Nike Inc (NKE) 2003 Q1 法說會逐字稿

Welcome to the Nike Inc first quarter and fiscal year 2003 earnings conference call. This call is being recorded, and will be made available on reply beginning today Wednesday, September 18th, at 12pm Eastern Standard Time, through Monday, September 23rd, at 7pm Eastern Standard Time. Please note that if you decide to ask a question, it will be included in any future use of this recording, that any recording or other transmission of the text or audio is not permitted without the express consent of Nike.

At this time I will turn the call over to Miss Pamela Catlit, Director of Investor Relations.

Good morning, and thank you everyone for joining us today. We're conducting today's call from beautiful Yarmouth, Maine, the headquarters of our subsidiary, Cole Haan. And where we will host our annual meeting of shareholders in just the next few hours.

Participants in today's call are Charlie Denson and Mark Parker, Presidents of the Nike Brand, and don Blair, Nike's Chief Financial Officer. Each of todays participants will provide brief prepared remarks, and then we'll answer your questions.

before we review the results, let me cover some housekeeping items. Such as we're going to make forward-looking statements based on our current expectations, and these 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've filed with the SEC, including forms 8-K, 10-Q, and the 10-K. 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 [INAUDIBLE] orders 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, Cole Haan, Bauer, and Hurley are not included in these futures numbers.

Now the results. Earnings per diluted share for the first quarter were 81 cents, an 8% versus the 75 cents per share reported last year. After a one time charge from the effects of implementing FAS-142, accounting for goodwill and other intangible assets, the company posted a net loss of 18 cents per diluted share.

Revenues increased 7% to $2.8 billion. In constant dollars, revenues grew 5% during the period.

Before reviewing revenues by region, let me explain that beginning this quarter, financial results from Golf -- Nike Golf, will be excluded from the financial results of the regions and included in other revenue. Prior year figures have been reclassified to provide a consistent presentation.

Now turning to revenues by region. Our Europe, Middle East, and Africa region grew 15% during the quarter. Had the dollar remained constant, European revenues would have been up 5%. During the quarter, European footwear grew 16% in real dollars. Apparel was up 14%, and equipment was up 20%.

Asia Pacific revenues were up 24% in real dollars and 22% in constant dollars. Asia Pacific footwear revenue increased 11% during the quarter. Apparel grew 54% and equipment 27%.

The Americas region decreased 11% in real dollars and grew 2% in constant dollars. Footwear down 6, apparel down 22, and equipment declined 5%.

Total revenue in the U.S. region increased 2% during the quarter. Footwear was flat, while apparel revenues grew 6% and equipment declined 1%.

A quick review of the income statement shows that during the quarter, gross margins were 44.4% of first quarter revenues, 280 points higher then the same period last year.

SG&A was 28.6% of first quarter revenues, which compared to 26.6% in the first quarter of last year.

Tax rates for the first quarter were 35%, consistent with last year.

And during the quarter, we purchased 947,400 shares of stock for approximately $44 million.

Futures scheduled for delivery between September 2002 and January 2003 totaled $3.3billion, a 2.5% increase compared to the same period last year. Had the U.S dollar remained constant at year ago levels, futures ordered would have increased by 2.1%.

By region, U.S. futures were down 3%. Europe was up 9%. Asia was up 18%. And the Americas decreased 13%. Constant dollars outside the U.S., futures orders in Europe were up 5%. Asia up 18%. And Americas declined 4%.

With those numbers, I'd like to introduce Charlie Denson and Mark Parker, Presidents of the Nike Brand.

Thanks, Pamela. This is Charlie. Good morning, everyone. Well, we have had another strong quarter, and we're proud of that. I think when Mark and I sat down with Phil 15 months ago to chart the course for this company, we believed we had a great global brand that needed to work on becoming a great global company. We felt we could do this by focusing on a couple of simple points. Continue to develop and manage our brand around the world, and build a profitable and sustainable growth plan that is consumer driven. The results that we're reporting today are grounded in those strategies and perspectives.

With our Chairman Philip Knight leaving the conference call circuit, Mark is going to kick things off with some prepared remarks looking at some of the events over the last quarter with regards to our product success and brand-building activities. I'll hit our regional business picture, and then Don Blair will close with the overall financial results.

So with that, I'll turn it over to Mark.

Thanks, Charlie. Hello everyone. This past quarter, we've continued to line up against our key products and marketing initiatives, and have continued to build brand strength around the world.

From a product marketing and communications standpoint, our successful World Cup '02 integrated campaign I think speaks well to Charlie's comments about using our brand to build profitable and sustainable growth.

[INAUDIBLE] the World Cup, we experienced great product sell throughs and continued strong market share gains in the globally critical football category. With revenue increase of over 150% in Asia Pacific, along with football futures increases in Europe of over 60%.

We've also launched the new and much anticipated Manchester United product with incredible response, especially in Europe and Asia Pacific.

Though you look at World Cup and Man U, and there's really two good illustrative examples of combining our product and communications, and our athlete partners, to drive growth. Not just in the football category, but really helping to generate brand heat that helps us in all categories.

We introduced a different side to the Nike Brand with the Presto campaign and product line, bringing comfort and performance off the playing fields to active lifestyle.

Our overall active life business continues to grow very profitably, contributing to our strong first quarter performance. Clearly the active life segment, made up largely of -- with what some classify as retro product, is having a major impact on the retail market right now, and our successes in this area has contributed to the U.S. gross margin improvement.

Also, in the basketball area, we've moved from the Dr. Funk ad campaign in the U.S. to a very successful hip-hoop campaign in Pacific Asia, and into our street basketball metro market based battle ground effort here in the USA.

I should also mention that the higher profile, some of the top players from Europe and the NBA is also creating more interest in the game and in this category in Europe.

And then last but not least, in basketball, I should mention that the strong sale through has continued with Jordan products up and down the price spectrum.

We've continued to amplify our connection to performance sport with the 4th TV advertising campaign. Along with our performance apparel print campaign, featuring the innovative apparel spear product. Some of you may have seen this product on the tennis players last month at the U.S. Open.

Now, we've also seen steady growth in core footwear, especially in Europe and the USA, behind our Bauerman initiative.

Our focus continues to be on the consumer, delivering compelling product up and down the price spectrum, across the sport categories, and into the active lifestyle product.

There has been much discussion and speculation in the US market around the relative market in marquee or statement footwear. With more compelling product choice and value at the lower to mid price range, there is clearly pressure to further increase the value proposition of high-end footwear. Through innovation and product performance and esthetics, backed up with the athlete's marketing, communications, and retail presentation, we have led the market in creating value for a wide range of consumers.

We believe what consumers value is innovation, great design, and a brand that speaks to them. We remain confident in our product pipeline and ability to create and sustain the more complete offense, with the product in more highly integrated marketing to drive that demands

I'll now pass it back to Charlie.

Thank you, Mark. Well, we continue to work on focusing on results that we have talked about for the last year and a half. These results are coming from a number of focal points that will vary from quarter to quarter, but I feel illustrate our ability to manage our business better.

Our most recent results were driven by strong top-line performance, 7% on the revenue line. But even more importantly was some dramatic improvement on the gross margin line. As we mentioned on the last call, our spending is up for Q1, with the World Cup efforts have now being totally accounted for.

Another highlight of the quarter was the continued improvement on inventory management. With the US market still very competitive, we have managed down our inventory in the U.S. on a year on year basis by over 15%. This is having a very positive effect on both our overall profitability and maintaining a very strong, price value relationship around the brand in marketplace. Our corporate inventory is down 4%, which is giving us some leverage on our overall profitability.

We continue to focus on growth. Our international business remains at the heart of that opportunity, with both Europe and Asia posting strong double digit gains for the quarter. We are starting to see some of the financial credit for all the business and brand building we've done in Europe and Asia over the last several years, as we saw a strong dollar continue to erode a lot of our results during that time period.

The Americas region continues to suffer from negative currency comparisons and political instability.

An important part of our continued success has been the development of our people and our organizations at both the national and regional levels worldwide. This will enable us to compete within a multidimensional set of business opportunity.

With all that said, and we've said it before, we're still projecting the international business to become larger than the U.S. business this year, for the first time in this company's history.

Now let's talk a little bit about the US. The footwear market continues to be highly competitive, and we have some great successes to talk about. We're continuing our focus on the consumer, managing a very complex market, and watching our inventories, and improving our profitability.

Consumer spending still appears to be a question mark for the foreseeable future, and a potential conflict in the Middle East will certainly not help to improve things in the short term.

We continue to see strong sales through results, as Mark pointed out, on our mid priced product, as well as life style and retro styles in both men's and women's. As I said earlier, our inventories are in great shape in footwear. The best in a couple of years. We feel very confident we are taking the right approach in these uncertain times.

Much has been said about our ongoing relationship with our biggest account, Footlocker. I will just say this. We intend to continue to pursue their business as aggressively as always. We have been working with them to determine the best assortment for the two of us to prosper. There has not always been complete agreement on this, and in todays world, we have differing perspectives as to what each of us are trying to achieve. However, we are confident that we are doing the right thing for the long-term health of our brand and our business.

I don't want to go into account specific strategies and or discussions, but they will continue to be our largest customer, and we will continue to work with them to optimize our businesses together. As we have stated, we are expecting a significant drop in futures from them, and we are confident that over time, we can replace most of this business through alternative distribution.

The U.S. apparel business is another bright spot for Q1. Despite some challenges on delivery, we were still able to post a 6% gain in revenue. And in the footwear, we are starting to see some of the benefits of our margin building initiatives that were put in place this last year. We're keeping a close eye on inventories, which started to show some significant improvements. Our label strategy is now in place. And our brand-building and performance product efforts are starting to take effect. We will continue to align resources to maximize both of these areas for the balance of the year.

As we look ahead, we are very confident in our ability to address the consumers' needs. We are looking at a challenging US marketplace that is being affected by both consumer confidence and a transition in our distribution picture. Our international business continues to be strong, and our successful brand-building and growth efforts outside the U.S. will continue. We remain focused on the consumer. The brand is in better shape than ever, and we are a much healthier company. Our focus is on growth and sustained profitability, and we will continue to drive towards our long term financial goals.

So to cover those financial performance results, here's Don Blair.

Thanks Charlie. Well, I agree that our business delivered outstanding financial performance in the first quarter. Our revenues advanced 7%, and our gross margins grew a full 2 points to 41.4%. We invested 25% more demand creation than last year, and still grew earnings per share 8%. And we reduced our inventories by 4%, and delivered over $80 million of free cash flow from operations in the quarter.

I want to begin my detailed remarks by setting the context for our first quarter numbers. As you know, we implemented Financial Accounting Standard 142 in this quarter. As a result, we recorded a noncash charge of $266 million to write down the value of goodwill and other intangibles related to the acquisition of Cole Haan in 1988 and Bower in 1995. This charge was in line with the guidance we gave in our last two conference calls and in our 10-K filing.

In the balance of my remarks, I'll be addressing our financial results excluding this one-time charge. You'll also note that in our press release, we presented our regional results excluding Nike Golf. Current and prior year results for this business unit have been included with other revenue. While the Nike Golf business was previously integrated in our regional management structure, we have now built dedicated golf management teams in key markets to drive this important growth initiative.

The new presentation reflects this change in management structure. So in the context of those items, let me tell you about our financial performance for the quarter.

Our overall revenues advanced 7% in the quarter, reflecting a 5% increase in constant dollars, and a generally weaker U.S. dollar environment. The growth was again powered by our international regions, which grew 14% in reported dollars and 8% in constant dollars. International pretax income advanced 9% in constant dollars, as robust revenue growth and a significant increase in gross margins more than offset heavy investments in World Cup marketing in the quarter.

In the Europe-Middle East-Africa region, Q1 revenues advanced 15% on a reported basis, reflecting a 5% increase in constant dollars, and a significantly stronger euro. All three businesses advanced in the quarter, reflecting growth in wholesale sales and sales at Nike retail sales. Constant dollar pretax income for the quarter advanced 10%.

In the Asia Pacific region, reported revenues advanced 24%, reflecting 22% year-over-year growth in constant dollars. Footwear, apparel, and equipment all posted strong gains versus the prior year, fueled by the success of our World Cup campaign. Nearly every country in the region reported revenue growth for the area, as Korea and China reported growth over 30%, and Japan grew double digits.

While our investments in the World Cup doubled demand creation spending for this region, regional pretax income for the quarter grew 11% in constant dollars, as gross margins expanded significantly.

In the Americas region, reported first quarter revenues fell 11% in real dollars, but were up 2% in constant dollars on mixed country results. Regional pretax income for the quarter increased 3% in constant dollars.

So overall, we're pleased with the continuing strength of our international businesses. In total, international futures orders for the next five months are up 8% in real and constant dollars. And our bottom-line profit margins are poised for continued expansion, as demand creations spending eases.

In the U.S., total revenues advanced 2%, and gross margin dollars grew 4%, as our regional gross margin percentage grew a full point. Stronger wholesale revenues across all three product business units, and expanded footwear and apparel gross margins, offset weaker Nike retail results post-September 11th.

Pretax income grew 1% in the quarter, as higher SG&A, principally demand creation, offset the higher gross margins.

U.S. footwears revenues were flat for the quarter. However, inline sales in footwear grew 8%, while closeouts declined, reflecting cleaner inventories year on year. Sales from Nike retail stores also declined in the wake of last year's September 11th attacks. Wholesale footwear gross margins increased two full basis points -- I'm sorry, two full points versus the prior year, driving a 7% increase in gross margin dollars for the quarter.

U.S. apparel revenues grew 6% in Q1, reflecting strong increases in men's and women's performance apparel, brand Jordan, and licensed apparel. Wholesale apparel gross margins advanced over five full points, driving a 23% increase in gross margin dollars for the quarter.

Equipment revenues fell 1% in the quarter, as weaker sales through Nike owned retail stores more than offset a 5% increase in wholesale revenues.

U.S. futures orders for the September to January period fell 3% in dollars, as growth in apparel futures was more than offset by lower footwear orders. U.S. unit footwear orders actually increased for the period, but average selling price declined.

Revenues for our other businesses, including Nike Golf, Cole Haan, Bower Nike Hockey, and Hurley International, rose 3% for the quarter. The addition of Hurley revenues in this fiscal year was largely offset by declines in Cole Haan and Bower Nike Hockey. Since Q1 is the smallest quarter of the year for our golf business, the inclusion of Nike Golf did not have a significant effect on the growth of other revenues.

Certainly one of the most encouraging elements of our Q1 performance was the significant expansion of our gross margins. At 41.4%, our gross margins were the highest in recent history. For some time, we have been talking about our initiatives to improve gross margins across all three of our business units, including materials, sourcing, and logistics consolidations, lean manufacturing, design for manufacturer, and leveraging our distribution infrastructure. Many of these long-term initiatives paid dividends in Q1. In addition, we're benefiting from the popularity of classic footwear, which is generally less expensive to manufacture than our more complex performance styles. Finally, our efforts to tighten inventory positions are resulting in significant reductions in closeouts.

While we're not ready to bank all of this margin expansion, we're very encouraged by the results in Q1. However, since our fiscal '03 product purchases were largely hedged going into the year, these Q1 do not include any benefit from the stronger euro and yen on the gross margin percentage.

SG&A spending increased 15% in the quarter, driven largely by a 25% increase in demand and creation spending. This quarter we completed our global marketing program behind the World Cup, while the first quarter of the prior year reflected lower spending levels, as we reserved funds for the beginning of the World Cup campaign in Q4 of last year.

This increase -- the increase in operating overhead was 9% in the quarter, up 7% in constant dollars. This increase was due to the addition of retail stores outside the U.S., the addition of new Nike owned companies in Europe, and the cost of final preparations for the implementation of our supply chains systems upgrades in Europe.

The consolidation of Hurley International overhead costs, and investments in golf infrastructure, also increased operating overhead for the quarter.

In the first quarter, worldwide inventories fell 4% versus the prior year, as inventories fell in every region except Europe. And while our accounts receivable increased $244 million year-over-year, this was largely a result of strong sales growth in the second half of the first quarter.

Our global days sales outstanding at the end of August actually improved by two days. As a result, we delivered over $80 million of free cash flow from operations in the quarter.

During the quarter, we also took advantage of low interest rates to strengthen our balance sheet. In the quarter, we issued $90 million of long-term debt, with maturities from five to 10 years. At the end of August, our overall debt was $288 million lower than the prior year, and the average maturity of our debt has increased from two years at the end of fiscal 2001 to four years today.

And while the year is not shaping up entirely as we had expected, we haven't given up on our overall financial goals. Over the balance of the year, we expect the U.S. footwear business to face continued challenges as we work to adjust distribution. The combination of these challenges and the impact of continued poor economic trends on consumer spending around the world, suggest that we may see somewhat weaker revenue growth than we previously anticipated.

On the other hand, we're seeing more [INAUDIBLE] benefit on the top line, and our margin performance has improved more quickly than we had expected.

So on balance, we remain focused on achieving the main financial goals we set for ourselves at the beginning of the year.

With that, we'd be happy to take your questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star, then the number 1 on your telephone keypad. One moment, please, for your first question.

Your first question is from Miss Susan Silverstein of Banc of America Securities.

Hi. Good morning.

Good morning.

Two questions. First. On your commentary on Footlocker, in terms of your different perspectives on what you might want to achieve going forward, if you could just elaborate on those specifics.

And then from a financial perspective, in terms of the revenue growth, are you saying that the [INAUDIBLE] benefit would offset the weaker product unit growth? Or are you saying overall the revenue growth, which I presume was, like, midhigh single digits, would be lower for the year?

Hi, Susan. It's Charlie. I'll take the first part. I think Don will take the second. But with respect to Footlocker, I think it's pretty well documented at this point, they've reclassified what they call marquee products to some degree. We really haven't. We have the utmost confidence in that high-end technical consumer, and we're going to continue to focus on that, both from a product standpoint and a communications standpoint.

I think in the past, we've always had a very synergistic set of strategies that have aligned with Footlocker. And today, I would say that those strategies maybe aren't as synergistic as they have in the past. And that doesn't mean that we're right and they're wrong, or they're right and we're wrong. We believe in our brand and our business and where we're going to go. And right now, it doesn't necessarily align with them.

With that said, we're very confident in where we're headed, and we believe that we can continue to address the needs of that consumer, and make sure that that consumer has access to our product.

What do you mean by the -- the marquee products that they view -- or that you think that they view versus the marquee product that you view exists out there.

I'm sorry? I'm not sure I understood your question.

In other words, you're referring to the marquee product, obviously that's well known, well documented already. But, in terms of what you think they're viewing as marquee product, or tapering their marquee product, and what you, Nike, views as marquee product, sounds like it's different.

Well, I think, you know, they've stated -- and we have ongoing conversations with them. They're focusing on a little bit lower price point. I think they targeted somewhere around $90. We feel that, you know, to continue to invest in our -- in R&D, and to bring innovation and exciting new products to the marketplace, that there is still a demand for a higher priced product out there, and that the consumer still exists out there.

I think that's the primary area that we're probably in a little bit of disagreement right now. And as I said, they have to run their business the way they feel it's appropriate for their consumers, and we have to keep our eye on ours.

So, 12 to 18 months down the line, what do you -- do you see another outlet for the marquee shoes, if Footlocker continues along with their strategy?

Not necessarily. We feel there is very adequate distribution today in both athletic specialty and better sporting goods to drive that business, and to make sure that that consumer has access to our products. So, at this point in time, I would not -- I would not anticipate a new channel emerging or anything like that.

Okay.

And Susan, with respect to your second question, yeah, we've targeted high-single-digit growth as the zone. And at the beginning of this year, we said that we thought we'd be in that range. And I think with the benefit of the weak dollar overseas, I think we still have the opportunity to be in that range.

So, you know, that's our goal. Obviously, as we've all said in our prepared remarks, the environment is very choppy, not only in our particular situation with respect to U.S. distribution, but worldwide consumer spending. So obviously there are no guarantees. But I think with the combination of the two factors, we have the opportunity to still be in the high single-digit zone.

And operating margins have any offset?

Well, I think as I said in my prepared remarks, we originally spoke in terms of a margin pretty comparable to the fourth quarter of last year. I think we have been pleasantly surprised by how quickly some of our initiatives have borne fruit. And as I said, while I don't necessarily think we're going to be able to bank a number of the order of magnitude of the first quarter for the rest of the year, I think we'll probably do a little better than we had previously expected.

Great. Thanks a lot.

Your next question is from miss Margaret Mayer of Goldman Sachs.

Hi. It's Margaret. How are you?

Hi, Margaret.

Great to see you controlling what you can control. And congratulations on that improving gross margin.

Thank you.

I do have a couple of questions. Don, with regard to the target for sales growth. If futures orders are up 2.5% -- and that includes the benefits of currency, I guess I don't really understand how you get to high single digits for the next three quarters. So can you help me get my arms around that a little bit?

And then the second question, with regard to SG&A. If we could just focus on the next three quarters, you know, you said that your operating overhead is up 9%. So the real variable is what is demand creation going to look like for the next three quarters. Clearly, I would not expect it to be anywhere near the level we saw this quarter. But could you sort of elaborate along those lines about how we should be thinking about your expenses over the balance of the next couple of quarters.

And then just a real quick last question, with regard to Nike Retail being down in August. Can you give us any more color about how that looks for September, now that we've anniversaried 9/11, and what your expectations are for Nike Retail going forward, and if that channel is going to play a bigger role in the new distribution of marquee products. Thanks.

Okay. Well, with respect to the revenue side first, we expect to have our revenues grow faster than the futures number for a couple of reasons. I think we're seeing in a lot of our businesses that are not on futures fairly robust growth trend. And that would include our other revenues group, including Nike Golf, as well as a lot of markets around the world. So that's a topic we've talked about a lot, historically. And one of the keys actually is your third question, which is retail. Our retail comparisons are the worst in the first quarter, as we're lapping pre9/11 numbers. So one issue is all of that other revenue that is not on futures, which is Nike Golf, the subsidiaries, and Nike Retail. So that's one element.

I think the second element is that we believe that there is more at once business out there. Not -- not from the standpoint of us pushing product. Because I think our tight inventory suggests that we're not doing that. But we feel there is more at-once business in the footwear and apparel than is showing up in futures.

I think the third thing to keep in mind is that we have a lot of distortion in our numbers related to supply chain implementations last year in the U.S. and this year in Europe. So, you're going to see a little bit of a difference between revenues numbers and futures numbers for that particular purpose.

So I realize it's tough to do a walk-down reconciliation on this. But those are some of the factors as to why we believe some of our revenues will be faster than the futures growth.

Just one clarification. I was under the impression that you wanted to back away from holding inventories from retailers for at-once orders, that you really wanted to get on a flow-through model. Is that an inaccurate idea?

Yes, it is. And this is not -- we're not talking about U.S. models here, and we're not talking about widespread. We just have some markets, particularly on the International side, where the [INAUDIBLE] is a little bit bigger. But as I mentioned in my earlier remark, if you look at our inventory positions, as Charlie mentioned, we're down 15 total U.S. inventory. We're not building inventory for prop business in established markets.

Okay. That's helpful. And SG&A?

On the SG&A front, as we talked about, we're going to see -- you know, most of the bulge in demand creation was in the first quarter. And as I mentioned earlier, we are gearing up right now to implement our supply chain systems in Europe. So one of the things we do when we make those preparations is we have a lot of our staff in training for the new system. And you backfill those with temporary workers, and so it boosts your operating overhead. So we do expect the OP-X numbers and the demand creation numbers will not be growing at the first quarter rate over the balance of the year.

Would a sort of high-single-digit rate growth in SG&A for the balance of the year be in the ballpark?

I wouldn't want to get into specific numbers like that, Margaret. And I think Charlie is going to handle your retail question.

Okay.

yeah, just a little color on the retail. I think, as you know, we have a lot of tourist destination retails. And it has probably been more adversely affected, and slower to come back, than some of our traditional retail comp numbers that you see in the marketplace.

But, with that said, we are starting to see these things come back a little bit. And now that we are going into the anniversarying of September 11th of last year, we are hopeful that we would continue to see an improvement in our retail figures.

So now that we've lapped those numbers, I'm not ready to make any robust forecast, because I think we are in some uncertain times right now. But I think overall, we're going to continue to work on operational improvements in our retail division, and that we are seeing an improving trend, as far as customer counts and improving revenue.

Okay. We'll see you Friday. Thanks.

Thanks Margaret.

Your your next question is from Mr. Bob Durbal of Lehman Brothers.

Good morning.

Good morning, Bob.

Two questions. First one, Don, can you give us some thoughts here on your use of cash for the next three quarters. You're sitting there with over $400 million still on your balance sheet. Share repurchase versus and other acquisition.

The second one was that you guys mentioned some challenge you had on the apparel delivery? I was wondering if you could further elaborate on that during the quarter.

Use of cash, Bob, we've talked about all of the uses of cash that are out there. I guess I'd start with saying that we're not uncomfortable holding relatively more cash at this point. I think the uncertainties that we've all seen go through the world at large in the last 18 months, means that we're probably holding a little more cash than we have historically. We have been buying back stock. I think we're going to continue to do that. So we're -- you know, we're obviously looking at all the levers, as we do all the time. But the one thing I would say is, we're not uncomfortable holding a little more cash right now.

With respect to acquisitions, I think Phil has talked about this on previous conference calls. And the bottom line is that we're very focused on what our strategy is around acquisitions. We are committed to making sure that they would drive incremental shareholder value. And we're not in any hurry. The money is not burning a hole in our pocket.

Hi, Bob. This is Charlie. I'll take the apparel deliveries piece. Most of it was in the U.S., but we did have a couple of global issues. Some of it I think we can attribute to still learning our new systems in the US, with [INAUDIBLE]. I don't want to give anybody an illusion that we're having problems, but it is an entirely new system, and we're learning how to use it effectively.

I think as Mini Grossman and her Source and Production Team in apparel have also spent a lot of time working on reprofiling the go to market process within the apparel division. And we're made significant adjustments which I think she's has talked about in the past, in realigning and restructuring our sourcing, both calendar and process.

So with that has come a few little glitches. It did affect some of our deliveries in some categories. But overall, the numbers reflect this, we had a really good quarter. And the thing I feel most confident about is that the demand for Nike apparel is probably as high as its been for several years, and we are forecasting that to continue.

So we'll work through some of these operational challenges. We're confident that we've got our arms around them, and that it shouldn't have a significant effect on overall apparel results going forward.

If I could ask a follow-up. Don, could you give us an estimate of where you think your free cash flow will wind up for FY '03.

I'd rather not try to peg a particular number on that, Bob. I think -- one of the things we have talked about, though, is some of the drivers for free cash flow. We've certainly continued to focus on working capital. And I think the performance this quarter of a lower absolute inventory number, as well as a -- an accounts receivable day sales outstanding improvement, suggests that we've getting after that. And we have talked about capital spending as being broadly in line with last year.

So I think -- while I wouldn't want to put a specific number out there, I think you can do the math, and that suggests that we will continue to be a good cash generator.

Good thing you're not holding us to one question. I have one question for Pam.

Oh, Bob.

Is there any change in terms of the quarterly sequential movement on the futures that we should be aware of?

Actually, I'll take that question, Bob. [LAUGHTER] As I mentioned earlier, one of the things that, as we look at the futures numbers and revenue projection, it's extraordinarily difficult to sort through the relationship between the two, because of last years supply chain implementation in the US, and Europe this year. So as you recall, we pulled forward some orders into November before we shut down our facilities for the implementation in the US. We're going to be doing the same thing in Europe. So when you tease all that out of there, while the futures numbers and the revenue numbers may not look like each other, bottom line is we think Q2 and Q3, from a revenue growth standpoint, will be broadly consistent. Does that answer your question?

Yeah, that's great. Thank you.

Thanks, Bob.

Your next question is from Mr. Brian McGough of Morgan Stanley.

Great. Thanks very much. I just have a question on the gross margin and the inventories. I have to look back about 5 years in order to find a quarter where gross margins were this high. And there has been anecdotal evidence out of some factories in Asia that the lead times have actually shortened over the past couple of months. SO, I'm just wondering, how much of that has helped your inventory reduction this quarter, and if it's not, when can we start to see it?

And then I do just have a follow up to Bob's question about the cash. And that now the market seems to be placing a higher premium on cash these days, and I'm wondering what the likelihood is of actually seeing a higher dividend out of Nike. Thanks.

Hi, Brian. This is Charlie. I'll take a stab at the inventory issue. I think we're doing several things better. One, I think we're doing a better job at working with our customers around the world in forecasting. I think we still have a lot of improvement opportunity there. But we're getting better at it. We're taking a little bit more conservative approach in our inventory as we bring it in on the buy side. And I think to your point, we have shortened some of the lead times. And this is the front end effect os some of the new supply chain implementation.

We would expect to continue to see benefits there. I think at the end of the day, we won't make as many mistakes as we used to by -- I think we've taken six or seven weeks out of the supply chain right now, on the footwear side. It certainly enables us to confirm everything, and not prebuild as much product as we used to have to do in the old system.

So with respect to benefits, I think you should hold us to continuing to improve here. I think that's our goal. And we're committed to that.

And as far as the dividends are concerned, Brian, that's definitely one of the items that we have in our consideration set, in terms of uses of cash flow. And we'll be discussing that -- cash flow. And we'll be discussing that with our Board of Directors, and our major shareholders. And we normally make decisions on that in the second half of the year. So that's definitely one of the things in the consideration set.

Awesome, thanks guys.

Yep.

Thanks, Brian.

Your next question is from Miss Virginia Genereaux of Merrill Lynch.

Thanks, and good morning.

Good morning.

First, on apparel. May I ask, in the US I guess, in particular. You know, the specialty guys are saying that branded athletics has been relatively tough. May I ask what's driving the growth there? Maybe it's into the department store channel. And how is the performance? How is the sort of sell-through, may I ask, in some of the new shop in shops at the department stores? That's one. I'll let you guys answer first.

Okay. Yeah, this is Mark. Let me take that apparel question. A lot of the energy around Nike apparel in the U.S. market -- actually around the world. But in the U.S., let's just focus on that a minute. It's around the performance product that we have been introducing. As Charlie mentioned, we have a label strategy in play. And it's really, I think, starting to have some effect on how we're differentiating the product at retail.

And the performance category, we think, is really starting to drive some energy. A good example of that of late is the introduction of the spear product that we have out there. And we have a print campaign around that. And the sell-throughs on that have been really incredible. And we expect to see great results on that product line throughout the remainder of the year.

But I think it's points like that that are creating energy around the performance apparel. And we're starting to see that lift up some of the apparel as well. And I just think overall we have a better designed and merchandised apparel line, led by Mindy, and Tom kennedy here in the USA.

That's great. And is a particular channel, may I ask, doing better? Whether it's your own stores, or department stores. I mean, a new channel, is that helping?

Actually, we're seeing fairly strong sell-throughs across the channels. There's been a particular focus on the department store channels, and we're actually outperforming in the department store channel, relative to where they are at overall. And then again, in the sporting goods channel, if I had to call another one out, I'd probably point to that one.

Great, okay. And then secondly, if I may ask. There's been some-- the data for a long time has been tough out of Europe, I guess particularly in Germany, which is still your smallest market. But are you -- and you guys keep bucking that trend. Can you -- are you see any incremental weakening in Europe? We know we're getting currency help. But on the constant dollar side, as you look out there, can you give any commentary by each of your major European markets?

Sure. Hi, Virginia. This is Charlie. I think -- you know, we talk about the Italy in the past. Italy is starting to flatten out. It's been down after 11 straight years of continuous growth. So we think we've pretty much flattened out there, and would expect to see some growth out of Italy again.

The UK has gone into a little bit of a plateau right now. I think you're seeing some retail consolidation going on in the UK. And that is another market that has been on fire for several years. So we're really expecting the UK to take a little bit of a breather right now in our plan.

That said, we're having great success in France. Spain continues to grow, despite the ongoing litigation around trademarks with respect to apparel. And we're having some success in Germany. We feel great about the team we have in Germany. The group has been focused on attacking the business. We're developing better relationships with the retailers, and we're really excited about the progress that we've made there.

So right now, France -- with respect to the big 5, France, Spain, and Germany are going to carry the day a little bit. With the -- both the Nordics and Central Europe starting to come on as more of an emerging marketplace. And as I said, we would expect Italy to start to come back a bit.

Okay, great. But you haven't seen Europe get a lot tougher for you in the last month or so, may I ask?

Not -- not -- not really. I mean, the UK has definitely slowed down a little bit. And we're keeping our eye on that. It's a big market. That and Japan go back and forth as our second and third largest markets in the world. So we'll keep an eye on that.

But for the most part, the brand -- you know, we had a fantastic World Cup effort. The soccer/football impact on the brand in Europe was very positive. And, like you say, we continue to buck the trend a little bit.

Great. And lastly, may I ask, on the Americas. Don, I think on the last call, you said, I know it's mayhem down there. But I think you had expected that you could -- that that segment could be growing by sort of the latter part of fiscal '03 for you. And currencies are a wildcard. But do you still think -- would you still say that's a possibility here? Do you think America could start to grow for you in the back half?

Well, we actually are growing now in constant dollars.

Understood.

I think the thing to bear in mind on this one is the Argentine pesos were worth $1 this time last year, and now they're worth 30 cents. So we'll have to get ourselves past that to see some real dollar, or reported dollar growth. But in constant dollars, notwithstanding all the stuff going on in Latin America, and then Canada has a lot of similarities to the U.S., the Americas region still grew in constant dollars both on revenue and profitability.

Okay. Great. We'll --

Thanks --

-- sort of see it. Sorry, Pam.

No, thanks, Virginia.

Thank you.

Your next question is from Mr. John Shanley with Wells Fargo Securities.

Good morning. Charlie or Mark, if we looked at the U.S. footwears futures, and you excluded the marquee end of the business, would the features still be negative, or would they be flat without marquee factored in?

Hi, John. This is Charlie. I don't have the numbers in front of me, John. I'll have to get back to you. I don't have the specific breakdowns, and I don't want to guess at that number. But, we're having great success in the -- well, throughout the product line. So I'd want to get back to you on the specific numbers there.

Can you give us a rough idea of what percentage of the revenues in the just concluded quarter came out of the marquees, so maybe we can balance the importance of this whole marquee issue?

Well, I don't have that specific number either. We have talked, about in the past, you know, somewhere between 15 and 20% of our business being marquee. So it's going to be, you know, probably --

You think it was that percentage in the first quarter as well?

I would assume that it's going to be relatively close. I'm hesitant to peg a specific number because I don't have a number in front of me.

Okay. Looking at the issue that you brought up in terms of Nike's relationship with Footlocker. Is it just the marquee issue, or is it also equally related to the whole issue of logos and price maintenance? Are they equally as important, or is one more important to you guys than the other?

Well, I don't think it's -- certainly, it's not around pricing. That's not something that, you know, we have the ability to manage or discuss. It's really more around brand presentation and consumers. And right now, their focus is a little bit different than where ours is, specifically around that marquee-type product. So we're disappointed with their shift in direction a little bit. But like we said, we feel very confident about our direction. We feel very confident about that consumer, and our ability to talk to that consumer, and deliver on the demands that that consumer expects from this brand.

So -- you know, that's what it's all about. And like I said, we don't necessarily -- I'm not trying to say that their strategy is a good one or bad one. They feel very confident and comfortable with it. We just gotta do our business the way we feel most confident and comfortable with.

Sure. Some of the other athletic retail specialty chains reported that their cells like Footlocker were not exactly robust for marquee products in the just-concluded back to school selling season. Getting back to this whole issue of what channel to go to, Finish Line and Foot Action are a drop in the bucket in comparison to the market position that Footlocker has. Are you going to go to -- more aggressively into the big box sporting good chains? Are you thinking of taking marquee into family footwear and general merchandise chains eventually if you can't get the product placed in the athletic specialty?

Right now, we have a lot of confidence in athletic specialty. And it will also be addressed on an almost region by region -- when I say region, I mean within the United States. I think that, you know, you're right when you look at the comparison between Foot Action and Finish Line versus Footlocker, there is a disparity in the store count there. We acknowledge that.

But we're pretty comfortable and confident that we have the distribution in the geographies that would get to that. I do not feel that we will have to either open up any new chains or that we will go to any new channels of distribution for our marquee products.

Okay. Charlie, I just want to touch on Europe just quickly. The 5% sales increase, and the 5% increase in the futures in Europe, is that partly due to the fact that you've gotten a substantial increase in the presence of the Eastern European markets? I don't understand how you're going to have robust levels if your two big countries, UK and Italy, are not up. I know you got some business going up in the other three big guys. But how much of that future, and how much of that sales momentum that you had in the quarter, were generated in filling the Eastern European distributorship that you look over?

Well, it's certainly going to have an effect. It's not a large effect at this point in time. Like I said, we would expect to start to see Italy come back as well. So Italy has been down over the last year. And we're starting to anniversary some of those weaker numbers.

So -- but we're excited about Central Europe, I think, as an emerging market. Poland, Turkey, Slovakia, Slovinia, Czech -- I mean, all of that is very good Nike -- has been a very good historically Nike marketplace. So it's going to continue to grow. And we're very, very excited about it and very bullish on it.

Okay. Looking aggregately from the five big guys, is your market share and your sales and future orders positive, looking at the five European markets that you've traditionally been so strong in versus the rest of Europe?

I'm not sure I understood --

In other words, the five big guys, five big countries, are your sales collectively up? Are your futures collectively up? And are your market share numbers collectively up?

I -- I don't have a -- I don't have all that statistic in front of me. But I'm -- I think I'm pretty comfortable in saying that we are still up in -- collectively up in the five big countries.

Okay in all three issues, market share, sales, and futures?

Yes.

Okay, great. Thanks a lot. Guys, I appreciate it.

Okay.

Your next question is from Mr. Dennis Rosenberg with CSFB.

Good morning. It's great that you're having a 9:00 conference call. I hope you'll consider doing that again in the future.

Thank you. That was your first question. [laughter]

That's my question. [laughter]

Okay.

Don, you indicated that inventories improved in every region except Europe. What was going on with inventories in Europe?

Well, part of it's foreign exchange, Dennis. The stronger euro means that the inventories are gonna go up in U.S. dollars, even if nothing else changed. So that's a piece of it. The other piece of it is, we've got fairly strong deliveries coming in the second quarter in advance of the supply chain implementation, so we had a buildup before we shifted out for preshutdown.

Okay. And could you give us some guidance on the -- specific guidance on the second quarter?

No. [laughing] I think that as we've tried not to be that specific on the guidance there, I think one of the comments earlier was that we expect revenue growth to be fairly consistent between the second and third quarters. You know, I think, you know, more than that, I think the margins are going to be more consistent. But I wouldn't want to put any specific earnings per share targets out there for the second quarter.

Would the margins be consistent for the final three quarters, do you think?

At this juncture, I don't see anything that would necessarily move them significantly one way or another. But you know, at this point, I really wouldn't want to stake myself on a particular number.

Okay. You know, this might sound strange, given the recent events, but if you're staying with your top-line sales guidance of high single digits, and it now looks like the operating margin -- the gross margin will probably exceed what your prior guidance was, it seems to me that the estimates out there might be too low?

Well, you know, Dennis, we talk about ranges. And the reason we do is that there is inherent volatility in the business. You know, when we speak in terms of high single digits, that's a range. And there are a lot of things that can change both externally and internally within the company. Same thing is true of margins.

So, I guess the way I think about this is, we've certainly seen some things that are going to be challenging for us. I think the U.S. distribution system is going to be a challenge. Certainly, as Charlie mentioned, there is a challenging U.S. and worldwide consumer situation out there. And we have a lot of movement regarding the timing around European supply chain implementations.

So there's a lot of challenges out there. At the same time, we have some things that are going our way. For example, currency versus versus the prior years going our way. And margins are going our way.

So what I would say is, as I said in my prior remarks, the net is we're staying focused on our goals. We're going to try to hold the course and steer through the choppy water. And that's the best I can tell you.

And finally, when will currency turn positive on the gross margin?

We should see it next year in '04.

Okay. Thank you.

Your next question is from Miss Noel Granger with J.P. Morgan.

Hi. Good morning. Is it still morning?

Yes.

A couple of questions. First, Don -- actually just following up to your comment about currency impact on margins for '04. Given the growth margin kind of benefits you're seeing right now, do you -- obviously you're going to come in higher than we kind of originally thought. Do you see this as a multiyear trend, as you continue to get some of the benefits from the supply chain initiative? And where do you think your growth margins can ultimately or will ultimately stabilize?

Well, that's a little more specific than I could be going out that far. I guess what I would point to is, we definitely feel that there is sustainable improvement in gross margin embedded in the 41.4. As I said earlier, we're not ready to bank the whole 41.4% at this juncture. But this is really grinded out improvement in gross margin. It's not currency-driven at this point. And there's been a lot of work done in the product groups and the distribution and logistics team to start driving that margin up.

I would say we still have not seen the full benefit of the supply chain initiatives, because we're basically just installed in Canada, U.S., and global footwear. So we still have a lot to do to finalize the rest of the -- you know, get the rest of the world on the same platform.

I think we still have opportunities in margin. And you know, I think some of the things we've done so far, we can continue to sustain. But where that is going to land, I -- I wouldn't want to predict that at this point.

You know, I will add. This is Mark. talking on the management piece. Nike has -- I think religion on this one as much as we ever have. Expense management, materials consolidation, product cost reduction. This isn't just any one area. It's all around the company. And I think it's a healthy balance between what we're doing there and obviously trying to drive the brand on the other side.

Okay. And Mark, I was hoping you could talk a little more about product. And specifically, how would you rate the product that you have been delivering at retail, let's say for the last three months, and for the next six months going forward? I mean, obviously back to school has been tough. And you know, the consumer is pretty weak. But just trying to get a sense of, you know, what kind of --

Uh-huh.

-- perspective you would take on your current product.

Yeah, I -- well, we said a year ago that we wanted to focus on the mid to lower price point range, $60 to $90. And we've seen -- we continue to see, I should say, great success there in footwear, with products like the 9,000 series, [INAUDIBLE], the Moto, the Turbulence, the Levitate, the Monarch. These are shoes that are actually seeing some very strong sell-throughs. And they have for months now. Not just this past quarter. So that has been working great.

It's not a mystery to anybody that there is some pressure at the marquee zone at the statement level. And I don't think we have broken through quite as much as we need to, obviously. Not just Nike. I think the industry competition as well. There's been a lot of misses. We do see some success there though. The football area, we have the Vapor and the Total-90 product, which have had tremendous sell through, through and beyond beyond World Cup. And Then, as I mentioned, the Jordan product, even at the higher price zones, is selling quite well.

We have to hit in more cylinders at that high end zone though, and that's a real fixation for us. You'll start to see more and more energy, not only in holiday and then through spring, but we have a massive ramp up, a massive effort in footwear, leading up to and through Athens in the Olympics. And I'm actually very excited. I can't get to specifics, but excited about some of the new technologies and concepts we have, within and across the sport categories. And I think you'll see more energies in the active life design. And all that to me is -- well, for us has been very profitable, and we will continue to see that in the quarters ahead.

In apparel, obviously we've had some success in all markets, all regions.

As I said before, I think that's largely driven by just better design, better merchandise products, not just in the performance end, but the performance side is definitely creating a lot of energy for us. You'll see the focus on apparel performance continue through holiday. We have a big campaign that will continue -- you know, continue with Spear and beyond. We have some other concepts coming. We have every intent to really line up around performance product in every category, every product type. And I'm actually very confident about what's in the pipeline, what's coming.

Okay. And my last question, just I guess for Charlie. With respect to the changing distribution in the U.S., and what you're looking to replace some of the lost business with. Can you give us any sense of timing or, you know, where you stand with respect to progressing in those initiatives?

Sure.

I know it's fluid, but --

Yeah. It's very fluid. You know, we've got -- there's no shortage of distribution out there. And we feel like there is enough both in the athletic specialty, you know, which is the consumer-driven group that we're looking at, and geographically, as far as alternatives go. We won't be able to replace everything immediately. There is just no way we can make a move that quickly. But we do feel comfortable and confident that we will not lose access to the consumer.

So at the end of the day, the consumer is not going away. That they're still out there. And we need to do, as Mark has stated, a better job telling compelling stories, introducing compelling product, and they'll find it. I mean, they've proved it before. And we anticipate that they're going to prove it again. If we put out the right product with the right communications, they'll find the product. They'll get to us.

And so, it's going to happen over time. And they're going to have to relocate some of that product in some cases geographically. But we're confident that we'll replace that business and continue to communicate with that consumer.

Is it something like a six-month type of time frame? I mean, is that the right way for me to think about it, that you will probably will have achieved a fair amount of replacement by then?

Well, I think again, it's going to be a combination of many factors. But you know, we're trying to accelerate it as quickly and as fast as we can. So -- I mean, it's hard for me to give you an exact date or even a time frame. I would just leave you with the fact that we're going to try to make that transition as quickly as possible.

Okay, Noel --

Okay, thanks.

We're going to have to move along. Thanks.

If we could do one more question. One more person, please.

Your next question is from Miss Carol Murray of Salomon Smith Barney.

Hi. Good morning.

Hi Carol.

I have a couple of questions. And they're really threefold. First, for Don. I think for last quarter, you had said that for SG&A for the year, you were going to be assigned a budget for a 4% to 5% increase in dollars. And I was just wondering whether -- one, whether I'm recalling accurately, and two, whether that would still be kind of a current statement.

Secondly, whether Mark or Charlie, your inventories obviously appear to be in good shape. Hoping you might comment in what your views are about inventory in the channel currently. Obviously some of the sales reports have been a little less robust than planned, particularly at specialty.

And then third, within the high end market -- let me ask you this a different way. With respect to the numbers that are out there regarding, you know, the change in distribution with Footlocker, you know, their SEC documents say 150 to $250 million in sales. I was just hoping you might comment on whether that number could change from anything you might do with the account. Do you think there is an opportunity to improve on that number, or in fact that number might get worse before it gets better?

Okay. SG&A, very briefly, Carol. 4% to 5% is our long-term objective, long-term model. And as I think as I said at the beginning of this year, we thought that was going to be a challenge to get there for fiscal '03. And I think the two things I called out specifically -- well, three things, were Manchester United, World Cup spending on demand and creation, and Nike supply chain implementation in Europe. So 4 to 5 is still our long-term model, but very challenging to get there in '03, because of those three factors I mentioned earlier.

Okay.

Yeah, Carol, this is Charlie. I'll take the other two. I think on the channel inventories overall, back to school was not a great back to school in any measure I think, specifically here in the U.S. And obviously I think some of our futures order the indicate that. So our -- our bookings for holiday are not as strong as we would have liked to have seen. So we don't anticipate any buildup with respect to our inventory levels at retail. We feel pretty comfortable and confident there.

With respect to Footlocker, we're certainly going to try to minimize the effect of that number. That is their stated number. It gives us a good target to measure ourselves against. And I'll just say this, that we have a lot of things in common with Footlocker. And there's a -- we're not walking away from Footlocker by any means. And as I said in my prepared remarks, they are still our biggest customer. And we will continue to go after their business as aggressively as we always have. And that consumer that they're serving is a big part of our business as well.

And so, you know, they've stated that number. We're going to try to minimize it as best we can, and continue to serve the U.S. marketplace.

Okay. Thank you very much.

Thanks, Carol. Thanks for joining us today. And we will see you all Friday. Thanks.

Thank you all for participating in this morning's conference. This concludes today's call. You may now disconnect.