our belt for the fiscal year,
we remain comfortable and satisfied with the course we've set for
ourselves. My comments today will be brief, but I do want to touch on a
few highlights from the quarter that I think are important to call out.
Then I'd like to talk about where we think we're going from here.
As you review the results, our business success for the quarter was
driven primarily through our international business, with a 31% increase
in revenue and a continued expansion of our gross margins assisted by a
weaker dollar. This also reflected a 14% revenue increase on a constant
dollar basis. There are several variables at work here that yielded these
results. Don has covered most of them, but I would like to hit on a
couple of the key areas from both a brand and a business perspective that
are driving our success.
Strong International Growth
The strongest growth driver in the international business is without
question the Asia Pacific region, led by China and Japan. Our brand
strength continues to improve in both geographies, and the business is
following. We delivered 15% growth in footwear and 30% growth in apparel
for the quarter. With the futures numbers in Asia up 23%, we are
confident this will continue.
In Japan we continue to build an authentic brand position that
complements our active business and will establish a better balance
between the sport and active consumers. This is critical to the long-term
stability of our business and our success in Japan, and the progress
we're making is something we feel very good about.
China is a story in and of itself. As the economy continues to grow at a
10%-plus per annum rate, our brand is becoming more accessible to a
growing middle class. The retail landscape is beginning to expand with
dedicated athletic specialty space, and sport maintains a position as a
core part of the Chinese culture. As a result, our brand is being
embraced and accessed by a growing part of the population, and our
business for the quarter was up over 70%.
As we think about the future, the large emerging economies represent a
significant growth opportunity for the brand. We are currently completing
the transfer of our distributor-led businesses in Russia and India to a
Nike-owned model. Coupled with our more established direct businesses of
China and Brazil, we are well positioned for growth in four of the
largest emerging economies in the world-places where a growing middle
class will create new markets and the world of sport is a centerpiece of
the local culture.
As you know, the biggest currency benefit we are receiving is in the Euro
zone, where we have seen a significant increase in gross margins over the
last 18 months. That said, we still grew 15% on a constant dollar basis.
This was led by the Central European countries where we have also
invested in a direct Nike-owned model. Western Europe continues to be a
story of portfolio successes and challenges. Italy is growing again.
We've won a Constitutional Court ruling regarding our trademark
litigation in Spain, and the U.K. is showing signs of recovery with an
improved quarter and futures numbers trending up.
Europe has been a strong growth market for us for the last seven years.
We have talked a lot about our ability to grow and expand existing
markets. Europe is probably our best working example. Our investments in
football or soccer have strengthened our position as an authentic sports
brand with the European consumer and has created energy and excitement in
the marketplace. This has been instrumental in a large part of our
growth. In the future we will continue to add to our brand dimensions,
using running and women's fitness to expand the market. With the success
of players like Dirk Nowitzki, Pau Gasol, and Tony Parker in the NBA, we
have the key personalities to capitalize on the growing interest in
basketball. The active life segment is another growth driver that's
connecting us with the European consumer. Investments with existing
retailers and our new franchise format will enable us to tell seasonal
stories and concepts in an impactful way.
A Reinvented U.S.
As you can see, we continue to expect strong growth out of the
international business. But one of the strongest stories we have for the
quarter is the ongoing improvement of the U.S. business. I said last
quarter that I thought the U.S. market was as healthy as it's been in
five years. As many of you have heard me say over the last three years,
the overall profitability of the industry is what will allow it to
reinvent itself. We are starting to see confidence and reinvestment.
Brand building, new and/or improved formats, and overall service levels
are becoming priorities again. These are the things that will bring
energy, profitability, and growth back to our business here in the U.S.
As we look ahead, our U.S. business has many of the components in place
to deliver a solid growth picture, leading the footwear and apparel
markets. We are pleased with our futures orders being the highest we've
released in eight quarters. Our apparel business is improving,
performance footwear is strong, and the active life business continues to
expand.
A Great Summer
As Mark referenced earlier, Nike and this industry have shown a
consistent history of growing and expanding after an Olympic year. This
summer we are probably better positioned, with stronger stories,
products, and plans than we've ever seen before. If the Olympics aren't
enough, we have the two most exciting players to have entered the NBA in
several years, the European and Copa America Championships, and
sandwiched in between all of that, the opportunity to witness what may be
one of the great "Just Do It" stories of all times as Lance Armstrong
goes for his unprecedented sixth Tour de France win in a row.
It's going to be a great summer. Now back to Syracuse. I think we'll open
it up to questions.
QUESTION AND ANSWER SESSION
Robert Drbul with Lehman Brothers: Good afternoon. A couple questions I
guess, first for Mark. You guys really talked a lot about the plans for
the Olympics. I'm just wondering if you might be able to elaborate a
little bit more in terms of some of your focus athletes, some of the
teams and the assets that you have that you will be focusing on, that we
should be looking for.
The second question would be for Don. You talked a little bit about
the level of close-out sales being down I think both in the U.S. and in
other regions. Can you put some numbers on the level of close-out sales,
the level of close-out inventories that you have year over year, and
really sort of how that's driving the gross margin?
Parker: Okay, Bob. On the first question you had, as Charlie said in the
end of his prepared remarks, there's a lot going on in the world of sport
for Nike over the next four to six months. The Olympics was mentioned.
Charlie also mentioned the Tour de France. Immediately right in front of
us though is the NCAA Basketball Tournament. Nike continues to dominate
in the relationships we have, with about 75% of the universities in those
tournaments. We have a very exciting set of new product coming out around
the tournament. One of the highlights there is probably the Huarache 2K4
basketball shoe. It's another one of the exciting $100-plus products we
have. It's a real sort of retro-modern design that's been highly
anticipated and awaited by retailers and players alike, so we're real
excited about that product. Actually it debuted down at the All-Star Game
in L.A. in a very limited quantity, limited release, and flew out in a
matter of hours, so we're real excited about that product.
Then just quickly down the list there, we have Tiger Woods showing
up again at Augusta, competing for the Masters Championship, so very
exciting. We have some great new golf product around that's come out over
the last few months: the Ignite driver, the Slingshot irons, to name a
couple-real exciting, industry-leading product in golf.
Then of course I think Charlie mentioned the European Football
Championships and the Copa America Championship and Tournament there,
lots of marketing support from Nike around both events, a real focal
point this summer in the world of football. We have a very innovative
campaign around both events there and lots of new product, including the
Total 90 III football boot and the new Arrow ball, so that's exciting.
Let's see, what am I missing? LeBron James and Carmelo, I think
Charlie mentioned that as well. We have very successful product around
LeBron. We have new colors coming out on his Air Zoom Generation, which
has been received incredibly well. Then we also have signature product
around Michael Vick and of course Carmelo Anthony in the Jordan line as
well.
Then I'll just come back right where I started, and that's the
Olympics. As you know from previous calls, we've been really rallying
around trying how to make the Olympics not only a great brand presence
for Nike but a great commercial opportunity as well. This is probably the
first time we've really focused on that in a more complete commercial
sense. The big initiative there, as you know, is our "Speed" initiative.
We've taken that from a performance sport product all the way through
active lifestyle product and across a pretty broad spectrum of retail,
from high-end energy accounts that are more lifestyle based all the way
over to the performance accounts as well. We're just very, very excited
about the next four to six months for all those reasons.
Blair: Bob, with respect to your question about close-out sales, the one
region in the portfolio where the close-out sales were a lower percentage
of sales was in Europe. Some of that relates to the timing of shipments,
as we discussed earlier. Generally, as you probably know, our close-out
sales are less than 10% of our overall Nike brand sales. The major driver
really has been the improved profitability of those close-outs. Europe
close-outs are a smaller percentage of the revenue. Everywhere else
they're broadly consistent with where they've been historically, but
they're much more profitable. I think that really reflects how tight
inventories are in the marketplace.
With respect to the inventory balance on our books, our inventory,
as I told you, is about flat across the company. Inside that total, the
close-out inventories are actually down year over year. So as a
percentage of our total inventories, we have less close-outs today than
we did last year.
Drbul: If I could just ask one follow-up, the futures numbers in the
U.S. Can you give us that number ex-Foot Locker? Just trying to
understand how much of the Foot Locker business was responsible for that
4.5% number.
Blair: No, we generally wouldn't give you that level of granularity,
Bob. One of the things I can tell you is as you would expect, Foot Locker
is improving and some other accounts are declining, but overall we feel
as if our position is in good shape.
Drbul: Okay. Thank you.
Robby Ohmes with Banc of America Securities: Actually I think I want to
follow up on Bob's question a little bit. With the 25% decline in sales
with Footstar, can you kind of comment a little bit about go-forward? Is
there a futures impact with Footstar that you reported today? If there
is, can you give us a little help on where the offsets to that came from
in the quarter and where they might come from going forward? The other
question is can we get a little more comment on how apparel in the U.S.
is doing in the moderate channel?
Blair: With respect to the first question, in the third quarter the
offset to Footstar came from several accounts; it wasn't any one account.
There was some broad-based growth in a lot of places. With respect to the
go-forward, certainly with the announcement that Footstar has made today
and earlier that they're closing a number of stores, we do certainly
anticipate that our sales to Footstar are going to be lower than their
original orders. But given the tightness of inventory in the marketplace,
we're very confident at this point that we can move that product with no
disruption in the marketplace.
Denson: Robby, on the U.S. apparel situation, right now we look at U.S.
apparel as improving. Certainly it's still a big opportunity as we
continue to work on inventory levels at retail and the overall futures
picture. I think the thing we're most excited about right now again goes
back to what Mark I think related to in some of his commentary is around
performance and branded apparel starting to show very strong signs of
improvement in the U.S. market.
Parker: I'll just add to that. The branded apparel business for Nike is
improving. We see it as rebounding a bit coming back. Cancellations are
well below what they were last year, indicating I think good shipping and
productive sell-through numbers in the U.S. As Charlie said, the market
is really leaning more and more towards a performance positioning, both
on the sports side of the business as well as the active lifestyle. We
see active lifestyle really being influenced more and more by what we're
doing performance-wise in fabrications and design lines and style. That's
a big part of our Olympics "Speed" initiative, and you'll see that really
influencing a lot of what's going on in the branded active side of the
business as well. We're getting more confident about that piece of the
business.
Ohmes: That sounds great. Thank you very much.
Dennis S. Rosenberg with Credit Suisse First Boston: Good afternoon.
Mark, you talked so very optimistically about Europe. Yet if you look at
the constant dollar futures in Europe, they're decelerating. They were up
3% in the February quarter; they were up 8% in the last quarter. In this
quarter you should be getting initial orders for product relating to the
soccer championships. Could you reconcile that?
Denson: When we look at the European market today, we're as optimistic
as we've ever been, certainly on a longer line of sight. The marketplace
continues to be an opportunity for us. Longer term we think that the
market penetration levels still have some room. The market expansion
opportunities that I talked about in my prepared remarks is a big part of
the plan. On a shorter term basis as far as reconciling the numbers,
there is a high number of obviously licensed product going into the
market with the European Championships. That will be reflected I think in
the upcoming results as we look forward to the next quarter or two. We're
spending a lot of money around the marketing of the event itself. That
kicks off I think in another two or three weeks and will run through
obviously the event itself until the end of June. I can't speak
specifically to any reconciliation of numbers. I'm not sure exactly what
you're referring to, but hopefully that gives you some indication of
where we're going.
Rosenberg: And another subject: Converse. You tell us what the numbers
are every quarter, but you don't tell us about the strategy. What is the
strategy going to be for Converse?
Denson: Right now we're very pleased with the results of Converse, as
you can see in some of the commentary that we've discussed today. We're
going to stay on that path for right now. They've done a nice job of
continuing to grow their business both here in the United States and in
some of the international markets. I think if you've had a chance to
travel or talk to some of the people in the international markets, the
Chuck Taylor franchise is probably as strong today as it's been in a long
time internationally. We're comfortable with the direction right now and
we'll continue to evaluate it as we go forward.
Rosenberg: And finally, the sales growth in U.S. footwear up less than
2% in the quarter. When you talked about Footstar sales being down 25%, I
thought that might have been the reason for the deceleration there. But
then in answer to a question, you said that you were able to offset that
by shipping to other accounts, so why the deceleration in the sales
growth in the third quarter in U.S. footwear?
Blair: Dennis, the comment about offsetting the sales, that's why we're
up 1%. There were a lot of accounts that were up and several accounts
that were down. Generally we were up.
Rosenberg: You were up. Your futures were accelerating going into this
quarter in U.S. footwear.
Blair: We obviously had quite a few cancellations from Footstar.
Rosenberg: Okay, but did you shift that product into other accounts?
Blair: Not all of it in the quarter.
Rosenberg: Okay. That answers it then.
Blair: But the point that I made earlier, which we absolutely are
confident that we have homes for that product. The marketplace is very
clean and we're very confident we can move it.
Rosenberg: Thank you.
Margaret M. Mager with Goldman Sachs & Co.: Another great quarter;
congrats on that. I have a question on the outlook for gross margins.
Pretty clear what you're expecting for 4Q. But as we look out to fiscal
'05, can you talk about why the margins are sustainable at the levels
that you're achieving currently? What would be the factors that could
allow you to improve them further as we look out another year? Then I
have a couple questions about the U.S. market.
Blair: Just so I understand your question, Margaret, another year
meaning '05 or beyond '05?
Mager: Yeah, fiscal '05.
Blair: In fiscal '05 the operational progress that we've made, we intend
to continue to do. Certainly one of the things I talked about a little
bit in my prepared remarks was some of the work we're doing on claims.
We're also going to get some additional benefit out of foreign exchange
in fiscal '05 because, as you know, our hedging practice means that we're
about twelve months behind the movement in the spot rate, so we'll get
some benefit there. I did also talk about some other aspects of gross
margin, which primarily is our desire to really drive the business in
Asia and Europe. I think on a net basis we expect to be up on gross
margins in fiscal '05. I think there's lots of places that we're going to
continue to dig for margins operationally. We get some foreign exchange
benefit and there's some places we want to invest in.
Parker: I'll just add, too. The continued focus on product cost
reduction is still very intense here at Nike, so we see some opportunity
there through materials consolidation, tooling usage. There's a pretty
healthy little laundry list to what we can do to continue to try to make
some headway on reducing product costs as well.
Mager: That's helpful. At this juncture, are apparel and footwear gross
margins pretty comparable?
Blair: Yes.
Mager: And there's opportunities in both, I take it?
Blair: Yes.
Mager: With regard to the U.S. market in particular, just curious what
your view is in terms of market growth. You talked about average price
per pair being up. Where is the U.S. market going? Can we keep driving
growth in this market? And if so, what level do you think it can grow at?
How do you think about yourselves in terms of market share? Is this a
sustained market share gain and just captured market growth or can you
lift your market share from current levels? Can you talk about where you
think your market share is? I'm talking about footwear because it's so
much harder to define in apparel.
Denson: Margaret, first of all, the absolute answer is yes, I think we
can expect growth in the U.S. market. One of the things that leads me to
believe this is what I talked a little bit about in the prepared remarks
in the sense that for the first time in five or six years, we're actually
seeing some reinvestment going back in and we're seeing increased
profitability from the retail sector. This is something that I talk about
a lot because I think it's hard for just one single brand or one single
company to generate enough excitement to carry an entire industry. But if
the entire industry is providing profitability and reinvesting in itself,
there's a lot of places that great ideas can be birthed and expanded
upon, and I think you're starting to see that. For you who've been around
this business for awhile, if you walk around retail today there's
probably more energy coming out of some of these new formats and new
independents. I talked a lot about this a couple years ago. The new
independent I think is a new breed of retailer that's actually making
this business fun again. Those are things that lead me to believe that we
can see and expect some overall expansion because I do believe it's there
to be had if we can create the energy that this industry has the
potential to create.
Then I think some of it's just environmental. You look at the
building, improving success of the NBA with LeBron and Carmelo and what
they're bringing back to the game and some of the other sports
environments. Obviously you've got some question marks out there, but
you've also got some improving scenarios, and I think that adds to this
as well.
Then as far as market share gains, that just comes back to if we can
lead the marketplace growth, which is what we've always concentrated on,
that's an inherent position to be in to accompany a market share
improvement as well. I think to Mark's earlier point, there's still a
pretty intense laundry list of things that we can do, not only in product
costs but in improving different segments of the business that we are
certainly under-performing in today.
Mager: Any level you think the market's growing at, Charlie or Mark or
Don?
Denson: The level?
Mager: Yeah, like is it a 1%? What do you think the market's growing at?
Denson: Right now I haven't seen any of the most recent numbers, so I'm
going to avoid sticking my foot in my mouth and taking a guess. But I
think that a low to mid single-digit rate is something that is
potentially possible.
Parker: I just want to add too that I think what puts us in a better
position now than maybe even a few years ago is that we're much more
surgically focused on some of these consumer opportunity segments out
there. I've often talked about this "complete offense" strategy from a
category, price point, men's and women's standpoint. I think we're much
better equipped as an organization to really zero in on some of those
opportunities and execute. I think the women's apparel is a great example
of really lining up against that opportunity across the sports active
spectrum and really upgrading the product presentation, detailing, color,
flow, assortment planning, and really checking off that sort of
fundamental list of what it takes to get into a business and succeed.
That's just one example across a broad spectrum.
Mager: Thank you very much.
Noelle V. Grainger with J.P. Morgan: A couple of questions, first just on
the Footstar athletic stores. Is this the first quarter your business has
been down with Footstar?
Blair: That's a good question. I actually don't have that number in
front of me for the second, but I would guess the answer is yes.
Grainger: Is Footstar contributing in the U.S. positively to the year-
over-year growth in futures, the number that you just reported, the up
4.5%? Obviously there's dollars in there, but is it-
Blair: I don't believe so, no. To the point I made earlier, the product
that's on its way here is going to be sold, and we think the demand is
strong in the marketplace.
Denson: Noelle, maybe a point of clarification so we don't start having
to answer a bunch of other questions. Are you asking whether there are
Footstar futures orders in the futures number that's been released?
Grainger: No. Clearly there are, right. I'm trying to ascertain whether
the dollars related to Footstar in your futures number are up year over
year.
Denson: No. The answer would be no.
Grainger: SG&A, Don, for fiscal '05, did I hear you say you expect to
get leverage? I guess maybe could you just highlight the major buckets
that you've been talking about in terms of what's changing as you look to
fiscal '05, particularly given all of the major sporting events. I'm a
little surprised maybe to hear that you would be leveraging demand
creation.
Blair: What I said exactly was that we will not leverage demand
creation. That's exactly for the reason you just laid out, so I couldn't
say that one better myself. We do have quite a few vehicles for us in the
next year and we think those are things worth investing in. With respect
to operating overhead, as I've talked about on many occasions, we still
target and we are targeting to deliver some leverage on operating
overhead. The proportion is about two-thirds of our SG&A is operating
overhead; about a third is demand creation. We believe in total for SG&A
we target some leverage for fiscal '05, but it's not going to come on the
demand creation line.
Grainger: Great. My last question would just be on Asia Pacific. Mark or
Charlie, could you give us a better sense of how your mix of business in
Asia Pacific, active life versus performance compares to your mix in the
U.S.? I know obviously performance is less than the U.S. in terms of
penetration, but is it 10%? I'm trying to get a relative sense.
Denson: Mark will jump in on this too, I think. Right now if you think
about it, you can say that the two marketplaces are actually coming from
opposite ends of the spectrum and both working towards a more balanced
portfolio between the active and the performance numbers. Right now a
good chunk of our growth in Japan, for instance, which is the most
developed market, is starting to come more from the performance side of
the business because we have such a large chunk of that business grounded
in the active side. We've penetrated baseball and launched baseball last
year, and we talked about that a little bit. That's been very successful.
Soccer or football following the World Cup has become much more
influential as a sport. We're starting to have some success there. In
China it's all about basketball. That's the big driver in China and
Taiwan. We love our position there because we have so many different
tools to use and develop in that marketplace. China is a little bit more
balanced. It's not near as polarized to one side of the equation or the
other.
Parker: Yeah, we've had a very robust active life business in Asia, I
think as you know, particularly in Japan. But we've actively, very sort
aggressively tried to balance that with a real focus on the performance
sport side of the business, in part to establish more brand strength and
credibility on that side of the business because we think in the longer
term that's a much better brand position to leverage than just being
perceived as an American sport-based fashion brand. So we're very, very
pleased. China is leading the way on the performance side with
basketball, as Charlie said, but in Japan, for example, really getting
much more balanced. There's been some very specific strategies and
products and concepts geared toward really amping up the performance side
of our business, and we're very pleased with the results.
Grainger: By the way, 80/75 Syracuse.
Denson: Oh, good! Thanks.
John T. Shanley with Wells Fargo Securities: Good afternoon and
congratulations on a nice quarter, guys. I've got a couple questions on
the retail side of the business, Charlie, in the U.S. market. A number of
major U.S. sporting good chains in the last couple days have reported
really strong sales and sell-through rates on Nike product and
indications that that's likely to increase. Is the sporting good channel
becoming a bigger part of your domestic business? Do you see that
improving or basically having no effect in terms of gross margin
contribution?
Denson: Yeah, it certainly is becoming a bigger part of our business. I
think if we go back to the last year and a half, maybe even two years to
two and a half years ago, as you remember, this was one of the areas at
retail where we probably had slipped the farthest with respect to brand
performance. That was one of the very specific areas that we focused on,
both from a product development standpoint to that retailer and that
consumer. It's not just a footwear story, either; it's certainly an
apparel story as well. I think it's going to continue to expand as a
percent to total of our business. I think again it goes towards our
intent of what Mark just referred to. Positioning the brand as an
authentic sports brand, that's the best point of which we have to
leverage the brand, and it's also probably the most stable part of the
business on a consistent basis.
Shanley: And the margins, is it comparable to the other channels?
Denson: Yeah. We're seeing no big variances or variations from any of
the other channels.
Shanley: Then with the problems with Footstar, do you see your business
relationship with Foot Locker in calendar '04 getting back to something
comparable to where it may have been in calendar '02?
Denson: As we've always talked about, even in the context of the Foot
Locker discussion-and I would use the same context with the Footstar
discussion-is it's a USA distribution strategy. How that plays out
athletic specialty has always been one of our priorities and will
continue to be. We continue to expect that to improve. The relationship
with Foot Locker I think, as everybody knows, has improved. We are really
working on many of the mutual opportunities that we feel we have
together. I know they've referenced their "20" program and how successful
that was. It's really expanded everybody's thinking around some of the
different ways we can approach and attack the business. That continues to
improve and we're going to continue to look at the U.S. market as an
overall marketplace, and the distribution strategies will be U.S. based
and not account based.
Shanley: And Europe, Charlie, you mentioned that the franchise stores are
a growing component of the business. How many are there and where do you
see the number of units that could potentially be Nike franchise stores
in the European market?
Denson: Right now I think I want to say we have about eight stores.
There's seven, eight, or nine, right in there. We're still in the test
phase, John. We don't really know what the long-term number is going to
be. We're not talking about that in that regard. We're still trying to
gain some level of comfort and optimism around the format and what the
program can produce. To date we're very pleased with it and we like what
we see so far. We've got some stores that are performing better than
others, and I think we learn something every time we open one. It's been
a great test for us and we're excited about the future possibilities.
Shanley: Super. The last question on the European market, currency
neutral. Are you gaining market share in the Western European markets,
particularly the big five, with the nice 3% forward order increase?
Denson: I think the most recent data I've seen says that we are. You see
the same data I do. I think the last data that I've seen is through
December that shows some increase in market share gain. We're as happy as
those numbers are truthful.
Shanley: Fair enough. Thanks a lot, guys. Appreciate it.
Virginia S. Genereux with Merrill Lynch & Co.: Don, you mentioned I think
that currencies might enable you all to become more competitive in Europe
and Asia, I think you said. Obviously you've got some gross margin
benefit there on the hedging side. When you say more competitive, are you
seeing any pricing pressure with the sort of weakening of the dollar
internationally? That's one.
Blair: I think that as Charlie said, we've had a great run of growth in
Europe and we've been taking a lot of market share. We're now starting to
converge down towards the market growth rate and we want to get that
moving again. We are starting to see a little bit of pressure. I think
that when the currency has gone in a positive direction, certainly there
is some pressure to put some of that back in the marketplace, whether in
the form of pricing or in the form of product value. From our standpoint,
we think this is a great opportunity for us to get the market moving as
well as continue to grow our margins, so what we want to do here is
balance the investment.
Genereux: Okay great, thanks. Secondly, you said you'd reduced customer
claims and charge-backs that had contributed $15 million to U.S.
operating profit I think so far this year. Can you give us a sense-you
talked about this at your Analysts Day, Don-how far you think you are on
that opportunity in the U.S. Are you starting at ground zero
internationally or is there not as much opportunity because there are
less mature markets? If you can talk a little bit about that, gross
margin opportunity.
Blair: I think there's opportunity everywhere. Certainly the U.S. market
is the one that's the most straightforward because we've got relatively
few distribution centers and some larger customers. Some of it's internal
to Nike; some of it's with the customers. I'd say we're still in the
early innings even in the U.S. Outside the U.S., as you recall, we're
about twelve months behind in terms of getting SAP in place, which is one
of the enablers for us, as well as having some good, tight warehouse
management systems. This is early days, but we're very confident that
there's a lot of opportunity out there.
Genereux: Great, and just very last quickly, share repurchase, Don. With
the stock price being a little higher, you guys have typically been
buying back enough to take your share count down year over year, and you
have tons of cash. Would you ramp up the share repurchase to offset
option solution?
Blair: Generally that's our goal is to do that. Certainly from a
quarter-to-quarter basis we're not chasing it. Even if there's a short-
term spike in option exercises, we're not necessarily going to change our
repurchase program. But over the long haul, meaning a year or longer time
horizon, our goal is definitely to offset option dilution at minimum, and
we are certainly buyers of our stock.
Genereux: Thank you.
Jim Duffy with Thomas Weisel Partners: Two quick ones. Were U.S. apparel
futures positive this quarter?
Denson: Right now the U.S. apparel futures were not positive, but they
were sequentially improved.
Duffy: Second question. Can you quantify the apparent growth in your
basketball business? It looks as if you're gaining share there. I'm
wondering if you can give us a sense of the momentum.
Denson: Are you talking about in the U.S. market?
Duffy: Yes, and overall.
Denson: I don't have the numbers at my fingertips. Maybe that's
something that we can follow up on or something with you.
Parker: Actually our basketball business for the quarter actually and
for futures is quite strong. We're upwards of about 15% in terms of our
futures numbers, so we're feeling very bullish.
Duffy: That's U.S.?
Parker: That's U.S., yes.
Duffy: Okay, great. Thank you.
Catlett: All right, Jim, you win the prize for most concise answer. Mark
has one more thing he wants to say.
Parker: I just want to put in a little plug. If you get a few minutes, I
would suggest you take a little swing through the new Nike iD site which
just opened up today. It's a tremendous new-and-improved kind of view I
think of the future, an important part of the future, and that's a
growing interest in customized, personalized products. So take a look.
PAMELA CATLETT
Thanks, everybody. We will speak with you soon.