Nike Inc (NKE) 2003 Q2 法說會逐字稿

Welcome to the Nike Inc.

Second quarter fiscal year 2003 earnings conference call.

This call is being recorded and will be made available for replay beginning today, Thursday, December 19th, 2002, at 7p.m. eastern time through Monday, December 23rd, 2002, at 7p.m. eastern time.

Please note that if you decide to ask a question, it will be included in any future use of this recording and that any recordings 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 Ms. Pamela Catlitt, Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good afternoon everyone and happy holidays.

Thank you for joining us today.

Participants in today's call are Charlie Denson and Mark Parker co-presidents of the Nike Brand and Don Blair our Chief Financial Officer.

Charlie, Mark and Don will each provide brief prepared remarks and then we'll answer your questions.

Before I recap the second quarter fiscal year 2003 results, which we relieved earlier this afternoon, let me remind you that on this call we're going to make forward-looking statements based on our own, 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 file 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 cancellation there the mix of futures and [inaudible] Orders which may vary significantly from quarter to quarter.

In addition it's important to remember a significant portion of our business, including equipment, most of Nike retail, Nike Golf, [inaudible] Bauer and Hurley are not included in these futures numbers.

Now the results.

Earnings per diluted share for the second quarter were 57 cents, a 19% increase versus a 48 cent per share reported last year.

Revenues increased eight percent to two and a half billion, in constant dollars revenues grew six percent during the period.

Revenues by region are Europe middle east and Africa region grew 35% during the quarter, had the dollar remained constant European revenues would have been up 25%.

During the quarter, European footwear grew 39% in real dollars.

Apparel was up 29% and equipment was up 33%.

Asia Pacific revenues were up 14% in real dollars and 12% in constant dollars.

Asia Pacific footwear revenue grew six percent during the quarter.

Apparel grew 2003% and equipment 19%.

American decreased 13% in real dollars and grew seven percent in constant dollars.

Footwear was down 17%, apparel was down 11% and equipment grew 15%.

Total revenue in the U.S. region decreased eight percent during the quarter.

Footwear fell 13% while apparel revenues declined one percent and equipment decreased four percent.

Quick review of the income statement shows that during the quarter gross margins were 40.2% of second quarter revenues.

The 190 basis points higher than the same period last year.

The SG&A was 30.2%, second quarter revenue which compares to 29% in the second quarter of last year.

The tax rate for the second quarter was 33.8%, 120 basis points lower than last year and during the quarter we purchased one million 16,500 shares of stock for approximately 44 million dollars.

Futures scheduled for delivery between December 2002 and April 2003 totaled $3.9 billion, a 2.4% increase compared to the same period last year.

Of the U.S. dollar remained constant future orders would have been flat year over year.

By region U.S. futures were down 4%, Europe was up 9% Asia 15% and America decreased 15 percent.

In constant dollars, outside the U.S. futures orders in Europe were up two percent Asia 12% and the Americas declined 5%.

With that I'd like to introduce Charlie Denson, President of the Nike Brand.

Thanks, ma'am, happy holidays.

Well, it is starting to feel a little bit more like Christmas around here.

We're very pleased with our performance for the quarter.

Earnings grew 19%, revenues 8 and improving gross margin performance in the results continue to demonstrate our ability to manage through diverse conditions and still deliver a constant earnings performance.

It wasn't for a lack of challenges.

Store closures in U.S. tentative global economy, implementing our supply chain project in Europe with a global upgrade for the rest of the business and the first quarterly impact of a 40% reduction in orders from Footlocker our largest customer.

I'll hit on a couple key points today international results, some observation on the U.S. business and an update on that Footlocker relationship.

It was just two short years ago this week that I participated in my first earnings call as the head of the U.S.A. region.

At that time our international businesses had delivered amazing growth while our U.S. business was mired in the after effects of retail consolidation, excessive inventory levels and a pervasive lack of excitement in the overall market.

I'm confident in saying we've improved dramatically on all fronts.

Hats off to Gary DeStefano and his U.S. team but more on that in a minute.

We like our position in the U.S. athletic apparel and footwear market. 70% of our business last year was not in U.S. footwear.

Fiscal year '03 will be a watershed year for us as we have stated we'll do more business outside the U.S. for the first time in our 30 year history.

So with that said, I'd like to review our international story first.

The quarter went quite well as you've seen, as both Europe and Asia posted double digit constant dollar revenue growth and Americas grew at a 7% constant dollar rate.

In Europe we saw 25% constant dollar revenue jump.

It was held by both strong demand and the pull forward of revenue in anticipation of that supply chain implementation over the last month that I mentioned earlier.

For the past several quarters there's been some concern expressed over the softening of our business in Europe.

Overall we're pleased with the strength of that business, even as we managed an increasingly challenging global macro economic environment.

Our [inaudible] is bouncing back with positive futures booking we continue to see very good growth in Spain, Portugal, France and some of the emerging central European countries while the UK Europe's most developed market has undergone some consolidation in the past year we have continued to deliver solid results and I think we're in good shape for the future.

Across the region, however, the Nike Brand is very strong and we believe we have a very healthy and realistic approach to managing this business for sustainable growth.

[Inaudible] VP.

Europe talked about our position in the environment in New York in September.

If you followed us for a while you also know we undertook a major pricing initiative in preparation of the Euro implementation two and a half years ago.

The benefit of that effort combined with our solid brand strength are a couple of reasons why we're enjoying some positive margin movement and maintaining flexibility to remain competitive in a challenging marketplace N Asia we continue to enjoy a very solid performance.

The Nike Brand in the business is as strong as it's ever been.

China grew 74%.

Korea was up 18% and Japan up 6%.

The regions continue to embrace sports as an important piece of both youth culture and as a business. [Inaudible] And the Houston rockets played last week on TNT to an audience of about 1.2 million viewers.

It wasn't a Brad draw for a mid-week game, but in China the tell cast was viewed by more than 11 million people.

And that was only because they had to watch it at 10 in the morning or it would have been more.

The last group that should be recognized is our global golf division.

Who posted a gain of 35 percent for the quarter, driven by new product launches of our pro combo irons and kids club package.

As I said two years ago on that first conference call, our U.S. footwear business is large and profitable.

And we intend to keep it that way.

Let's touch on the vision we have talked about with you over the last couple of years.

It comes down to three areas of leadership and execution.

Product marketing and brand presentation.

We said we would focus on returning our U.S. footwear business to the full model that's been so effective for us over the years.

We believe the most important element to our success is making great product and that our track record with our consumers has been pretty good.

Beyond that, our strategy was to focus on connecting our brand position with consumers and managing our inventories to ensure demand and profitability.

The product continues to improve.

We have attacked the 70 to 90 dollar price point with the best product we've ever produced while continuing our dominance in performance.

Our marketing and communication has been much more consumer centric and intuitive than we've had for the several years.

And our brand has been enhanced and embraced because of it.

To the final piece of the puzzle is the retail shopping experience.

Our business has always been more than just a commodity driven consumer segment and it will not prosper in the future if we were to treat it like one.

It is fueled by innovation, emotional ties and a shopping experience that is built around excitement, story telling and a special connection to an [aspirational] consumer, this is as important a component to our overall brand strategy as product and marketing.

As we look to the future, there are several ways to energize the U.S. athletic footwear market.

Great product assortments.

Inspirational stories of from sports and providing a shopping experience that delivers on the promise we promote on a global brand.

Let's make sure we're clear here we're executing a strategy to grow our U.S. footwear business and to grow it profitably.

What we're talking about is a Nike U.S. footwear strategy, not a Nike Footlocker strategy.

Ultimately our business success is built on our long-term brand equity and position.

This is something we simply will not compromise.

The U.S. footwear segment as a cornerstone is critical to the overall health of the global sports and fitness industry.

We feel that this part of the business can be much more compelling and exciting than it has been over the last several years.

Another reason that we're continuing to grow profitably in the U.S. footwear is our margin improvement.

Over the past several quarters our gross margin for U.S. footwear has shown improvement.

A key component to that equation is driving consumer demand, which in turn drives retail traffic and profitability for our retail partners.

We do not see any reason to change this successful approach.

We do see a number of our competitors willing to sacrifice profitability to gain shelf space.

We don't feel we should be compromising our brand for unprofitable growth.

But you know at the end of the day the consumer will decide.

Much as has been written in the past months about our relationship with Footlocker.

They have now released projections that our business with them will be down three to 400 million for calendar year '03.

This is not new news to us and hopefully not to you.

It is certainly not a surprise to us.

This number is consistent with the trend line we've been discussing over the last several months, just rounding out the calendar year.

What this means is Footlocker will no longer be a primary distribution point for high end innovative product in the U.S. market.

But that we still expect them to play a significant role in our global footwear distribution plan.

We will no longer look to Footlocker to distribute our elite and statement level product in footwear apparel in the U.S.A. nor will they participate in any of our key footwear product launches after February.

We are confident that this business will be replaced by retailers that believe in a better brand of presentation and shopping experience.

I'm very pleased to say that for the futures months of April and May that we just booked, we have replaced the [parage]in units that's been lost in the Footlocker scenario.

This has happened even quicker than we had projected and we expect to see it continue into our new fiscal year.

We're still seeing pressure on our average price per unit, but that is consistent with an overall industry wide trend.

So while we've spent all this time talking about this important mature 30 percent of our business, the other 70 percent has continued to grow.

As we have said for several years, revenue growth, the Nike Brand will be driven primarily outside the U.S. and we will rely on our entire global portfolio to supply a consistent earnings performance.

While we feel very good about the strength of our results this quarter, we will have to focus our efforts even more as we all continue to face a challenging and uncertain economic environment.

For our part, you should expect that we will remain focused on growing our business profitably and for its long-term health.

And now I will turn it over to my co-president, Mr. Mark Parker.

Thanks, Charlie.

Good afternoon everyone.

Charlie had mentioned that we'll be doing more business outside the U.S. this year for the first time in our 30 year history.

Well, I think this is an important milestone for us.

I think it also illustrates the point to which the Nike Brand has evolved.

Our success is really based on having a diverse portfolio of business and I think this quarter's results are a perfect example of that.

It's not just a portfolio of international versus U.S. business.

It's operating successfully on a number of different planes.

Geographies are one.

Footwear apparel and equipment are another.

Men's women's and kids are another level as well.

And then there's the specific categories where you must be as nimble as the companies who complete solely in one segment of the business.

With that as a backdrop, I would characterize our performance manager that importantly as very strong over the last nine months it's a different Nike that we're managing these days one where we must invest in growth when appropriate.

But also recognize that some of our growth in profit improvement is coming from areas where we have not historically applied as much focus and discipline.

One area where we've seen a great return on our investment is in the initiatives we're making around margin improvement.

Eric [inaudible] And footwear and Mindy gross man in footwear have led in this area and again the evidence is in the numbers this quarter.

And really over the past few quarters.

Our gross margin over the past 12 months has improved by 190 basis points on a trailing 12 month basis.

And most of that has come from our focus on materials consolidation, better sourcing and expense management, and product cost reductions.

And I'm especially pleased that we've been able to transfer that gross margin improvement to our bottom line result.

Specifically in apparel we saw the gross margin percentage grow in all four regions.

Much of that growth was driven by increases in our net pricing margins on apparel, lower inventory levels in the U.S. and in Europe, as well as improved warehousing costs in key markets in Asia Pacific.

On the footwear front, margins are growing, in part due to our efforts around product cost reductions, higher pricing margins in Europe and the Americas and improved product mix.

But we're still without question a growth company and you don't need to look much further than this quarter's numbers in Asia Pacific and Europe for evidence of that.

The growth opportunities outside the U.S. are still abundant and fortunately we're in a much better position to profit from those growth opportunities than we were just a few years ago.

Our systems are improved.

We are more focused on profitable revenue growth and we have a cohesive management team that is committed to our growth agenda.

Charlie spoke earlier about the brand being in better shape than it was two years ago.

I wanted to get into a few specifics there.

Particularly at our communications.

I mentioned earlier that I think we've done a good job of managing our portfolio of different businesses.

Each with specific consumer preferences and characteristics.

Part of that success stems from our ability to reach our consumers in a rapidly changing media environment and speak to them about our performance and innovation agenda.

We've had some real successes over the past year in creating communications that rest son 98 with our consumers.

We talk a lot about the complete offense approach to product creation and I think we've successfully adapted that approach to our communication.

We're reaching a broad audience with ads like our ME, winning TV add move our World Cup campaign our biggest and obvious success to point to this year while we're doing well in connecting with the broader audience we're also reaching our consumers in smaller more intimate ways.

One great example would be the communications we've done with runners around the world with events like run London, where we had over 20,000 runners participate or the marathons in New York and Chicago where runners lounge and product hits are a big hit.

This is again driving bottom line results for example on the Saturday before the New York marathon we had over 50,000 people come through Nike town New York it was one of the top ten sales days in the history of the store.

This past quarter we saw very strong growth in our Bauer series, running footwear for our core running consumer.

With that business on track to did you believe over this fiscal year.

We've also had great early success with the Nike Lab.com which is the ultimate on line destination for those who really want to be the first to interact with Nike's most performance driven products then again in Nike ID where you can personalize your stuff on line.

Another example of reaching core consumers with a different approach is our sole provider book a 30 year history of Nike Basketball.

It's another way of having a deeper more intimate dialogue with consumers than a 30 second ad can achieve.

I'm not trying to sound like Oprah but I'll personally recommend the book to any those who haven't finished their holiday shopping.

Finally, on the topic of brand management and marketing, I want to point out the recent promotion of Trevor Edwards to the role of corporate vice president of global brand management really adds more strength and focus to the critical part of the Nike organization.

I'll finish up by giving some direction on our product focus.

But first I want to clear up a miss perception.

We're all aware of how strong the classics business has been for us recently.

And I want it to be clear that this trend has been a positive one for Nike.

We appreciate our success rate in this zone.

I think you only have to look at the two extremely successful launches we've had in the last two weeks.

The latest new color waves, introductions on the Air Force one and the Jordan 7.

Just to give you more context our U.S. footwear business in the 50 to $75 price range was bigger last year than the entire U.S. footwear business of our largest competitor.

It's not a case of where the classics business is a bad thing for Nike.

No classics or no doubt classics is a very profitable piece of business for the industry.

It's also been a positive contributor to our margin improvement.

And we will continue to lead in this area.

But classics are just one important element of Nike's complete offering.

In addition to the Jordan 7 large I mentioned early why and the great launch in Jordan 9 we're excited about the upcoming launch of the Jordan 18 coming up in February.

We're also having great success in getting great exposure on the football field.

In America football we've had great presence on the college fields as well as NFL more than 80 percent of the players are wearing our product.

And on the soccer front the air zoom Total 90 and material vapor are on the feet of key players around the world including Ronaldo who swept the all three player of the year world award.

We're experiencing the after glow of the World Cup especially in Asia Pacific.

We know has the industry leader it's imperative we lead the market to a more balanced product environment.

Performance under the equation is where we have consistently brought the most excitement to the industry.

We're very focused on making sure that that performance is the real foundation of a healthy athletic footwear market.

Our footwear product creation teams have set up to run on that complete offense.

And by that I mean we have dedicated teams working on both the active life performance agendas.

This is becoming a greater competitive advantage for us providing us with another great opportunity to lead by creating compelling products, products across the spectrum.

I want to ensure you that you'll be seeing a steady stream of innovative performance based product initiatives over the next 12 months and really leading all the way through the Aspen Olympics in 2004.

You'll start seeing some of these initiatives next month with the new shock products for spring which includes our first full length shocks and then the shocks NZ which brings the Shocks technology down to the 100 dollar price zone.

On the apparel front I'm really pleased with the progress we're making in the performance zone.

We've had a tremendous success with our newest technology platform sphere which has had great sell in and sell through at retail has helped push our average apparel price up across the region.

We've just finished running our first apparel TV advertising and I think the integrated success we've had with the sphere and the great reaction of consumers and retailers to our ability to tell the performance story for communications is really a great indicator of what we need to do moving forward with some of the new performance platforms that we'll be bringing to market over the next 12 to 24 months.

With that, I'll hand it over to Don Blair to take you through the numbers.

Thanks, Mark.

For some time now we've been talking about our portfolio of businesses.

As Mark said, that portfolio includes a number of geographies, product types, price points and even brands.

Our proposition was that managing all the elements of the financial equation across this diversified portfolio will allow us to deliver profitable growth today and invest for profitable growth tomorrow.

And the second quarter, year-to-date, we have delivered profitable growth.

We've grown our free cash flow.

We've increased our return on invested capital.

All while investing for the future.

So first let's talk about profitable growth.

Consolidated revenues advanced eight percent for the quarter, reflecting 6% growth in constant dollars.

Although revenues in our U.S. region fell, strong results from our international regions and other businesses more than offset the decline in the U.S..

For the quarter, revenue from our international regions alone was more than 20%larger than revenue from the U.S. region.

Year-to-date our portfolios delivered 7% revenue growth of five percent in constant dollars.

Our international regions also helped drive a 19% increase in earnings per share, as surging constant dollar profitability and stronger currencies overseas more than compensated for lower profits in the U.S. region.

Year-to-date our portfolio has delivered 12% earnings per share growth.

As of the end of November, we reported lower year on year inventories for the fourth consecutive quarter.

And in the second percent we generated $170 million of free cash flow from operations up 16% versus last year.

Year-to-date we've generated $279 million of cash flow, 10% above last year.

At the end of the quarter we returned some of that cash to shareholders as we raised our dividend 17% and bought back $44 million of stock.

While we did deliver strong profitable growth in the quarter, we did so while making significant investments for the future.

One such investment in Q2 was another major milestone in our supply chain project.

At the end of the quarter the systems went live for our principal operations in Europe.

We also added new capabilities to our previously implemented systems in the U.S. and Canada.

This event was an enormous undertaking, covering 25 countries, operating in 18 languages, and 15 currencies.

So far implementation has been extraordinarily smooth and we've resumed normal operations around the world.

Our new systems footprint now covers operations accounting for about 85% of our worldwide revenues.

Although we've already begun to see some benefits from this investment, we expect far higher returns will come as we leverage these systems across the currently installed base and extend them to the rest of the world.

But certainly the largest investment we made in the second quarter was in realigning our distribution in the U.S. market.

While the short-term cost has been significant, we believe the steps we've taken are essential to the long-term profitability of our business and long-term health of our brand.

As has often been the case over the last several years, the Europe, middle east Africa region drove our financial results this quarter.

Reported revenues for the quarter advanced 35%, reflecting a 25% increase in constant dollars and a significantly stronger Euro.

Consistent with our approach to the systems implementation in the U.S. last year, we closed our European distribution center from November 27th, December 6th, as we converted data and installed new software.

To prepare for the shut down period we worked with our customers to accelerate futures orders and deliveries from December to October and November.

In addition, we moved aggressively to liquidate closeout inventory prior to the shut down.

We estimate that these operational adjustments moved about $66 million of revenue from Q3 to Q2, adding about 11 points to the constant dollar revenue growth for the region.

Reported pretax income for the EMEA region more than doubled in the quarter as the rapid revenue growth and higher gross margins more than offset the incremental costs in the system implementation.

The Asia Pacific region reported revenues advanced 14%, reflecting 12% year-over-year growth in constant dollars.

Reported pretax income for the region grew 18% in Q2 as gross margins held steady and we leveraged SG&A expenses.

In the America's region, reported second quarter revenues fell 13% in real dollars, but grew 7% in constant dollars, a strength in Latin America more than offset weaker results in Canada.

Reported pretax income for the region grew 2% in the quarter.

Now, as is expected, our U.S. regions faced a number of challenges in Q2 and posted a very difficult quarter, as revenues declined eight percent in pretax profits fell 25%.

This quarter the U.S. region overlapped last year's U.S. supply chain implementation that resulted in movement of shipments from Q3 to Q2.

We estimate about four points of the revenue decline in the region was due to the acceleration of deliveries last year.

The region also experienced footwear and apparel delivery delays due to the labor dispute and the west coast ports and operational issues in our apparel unit.

We estimate these delays reduced revenue growth by about two points and added approximately $10 million of incremental air freight costs.

Finally, as we expected, lower footwear sales to Footlocker were not entirely offset by higher sales to other customers.

Higher in-line pricing margins and lower closeout sales drove higher overall gross margins despite increased air freight.

However, our pretax profit margins declined as we increased our U.S. marketing spend to drive consumer demand across the new retail landscape.

Although the overall results for the U.S. region were below the prior year, as we expected, there were several bright spots.

Our U.S. team sports business posted strong growth in the quarter, as did Nike-owned retail stores.

In-line stores reported comp store sales increases of 3% for the quarter, while factory outlet stores reported a 5% increase in comp store sales.

In the context of the figures being reported by other retailers, these results continue to reinforce the strength of the Nike brand in the marketplace.

U.S. futures orders in dollars for the December to April period fell 4%, as growth in apparel futures was more than offset by lower footwear orders.

However, U.S. footwear unit orders increased for the period, as we more than offset the impact of lower unit sales to Footlocker, with higher sales to other accounts.

Average selling price continued lower than the prior year, as our mix shifted to lower price classics in kids styles.

While these styles carried lower average selling prices they also deliver higher gross margins.

Revenues for our other businesses, including Nike Golf, co-, Bauer Nike Hockey and Hurley international rose 28% or $46 million for the quarter.

The addition of Hurley revenues in this fiscal year and significant growth from Nike Golf drove over 80% of the increase.

Hurley is on track to meet our growth expectations for the year and we're particularly pleased by the success of our golf business, which posted a 35% increase in revenues for the quarter.

Certainly one of the most encouraging elements of our Q2 performance was the continued strength of our gross margins.

At 40.2%, our gross margins were 190 basis points above the prior year, reflecting gross margin expansion in each of our geographic regions.

Consistent with our results in Q1, higher in-line margins and distribution overhead leverage drove the increase, despite higher air freight costs in the U.S. and higher closeout sales in Europe.

As we indicated earlier, our gross margin percentages does not yet reflect any significant benefit on the weaker dollar, since the majority of our product purchases for fiscal 2003 were hedged some time ago.

SG&A spending increased 12% in the quarter, driven by a 16 percent increase in demand creation.

Investments in the U.S., the addition of man Chester united and comparisons to relatively low spending levels in the prior year drove the increase.

Operating overhead increased 10%, or about $42 million versus the prior year quarter.

This increase was due to factory outlet store expansion outside the U.S. the addition of new Nike-owned countries in Europe and the cost of our implementation supply chain systems upgrade in Europe.

The consolidation of Hurley International overhead cost and the growth of our golf business also increased operating overhead spending for the quarter.

Operating overhead in the more mature U.S. regions and corporate departments both rose about 2%.

Our effective tax rate for the quarter was 33.8%, as we trued up our year-to-date rate to 34 and a half percent, which is also our expected full year rate.

In the second quarter, worldwide inventories fell 3% versus the prior year.

Lower inventories across the majority of our regions and businesses more than offset inventory increases in our rapidly growing golf business.

Accounts receivable increased 14 percent, or $230 million year-over-year.

Over $200 million of the increase came in Europe, where the stronger Euro and accelerated shipping at the end of the second quarter drove the increase.

As a result of the strong growth in profits and continued tight working capital management, we delivered $170 million of free cash flow from operations in the quarter.

In our four quarter trailing return on invested capital reached 16.9%, the highest level since May, 1997.

In spite of a tremendously difficult economic environment, and heavy investments in the future, we remained committee to achieving our financial goals for the year.

While there's still work to do, we believe we're still on track to deliver high single double digit revenue growth.

Although our future order reflect low single digit growth we expect the accelerated [inaudible] And the growth of non-futures businesses such as equipment, golf, Hurley to drive overall revenue growth at a faster clip.

We expect to post gross margins above 40% for the year.

Although full year SG&A expenses will grow somewhat faster than revenue.

We expect much slower growth over the balance of the year.

While full year profit growth should be in line with expectations, we expect that third quarter earnings will be essentially even with the prior year and the majority of the balance of year earnings growth will occur in Q4.

There's several reasons for this.

First, our future orders reflect an accelerating trend through the five month period, suggesting that Q4 revenue growth will be stronger than Q3.

Second, the acceleration of European shipments from the third quarter for the second quarter will distort third quarter revenues and profits.

Third, the rapidly growing businesses we reported, other, not sell on futures, and ship the majority of their business in the spring.

This will push more of our revenue growth into Q4.

Finally the concentration of demand spending in fourth quarter fiscal 2002 will make profit comparisons more difficult in Q3 and easier in Q4.

In many ways this has been a very challenging year.

But we're pleased with what we've accomplished so far and we believe we're very much in the game for the full year.

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

Operator

If you would like to ask a question at this time, please press star one on your telephone keypad.

We'll pause just a moment to compile the Q&A roster.

Your first question is from Bob Durbal of Lehman Brothers.

Good afternoon.

A couple questions.

On the futures trends that you talked about, can you talk about what your orders outside of Footlocker would be?

I think you said the orders during this quarter were down 40%.

Can you give us an idea outside of that where you're going and sort of when you talked about replacing the parage could you give us an idea what sort of retailers that are taking, you're going to focus on with this category, the high end elite shoes.

This is Charlie.

I don't have the exact numbers as far as offsetting it and it would obviously vary from quarter to quarter.

What the 40% reflected was the number that we were looking at in footwear for holiday season.

And obviously we are in a position that we were not able to offset that hardly at all during this quarter, because of the severity of the -- and our plans weren't in place to offset it if we hadn't really moved off of our old distribution philosophy.

I think -- what was the second question you had?

Where is it going?

Yes.

Yeah, I think certainly finish line and foot action are two of the retail players where we are seeing some development in this area.

You can see it though going to better sporting goods stores and we're seeing a very positive growth and change going on within the independent dents, both in the urban inner city and across a broader landscape in the U.S. market.

Okay.

And for Mark, you talked about the product trends and you really focused on running.

As you guys look forward into this spring and into the summer, could you maybe give us an idea what you think happens with this classic retro trend that we're experiencing right now and is running the next category that we should look for some growth.

I think the classics retro trend will stay with us for a while, certainly through spring and really through the year.

And running is definitely one of those categories that from a retro classic standpoint that we have a rich heritage and a rich bank of product to pull from to feed that demand.

And maybe dimensional lies it a bit beyond more in the can quarter basketball area.

I definitely think that.

On the other hand, running, performance running we see as being a great series of results for us over this last two quarters and really through the year.

And then you'll see just a little side note, you'll see some of the, the fact that the classics retro product is really resonating out there, we think it will have some impact on the performance area from a design standpoint as well.

By that I mean I think you'll see more of a trend towards simplicity, cleaner product, that is, quote, unquote more wearable, still obviously very much performance-based but perhaps not quite as complicated as some of the product in the past.

And really some of the product that is sitting on the shelves around the retailers around this industry right now.

We're trying to learn from why is that product rest son 98ing what influence can it have on other parts of our business.

Quick one for Don, you finished a quarter with more than a half a billion dollars of cash on your balance sheet.

Can you maybe give us an update on what you're looking for, for the full year on cash flow side and sort of where your priorities and what your thought process is.

I saw you increase the dividend but share repurchase and maybe acquisitions.

I don't think anything has changed materially from what we thought about in the past. 33 all part of the equation.

One thing we have done is we have changed share repurchase approach several quarters ago we took the position to not be on a market on a discretionary basis during the quiet period.

We found that was really restricting when we were able to buy.

We've implemented more structured approaches to buying shares.

So share repurchase is going to be a piece of it.

Obviously the dividend was a piece of it.

As far as acquisitions are concerned, as Phil indicated at the analyst meeting, we definitely are looking, but we're extremely selective.

Thank you.

Your next question is from Margaret Mayer of Goldman Sachs.

Hi Margaret.

Operator,

Would you like to proceed with your question.

Can you hear me?

Sorry about that.

Congrats on doing so well in such a tough environment.

And I say bravo to you for caring more about your brand than volume.

I think it seems to be the right decision.

I do have a question about marketing and just the whole expense of dealing with sort of re-strategizing the distribution.

You talked about your marketing spend and the U.S. being up for that purpose this quarter.

Yet Charlie you said you really didn't have the new strategy in place and you saw it kicking in much more in terms of your orders in April and May.

Can you talk about the timing of spending marketing and how long you feel like you have to have an elevated marketing spend in the U.S. and how that [synches] with Don's comments that SG&A growth would be lower in the second half of the year?

This is Charlie.

What I was referring to was the strategy in place for holiday.

It was more during the booking period, not necessarily the actual time.

So we didn't have an alternative distribution strategy in place when we were booking holiday orders.

So that's -- I think if I understood your question right, that was what that commented reflected.

With respect to our marketing going forward and how it ties into our distribution, we feel really good about our spring line.

The futures were somewhat hindered by some of the distribution issues that we've talked about over the last several months, but the line itself we have a lot of confidence in.

And so you'll see a very strong shocks program for the spring season in the U.S.A.. and highlighting some of the new shocks product that we're going to be launching for the second half of the year.

So we're really looking to drive sell through for the back half of the year and as you know that will ultimately drive our futures program and the long-term health of the business.

From a financial standpoint, the basic premise was even as the revenue was declining in this quarter, we made the decision we weren't going to take our foot off the marketing pedal.

So as a result our spending stayed basically originally where it was planned in the U.S.. and with the balance of the year, the way we leverage the spending is both in terms of how the marketing programs are laid out but also in comparison to last year's numbers, when, as you recall we had the World Cup in the fourth quarter.

So that's why we expect to see SG&A leverage in the back of the year.

It's a combination of this year's marketing initiatives and last year's World Cup comparison.

Okay.

That's helpful.

Thanks so you see the marketing remaining in the 10 to 11% range for the full fiscal year this year, of sales?

Talking about U.S.A. or annual.

Total company.

We're pretty close to that number.

If I could ask one other question on apparel and the U.S. is down one percent, Europe and Asia up very strong double digit.

Can you talk about why the differences in the trends in those, in the U.S. versus outside the U.S. in the apparel space?

Right now the differences we are seeing a little bit of a softness in the U.S. on apparel front.

The European as you recall we saw some softness in the European business about eight months ago.

We made some corrections there and I feel very confident that we're making the corrections here.

We've also struggled a little bit, as I'm sure you've all been out talking to some of the retailers, we struggled a little bit on delivery and coverage.

So right now that's something that is top of mind for us we talked a little bit about it on the last conference call.

We're starting to see some improvement there and would expect to see a better coverage and delivery percentage on the back half of the year.

And obviously improving going into next year.

Is there still NFL or license business in last year a number that's not in this year's number that may also be a part of the reason why U.S. apparel looks the way it does?

No, I don't think so.

I think we're past the anniversary of some of the license apparel product.

The things on the apparel number this year Margaret is supply chain.

As you'll recall we pulled forward into the second quarter so we're overlapping against those numbers and we also talked a little bit about the combination of port strike and apparel sourcing or delivery issues that we discussed earlier and the combination of those two is part of what's bringing down the U.S. number.

Thank you very much.

Great job.

Sell throughs in apparel are actually very strong.

We're having great success on women's front, label strategy, recent sphere discuss we've had, the great sell throughs there.

We've had great initiatives selling for spring and the feedback on the fall line as it's [inaudible] And selling activity on some of our retailers has been very strong

Your next question is from Brian McGough from Morgan Stanley.

I actually had a question on the gross margin.

I'm wondering with the classics being so hot now, are you seeing any boost to the gross margin due to lower amortization of the cost on the tooling of the retros.

And if so do you think you can overcome that next year on the gross margin line to the extent that retro loses its luster.

We are seeing a benefit, Brian, from the higher margins on the classics product.

One of the things to bear in mind for next year is in addition to continuation of some of the initiatives already implemented, we have additional materials and margin initiatives that we'll be kicking in next year plus we'll also get more benefit out of foreign exchange next year than this year.

Secondly I was hoping you could update us on that, Mark, on Hurley, you didn't hit much on it in the call, but I think we're at about the point where we should start seeing Hurley footwear.

So I guess one when should we start to see it and where will it be distributed?

Hurley footwear hits late January, early February.

And we feel really strong about the, strongly about the initial introduction, small introduction as we move into the fall season it will expand from a breadth and depth standpoint.

But starting off easy, kind of slow on the Hurley footwear front.

We think this will definitely start to pick up again through the second half of the year.

From a distribution standpoint, we want to hold on a, for the smaller, tighter strategy out of the blocks.

Keep it special.

Really go more with many of Hurley's current distributions that they've got lined up.

Not try to expand that too quickly.

This is sort of ease into it and then grow steadily as we go season to season here.

So sell more in the like journeys of the world and niche shops rather than your product lines (phonetic).

Yes then we'll take it from there.

It's Hurley's strategy Nike is not going to come in here and force them into a broader distribution.

This is the Hurley strategy.

Thanks.

Our next question is from Dennis Rosenberg of CSFB.

Hi, guys.

Could you give us a guess as to at what point in time you'll see the low point in your U.S. futures and the low point in U.S. footwear sales?

That's a good question, Dennis.

Right now the way it looks, we'll probably see continued -- we're continuing to anniversary some big numbers based on the old distribution philosophy and strategy.

And that will be in effect probably through September/October of next year.

So we're talking about maybe this time next year for the first sequential turn?

That would be when we would start to anniversary the change.

As we talked about today, this is the first quarter in which we actually were impacted by this change in distribution.

But if your strategy works, shouldn't you begin to offset some of the lost Footlocker business prior to that so that sequentially it would start to get better earlier than that?

Yes.

And I would certainly anticipate starting to see some of that.

I think as I said in my opening remarks, we've actually replaced the lost parage for April and May which came quite frankly much quicker than we had expected.

So the parage that we had lost from the Footlocker situation has been replaced for April and May.

So based on all of that, what quarter would you think would be the low quarter, the lowest quarter in year-over-year declines in futures and also in year-over-year declines in sales.

This is Don speaking now.

Let me draw a little distinction here from a parage standpoint here, as Charlie said, we basically filled the hole on the pairs.

But he also said we have seen an industry wide trend toward lower average price per pair.

So in order to start seeing a positive futures number, you actually need to see enough increase in pairs to offset the average price per pair decline or alternatively see a turn in the price per pair.

To guess which direction those two are going to take when it's actually going to go positive that's why it's a little tough to tell.

As Charlie said from a parage standpoint, we actually have filled the hole already, and we're hopeful that that trend would continue.

Okay.

The question wasn't when you turn positive year over year, it's when the rate of the delta starts to improve, the rate of decline starts to slow.

Right and that depends upon whether or not you can gain on the decline from an average price per pair and a parage standpoint.

And it's too tough to predict when you have the two moving parts like that.

Okay.

I assume sales are pretty much the same thing?

With sales, if you're talking about global sales --

U.S. --

As we've talked about a lot, we have a lot of non-futures related business now.

That's much more difficult to project as well.

And I think as both speakers have said so far, we're feeling pretty good about the apparel zone that we're in and I think there's a lot of moving parts.

So that's again one I wouldn't want to predict.

All I would say is I think if you look at the various pieces from a financial standpoint, we feel pretty good about the direction they're going and I don't want to predict as to when you're going to see the inflection point.

Two other questions.

We need to pick up the participation, Dennis.

Could you give us more specifics on what you think sales are going to look like in the coming quarter and the third quarter.

You said it would be much more weighted to the fourth quarter.

Exactly.

I think I covered that in my script.

But are we looking at flat sales up very low single digits, down low single digits.

If you work the math I think we're still in the hunt to achieve high single digits for the year and we'll get two points of currency on that.

And if you work the math out, I think that gives you a pretty good sense of what the third and the fourth should look like.

Okay.

Thank you.

Your next question is from John Shanley of Wells Fargo.

Good evening, guys, and congratulations, nice sales result in a really tough market environment.

Charlie, I wonder if you could give us a little more insight in the Ford order position for the U.S. and the footwear.

Is it considerably below the overall negative four percent that you reported for the combined footwear equipment and apparel?

You mean for the --

Was footwear below the 4% combined product line in terms of forward orders.

Footlocker, obviously footwear is the most challenging number we have.

We don't break out the numbers specifically.

I know up don't but was it below four percent.

Just trying to get a sense for whether apparel and equipment may have been positive and maybe footwear was somewhat less than the four percent.

We talk about this every quarter and we don't break out footwear and apparel and equipment is not included in futures.

Okay.

Let me jump to another question, then, Charlie.

In terms of the -- maybe you can give us some help on this whole Footlocker situation.

Can you give us an idea of the 13% decline in forward orders and the four percent decline in sales, how much of that was attributed to Footlocker, approximately?

I'm not tracking with you, John.

The four percent decline in sales and the 13 percent decline in what.

Forward orders at the end of second quarter, going forward, how much of that may have been attributed to the cancellations or the pull back that was recently announced by Footlocker?

I'm just trying to see if there's more momentum in your other accounts.

Right.

I don't have the numbers in front of me, specifically, John.

But I can confidently say that we're starting to see as we've talked about a swing in replacing those numbers and the trends we feel very competent in.

You mentioned you replaced the parage or the units.

Have you replaced the dollars?

No.

And you mentioned that you're going to go into finish line and foot action and some of the independents, I think we've both used the same consumer panel data.

Adding those up, that doesn't add up to the 19 and 20% share of Footlocker.

Are you going to another channel of distribution to make up that difference?

No, we will not go into another channel but we would expect to see some of the share be redistributed.

We have to move along, John.

Mark, you mentioned.

Excuse me, John, we need to move along.

One quick question to Mark.

The sales of the classic, about what percentage of your domestic business would you say is classic versus all your other footwear products?

I don't have that number broken down.

I will say it's definitely been no surprise to you or anyone here, it's definitely been a piece our business and the industry that's been rising.

Is it 10%, 20%, 50%?

Don't have the number we'll have to get back to you.

Okay.

Thanks.

Sorry to everybody else in the queue, but we are going to have to pick up the pace of these questions for those of you -- and I know there are several of year.

So if I could limit you to two questions and anything that we've already covered, if we could not repeat that.

Thanks

Your next question is from Virginia Genereaux of Merrill Lynch.

Thanks.

Two questions, then.

First, please, Europe, can you give us a sense -- that business, even on a constant dollar basis, Charlie and Mark, has outpaced the constant dollar futures.

And even it seems if you back out the 11% sort of pull forward and maybe the closeout business, it's still kind of trending above.

So is that one is Europe more of an [inaudible] Business and sort of part B, -- well answer that first, please.

I think what we're seeing is a strong demand curve in Europe.

We're talking about, as well as that's some gyrations we're dealing with supply chain and the pull forward.

And we feel very good about where we're at in the European business.

I think the brand continues strong.

We have -- we still have a very strong pull coming off of World Cup.

We love our World Cup performance.

I would say that the European team has really gotten after the running business, both footwear and apparel.

Our equipment business is very, very healthy in Europe.

When you add all those up, it starts to really add up to a significant number and that's what you're seeing in this quarter.

The 2% constant dollar Europe futures, Charlie, is not representative because that had to, because that's backed out, that left the advanced orders.

So the normalized Europe futures would be higher than that for next quarter effectively?

Yes some of the futures orders that would have gone in the third quarter were actually booked as orders in the second quarter and actually delivered in the second quarter.

Then very quickly, Don, other expense, that's been, 1411 it's been a pretty big number the last two quarters.

Should we expect that to trend likewise that high, sort of in the back half?

In this year, one of the things going through there is some of the hedge results.

So we hedge some of our inter-company transactions and as a result because the Euro has been so strong and we were hedged at a less favorable rate a lot of those loss have been in that line.

Thank you.

Congratulations

Your next question is from Noel granger of JP Morgan.

Hi there.

First question is with respect to the U.S. footwear sales number down 13.6%.

Can you give us a sense either you can be as specific as you like.

But at least a sense of what contributed more to that number, units versus dollars, the decline.

Again I don't have it broken down well, but I can almost pretty comfortable in saying it was more dollar than units.

More dollars.

Thanks.

I'd back that up.

A lot of that is the shift in the classics front.

Right.

Okay.

Which means -- that's going to continue to be an issue even beyond April/May.

To Mark's earlier point as long as we're in this trend it's having an effect on the overall dollar average price per unit.

Okay.

Great.

And the other thing would just be, could you talk a little bit about the trends that you're seeing in your at once business in general, maybe more particularly in the footwear at once business, and maybe how big you expect that to be this year relative to last year.

Sure, we're not seeing any significant shift in trend on the at once in footwear.

We have a pretty strong futures program.

We've worked hard over the last several years getting some discipline back in that program.

We think it's a backbone of our financial model and it certainly has had a very strong effect on our ability to manage our inventories, which you continue to see some come down, even with a growth number on the revenue line.

So I wouldn't change anything with respect to the prop trend, specifically in footwear.

As the other businesses continue to get bigger obviously they have a higher impact on the overall number.

Is it still somewhere around 20 percent at this point of the overall business.

Total?

Total.

Overall.

No, there's more business outside the futures program than that.

Okay.

Thanks so much.

Next question is from Jeff Edelmann of USB Warburg.

It's impressive you were able to more than offset the lost of domestic volume overseas to keep your inventories down.

Were you able to re-divert shipments originally destined for here overseas or did you ship overseas from inventory you had here?

No, actually, we were fortunate enough, you're talking about with respect to the port closures and the issues we had to deal with?

Yes.

We were probably better lucky than good in some cases with respect to the inventory we had on the water that got caught.

And then we were pretty aggressive with our air freight.

And I think we've talked about that a little bit in the past under those circumstances.

We did not take a lot of chances with key product.

So you'll ship that overseas.

No.

Jeff, your question was that U.S. was soft and international was up big and the question was did we have excess product headed towards the U.S.

P the answer is no.

We basically had visibility into where the orders were and we took a very conservative approach on ordering the product.

And so we managed the market tight and we didn't get caught with excess product in the U.S.

Okay.

And then secondly, while you don't record, didn't record any currency gains because you were hedged, still that big growth in Europe still had that leveraged impact on the bottom line, right?

It absolutely had a leverage impact.

We had less than a penny of translation in this particular quarter.

More in the first quarter, actually.

And nothing material in the margins.

But if you look at individual P&L line items like European revenue, there's ten points of the 35% growth we reported that's currency.

Right.

Okay.

Thank you.

Operator, we'll take one more question

Our final question is from Elaine Reese of Dreyfus.

Could you talk a little bit about the equipment business, what your plans are there.

I know it's not a big part of the business.

But what your thinking is and is that going to be expanded from where it is now?

Well, I would say that we've got a fairly diverse portfolio of businesses within equipment today and we don't have plans to greatly expand that portfolio as much as really focus on the ones that we have in place.

So I think you'll see some movement here in the months ahead around evolving the organization to get more completely and vertically aligned against each piece of the equipment business.

That's definitely a major initiative for the company.

And we still see this as a major source of growth and brand strength in the company.

Thanks everyone for tuning in.

We look forward to talking to you soon.

Have a nice holiday

This concludes today's Nike Inc.

Second quarter fiscal year 2003 earnings conference call.

Thank you for your participation in today's conference call.

As a reminder, this call will be available for replay beginning today December 19th at 7p.m. eastern time through Monday, December 23rd at 7p.m. eastern time.

The conference ID number for the replay is 7040475.

Again.

The conference ID number for the replay is 7040475.

The number to dial for the replay is 1-800-642-1687 or you may dial 706-645-9291.

Again, the numbers to dial for the replay are 1-800-642-1687 or 706-645-9291.

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