Nike Inc (NKE) 2004 Q1 法說會逐字稿

Good day everyone, and welcome to the Nike first-quarter 2004 earnings conference. Today's call is being recorded. At this time for opening remarks and introductions, I will be turning the call over to Ms. Pam Catlett, Director of Investor Relations. Please go ahead.

Good afternoon everyone. We're pleased you joined us this afternoon to discuss Nike's fiscal 2004 first quarter results. We are going to keep our streamlined approach in review of our results. For those of you who need to reference our release, you will find it on our website at www.Nikebiz.com/investor. You'll also find expanded information on the Web site about some of the highlights we will be discussing today.

Participants in today's call are Charlie Denson and Mark Parker, Co-Presidents of the Nike Brand; and Don Blair, Nike's Chief Financial Officer. Each of today's participations will provide brief prepared remarks, and then we will answer questions.

Before I turn it over to Don Blair, let me remind you that on this call, we are 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 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 at-once orders, which may very significantly from quarter to quarter.

In addition it is important to remember a significant portion of our business, including equipment, most of Nike Retail, Nike Golf, Cole Haan Bauer, and Hurley are not included in these future numbers. During this conference call, we may discuss non-GAAP financial measures.

A presentation of comparable GAAP measures and quantitative reconciliations can also be found at Nike's web site, again, www.Nikebiz.com. In this call we may also discuss non-public financial and statistical information, which is also publicly available on that site. Now here is Don Blair.

Thanks, Pam. Well, in a number of ways the first quarter of fiscal 2004 was very gratifying for us. We saw the benefits of many of the initiatives we have undertaken in recent years. Our revenues grew 8 percent in the quarter. In line with our long-term goal of high single digit growth. As a result of the growth in our international businesses over the last several years, we were in a great position to benefit from the significant strengthening of currencies outside the U.S. In the quarter our international regions delivered 15 percent revenue growth versus the prior year, and once again reported more revenue than the U.S. region.

Our quarterly pretax profit margin exceeded 13 percent for the first time since the first quarter of 1998. This was driven by a consolidated gross margin of 43 percent, up 150 basis points versus the first quarter of fiscal 2003, and the highest in recent history. This performance was particularly encouraging since the stronger euro accounted for only about 40 basis points of this improvement. And there was no net impact from other currency movements. In other words, higher in-line pricing margins, and the positive effects of the tighter supply chain, and cleaner inventories drove 75 percent of the improvement.

Our diluted earnings per share for the quarter, at 98 cents, grew 21 percent versus the prior year, ajusted for last year's accounting change. We raised our return on invested capital to almost 22 percent, up over 5 points versus the prior year, and again the highest level since 1997.

Over the last several years we have invested a significant amount of capital and operating expense in our supply chain, both in our distribution facilities in the U.S., Europe and Asia, as well as improved systems and processes. In this quarter you can see that we're now effectively leveraging that infrastructure, both in terms of higher gross margins and higher returns on capital. And we continue to generate strong cash flows, and to deliver quite a bit of that cash back to the shareholders. For the quarter we repurchased $95 million of stock, and paid out $37 million in dividends.

So let's get behind the numbers a bit. In our Europe, Middle East, African region, which we call EMEA, revenues grew 17 percent in the first quarter, with nearly 19 points of growth driven by the stronger euro. For the quarter, reported footwear revenues grew 20 percent, and equipment revenues advanced 24 percent. Apparel was up 10 percent. Our gross margins expanded in EMEA by 210 basis points versus the prior year, and that accounted for 70 basis points of our consolidated margin improvement. As we expected, the stronger euro was a key factor, driving 130 basis points of the improvement in EMEA.

Higher product margins and leverage of our distribution infrastructure also contributed to the improvement, partially offset by lower in-line apparel margins due to a shift in product mix. Overall, Q1 pretax income for the EMEA region advanced 26 percent to $205 million. And as in the past, our segment disclosure of regional pretax income is currently available on our web site.

In the Asia-Pacific region, our business continued to grow strongly in the first quarter. Revenues increased 13 percent for the quarter, with about 4 points of the increase coming from stronger currencies in the region. For the quarter, footwear reported 12 percent growth, while apparel grew 15 percent, and equipment advanced 13 percent.

Revenues grew in nearly every country in the region. For the quarter, Asia-Pacific gross margins increased 80 basis points, accounting for 10 basis points of the gross margin improvement for Nike, Inc. The Asia-Pacific margin increase was largely the result of higher in-line margins across footwear, apparel and equipment. Reported Q1 pretax income for the Asia-Pacific region grew 51 percent to $77 million.

In the Americas region revenues grew 8 percent for the quarter, with a little over 2 points of the increase coming from currency effects in the region. For the quarter, footwear reported 11 percent growth, while apparel grew 2 percent, and equipment advanced 5 percent. On a country basis, the revenue increase was given by strong growth in Brazil, Argentina, and Chile, while sales in Canada and Mexico were essentially flat.

For the quarter, gross margins in the Americas region fell 140 basis points, reducing the consolidated Nike gross margin by 10 basis points. Less favorable hedge rates in Mexico and South America accounted for 100 basis points of the regional gross margin decline. Reported Q1 pretax income for the Americas region fell slightly to $24 million.

In the U.S. region we continued to grow profits, while realigning sales and distribution. Although revenues for the quarter declined 2 percent, pretax profits grew 4 percent. Gross margins for the quarter reached 43.7 percent, up 210 basis points versus the first quarter of fiscal 2003, and driving a 90 basis point improvement in Nike Inc.'s consolidated gross margin. Over half of the region's gross margin expansion came from higher wholesale footwear margins, with the balance contributed by higher gross margins in wholesale apparel and equipment and Nike Retail.

SG&A spending for the region grew slightly, as demand creation increased at a low single digit rate, and overhead spending declined. U.S. footwear sales declined 5 percent in the quarter. And sales to Footlocker declined 34 percent, while sales to other accounts advanced 2 percent. About half of the overall decline was due to a lower average selling price per pair. U.S. apparel revenues rose 5 percent in the quarter, as growth in performance apparel and licensed product more than offset lower sales of active life apparel.

Nike owned retail continued to perform well in the U.S., as strength of the brand and improving store operations drove a 7 percent comp store sales increase for August and for the first quarter.

Revenues from our other businesses grew 32 percent for the quarter. Coming off the challenges of last year, Nike Golf revenues grew over 40 percent for the quarter. Bauer Nike Hockey and Hurley each advanced about 30 percent, and our Cole Haan business posted 14 percent growth for the quarter. For the first quarter, which tends to be the smallest revenue quarter of the year for these businesses, our other businesses reported a $3 million pretax loss, $8 million better than last year. Better bottom-line results at Nike Golf, Cole Haan and Bauer Nike Hockey drove the improvement.

Consolidated SG&A spending grew 8 percent in the first quarter. Six percentage points of the increase were due to changes in exchange rates. For the first quarter, demand creation spending increased 1 percent to $324 million, reflecting a 6 percentage point increase due to changes in currency exchange rates. Excluding the impact of currency, our demand creation spending declined versus the first quarter of fiscal 2003, when we were finding our World Cup marketing campaign.

For the first quarter operating overhead increased 13 percent to $546 million. Nearly three-quarters of the increase came in our international region, which grew 25 percent for the quarter, reflecting the stronger euro, higher reserves for bad debts, and factory outlet store openings in Europe. Higher IT spending and infrastructure investments in Nike Golf, Cole Haan and Hurley accounted for most of the remaining growth.

Now let me spend a few minutes on one of my favorite lines of the P&L, other income and expense. Beginning this fiscal year, we will no longer report interest income or profit-sharing expense on the other income and expense line. Interest income will now be netted against interest expense on the face of our income statements. And profit-sharing expense will be reported as a component of operating overhead. We have adjusted the presentation of income statements for prior years to conform to this new classification.

Excluding these items, other expense for the quarter was $24 million, up from $11 million in the first quarter of the prior year. The majority of the year-over-year increase in other expense related to the donation of property to the Nike Foundation and reserves for the settlement of various nonoperating obligations. About $10 million of this quarter's other expense, and a comparable dollar amount in the prior year, was due to foreign currency losses, mostly from Europe. These losses were more than offset by favorable translation of foreign currency denominated profits reported by our international regions.

For the current year quarter, the effect of netting these foreign currency losses, and the favorable translation of foreign currency denominated profit, was $34 million of pretax income growth, for about 8 cents per share versus the first quarter of fiscal 2003. Our effective tax rate for the quarter was 34.8 percent, which is our current estimate of the full year rate.

We are also very pleased with our working capital management during the quarter. As of August 31st, worldwide inventories were 4 percent, or $56 million higher than the prior year. The stronger euro accounted for approximately $39 million of the growth. Inventory or our U.S. region was flat versus the prior year.

As of August 31st, accounts receivable increased $53 million, or about 2.5 percent versus the prior year due to the strong euro, which accounted for $81 million of growth. Excluding the euro impact, accounts receivable declined just over 1 percent.

For the quarter, we generated $351 million of cash flow from operations, and used $42 million of cash by investing activities. Cash provided by financing activities including $95 million of share repurchases and $162 million of net borrowings totaled $50 million. As a result, our cash balance increased by $364 million during the quarter, as we prepared to close the Converse transaction in early September.

As we enter this fiscal year, we told you that we expected to report full year results broadly in line with the financial model we have articulated before, high single digit revenue growth, expanding gross margins, and midteens earnings per share growth. Certainly, our first quarter results give us additional confidence that we could achieve those goals.

We do believe we can deliver high single digit revenue growth this year. Today we reported a 10.5 percent increase in futures orders for the next five months. It is important to recognize that this order growth reflects a change in the timing of our spring orders in Europe. We will begin shipping some spring product in January 2004, a month earlier than in 2003. At this point, we estimate that this change resulted in a 4 to 5 percentage point increase in our futures orders growth for this release. Nevertheless, these orders represent a significant acceleration of our futures trend over the last several quarters, particularly in the second half of the futures window.

In addition, as you recall revenue growth in the second quarter of fiscal 2003 was stronger than normal, and the third quarter weaker than normal, as we pulled shipments forward in advance of our supply change limitation in Europe. When you work through all of the ins and outs, we expect revenue growth in the mid single digit range for quarters two and four, with midteen growth in the third quarter.

Our first quarter gross margin performance also increases our confidence in achieving our full year goals, while we do not expect to see the same absolute gross margin percentage over the balance of year. Generally, our gross margin percentage is highest in the first and fourth quarters of the fiscal year due to seasonal product mix and leverage on fixed costs. Hence, we expect to see lower gross margin percentage in the second and third quarters, and in the quarter we just concluded. However, we do expect to see year-over-year growth in gross margin and pretax profit margins for the full year.

So overall, even with the strong results we posted for Q1, we still expect accelerated earnings per share growth in the second half of year. The second quarter remains our most difficult growth comparison. In addition to the revenue timing discussed earlier, our SG&A was relatively low as we scaled back demand creation spending following the World Cup last year. For this year's Q3, the comparisons will ease and we should see stronger earnings per share growth versus the prior year.

So in summary, we're very pleased with our results so far this year. And we feel we're in a great position to continue to deliver solid profit growth over the balance of fiscal 2004. And with that, I will turn the floor over to Mark Parker.

Thanks, John. I am sure none of you will be surprised to hear that I'm very pleased with the numbers that we are reporting today. What these results are telling us is that the Nike Brand is strong, that our products are right with consumers, and that our brand communications are resonating, both here in United States and round world; all helping to really drive our business performance.

During the year and in the earnings call in June, I mentioned that much of our success in fiscal year '03 was due to our running a more complete offense, delivering great product across the performance sport categories, interactive life, and plastic product, and up and down the price spectrum, across the regions and then again around the world.

We are continuing that momentum into quarter one of this current fiscal year. For example, in the U.S., Nike delivered nine of the top ten selling footwear models for July, according to the most recent NPD data. In apparel, Nike team sports continued to shine with the NBA Rewind Collection still one of the hottest in the market. Well, we couldn't sustain brand heat without having the right products that meet or exceed consumer expectation.

From a performance perspective, footwear such as our Speed product and Nike Shox continues to generate strong energy at retail. Backed by an integrated marketing effort that included television, print, Web and retail executions, Nike introduced in July the Zoom Spiridon, a lightweight performance running shoe. It quickly became one of the fastest selling shoes at retail, and really our top-selling product on Nikerunning.com. And the Zoom Spiridon joins the Nike Shox NZ, and the Nike Shox Rise 3 (ph) as the three top-selling running shoes of any brand in the market. All, by the way, selling fo $100 or more at retail.

Just as consumers have long embraced the Nike Air cushioning technology, the Nike Shox platform is earning its respect and following as evidenced by the highly successful launch in our Americas region of the Total Magia, the first Nike Shox soccer shoe. We will bring this product to the U.S. next month, and we will continue to broaden consumers' access to this advanced technology with other Nike Shox products, and in new categories.

In addition to these great performance products highlights, we also enjoyed solid results in our core businesses of running, basketball and cross training. Our cross training business saw improvement with the success of the Air Monarch, a clean white leather shoe that NPD says is the top-selling cross trainer in the industry today, having sold more than 1.2 million pairs year-to-date.

At the same time, we've seen success in our active life segment, showing that our product is resonating both on and off the fields of play. For example, the Haze Dunk (ph), which was a very limited quantity product; another example of collaborating with artists and designers. This product sold out literally within hours.

And a couple weeks ago we hosted an exclusive event in New York to launch a limited collection of Laser Etch footwear designed to captivate and inspire. The real sneaker heads are sneaker aficionados, really from around the world. We are continuing to see our active life footwear business grow even stronger and build on that momentum, while at the same time we stay fixated on further extending our performance leadership position.

Not only did Nike generate excitement in the marketplace, but it also drove profitability, contributing to our highest single quarter gross margin performance in recent history. After several quarters of decline and then stabilization, we're encouraged by the positive average price growth we've seen in both footwear and apparel futures.

Overall, gross margins of 43 percent were a 160 basis point improvement over the first quarter of our fiscal year 2003, and a 150 basis point improvement since our last quarter's performance. Gross margins for Nike Brand footwear were up 200 basis points from last year, contributing 100 basis points to total gross margin improvement. And we enjoyed the euro strength, and continue to improve our execution in delivering our products to market.

Nike's apparel business in the first quarter was driven by innovation, continued momentum in team sports, performance apparel, and the strength of our woman's collection in every region. Once again, Nike created history through innovation with the launch of the Swiss Spin (ph) technology at the Tour de France, helping Lance Armstrong ride to his very exciting and inspiring fifth consecutive Tour de France win.

At the recent U.S. Tennis Open we provided our athletes with great technology and style, that generated tremendous consumer interest in the sleeveless Nike Spear (ph) shirt, and the cool motion dresses, which then translated as the strong sell-throughs of our products at retail.

Nike team sports has been a great success story, and this quarter was no exception. This fall we will continue to dominate college football. Not only the top 10, but 22 out of the top 25 teams are Nike partner schools. At retail, we've just launched a collection called the Tradition Defined, celebrating 10 years of our college football affiliation by bringing back replica product from our top teams. The response has been very positive. And NBA Rewind continues to be one of the hottest products in the marketplace, as the consumers' demand for high-quality, vintage replica jerseys shows no sign of slowing down.

In addition to football and basketball, Nike team sports obtained the rights to market vintage major league baseball products under the Cooperstown Collection. This collection will add to the momentum that our team sports division is building in NLB, as indicated by the recent expanded licensing rights beginning January 1, 2005.

The team sports is not just the U.S. business, Europe team sports also enjoyed strong sales with the successful launch of the Adventis Kit (ph), and continued growth of our Manchester United business.

Our global women's business in the first quarter, was particularly strong, and our sell-throughs at retail continue to reflect consumer demand for our product. The women's Focus campaign, as well as the new Shadow campaign showcased our women's product and contributed to our strong sell-through momentum. In the U.S., our women's business in all channels is strong. And the newly revamped and younger attitude Silver Label collection, achieving the high sell-throughs that we consistently see in our performance collection. Response to our spring line was great, and the new summer collection has had the strongest response to any women's line yet.

In our international markets the Americas region mirrors the U.S. with our new women's stores in Canada and Argentina performing extremely well. In Asia the success of the women's Own the Gym Campaign, has resulted in an increase in the sell-through woman's training products, with particular success in the total conditioning and workout area.

In Europe, the new concepts, such as of the dance inspired Studio 71 Collection has been particularly strong. And the reaction to spring and summer has been excellent. The Find Yourself campaign increased our women's visibility with impactful retail areas that showcased our product with our marketing message.

So while the U.S. retail environment overall presents its challenges, on a global level we're pleased with our overall sell-through performance at retail. We are executing on deliveries, improving margins through supply chain management, and continuing to provide differentiated products and innovation to our consumer. Simply put, our consumers are telling us that the product is right.

Finally, Nike's offense is really not complete without connecting our brand and product to the needs and passions of our consumers. This quarter is a great example of how brand momentum can drive results globally, regionally and locally. On a global level since we last spoke to you, Nike athletes have delivered memorable performances at the Tour de France, the world's swim championships in Barcelona, world track and field championships in Paris, Wimbledon, and the U.S. open. These events have also been great vehicles for Nike to showcase our apparel and footwear technology in both large and small ways.

One great example is our first global apparel campaign called Shadow, which you can check out on the Web site. The campaign features Nike's performance apparel technology, and has helped to create both consumer demand and drive sales. As a result, Nike's performance apparel business, which makes up over a third of Nike's total apparel business, was up over 13 percent this quarter.

On a regional level, earlier this month MTV aired the second annual Nike Battleground One-on-One Basketball Tournament, which received fantastic ratings in the important 18 to 24 year male demographics. And in our Americas region, the Total Magia that I mentioned earlier, generated record-setting sell-throughs for Americas' footwear, supported by a brilliant television and ad campaign that we recently labelled, a 60 Second Documentary of Genuis at work.

And then locally, we continue to connect with people through unique and innovative ways, building deeper relationships with the brand. Just in the past few weeks, we held the Nike Soccer Curb Cup in Los Angeles, which was a three-on-three tournament, including music, interactive games and skill demonstrations that were enjoyed by over 4,000 soccer crazy L.A. youths. And we had over 20,000 runners participate in the third annual Nike Run London 10-K race.

So as I said at the outset, the reasons we're here today looking at strong and encouraging numbers are really simple. The Nike Brand is strong. Our products are right with consumers. And our brand communications are resonating. With that, let me pass it over to Charlie.

Thanks, Mark. Good afternoon everyone. Please pardon my voice as I'm battling my annual summer ending cold. As you have already heard a very total view of our financial results from Don, and Mark had covered the brand and products success, so that does leaves me with a quick spin around the world for a regioanl review and some thoughts about the future.

So I would like to spend a few minutes talking to about three points that I believe are important for you to understand where Nike is today and what we're focusing on going forward. First of all, the strategy we have articulated to manage our global business for long-term profitable growth, continues to work. In the past twelve months, we've added over $800 million in revenue to Nike Inc. And this quarter we again delivered healthy pretax profit growth in the U.S., Europe, and Asia. We grew our earnings per share by 21 percent, and achieved our highest ROIC since 1997.

This quarter we have also announced that futures orders scheduled for delivery over the next five months advanced 10.5 percent versus the prior year. Yes, there is some noise in these numbers from currency movements and the seasonal shift in Europe. But when you strip all that out, our futures growth has still accelerated significantly over the pace of the last five quarters.

We have talked about how important it is to grow in the USA. But trying to grow an unhealthy business was not something we wanted to force. We needed to figure out how to create excitement with the consumer again. We had to understand why the market wasn't growing, why there wasn't the excitement that it once had. In the U.S., our focus on the consumer and an integrated approach to our product, marketing and distribution strategies have combined to create an improving marketplace; one that is profitable for both us and our retail partners.

The profitability is what is starting to drive some excitement back into this business. The brand and product momentum that Mark talked about has been core to this success, but we're also managing the business well. There are several components that we have concentrated on gross margin management, product mix, sourcing efficiencies, inventory management. They have all have a positive effect on our ability to drive overall profitability for the industry.

Our distribution strategy is something we have talked about at length over the last year. It is our intent to continue to concentrate on how our brand is presented to the consumer; to improve the presentation of both footwear and apparel; partner with the new and innovative retailers that create a compelling shopping environment; and believe that brand building is the key to success in this industry.

Our dialogue with Footlocker Inc. is ongoing. They're looking at their formats and how they might fit into where we want to go. While we still expect our business with Footlocker will be down for the balance of this calendar year, futures orders from Footlocker are up for the spring season to date. In addition, we have had considerable success with some off our other retail partners, both big and small. And fee very good about the improving condition of our brand at retail.

And as a result, our U.S. footwear futures orders have grown for the first time in five quarters. And the seasonal shift impact in the European futures numbers may be a combination of both the shift and additional growth. We'll have to wait and see next quarter how it shakes out. Our U.S. apparel futures are down for the quarter, as we continue to work on improved presentation distribution, and continue to see a growing percent to total shift toward our licensed product that is not included in or futures numbers.

The second point I would like to cover is Nike's international business; it grew 15 percent. We told you last quarter that FY '04 would be a great year for Nike's Asia-Pacific region, and this quarter's results certainly bear that out. China continues to be one of the most exciting markets in the region, as consumers embrace the world of sport, and Nike's footwear, apparel, and equipment products. Last quarter we told you our China business had exceeded the $100 million mark for annual revenue. In this quarter the team produced a 47 percent gain.

Korea, Japan and Taiwan continued continue to to deliver solid growth, and are great examples of where our focus in building our authentic performance position in sports like soccer, running, baseball and basketball are a healthy complement to our strong active life position. As the spotlight continues to brighten on this part of the sports world in the coming years, I think we are in a great position to continue our growth.

In Europe, we're finally enjoying some of the currency benefit we have been waiting for. Over the last several years, as we build market share and drove revenue growth in Europe, the impact of these gains on our consolidated results was masked somewhat by currency pressures. As you've seen, all of our growth in Europe this quarter was driven by currency. It is a benefit we have earned, as we catch our breath and position ourselves for the next phase of growth.

Nonetheless, we have focused on building a sound business model that will allow us to grow in the key markets around the region. This quarter France, Iberia, Italy, they all grew. While we have not seen the full turn to a healthy growth in the UK yet, the futures numbers reported today include positive growth into the spring season.

We'll continue to manage our portfolio for profitable growth around the world, optimizing the components of a global business, bridging varying market trends, economic conditions, and consumer landscape, enabling us to continue to deliver a healthy consistent growth to our shareholders.

Finally, I will close with my view of Nike's abilities to lead this amazing industry in which we belong. We feel very good about our business, our brand strength, and the trends we're seeing in the marketplaces around world. As the health of the overall industry improves, we believe investment and confidence will continue to grow. We are excited about some of the new retail formats we're seeing in the U.S., and believe leading retailers will continue to create fresh environments that excite consumers.

We're certainly committed to doing our part to generate consumer excitement. Our U.S. footwear business is starting to build positive momentum, and our international business is still very strong. And there is still many areas where we feel we can improve our performance.

It is a great time of year, starting this weekend. We will see that Women's World Cup begins. Football season is in full swing, both the American and European versions. The World Series in October, and for the the southern hemisphere, the Rugby World Cup kicks off in Australia next month. This next quarter we will launch some exciting new basketball concepts, and we will gear up for our run towards next summer in the Athens' Olympics and the European championships in Portugal.

We have a strong experienced management team in place, and great people throughout the world committed to growing the Nike business. I have been waiting three years for this call. Now we've got a strong first quarter in the books, a lot of momentum around world, and it is shaping up to be a great year.

So now we will open it up for questions. Thanks.

(OPERATOR INSTRUCTIONS). Our first question today comes from Margaret Mager with Goldman Sachs.

Hi, it's Margaret. Congratulations. Great to start the year off on a positive note. I want to ask a couple of questions. First of all, about the sales, the sales growth in the quarter being up 8 percent, and particularly in the U.S., is a lot better than the futures indicated. Is there something about the timing in the first quarter in the U.S. versus the second quarter, or can you just explain that a little bit more. And I heard you say apparel license is not on futures, so that probably helps that number. So just trying to understand that.

And then my second question is on the gross margins. And I believe you said, Don, that 40 bps came from favorable currency impact. And Charlie talked about mix forcing and inventory management all being factors in improving the profits. Can you just talk about how each one of those played into gross margin improvement, and how that will play out over the balance of this year? Thanks.

Well, with respect to the revenues, you culled out the 8 percent. That is actually the consolidated revenue number, that is not the U.S. number. And you did identify one of the items here. We certainly have had very good growth in the quarter from the parts of our business that are not on futures. So in addition to licensed apparel, I would also cull out some of the other businesses, like Nike Golf, Cole Haan, Bauer Nike hockey, as well as the retail business in the U.S., which was pretty strong. So those are some of the things that we often talk about as reconciling items, and those were all up pretty strong for the first quarter.

With respect to your second question, I think over the course of the year we do expect to see about 40 basis points plus. I think this is the quarter where we have the least of the benefit. I think more of it comes a little further back in the year. And that is from a hedge rate perspective. On the translation side, the comparisons actually get a little tougher as we get to the half back half of year, because as you recall, the fourth quarter we have been pretty euro translation rates for the fourth quarter. So on the margin front, the comparisons get a little better from foreign exchange. And on the translation side, they get a little worse. Does that answer your question?

Yes, it does with regard to currency specifically, but I guess I'm trying to (multiple speakers).

(indiscernible) the items?

Yes, the other things then. How that impacted gross margins. If you can just give us more color on what you're doing in sourcing. How the mix is impacting gross margins? You know, the other factors that are --

All right. Well, first of all, we did talk a little bit about the benefits in our supply chain. So a couple of the things that are benefiting us in margin in the supply chain is cleaner inventories which is reducing our level of closeouts and improving the margin on the closeout sales we do have. So that is one of the pluses. We also are leveraging our distribution infrastructure. So over the last couple of years we built out a lot of our distribution infrastructure, and now we're putting more volume and more revenue through the same distribution infrastructure, which benefits our margins. And then as far as mix is concerned, we have talked about some of the U.S. footwear benefits, particularly around retro and classic products, which tend to carry a higher margin and that was also a benefit for the quarter.

Okay. And at this juncture apparel margins versus footwear margins, rough guidance on that? Are they comparable?

Yes, they're comparable.

We'll take our next question today from Robby Holmes (ph) with Banc of America Securities.

Hi. Thanks. A couple of quick questions. I was hoping you could tell us if you have gotten a little bit further thinking on what may happen with Converse over time, now that you own it.

And my other question was, if we could get a little more clarity on what is happening with you guys in Footlocker. Is there sort of a move towards them getting some of the marquee product, $100 and over stuff that you mentioned that is performing, the top three styles at retail? Thanks.

Robby, this is Charlie. With respect to Converse, we just completed the final closing of the transaction, so we haven't really put ourselves into position quite yet to disclose all of our specific strategies. But we are obviously very excited about adding the brand, and it continues to round out some of our basketball strategies, and gives us some opportunities to do some different things.

With respect to Footlocker, we have continued to dialogue with them. I would say that the dialog is probably much healthier today than it was a year ago. And that their expectations are to get back into the marquee product zone and have access to that product. We're working with them, but we have not set any timelines, nor have we made any changes to our distribution policy to date, so that dialog continues.

And just one last question. On the apparel side, how is the branded apparel for you guys in the moderate channel performing?

Well, I would say it's probably one of our weakest segments. And that is one area we think we can improve on going forward. So that is a focal point for the U.S. apparel team.

And is it a delivery issue, or is it just in general that the environment is week?

More the latter. I think in general the environment is weak. And we're trying to focus on our products and how we can differentiate ourselves from the competition in that zone.

So the issues that you talked about the last quarter you would say are pretty much resolved?

They seem to be.

And that is a more of USA situation.

Great, thanks guys.

Our next question today comes from Bob Drbul at Lehman Brothers.

Hi, good afternoon. Two questions. Can you talk about the futures orders trends during the quarter in footwear and apparel? That will be the first one.

The second one, you finished with almost $1 billion in cash. If you back out the $300 million for Converse, can you really give us an idea where you are in terms of the dividend policy here, with share repurchase, etc.? It just seems like cash was really starting to build up here?

Well to take your first question, Bob, the futures, the back half of the window was differently stronger than the first half. And I think we talked about a couple of the reasons for that, specifically the European seasonal change. So definitely stronger futures in the back half.

With respect to the cash balance, the Converse transaction was the acquisition, plus we also funded Converse's lines of credit from Nike Inc. So the amount of cash that we took off the balance sheet related to the Converse transaction was a little bigger than 300. But having said that, we are certainly, as we have discussed before, looking at all of the deployments of our cash flow, both share repurchase, as well as dividends. At this point, we're not yet prepared to talk about what changes we may have in mind there.

Back on the futures as a follow-up, can you give us the order book X Footlocker, like you did last quarter in the U.S.?

Yes, I think if I remember the final number was -- the X Footlocker we're up 3 percent in the USA.

Thank you.

We will go next to Jeff Edelman at UBS.

Thank you. Good afternoon. Nice quarter here. Don, two questions. One, would you expect the gross margin improvement to be able to offset the SG&A difficult comparison you would expect in the second quarter?

You know, Jeff, I would rather not get into the specific discussions around a quarter with that level of granularity. I would say for the full year, the comment that I made around full year expectations are that we expect our operating profit margin to improve year over year. Which basically tells you that for the full year I do expect gross margin improvement to offset any SG&A movement.

Fine. Secondly, could you explain the discrepancy between the currency impact in Q1 sales in the European region, which was 19 percent, and the impact on the futures, which is about 7 percent? Is that due to mix or is that just due to the timing in the currency?

It is the timing in the currency.

Fine. Thank you.

And we will take our next question from Noelle Grainger at J.P. Morgan.

Two questions, if I could. First, Don, can you talk a little bit, maybe more big picture, in terms of the margin and the leverage opportunity in the business model over a longer period of time, particularly related to the infrastructure that you have built? What type of volume capability do you have without adding significant incremental significant dollars at this point? Can you just kind of maybe broadly address that?

Well, the approach we take with our infrastructure is we essentially go into the proposition saying, we don't want to build more footprint at this point. So one of the things we look for is ways to put more volume through the existing footprint. We do that by managing direct shipments to customers, and doing operational steps like cross docking. So the agenda here for us is to try to get as much mileage out of our existing distribution footprint as we possibly can.

So at this point, we believe that we do have additional opportunity to put volume through these facilities for years. I don't know that that is five years, ten years, but it is not next year that we think we going to have to build additional footprint. With that said, we do have to put capital into these facilities. Some of the capital goes into improve the systems, and make sure that we can get more throughput through the existing buildings, bricks and mortar. So I guess what I would say to you is, we don't see the need in the short term to be building additional distribution centers, which is the big capital ticket. What we do see is somewhat smaller investments in productivity assets that help us get more products through the same bricks and mortar.

And regionally, is there at this point kind of what you see on maybe the next year horizon? Obviously, Asia is going to go on to supply chain this year. I'm assuming that is still planned. Regionally, where do you see the need for the investment?

Well, I think first of all, with the Nike supply chain project, we will be doing Japan and some other parts of Asia next calendar year. And it will take us a couple more years to actually get the system's footprint in around the world.

With respect to things like productivity investments, some of that has already going on in the U.S. For example, we're doing some of it Europe. And Japan and Korea are our other large company-owned distribution centers. So we're doing projects really around the world all the time. It is just part of our ongoing capital expenditure budget.

My second question, I think you indicated that your sales in the U.S. in the quarter X Footlocker were up 2 percent? Is that right?

Right.

Can you talk a little bit about that? Is that futures or is that sales?

No, that is sales.

Can you talk a little bit about that by channel?

This is Charlie. We don't have anything by channel in front of us. And so I'm really not in a position to talk specifically by channel. I will say that we feel great about the primary channels of distribution that we call out on a regular basis. Athletic specialty and sporting goods are both -- we feel great about both of those.

And actually just to clarify, Noelle, the numbers you are quoting here are footwear, so U.S. footwear sales up 34 percent for Footlocker, and -- I'm sorry down 34 percent for Footlocker, up 2 percent for all the rest of the accounts. That is just the U.S. footwear number.

What about like the family channel?

It is still an area of opportunity for us. I think from a booking standpoint, there's been a lot of discussion over the last six or eight months that we were using that channel to offset some of the other business, which is not true. We feel pretty good about the way it looks going forward. Again, we still have seen some inventory buildup, but I doublechecked this today, any of the buildup with regard to Nike product is minimal. So we think that that is starting to work itself through from an overall basis. And that will be an opportunity that we're looking out for the next six to twelve months.

Thank you very much.

We will go to Dennis Rosenberg at Credit Suisse First Boston.

Hi, guys and congratulations for more than just doing it. The guidance you have been giving, I assume that is including Converse now. And if that is true, could you just give us a sense as to what you are expecting Converse to be contributing to that?

Sure. For this year, Dennis, I would say in the second half of the year we expect Converse to be a few pennies accretive. And when I say that, part of the issue, as you may know if you are a student of such things, there are number of accounting adjustments related to the purchase of the company that will be a bit of a drag on earnings in the first year. So that is why we think it is only about a couple of pennies.

What is the yearning power once we get into the second year?

Tough to say. I think, as Charlie said, we're just closed this transaction earlier this month. I guess we have owned it for about two weeks now. And while we have a set of strategic projections in terms of what we think the business can do, we want to send some time working with the Converse folks to make sure we now nail that down a little more clearly before we talk to you about it.

And when you talk about second quarter sales growth of mid single digits, the inclusion of Converse I think would probably account for 1 or 2 percent of that. So are you saying that you would be up less than mid single digits just X Converse?

Well, mid single digits is a bit of a range, Dennis. I think at this point Converse is a point or so, but that is not -- I wouldn't use that to drive your model in terms of what I'm saying here. Our range is mid single digits, and Converse is probably a point or two.

And another subject, on the shift in Europe and futures and deliveries, is that something that is just affecting the spring season, or is that something that is going to affect future periods? And how should we factor that into our projections?

No, it is just really the spring season. There was a month's shift in the launch dates of the product line.

Thank you.

We have a question from John Shanley with Wells Fargo.

Good afternoon. Congratulations on a nice quarter, guys. I wondered if you could drill down for us, either Don or Charlie, a little bit more on the European numbers. I'm a little confused. You said the revenues were up 17 percent in the quarter, but 19 percent of this was currency related. Does that mean on a currency neutral basis, sales in Europe were down 2 percent?

That's correct.

Okay. Was most of that in the western part of the European market? And can you give us a sense in terms of whether you are gaining or losing traction in terms of market share for your footwear business in Western Europe?

Well I think, it was pretty consistently spread over the European business, and obviously all the euro countries participated in it. I think from a country by country standpoint, like I called out in the prepared remarks, we saw growth coming out of Western Europe, led by Italy, France and Spain. UK is still not quite rounded the corner yet, but the futures numbers are promising. And so we're still optimistic that we're going to see some bounce back there.

And we feel pretty good about the footwear business overall. We're still very heavily dependent on soccer. Our soccer numbers continue to grow. And I think what I most excited about is starting to see some of the other categories come alive, specifically running has always been a strong category in Europe, but we're really started to the basketball have an effect. And some of that is being driven by some of the European players playing in the NBA today.

On the U.S. front, the Footlocker renewal that you mentioned in the 10-K, Charlie, can you give us an idea of when that may hit in terms of quarter? Are we going to see some of that in the second quarter, or will the majority of it be back half loaded?

I'm sorry, John. What renewal are you --?

Well, there was a mention that the business with Footlocker was likely to increase in the 10-K. I just didn't understand when that was going to occur. Was it --?

I think, John, like I said in my prepared remarks, we're going to be down with Footlocker through the calendar year. But the early read on spring, starting to anniversary some of those numbers, is that we're signed to head back north. So we feel like the business is trying to stabilize.

Okay, and the last part is also on the U.S. front. Any concerns about -- you saw the numbers, I am sure on Monday on Footstar -- any concern about Footstar in terms -- I think it is your second biggest customer, where that may be going and what your relationship with the retail channels that they operate may be going forward?

John, first of all, Footstar is not our second biggest customer. And with respect to the business relationship with Footstar, at this point our sales performance has been very good with Footstar. And our accounts receivable are current. And we're not seeing any issues in terms of liquidity or other financial issues at this point coming through Footstar.

Super. Glad to hear it. Thanks a lot.

We'll take our next question today from Brian McGough with Morgan Stanley.

Thanks very much. Just two quick questions. One is on U.S. apparel. It seems like it is just a massive lever for next year. So in your opinion, how confident are the retailers that you can get them the product on time?

And then just a follow-up on Converse and the distribution there. Now there is some speculation out there that you guys with take this downstream and have it be a mass-market brand, which I can't imagine is the case. So would you just hit on that, and maybe what the opportunity is to pull back international licenses? Thanks.

Yes, Brian, this is Charlie. I think with respect to the USA apparel deliveries, I feel pretty good about that. We have corrected almost all of the issues that we dealt with in the back half of last fiscal year. And our deliveries for fall have been a lot better. And I think if you check out in the retail community, they will start to reflect some of that. So it is a potential lever for us next year, and we are looking forward to anniversary some of those numbers.

But with respect to Converse, again, I'm just going to defer back to what we have said so far. We haven't really gotten a chance to sit down with Converse team and spend any time with them. So that is something that is on the calendar here relatively quickly. And as soon as we get a little bit more defined position on where we're at and how we go forward with the business, we will articulate it publicly.

Brian?

We will take a question from Virginia Genereux with Merrill Lynch.

Thank you. One maybe for Don, I guess. Don, the way I'm thinking about it is that we think you have sort of 18 cents of currency help for the rest of the year. You beat this quarter by 18 cents -- and I'm looking at hedging and translation -- and then maybe Converse is 5 cents. So that is 41 cents right there, which is 15 percent EPS growth on your Q77 (ph) of last year, plus anything else that might be happening in the business. You said you were more confident about midteens EPS, but this quarter was up 21. Why can't you do a good bit better than that, may I ask?

First of all, Virginia, you're stacking up some numbers I don't recognize there. The translation impact this quarter was 8 cents, not 18. But looking -- let's talk about the growth rates. Yes, we're up 21 percent for the earnings per share in the first quarter. As I said though, we expect to have a somewhat more challenging comparison in the second quarter because we're not only anniversaring a pull forward of revenue in Europe, but we also have a relatively light demand creation spend last year because we were coming off the World Cup. So a combination of those two things means that our expectations around the second quarter is that that is going to be a more challenging comparison.

In the second half, we definitely expect the third quarter to be the easier comparison. We expect to do relatively well there. And we had a very strong fourth quarter last year. And the currency benefits do start to narrow in the fourth quarter because the euro was fairly high in the fourth quarter of last year.

So bottom line here is, we do feel much more confident about our midteens earnings growth target. Is it possible that if things all went right that we could potentially do better than that? Yes, it probably is. But at this stage what we're looking at is our long-term goals, and that is what we aim at.

Great. I was saying 18 cents currencies for the rest of the year. But may I ask, do you expect the second quarter math to be down year-over-year, Don -- so just for everybody's benefit on an EPS basis?

At this point, all I would want to say is that that is the most challenging comparison. I'm not sure it is will be down, but I think it is going to be the toughest quarter of the year for us in terms of growth.

And then lastly, on your last call you said, I think you said, you thought you could get some SG&A leverage this year. I have you losing -- not getting SG&A leverage. What is your thought on that, may I ask?

One of things we talked about in the past is this is clearly a challenge for us. As we expand our business internationally, and as our portfolio grows, we certainly find it more difficult to leverage the overhead. Having said that, we did a little bit of leverage in the first quarter. That is always our goal. And that is our target, to try to do that for this year. But as I said, at this point pulling all believers in the business, we expect to improve our pretax profit margin. I'm not sure at this point I would expect to see a lot of leverage in SG&A, although that is always our goal.

Great. Thank you all.

We're going to take one more question, please.

We'll take that question from David Campbell.

Nice quarter. I was wondering if you could comment on the sell-through of marquee products you're seeing this year. And what differences you expect in the presentation and promotion of that product when it goes back into Footlocker?

Actually as I mentioned in my remarks, we're starting to see some really good sell-through on marquee products. I mentioned the Shox and Ride and the Spiridon, the Spirit running shoes. We are also seeing that in Jordan. We've got some very strong product. I would say one of the strongest sets of marquee products coming in the next few seasons between basketball, both Nike and Jordan, training, continuing in running, even in football or soccer. We have some of the strongest products above $100 that we have had in a long time.

And we will continue to be bullish in terms of promoting, marketing that product, not just through athletes, but through TV and print campaigns and other events, what we call 360 marketing. So we will look at any opportunity to really create some energy up at that level. But from a technology standpoint, a product standpoint, a commercial potential standpoint, we think that the marquee product we have coming in the next three quarters are some of the strongest we had ever had; so quite bullish. As far as Footlocker goes, I let Charlie take that one.

I'm not sure I understood exactly what the question was regarding the Footlocker issue.

How do you expect the presentation and promotion of that to be different that it might have been in the past at Footlocker?

Well, like I said we don't traditionally talk about specific strategies within specific accounts. And so I don't think now is the time to start. But I think the overall comment that I will make, in referring back to some of the things I've talked about, is our increasing profitability in the business, both here in the U.S. at retail and at wholesale. That the branches in as good shape as it has ever been in. And we continue to look our distribution and how to optimize it with respect to the business that we're trying to do.

I can't say how excited I am about the progress we have made in the overall marketplace, and what the brand has been able to do with respect to shifting the emphasis back into profitability, as opposed to just driving pure revenue.

Thank you very much.

Okay, everybody, thank you for listening in. We will talk to you soon.

This does conclude today's conference call. You may now disconnect. And we do appreciate your participation.