Nike Inc (NKE) 2003 Q3 法說會逐字稿

Ladies and gentlemen, once again, in order to ask a question, please press "*1" on your telephone keypad. Also if you are using a speakerphone, please pick up your handset before asking your question. Your first question comes from the line of Noel Granger with J.P. Morgan.

Hi, everyone.

Hi, Noel.

Two questions.

Thank you.

You're welcome. The first is on Foot Locker, just to kind of get it out of the way maybe. Do you have any plans at this point to sell Marquis product for back to school or holiday, and what's your position on where that relationship goes next year, and then Mark, could you elaborate a little bit in terms of the average price point declines? You mentioned that you're seeing a slowing rate. Can you quantify that for us at all or help us understand maybe when you kind of lapse the biggest declines? Is it in the fourth quarter?

Hi, Noel. This is Charlie. I'll take the Foot Locker piece. I think the owe obligatory question up first, which is good to get it out of the way, you know, our current relationship with Foot Locker has not changed, and right now, we're not in a position to discuss anything going forward. It will remain the same position. I think we're very comfortable with where we are. We have an open dialog, and we'll continue to work together as our biggest account and I think their biggest vendor on optimizing our mutual interests. I think, though, I would like to say maybe for everyone, I think everybody is trying to categorize this situation more like a prize fight than truly a relationship, and we don't think it's like that. We think it's a relationship, it's an important relationship to us, it's not a round-by-round situation that we're keeping score, and I think it's time for us to move on with this conversation and continue to look at the results of the business.

OK. This is Mark. I'll take your average price question. As I said, we're seeing a decline or a slowing in the decline of average price per pair as we kind of come through the third quarter into the fourth quarter, and as we look at futures orders, we definitely see a clear trend that that decline is slowing. And as we look at actually fall 2003, futures orders for basically back to school, we're definitely seeing that average price decline slowing considerably. In fact, the average price is up our strategic account channel. So we're seeing some good indicators that average price has kind of hit the rate of decline that, you know, we'll continue to see the decline slow. I guess that's the best way to put it.

Is that athletic specialty only or ...

No, that's across the board.

OK.

We're seeing the slowing more rapidly, put it that way, in the specialty or strategic channel.

OK.

But the indicators of the slowing trend are across the board.

Great. Thank you very much.

Your next question comes from the line of Margaret Mager with Goldman Sachs.

Hi. It's Margaret. Congratulations.

Thank you.

For doing so well in such a tough environment. Let's see. I have a question about the repurchase, what's going on with that. It was 27 million which is, you know, good, that's s but if you're sort of targeting a billion dollars over a four-year time frame, I would think that you would repurchase to a higher level, at least50 million if not more a quarter. So can you just talk about your thought process behind your repurchase and how that figures into your whole thought process on your cash flow and the use of that? That's one question. And then the other question I have is, can you just talk about your U.S. distribution realignment strategy and give us a little more color on how you've accomplished that where -- you know, just some more color on who's getting the Marquis product, how that's unfolding, and within the context of that, why are the factory outlet stores popping up 11 percent?

OK. Well, with respect to cash flow and share repurchase, Margaret, first of all, what I want to call everyone's attention to is that over the last several years, we've used our cash for a number of purposes. We've invested in our existing business, we've made some acquisitions, such as Hurley, and we have bought back stock and we've also raised our dividends. So those are all the fairly classical versions of what can you do with cash flow. And I think we've looked at all four of those options, I think we've been very disciplined about how we employ our cash in a way that drives value for shareholders. I think all four of those will contribute to our plans going forward.

With respect to this particular quarter's share repurchase, we're very confident in the strategy that we're implementing now and the business trends we see in the marketplace. What we're less comfortable with, frankly, is the environment in the world at large, and as you know, we are not in total control of our own destiny. We certain certainly are as far as our own strategies and our products and how we market them, but there's a lot of things going on in the world, both the world and the stock market that we don't control, so for now, we've been very cautious in terms of how we deploy our cash flow, but that's not to say that we're going to let it burn a hole in our pockets and spend in some way that doesn't add value for shareholders.

You talked about your going on to a systematic program last quarter.

Right.

Can you just elaborate on how that works?

Sure. As we come into our quiet period, we implement a fairly structured program for purchasing that is purely a function of the stock price movement. Over the quiet period this year, or this quarter, the stock price has been fairly strong, so as a result, it has not acquired that many shares. You cannot change that program once you enter the quiet period.

OK. Thank you.

Hi, Margaret. This is Charlie. I'll take the realignment piece. First of all, just to restate, we're comfortable with our progress. By no means feel that we're through this completely. I think you have to wait for an annualization to see the overall effect, but we're comfortable with the progress we're making. A couple of points maybe on the actual strategy itself. I'll just reiterate, this is not a footlocker distribution strategy. It is a U.S. distribution strategy. So Foot Locker obviously is a player within it, but we're looking at the overall marketplace and what the marketplace is dog, where the consumers are shopping and what they're shopping for.

So we've been able to move most of the product that we have taken out of Foot Locker into some of the other points of distribution. There has been a lot of insinuation that is we've inflated the numbers with an aggressive pursuit of our discount or family footwear chains, and I would say again that that is not true and that we have plenty of points of premium brand distribution throughout the United States and that we feel very confident and comfortable with where this product is going at the level that it's going in. And I think you're starting to see some of the appropriate sell-throughs at the high end that mark mentioned in his prepared remarks that start to illustrate that fact. So we feel pretty good about that.

As far as the factory store outlets, one of the things that we have done and I think we talked about it on the call maybe two or three quarters ago where we really started to take a look at our retail infrastructure and internal process, and we've spent the better part of the last six months focusing on the operational efficiencies of our stores, and what you're starting to see is some of that work paying off at the store level. It's not necessarily that we're putting a lot more product through the stores themselves. It's more an effective and efficient operational situation than it is anything else.

That's great. OK. Thank you very much.

Your next question comes from Brian McGough with Morgan Stanley.

Great. Thanks very much. Sales in every region were solid and across all product lines, and I know that's the strategy, so excuse me for sticking with the whole U.S. footwear bit here, but it looks like after over a year, you finally got the pole model back with the retailers, and I was hoping you could hit on what are some of the product drivers or operating strategy that it should help you maintain that and maybe even accelerate it in 03.

OK. Well, let me touch on that. This is Mark. Some of the product successes, I mentioned a few of those in my earlier remarks. Obviously the Shox product, not just the running but also the basketball product we had over this past two months has done incredibly well, particularly the Shox NZ running shoe and then the Vince Carter VC2 basketball shoe. Then as I mentioned we have the Supremacy Shox basketball shoe coming out today. So Shox has been a great source of energy for us. There's other products too in the mix. Jordan, the game shoe, the Jordan retro product, which is at a higher price point as well.

All have done very well. The Gordon T runner shoe is another one, a $120 shoe, the Jordan retro, the AJ8, shoe that's done incredibly well. I should also mention the Vapor and total 90 football boots, which may be less in the U.S. but more international business have done incredibly well, both above $150. Become what I call performance franchise products for Nike. And then very optimistic about what's on the immediate horizon too with some new technology concepts that we're introducing over the next three months in running, in basketball, and in training. And then I should mention also football or soccer. So we have a lot of energy coming in above $100 with real strong performance products. I think strong not only in terms of performance and technology, but also I think more appropriately styled for today's market.

Great. And then my second question is just on SG&A and endorsement trends. There's a few high profile athletes out there, you've got LeBron and Kobe and Yao's contract is up soon. Would you hit on just what has changed, if anything, in your overall endorsement strategy and how have you narrowed down whether an athlete is worth paying for or not?

Brian this, is Charlie. I think really our philosophy hasn't changed. You know, you look for Marquis athletes that can drive consumer interest, and certainly, you know, right now there's a couple of them out there that have done a pretty good job of creating excitement within the game, the know, LeBron , Kobe and Yao , it's an interesting time with them coming out, some great players coming out of college as well that looks like may pop into the draft, as that's in basketball. Certainly we continue to invest in the worldwide soccer or football market and other sports, collegiate and professional NFL players as well. There's no secret formula to it. I think, you know, this is where we have a lot of good people on the ground that understand the game and understand what it takes to be successful in it at an individual and a team level, and as a collective group, we get together and make those decisions.

I'll add, Brian, that there is definitely very careful consideration as you might imagine on return on investment potential from an athlete standpoint and who moves product, you know, who can create authenticity around new concepts around product, and help Nike kind of maintain a leadership position. Those things are really looked at very carefully. And I think if there's a trend, it would be that Nike and probably others in the business are more selective. Not just numbers and percentages, but quality.

All right. Great, guys. You Thank you very much.

Your next question comes from the line of John Shanley with Wells Fargo.

Good afternoon. Charlie, I wonder if you can just give us a brief commentary in terms of whether you think there could be and if there's any efforts of the company as looking at in terms of the issues that are now facing the U.S. in terms of our issues in Iraq. Do you expect that there will be any negative feedback on the brand in international markets, and is there anything that you can do to protect it since Nike is so closely identified as being an icon of America?

I think that's a good question. I'll defer to a couple comments that we've made in the past in the sense that we are perceived as U.S.-based and American company, but I think we've done a pretty decent job of broadening that perspective a little bit as we become more authentically perceived in the global sports environment. And I think associations with national football teams and premiere international athletes tends to take a little bit of the edge off that. That being said, we are not underplaying the importance of, you know, your question. We, I think, challenge our international management teams pretty regularly on what the cause and effect of that might be. We feel pretty comfortable to date with where we're at, and we're not sending off any alarm bells, but we are very sensitive to this issue as well.

OK. Fair enough. And then either Charlie or Mark, on the issue of the U.S. footwear channels, the distribution, and in the second quarter conference call, you mentioned the growth of the mid tier retail channels. Is that still growing at the same pace, and is it now -- the athletic specialty stores and maybe some of the other channels that have been such an important part of Nike's footwear distribution process?

When we speak about mid tier, we speak about our mid tier product.

Mid tier retail, call it that, whether it's family or general merchandise or however you want to classify it. Is that growing at a more rapid clip than your growth in other channels like sporting goods or independents or athletic specialty stores?

So I'll go back to taking it from a product perspective. I think that's the way we always look at it, John. I think, you know, where we do our mid price product business varies over several of the channels. I mean, athletic specialty has a chunk of it, sporting goods has a large chunk, family footwear and in some of the discount groups, that sector of distribution all have a play in that sector for us. We are still seeing very strong performance levels and Mark can get into some of the specifics around the products with that mid tier price point initiative that we talked about a year or year and a half ago. We're sustaining our position there, we feel, and we've got some great products coming that we feel will continue to put pressure on the competition in that zone. Mark can talk about some of the specifics.

John, as you know, and you mentioned, we put a lot of focus on that mid tier price point because there was a point certainly about a year ago where we felt that was a vulnerable area for losing ground, so we put a lot of focus on that. And that continues to be a strong growth segment for us, because the focus has continued to be there. But I think the good news, you know, is that we're also seeing some really healthy growth in the100to 120-dollar range as well. We put a lot of emphasis on that particular price point and we've seen some consider growth there as well as that mid tier. So there's a good balance, I think, in terms of price point results, and then again, I think between performance and active, there's a really good balance, I think, on both sides. We're really starting to see performance kind of kick into gear here, but I should mention that we're very pleased with our active life classic retro business. Seems to be very strong and one of the most profitable pieces of our business.

Regardless of what type of product it is, is there more growth occurring among your customers that are really classified as family footwear or general merchandise guys than maybe occurring within the athletic specialty or sporting goods? I'm just trying to get a sense ...

Yeah, that would not be the case.

It's pretty well spread.

it's growth in all categories? Is that what you're saying?

Yes.

Great. That's what I wanted to hear. Thanks a lot, guys.

Your next question comes from the line of Bob Drbul with Lehman Brothers.

Good afternoon.

Hello.

Hi, Bob.

Couple of questions for Don, actually. Don, as you look at the fourth quarter, the SG&A opportunity that you see compared -- going against the heavy demand creation spending from last year, that's the first question. The second question is more on currency. Can you talk about sort of where you're hedged, how long you're hedged now and when we might be able to expect some of the currency issues to benefit the bottom line?

The first question is yes, we expect to see more favorable comparisons on SG&A in the fourth quarter, Bob, and you've articulated the reason for that, which has to do with last year's World Cup spend, but I wouldn't want to quantify it at this point. And the second question with respect to currency, as we've said pretty consistently, and this is our current view too, we're not really getting any material benefit this year at currency, either on the margin line or on the translation line, and that's because of where we had been hedged 12 to 18 months ago. With respect to when you see the change, we are definitely hedged at more favorable rates for fiscal 2004,which will start in June, and I think that's when you'll start to see more of the benefits coming through.

OK. Great. Thank you.

Your next question comes from the line of Virginia Genereux with Merrill Lynch.

Thank you. Two questions. First, Don, you mentioned you expected maybe the challenges to become tougher maybe in the coming months, but that you guys still feel comfortable with the original financial goals. Could you just review those for everybody, the original financial goals as you finish a model in terms of revenue and EPS growth? If you could just summarize that?

OK. Well, you can probably play the tape of any one of a number of conversations we've had, but our long term aiming point is high single digit revenue growth, and we aim to expand our gross margins, leverage our overhead and generate mid teens earnings per share growth. That is where we aim over the long term. What we've said is that that is not a model that you can necessarily apply to any particular quarter or any specific fiscal year. What we are endeavoring to do, as Charlie said earlier, with all the moving parts there are in a business this size, we try to pull the levers in the right combination to generate the kinds of results that we target.

I think for this year, we've certainly had some variation on that model. We have hit generally our high single digit revenue growth, we have expanded our gross margins. As we've said early in the year, we expected that this year, we're probably not going to see a lot of leverage in expenses because of things like Manchester United, World Cup, and supply chain implementation. So this is -- as you know, this is not a science here and you don't plug in the assumptions in spreadsheet and it spits the number out at the bottoms. What we try to do is pull all the levers and deliver the bottom line.

Right, and mid teens is 15ish? You won't get that specific?

Virginia.

OK. Number two, quickly, the U.S. business, Don, you mentioned you had easy compares against last year, you know, that that was sort of four points of growth this quarter was the (inaudible) compares with last year, and your U.S. futures were as we had expected, they came in better, but are still down 4. Should we expect that your U.S. business might -- or portions of it, maybe U.S. footwear could be still negative over the next quarter or two, could still run negative because you had this weird quarter and, you know, you may be cutting back some of the units and the ASPs are a little lighter?

The issue that we discussed, the four points, that's related to supply chain shipment pattern, so that affected the second and third quarter and we talked about that both on last quarter's conference call as well as this one.

I understand that.

So let's take that one aside for a second. With respect to U.S. footwear numbers, you know, as Charlie had mentioned in his discussion, we are going to be anniversarying higher numbers from prior to these changes in our distribution through holiday of this year, and we don't have all of our orders in yet for back to school, and we haven't yet started to take bookings orders for holiday. We feel pretty good about the progress we're making on realigning the distribution, but at this point, it's not entirely clear whether we're going to cover all of that shortfall and grow or whether we're still going to be slightly down versus the prior year. But certainly our aspiration here is to cover the shortfall and start to grow again, and as I say, we're going to be overlapping our numbers through holiday. So we feel good about where we are right now, but it's a little bit too early to call when we still have orders to take for back to school and for holiday.

OK. Great. Thank you.

Your next question comes from the line of Dennis Rosenberg with CSFB.

Hi, guys. I'd like to you elaborate a little more about the difference in U.S. footwear sales decline in this quarter versus the second quarter was down 1 percent. This quarter down 12-1/2 percent, last quarter, and I was looking at my year-ago report after reporting the quarter, and U.S. footwear sales, as you used to report them, were up 7 percent in that quarter, so could you just reconcile the big difference between the February quarter performance and the November quarter performance?

I'm sorry, what was the 7 percent you quoted me?

This is a year ago. Last year's third quarter, U.S. footwear sales why were up 7 percent.

Right.

OK. So you had a good quarter last year.

Right.

And yet the comparison of this quarter versus the November quarter was so much better, given --and you have futures down 4 percent and I don't know what the footwear component to that was, but I can't reconcile that this quarter is down 1 percent and the previous quarter was down 12 percent.

OK. Well, there's a couple of things here. First of all, there is some shipment timing in the last year, but there's no doubt that this year's third quarter was better than the second quarter, and I think the reason, if you think about it, we really didn't have much time in execution of our realignment of the U.S. market until we started off with spring. Base Basically for holiday, that was really the first season when we had the full impact of the changes, and we really hadn't fully offset it. We're starting to get traction in spring. We expect to get more traction in back to school, and that's why I think you'll see an improving trend.

OK. So from that, we can make the assumption that we've reached a bottom in U.S. footwear comparisons in the last quarter and sequentially, we should continue to get better?

No, I don't think you can make that assumption, Dennis, because, you know, we are still anniversarying these changes, and everything season is slightly different. So as I said, we're very pleased with the progress we're making, but you can't necessarily make that assumption. The other thing is that other than our little category here of athletic footwear and apparel, we have a lot of other things going on in the world today.

I understand that, but I'm trying to understand what the trend is going to be in the U.S. footwear business because that had been your weakest part of your business, and it looks now like it's starting to come back, and if you can give us some guidance as to what you do expect for that segment going forward. It would be good.

Yeah, Dennis, I can't really tell you any more than what we have told you, which is that we're making progress and essentially have our futures numbers that we've talked about for the USA, and, you know, basically they're about where they were, but we are making progress in footwear. That's basically the bottom line.

OK.

Next question, Dennis.

Next question on the down 4 percent U.S. futures, how was that baked down for the first half of the period versus the second half of the period?

It's a little stronger in the front half than the back half.

Stronger in the first?

A little bit.

OK. Thanks.

Your next question comes from the line of David Campbell with Davenport.

Yes, good afternoon. Thank you. I was wondering if you might be able to elaborate a little bit on the new technologies that you mentioned in the next couple months, and what we might expect to see there.

OK. I can give you a little bit. I mentioned both footwear and apparel, by the way. I want to point out first that apparel has been -- I'll reiterate, I should say. Apparel has been on a real role from a performance standpoint. In fact, our average price in apparel has been going up steadily because of a very, very - our strongest-ever, really, performance presentation. So I mentioned things like the sphere technology which continues to sell through at great rates, response to that, and the campaign around it have been incredibly positive. Seamless is a new technology that's coming on in apparel, and we really expect that to be a big step for us on the apparel side. We've got the Olympics effort coming up. There's a major push in both -- in all product types, I should say, to elevate our performance presence technologies around Athens, particular emphasis on lighter weight, faster product that we're very excited about what that looks like right now from both a performance and an aesthetic standpoint.

And then back into footwear, we've obviously got a lot of good bugs going around Shox, so we'll continue to expand that technology. There's other cushioning technology. Max is something that you haven't heard much about lately, but there will be a resurgence of attention around Max-type product, and we're very excited about some of the new product in that area for back to school. And running and basketball and training, and then you'll see Shox actually take on some new forms as well as we move into back to school and holiday and then spring 2004. And then we have another new technology, cushioning technology which I really can't talk about, but I think will create tremendous excitement for back to school that will build through holiday and ramp up through the Athens Olympics. But personally incredibly excited about that product, again, not only in terms of the technology and the componentry, but the aesthetic. And it's just something that

I personally think will really resonate. And it's at the higher price points, but it comes down also into more accessible price point. I think we've got a good balance, a lot of great stories. I didn't mention equipment. In equipment, we've got a whole price technologies depending on what category you look at from timing to vision, even the bag business is really starting to come on with some incredible product. That one has been lagging, but I think we've really got some good product in there. Charlie mentioned golf before. Obviously there's a number of important subcategories, product types in golf, and we've got some tremendous innovation coming across those categories as well, and digital is a new area. I didn't mention. We're in the audio business.

In fact, one of the top MP3 players in the country right now in the U.S., that is, is a NikeMP3 player, the audio product, visual audio product. So a lot of excitement. I mean, I could spend an hour really, but I really can't. I'm getting the signs here to cut it off.

OK. Thanks. Great quarter.

Thank you. We have time for one more question.

Your final question comes from the line of Robert Toomey with RBC Dain Rauscher.

Hi, good afternoon. I just wondered if I could ask a follow-up question, this was asked by a couple of other people, but Don, when you say you're making progress in footwear, I'm just trying to get a better clarification on -- I guess that means your con fi dense about future growth going forward, were you down 1 percent this quarter --you were down 1 percent this quarter. Can we take that to mean that you at least believe going forward, year over year comps should begin to improve? Is that what I take away from your answer?

This is Charlie. Let me -- I'll take another crack at it.

Thank you.

I think, you know, as I said in the prepared remarks, we're going into a quarter where we're pretty excited. There's a lot of sporting events taking place around the world. We are well-positioned. We really feel good about our product lines, the overall environment from our perspective is really good. So that is something we feel very good about and are confident with. That drives obviously our futures orders, our brand is in good shape. Those are all the positives. So the downside is, is we have a situation worldwide where the world is at unrest, and so the impact of that on the overall circumstances of the business looking forward, I think we all have to be honest with each other in saying that, you know, your guess is as good as ours with respect to what the implications of that situation are going to be. But we're not going to go out on a limb and try and determine what the impact of that situation is, and we're going to be somewhat conservative upon our forward-looking thoughts.

This is Mark. I'll add apart from the geopolitical references we're making here, as Charlie said, there are a lot of reasons that we're optimistic about our footwear business and the growth in the USA, certainly outside the USA as well, brand product, balance and product offering, just the direction from design and technology standpoint, and then the brand. The brand itself is actually got a lot of buzz around it right now. We really feel like aloft what we've got in play here and what's come something really going to help amplify that. There's the backdrop here that's the big question mark.

OK. I guess that comes through in your comments. And then I guess for Don Blair, can you -- gross margins have improved quite significantly and are holding in there. Do you feel comfortable about that aside from factors that you can't control, such as external factors? Aside from that, do you feel comfortable about your gross margin in this general area?

When you say comfortable about it, you know, I think we're getting it the old-fashioned way by doing it through improving our costs and our raw materials and how we buy, so we feel very good about that. We're also doing it through mix, which I think is also the right way to do T1 of the things we're certainly looking at on the horizon is that the world unrest, at least in the preliminary discussions, starting to have some impact on raw material prices, particularly those linked to oil. So we feel pretty good about all the things that we're controlling, which is how we byproduct and how we design product and what kind of mix we sell, but again, just as Charlie said, there's a lot of uncertainties out there that not only affect sales and revenues but also potentially affect product cost as well as transportation. So again, I feel pretty good about where we are in terms of what we're doing. Our level of caution here is more around the world at large.

Great. Thank you very much.

Thank you.

Thanks, everyone, for joining us today. We'll talk to you soon.

Ladies and gentlemen, this concludes today's Nike Inc. incorporated fiscal 2003 earnings conference. Thank you for your participation. You may now disconnect.