Nike Inc (NKE) 2002 Q2 法說會逐字稿

With those numbers, I'd like to now introduce Phillip Knight.

Thank you, Pam.

Obviously, I'm pleased with the quarter. I think most significantly is the earnings per share number which basically grew at 9%, which was higher than almost all estimates. But more significantly than the last 90 days, I think, is really the -- the pride I have in the last 9 months. It really has been a very good three-quarters of a year. And it signified most by the -- the change in the futures orders that prior to the 4th quarter quarter of 2001 futures orders had ranged for the prior year between -1 flat and +1. And in the 4th quarter of 2001 which we now see June, futures orders jumped up to +3%, and I said at the it'll be interesting if that's a blip, or that's a trend and that we would know more about it in the September announcement. And in the last four years, w really had not been able to adjust management-wise for all the problems thrown at us, the too fast of growth that we had gone into that four-year period with the problems in Asia, the Asian meltdown, problems with retail consolidation in the United States, and the problems with the devaluation of currencies in our fastest growing market.

Management was good enough not to have a significant decrease in sales during that period, but it wasn't good enough to handle all those problems and create any real increase. We have tried hard to improve management. I think you're beginning to see some of the results of that, that obviously it has not been an easy six or nine-month period, that we have an economic downturn made much more difficult and more emotional by the fact of the September 11th tragedy. And obviously the horrible impact in certain areas of the world really in terms of the tourist areas and what happens to retail in those areas of Hawaii being the worst example. And we have had the complexity of implementing a very complicated supply chain during the same period and we have basically taken those problems and really adapted to them very well. So I think that I'm overall, I'm pleased with management's performance and the progress that we're showing. I think it's also significant that the supply chain that's been much maligned in the past, especially related to our March announcement when it impacted our earnings negatively, basically continued to be implemented and over this last three weeks that we have really implemented across the board in the United States, which is by far our most complex implementation that we have to do. And while we are not ready to declare victory yet, I think the three weeks has gone very well without any kind of significant negative impact. And I think that's also shows progress and it's a real compliment to the much-maligned supply chain team. I touched on before, I think the management progress and certainly nobody gets better marks in that area than Mark Parker and Charlie Denson, that essentially it's no coincidence that they took their current roles about nine

months ago and the progress that we have made is significant over that period. And you will hear from both of them here this afternoon after I quit patting them on the back, but before that, we get into the nuts and bolts with the Chief Financial Officer and Vice President Donald Blair.

Phil indicated we are pleased with our achievements in the 2d quarter.

While many businesses have struggled over the last several months, Nike has performed very well in a challenging environment. As Pam said, our reported revenues advanced six percent, up 8% in constant dollars. And our future orders for the next five months are up 8%, an increase 10% in constant dollars. Although our gross margins were somewhat disappointing, most of the marvin erosion was the result of exchange rates in Europe, lower closeout margins in the U.S., and weak results at our non-Nike brand subsidiaries. Our spending discipline continued to be excellent as overall SG & A increased less than 1%. Pretax income for the quarter increased 6% and earnings per share increased 9%. While these results are not yet in line with our long-term financial model, we have continued to make progress toward achieving those objectives. To give you some context on our results, let me start by outlining the effects of two significant events that occurred during the quarter. The first was the dramatic slowdown of the U.S. Economy and the fallout from the terrorist attacks in September. Which have unquestionably had an effect on our business. The most significant impact was on sales through Nike and Kohan retail stores. Many of our most productive stores are located in resort or major metropolitan areas such as New York, Las Vegas, Honolulu and Orlando. These stores have been particularly hard-hit by the faltering economy and the decline in tourism. While first quarter comp store sales for Nike in-line stores were up high single digits versus the prior year, we have seen double-digit sales declines in the second quarter. Factory outlet store sales have also declined although we have seen some improvement in sales trends in these stores since September. On a more positive note, the second major event affecting the second quarter was the implementation of our new supply chain systems in the U.S. At the end of November, we implemented a number of new systems and processes affecting nearly every element of our business.

This step was a key milestone in a project that's been under way for over three years. To prepare for the new system go live, we shipped a larger-than-normal amount of our December orders prior to the shutdown of the old system on November 21st. As planned, our distribution facilities and other operations were shut down from November 21st to December 3rd when we began a controlled ramp-up of activity using the new systems and processes. As Phil said, to date we're very pleased with the early results of the implementation. Clearly the years of preparation and more than 100,000 hours we invested in training our people have paid off. Using the new systems, we are placing orders with factories, taking orders from customers, shipping and receiving products for our warehouses, issuing invoices, paying bills and getting paid, all at normal levels of activity. Please keep in mind that for a systems implementation of this size and complexity, go live is just the beginning. Over the coming months, our focus will shift from implementation to using the full capabilities of the new system. Therefore, we'll be better able to update you on our progress in coming quarters. With that overall context, let me review some of the key elements of our 2d quarter performance. U.S. Footwear revenues fell 2% in the quarter reflecting a 1% increase in in-line sales offset by a steep drop in closeouts. As a result, gross margins for U.S. Footwear rose 45 basis points and gross margin dollars were essentially flat. This pattern reflects our continued efforts to reestablish a pull footwear sales model in the U.S. As our brand and products gain strength, we have seen improving trends in futures orders. Initially this growth will be partially offset by lower closeouts and at-once orders. However, in the long run, we believe this approach will help to strengthen our brand and improve profitability for us and for our retail parents. U.S. apparel revenue increased 10% in the second quarter as growth of Nike brand apparel more than offset declines in licensed apparel due to the expiration of our agreement with the NFL. We also increased our net pricing margins on in-line apparel over 130 basis points, reflecting the initial impact of product cost reduction initiatives.

Equipment revenues grew 14% in the U.S. In the second quarter. Driven by growth in golf, as well as bags, socks, and sports accessories. U.S. futures orders for December through April increased 8% versus the prior year reflecting accelerating orders for both footwear and apparel. While these orders are an important indicator of the strength of our brand, futures order growth, as you know, does not necessarily translate directly to short-term revenue growth. We expect several factors will reduce actual revenue growth below the level of futures growth. We estimate that a little over a point of our U.S. revenue growth in the second quarter was the result of early shipment of 3rd-quarter orders prior to our warehouse shutdown in November. Secondly, in the uncertain environment following September 11th, as we discussed with you earlier, we made the decision to minimize our inventory risk by reducing factory orders for spring product. Third, as in Q2, we expect to see our revenue growth lag the increase in futures orders as we reduce footwear closeouts and other at-once orders. So as a result, we expect U.S. revenue growth in the low single digit range for the balance of the year translating to the mid-single digit growth for Nike Inc. that we discussed on our last call. Overall, we continue to be very pleased with our international business momentum, as well. In the second quarter, these regions delivered 12% real dollar revenue growth and a 15% increase in constant dollars. As futures order for the next five months are up 9%, a 12% increase in constant dollars. In the Europe, Middle East and Africa region, Q2 revenues increased 14% on a reported basis and were up 11% in constant dollars.

Strong growth in footwear revenues which posted a 21% constant dollar increase in the quarter, drove the results. It's important to note that the footwear unit sales grew 11% despite the significant price increases we have taken to offset the erosion of the euro. Constant dollar futures in EMEA advanced 9% as both footwear and apparel futures grew year-on-year. In the Asia-Pacific region, reported revenues advanced 11% in the second quarter, reflecting significant currency weakness year-over- year. Constant dollar revenues increased 23%, reflecting strong growth from all three of our business units and nearly all of the countries of the region. Constant dollar futures orders advanced 16% indicating ongoing strength for the businesses in the region, despite some difficult macro economic conditions. The Americas region reported 2d-quarter revenues grew 5% and were up 13% in constant dollars. Despite challenging macro economic conditions in Latin America, our revenues for that part of the region grew 15% in constant dollars. While futures orders for this region have grown 22% in constant dollars, we remain somewhat wary about the prospects for the Latin American businesses, particularly Argentina. Although our revenues and profits have held up remarkably well so far, current economic conditions in Argentina will almost certainly have some impact on our business there and possibly across the region. Consolidated gross margins for the second quarter were below the prior year and a bit below our expectations. But nevertheless, we're encouraged by some of the details. As we anticipated, a large factor in the decline versus year-ago-quarter was foreign currency exchange rates. While the largest impact came from the Euro, we have seen year-on-year currency weakness around the world. The impact of weaker foreign currencies in our consolidate gross margin was about 150 basis points, or roughly $35 million.

We were only able to recapture a portion of these costs through pricing actions. Also contributing to lower gross margins for Nike, Inc., were lower margins at our non-Nike brand subsidiaries and lower closeout margins principally on apparel in the U.S. Worldwide SG & A spending increased only slightly, less than 1% in the quarter. Demand creation spending continued below the prior year as we deferred some planned spending in the current year and overlapped the final stages of our olympic marketing effort last year. As we have indicated previously, we do intend to grow our demand creation spending in this fiscal year, but the primary focus behind the football world cup in our fiscal 4th quarter. Operating overhead increased modestly in the quarter as we implemented our supply chains system in the upgrades in the U.S. In the 2d quarter our worldwide inventories increased 4.5% versus the prior year reflecting higher retail and golf inventories in the U.S. And sales-driven inventory increases elsewhere. Accounts receivable increased about 10%, somewhat faster than our sales growth. A large portion of the incremental balance was for December orders shipped in November and for extended credit terms for some customers who accepted these early deliveries. In addition, the rapid growth of our golf business also resulted in a larger receivables balance. Since trade terms in the golf business are generally longer than our core athletic footwear and apparel businesses, the growth of Nike golf will result in somewhat higher levels of accounts receivable. Over the balance of the year, we'll still face a good deal of macroeconomics uncertainty. Our futures orders trends are encouraging, particularly since our customers had visibility to current economic conditions when the latest orders were placed. The strength of our brand and the strong consumer acceptance of our current product offerings also puts us in the best possible position in this

environment. However; the retail situation continues to be highly uncertain so we are fairly cautious over the back half of the year. On our last call, we told that you we expect to grow earnings per share for the full year. We are confident that we are still on track to do that. Current trends still suggest middle single digit revenue growth over the balance of the year as futures growth more than offsets lower closeouts and prop sales in the U.S. and our international regions continue to grow. For gross margins, we still expect improvement quarter-by- quarter as the Euro comparison gets easier over the the balance of the year and closeouts fall. By Q4, we are targeting gross margins to be back around the 40% level. SG & A spending will be concentrated in the back half of the fiscal year as demand creation spending against our 2002 world cup marketing initiatives will be heavily weighted to the 4th quarter. So in summary, we're very pleased with the fundamentals of our business and our progress toward achieving our long-term goals and while we are keeping a careful eye on the market and the economy, we feel we're in the best possible position to deliver growth through these challenges times. With that we would be happy to take your questions.

Ladies and gentlemen, if you wish to register a question for today's question-and-answer session, please press the 1 followed by 4 on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw, press the 1 followed by the 3. If you're using a speaker phone, please lift your handset before entering your request. One moment, please, for the first question.

Brian McGough, from Morgan Stanley, please ask your question.

Thank you. I'm usually not a question hog but I have three questions for you today. The first is, I was hoping you could elaborate just a little bit on what's going on over in the footwear business in Europe, it appeared to be on fire this quarter.

Yeah, Brian, this is Charlie Denson. Well, I think most of it is just a continued position in the marketplace with the brand.

Are you seeing any impact of the Euro conversion? One thing we have heard a little bit about is this sort of cash in the mattress phenomenon of people, folks spending a lot. You all mentioned you alluded to potential softening in Italy last quarter. Is there anything else you see sort of coming up in Europe? Because it was such a -- such a strong point in November for you.

Let me take the first part of that. You know, I'd say that the money coming out of the mattresses, I've seen those reports, as well. I think people selling higher ticket items will see more benefit than we would. But at this stage I couldn't tell that you that we have had any material impact from that but I just don't know. It's hard to tell. We wouldn't measure it that way.

Yup.

And I think, uhm, the other thing with respect to the conversion itself and the impact that it's having on a country-by-country basis, we have spent a lot of time over the last several years preparing for this. Doing a lot of work in our pricing and distribution strategies and working with the retail community throughout the european union, and I think it will have a very positive effect on it as we do go through the hard currency conversion. And I think, uhm. The Italian situation is challenging in that we have great expectations. That's always been a very strong market for us. It's a great sports market. I was there a month ago. I think the team there has a very strong strategy in place. I think we are on the road to recovery there, but it will take time to get back into a place where we feel good about that business long-term.

Last question: The point of growth you said that was basically pushed from February into November, uhm, on the U.S. Side, is that sort of equally across all the business segments?

That was mostly apparel.

Caller: Okay. Thanks very much.

Bob Drubul, Lehman Brothers, please go to the question.

Hi, guys. Nice quarter.

Thank you.

Nice futures. I guess can we talk a bit more about the U.S. futures number and the nice improvement that we saw? Can you talk maybe about the footwear futures trends versus apparel trends?

Yes. This is mark Parker. Let me touch on the footwear first I mean, obviously we have a very strong spring futures report for footwear. We feel a lot of that is really based on strong brand momentum, good sell-throughs for us, obviously generating some good futures. And then I think it something I have said before is just good strength across the board. Category-wise, it's driven in large part by basketball, uhm, you know, Nike and Jordan our fusion business is very strong. What we call active or fusion. And then we have the women's business is also quite strong for us in the spring, as well. But really it's more strength across the board category-wise and up and down the price spectrum. Back in June and then in September, we talked about how we're -- we were focusing on the sort of more accessibly priced footwear product and I think we are starting to see the results of that. I would anticipate that at least three of the top five shoes, maybe five out of the top 10, would be shoes that were specifically targeted to shore up our strength in that more accessibly priced footwear zone. We think it's a better attack.

I guess from the quarter we just had in looking forward, the mix of at once versus futures, uhm, you know, what was that in the quarter? And can you maybe give us a range in terms of the percentages that you expect the rest of the year?

This is Charlie. We don't give out the futures prop numbers on a regular basis. I think we'll stay on that course, I think as far as our anticipated look at the future, uhm, we have always operated on -- in a pull marketing pull demand type business model which is highly dependent on our futures orders. And I think we talked about over the last several calls, you know, the variance in the weight of our futures business overall but that tends to stay pretty constant in footwear and apparel and as the other emerging businesses become bigger, golf, the equipment business, some of these other things, you're tending -- you know, you're seeing a little bit variance in the numbers maybe than they have been traditionally. But we still feel like futures is a great indicator of both our brand strength and the direction.

One final question. On the apparel side, can you talk a bit more about the effectiveness that you have had in the segmentation strategy by channels?

I think really the strategy is shifted more so from a channel based strategy really to what we feel is a better and more consumer-based strategy in a sense that it's good, better, best and using labels to differentiate those different parts of the business. So we continue to build the labeling strategy that we introduced in spring to the trade. It will start to hit retail late spring and start to see it show up and we're very comfortable and confident that we can really start to break the business down and grow our business in segments for the future in apparel. So I think you're seeing some of the response to that in the futures numbers. And I think you're also seeing an increased confidence level at retail in the brand and the product. I think I would agree with both Mark and Phillip's earlier comments that I think our overall product has improved dramatically and we continue in both footwear and apparel to manage our marketplace much better and much more profitably for both us and the retail community.

Thanks. Happy holidays.

Noelle Grainger from J.P. Morgan, please go ahead with your question.

Good evening. Happy holidays, everyone. A few things if I might. First, on the retail side of the business, can you elaborate a little bit with respect to your outlook there there? I mean, are you expecting comps to improve, continue to improve, on the outlet side and kind of stay where they are for the Nike towns, or not?

We would like to always take an optimistic approach in the sense that we think that, or we would like to see the business return to normal levels. But I think, you know, it's still related to earlier. Most of our retail outlooks are in tourist destination locations in a lot of cases. It certainly has a significant effect on our ability for --- to deliver the numbers that we had anticipated prior to the 9/11 tragedies. But we would like and expect to see it continue to improve. Whether it will mirror the improvement of the overall market is -- your guess as good as mine.

So would you expect them both to continue to be down, though?

Right now, yeah. They are significantly down and we expect those to be down through the rest of the year.

Caller: Okay. Um, could you talk a little bit both with respect to the 2d quarters topline as well as the futures number on a kind of unit versus price basis? I would assume pricing has been helping? Can you help us, uhm, understand the impact there?

Yeah. Speaking mostly to the U.S. for the moment, on the footwear side, we had about a 1% increase in price per pair in the 2d quarter. So that's broadly consistent with what we're seeing in the futures area, as well. And as we have talked about in the past, for Europe, there's been a fairly significant increase in price per pair and that's largely driven by plis increases we took to offset the weakness in the Euro. So as we talked about our constant dollar revenue growth was 24%, we had 11% unit growth on footwear so fairly significant price increases. But you know, as we've talked about, this business in Europe remains really strong and the market's accepted those price increases so far.

Okay. Great. And, uhm, last thing, Phil, I thought I'd let you chime in here. You have a pretty nice cash balance on your balance sheet at this point in time. Could you perhaps readdress the issue of acquisitions and how you think they fit into the strategy? Over the next 6 to 12 months?

I think we have been pretty open about our thought processes in terms of acquisitions.

-- some fairly significant numbers on the apparel side for us there, in fact record numbers for Nike apparel in Japan. So we are feeling very good about our brand situation, our product situation as it relates to the Japanese market.

Do you have any market share data on Japan that you can share with us? You must be taking share significant share.

We are in a share gain situation. We have to get back to you with some specific numbers on that though.

Okay.

And I'll take the -- this is Charlie. I'll take the U.S. apparel piece. For me, I think you're right. We are performing well in a tough marketplace. I think it really boils down to four specific things. First of all, I think our product is improved dramatically especially here in the U.S. We are making some significant progress in some of the key categories. Basketball and the resurgence of that has certainly mirrored some of the success in apparel that we have had in footwear. And, um, you know, the -- our ability to use both the Nike brand and brand Jordan together to attack the basketball market is a positive force as that category returns to a dominant position in the sporting goods and athletic specialty channels. I think the other thing that really plays to our advantage is really, it gives you an indication of just how much opportunity this brand has in apparel. And we had slipped significantly in some key areas and part of our progress right now is just based on how bad we were at one point in time. And you know, it's a great piece of momentum to have certainly in a market that's in the condition that it is today. In the apparel piece. And then finally, I think a lot of it is -- goes back to leadership and Mindy Grossman and what she has been able to do with our apparel division. She has brought in some additional people, Tom Kennedy for one, here in the U.S. And some of these people have meshed really, really well with a very strong core group of people that we have in our apparel business here. And, um, that has a significant impact on where we are today and certainly will continue to have an impact on our future.

Could -- I know you guys don't like to be this specific but I'll give it a shot anyway. Was your business in the department store channel up and what are your orders look like for that constituent?

Yeah, I don't have any specifics. It was a good shot, but I don't have any specifics on the channel numbers and how they break out. We feel good about where we are. We have talked about the channel approach in the past. I think for us, um, the thing that is really most encouraging and most exciting is just the overall improvement on the product and really getting zeroed in on the consumer. And, um, being able to have a strong point of view from a consumer and a category standpoint to be able to have the discussions with the different channels of distribution.

I'll add, too, that I want to put in another plug for Mindy who has done an exceptional job in getting some more focus on a department store channel for us. You know, as Charlie said, it's a consumer-based business and we are seeing growth in spring on the apparel side.

Thank you. Have a great holiday.

You, too.

Margaret Mager, from Goldman Sachs, please go ahead with your question.

Hi.

Congratulations on a very solid quarter.

Thank you.

Nice to see a trend emerging.

We hope so.

I have a couple questions. First of all, on apparel, I know you mentioned that your pricing margins were up 130 basis points in your -- and you're attributing that to getting your costs down in apparel. At this point, how do apparel margins compare to footwear or to the average for the company? That's a question that comes up quite a bit.

It's higher than the average.

But there is still room for them to go higher?

We think so.

Okay. Uhm, as you look at your company over the next, say, three years, if I take a backward look at the company, um, for the past three years, you had sales -- total sales increase of a billion dollars. And I'm going through the end of this fiscal year using our estimates. About $500 million came from it from footwear, about $500 million of it came from equipment with apparel and other brands being approximately flat, up a little tiny bit. As we look out over the next three years, where do you think the next billion dollars comes from? Just is equipment still going to be the driver and if so, can you speak to how that influences the profit mix of the company?

Well, no. But let me give the general comment. I think you're looking at a little bit wrong in the sense that, um, yeah, you can divide it down that way, but essentially the big growth opportunity for Nike is outside the United States. And in order to grow in all those areas, internationally, I think obviously that we've based a lot of emphasis management-wise and emotion and investment-wise in Europe over this last five years. But we have really kind of only scratched the surface of opportunity in both Asia and Latin America. So I think all of our categories, equipment, apparel, and footwear ought to grow outside the United States at -- and the potential is significant.

Okay. Um, all right, then, just can we talk a little bit about the equipment and the influence that that's had on the company's profit mix? Is it comparable, above average, below average? Margaret, that business as you know, is a combination of a number of businesses which have very different business models. Some of them are licensed, some them are, um, ones where we have an OEM manufacturer and in some cases, um, you know, we've got some hybrid arrangements. I would say on average, it's a little bit below the profitability of the rest of the business. But as the different categories grow at different paces, then that changes. And it has been somewhat more volatile both up and down and our businesses just because there is such a changing mix of businesses within that portfolio.

Well, you've really done tremendously well. For the past three years in equipment. So, um... Okay. Let me go back to something a little bit more mundane but also very impactful. Inventory turnover. We if we look at it, um, on an annualized basis, we look at it every quarter on a trailing 12-month basis. It's been declining. You're at, you know, pretty low levels relative Nike's history. For the past 10 years. I'm just wondering, what is it going to take -- Don, you mentioned in one of your comments that you're very focused on inventory and you feel there is an opportunity there. Can you give us one or two key strategies that will result in an improving trend in that inventory turnover and your ability to release capital off the balance sheet out of inventory and then I would hope or guess that you're more likely to use it to buy back stock than to make acquisitions, given Phil's comments on the size of likely targets.

Well, one strategy for improving the trailing 12-month inventory turn is having the 3d and 4th quarter of last year drop off the calculation. So that certainly is going to help. But as far as operational things that we can do, you know, clearly supply chain is one of the initiatives. And we do think that that's going to pay off over the next three to four years. But you know, just getting the model right in the U.S. And in, you know, the rest of the world where we really are aiming for a pull model that we fully develop the advantages of the futures structure, I think it's going to have a tremendous impact on inventory. It's about being disciplined. And, you know, I think that we do understand that inventory equation and, you know, overtime, we can operate in the current environment better, plus when supply chain comes along we think that's going to help us even more.

So is the biggest opportunity, you know, how would you look at it? Category-wise, footwear apparel, or geographically, Europe? Europe, U.S.? I mean, or is it -- is, um, inventory turnover comparable across categories and geographies?

Margaret, this is Charlie. I mean, I think to the earlier point, they're all different and we are going to manage them all a little bit differently based on market conditions and maturity rates in the market and everything else that goes into, you know, dealing with the global issues that we look at around the world. But I think overall, I'll go back to what Don said, is having the discipline to maintain the business model in the way that it was built and intended to perform. And I think, um, the supply chain piece is a significant investment in that discipline. And that we are looking forward, you know, over the next three to five years to see some considerable benefits based on the implementation that we're currently investing in.

Okay. Is the goal still to get futures down to three months versus five?

Well, the goal is really -- no. The goal is not to get it to three from three to five but the goal is to get closer to market. And what those dates turn out to be, um, is going to be, you know, as the market mandates and dictates. But we certainly need to get closer to market. If we are, we make better product, more timely relevant product. It minimizes our closeouts. It maintains the integrity of our brand in the marketplace. And overall, you know, puts us in a better position to build in the brand in the business worldwide.

Okay. Um, I -- a more near-term question and I'll make this is last. Talk a little bit about back-to-school. I know that's beyond the futures period that's captured in the numbers reported today. But obviously, an important, um, time. And you'll be anniversaries some very strong product from last year in the presto and, um, the emergent -- you know, the emerging trend in basketball area was quite good for back to school. So can you just talk a little bit about how you're thinking about anniversarying and building your business, um share in back to school?

This is Mark. As I mentioned before, the response to the product from sales meetings standpoint for fall into holiday actually, um, has been incredibly positive for both footwear and apparel and equipment. So we are feeling actually very confident from a product standpoint and some of the initiatives we are going to be building on I think now we're reenergizing presto, taking that across the several product types not just within footwear but across apparel and equipment. And we're building on the shocks technology. We are in the midst of reenergizing our air cushioning systems in our footwear. We still have a balanced attack up and down the price spectrum in footwear. Bullish on the, um, the direction we are heading in terms of ACG and the outdoor business. Feel like we have great momentum coming through spring that will carry into fall and holiday in the women's area. Um, so overall, kids is another area, too, which we're looking at some growth for back to school over and above last year. So we're actually very bullish. And then likewise on the apparel side. I think we have a very, I think the feedback in terms of our apparel from the last sales meeting was some of the best we've ever had.

Mm-hm.

So I'm feeling -- I think we're all feeling very confident from a product standpoint across the three product types.

Before I let you go, the apparel --

Margaret, we are going to have to wrap up with you so others can have a chance to get on. Is there something pressing?

Just a good, better best. What were the labels? Was it -- is it white label, red label? What were they again? You did that at your analysts meeting.

Silver, black and white.

Thank you.

Thanks, Margaret.

Don from Wells Fargo Securities, please go to the question.

Good evening. And let me add my congratulations on a great quarter, guys.

Thank you.

Mark or Charlie, can you give us a little bit of an insight in terms of the gross margin contribution that you're getting from this new strong demand in the mid-price range product? Is it comparable to what you get from the Marquee product line, for example, or is it somewhat different?

Actually, the gross margin on that product is I'd say a little bit better in that we have -- we have had a very focused effort in what we call design for manufacturing. We have met a very conscious sort of build from the bottom up on the product, meaning that we are designing the product very carefully to try to reduce the product costs and then translate that into a good pricing margin for us. Which obviously adds to the profit picture for us. So we have a very healthy situation there in that mid price point zone. We are not sacrificing any margin. If anything, we are looking better.

Will the growth of that mid-priced product have any material effect in terms of the channels of distribution that you may grow a little bit quicker than you would have otherwise in '02?

Hi, John. This is Charlie. Well, it certainly gives us more options. I wouldn't want to sit here and say that we are going to grow more aggressively in any certain channel of distribution. The object obviously is consumer-based and to make sure that we target those consumer types that are looking for the products and deliver the price value relationship that that person is looking for. It does give us more options with respect to managing the different channels of distribution.

Fair enough. Do you have any sense in terms of where you wound up at the end of the current calendar year in terms of market share either Charlie or Mark or -- and what's your target for next year?

I don't have any specific market share information available with me right now, Don. I think we are making pretty good progress. People have been throwing some numbers around on where we have been historically. Additionally, those numbers usually lag behind interest a timing basis and are usually a three-six-month lag. So a lot of people have talked about our slipping market share. I'd like to feel based on our numbers against where the current marketplace is that we are gaining.

Okay. That's fair enough. How about in Europe? Any significant shifts? I think you shared with us some estimates last go-around. There greater growth coming in the four big countries, UK, Germany, France, and Italy? Or are they basically about where they were at the end of Q1?

Pretty consistent with Q1 performance. No significant changes in the way the countrys are performing. France continues to do very well. We have a very strong business in the UK. We talked already and, um, you know, I talked last call about our team in germany and I'm very excited about the progress that they are making in Germany, as well. .

Does it look like you're going to gain share in all four of those countries?

I -- I'll go out on a limb and say, yes.

Super. That's great. Don, I had a quick question. Aside from the enhanced credit terms that you mentioned, to get the retails to take some of the product earlier, based on the fact that a lot of retailers were facing an uncertain fall selling season when they took some of that goods in, was there anything else other than better credit terms? Were there any other type of incentives, any kind of guarantees that may have an impact on the back half of the year?

No. There's -- we do -- we've seen a little bit of a slowdown in collections on some accounts, but generally, the only accommodations we have made have related to the early shipments around supply chain.

All right, that's fair. And the last question I had, Don, is if we model our tax rate in the back half of the same 35%?

That's a good benchmark.

Good enough. Thank you.

Thank you, Don. One more question, please, one more person.

Our last question comes from John Taylor from Arcadian Investment Corporation. Please go to your question.

Hi, can you you hear me?

Yes.

Hi, happy holidays too. I have two questions. First, in the past you have talked about auto replenishment as kind of a growing piece of your supply chain management side of things. Can you give us an update on how big that is at this point?

Yeah, this is Charlie. Well, we haven't really focused on auto replenishment as a big part of the business model, and don't plan on doing it in the future right now. Supply chain, you know, some of the supply and demand planning tools that we have in place will enable us to structure our auto replenishment business and systems much better. And we can, um, I think, run that business much more profitably from both us and the retailers.

I guess what I'm asking is it kind of a fixed dollar amount, or is it kind of growing with revenues?

Well, it will grow with revenues. Again, it's pretty specific to product type. And some of the different business models that we're running. So it has a varying degree of affect on each of the different businesses.

Okay. All right, and the other thing is, you're kind of keeping your powder dry in terms of demand creation for the world cup. Can you give us a sense of how we might think about that? Are we going to -- are you likely to reap the rewards of that in Q4 or what do you expect the impact of that spin to be on next year's growth rate?

Well, I'll just go back to I think some of the earlier comments that, you know, the world cup is really an investment in primarily the international business. And it's as much a brand impact tool as it is a specific soccer tool. And as you know, if you traveled out there, I mean, the top three sports are soccer, soccer and soccer. So... it's an incredibly powerful tool to use from a branding standpoint and we would expect our international business to continue to grow.

Okay. So you don't expect any specific payoff for that, this is just one thing you can really get behind because it's so material?

Correct.

Okay. Thank you.

Thank you, John, and thank you everybody else for joining us. Have a very happy holiday.