Nike Inc (NKE) 2004 Q2 法說會逐字稿

Thank you for standing by.

Good day and welcome to the Nike second-quarter fiscal year 2004 earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Ms. Pamela Catlett, Director of Investor Relations.

Thank you.

Good afternoon everyone.

We are pleased you joined us this afternoon to discuss Nike's fiscal 2004 second-quarter results.

For those of you who need to reference our press release, you will find it on our Website, www.nikebiz.com\investor.

You will also find expanded information on the Website 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, our Chief Financial Officer.

Each of today's participants will provide brief prepared marks, which we will also provide on the Website immediately following the call before we then conclude the question-and-answer period.

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 file with the SEC, including Forms 8-K and 10-Q.

Some forward-looking statements concern future orders that are not necessarily indicative of total revenues for subsequent periods and cancellations and the mix of futures in that one quarter 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's retail, Nike Golf, Converse, Cole Haan, Bauer and Hurley are not included in these numbers.

During this conference call, we may discuss non-GAAP financial measures.

A presentation of comparable GAAP measures and qualitative reconciliations can also be found at Nike's Website under the Investor heading.

Again, www.nikebiz.com.

In this call, we may also discuss non-public financial and statistical information, which is also available on that site.

Now here is Don Blair.

Thanks, Pam.

On our last conference call, we told you that the second quarter would be the most difficult growth comparison in the year.

So we feel very good about the growth in revenue and profits we have just reported.

Our revenues grew 13 percent in the quarter, including about six points of growth from currency and about two points from the Converse acquisition.

Excluding these factors, our business grew just over 4 percent.

As you may recall, last year we accelerated about $66 million of product shipments from the third quarter into the second quarter in advance of our supply chain systems implementation in Europe.

In addition, we are just beginning to feel the impact of lower shipments to Foot Locker in the U.S..

So when you net out all the puts and takes, we are very pleased with the topline performance of our businesses in the second quarter.

Our consolidated gross margin for the quarter was 42.3 percent, up 210 basis points versus the second quarter of fiscal 2003.

On the net basis, foreign currency movements accounted for only about 30 basis points of the improvement.

Excluding the impact of currency, gross margins increased to nearly every one of our businesses.

The largest driver of the gross margin improvement was wholesale footwear where higher product margins, lower airfreight and fewer more profitable closeouts drove about 130 basis points of the consolidated gross margin improvement.

Gross margins for wholesale apparel, equipment and Nike retail also advanced, driving about 30 basis points of the improvement.

The balance of the growth came from our subsidiaries.

Our diluted earnings per share for the quarter grew 16 percent versus the prior year bringing year-to-date diluted earnings per share growth to 19 percent before last year's accounting change.

Our return on invested capital as of the end of the second quarter was up three points versus the prior year, and for your reference, we posted our return on invested capital calculation on our Website.

We continue to generate strong cash flows in the quarter and to deliver a large amount of that cash to our shareholders.

For the quarter, we repurchased over $100 million of stock, and we paid out $37 million in dividends.

In addition, on November 24, we announced that we are raising our quarterly dividend to 20 cents a share, a 43 percent increase over the prior rate.

So once again, it was the depth and breadth of our portfolio of global businesses that enabled us to deliver these results against difficult comparisons, so let's talk about the results in our key businesses.

This quarter our international businesses maintained a healthy rate of growth, delivering 12 percent revenue growth and over 14 percent growth in pretax income.

In our Europe region, which includes the Middle East and Africa, revenues grew 9 percent in the quarter as footwear was up 8 percent, apparel grew 10 percent and equipment advanced 4 percent.

Stronger currencies accounted for nearly 15 points of growth.

As I indicated earlier, we estimate that $66 million of revenue moved from the third quarter to the second quarter last year.

This shift in product flow reduced our second-quarter revenue growth this year by about nine points.

If we remove the effects of currency and shipment timing, revenue would have grown about 3 percent in the Europe region.

Gross margins in the Europe region expanded by 320 basis points versus the prior year and accounted for a full percentage point of our consolidated margin improvement.

Stronger currency was a key factor, driving 120 basis points of the improvement in Europe alone.

Lower levels of closeouts and higher closeout margins accounted for most of the gross margin upside, more than offsetting higher per unit distribution costs as we processed fewer units through our fixed distribution infrastructure.

Pretax income for the Europe region advanced 12 percent in the quarter, and as in the past, our segment disclosure of regional pretax income is currently available on our Website.

In the Asia-Pacific region, our business continued to grow strongly in the second quarter.

Revenues increased 18 percent for the quarter with about five points of the increase coming from stronger currencies in the region.

For the quarter, footwear reported 21 percent growth, while apparel grew 15 percent and equipment advanced 11 percent.

Japan, China and Korea again drove the growth, although revenues grew in most countries in the region.

For the second quarter, Asia-Pacific gross margins increased 170 basis points versus the prior year, accounting for 30 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.

Pretax income for the Asia-Pacific region grew 18 percent in the quarter.

In the Americas region, revenues grew 17 percent for the quarter with about eight points of the increase coming from currency effects in the region.

For the quarter, footwear reported 25 percent growth, while apparel grew 3 percent and equipment advanced 5 percent.

On a country basis, the revenue increase was driven by strong growth in Brazil, Argentina and Chile.

For the quarter, gross margins in the Americas region fell 130 basis points year-over-year, reducing the consolidated Nike gross margin by 10 basis points.

Less favorable currency rates in Mexico and Brazil accounted for 200 basis points of the regional gross margin decline.

Pretax income for the Americas region grew 10 percent in the quarter.

As pleased as we are with the performance of our international regions, we are equally pleased with the strong results from our U.S. region.

Revenue for the second quarter advanced 5 percent over the prior year, while pretax income grew 12 percent.

Year-to-date pretax income is up 7 percent on a 1 percent increase in revenue.

In the U.S. region, gross margins for the quarter were up 210 basis points versus the second quarter of fiscal 2003, driving an 80 basis point improvement in Nike Inc.'s consolidated gross margin.

Virtually all of the region's gross margin expansion came from higher wholesale footwear margins driven by higher in line product margins, lower airfreight costs, and fewer more profitable closeouts.

SG&A spending for the region grew about 10 percent, driven largely by double-digit increases in demand creation spending.

U.S. footwear sales increased 5 percent in the quarter as sales to Foot Locker declined 8 percent, while sales to other accounts advanced 6 percent.

However, as we have indicated in a press release issued in November, we are now reaching a greater degree of alignment with Foot Locker and expect our business with them to improve over the next few quarters.

For U.S. footwear as a whole, average selling price per unit increased mid-single digits as the mix of over $100 product grew and closeouts fell.

U.S. apparel revenues rose 8 percent in the quarter as continued growth in performance apparel and licensed products more than offset lower sales of active life apparel and lower closeouts.

Reflecting the continued strength of the Nike Brand, comparable sales from Nike-owned retail operations in the U.S. grew over 8 percent on a comp store basis for the quarter, lead by a double-digit sales growth at Nike/Converse stores.

Revenues from our other businesses grew 54 percent for the quarter with 28 percentage points of the increase due to the acquisition of Converse.

Revenues for Nike Golf, Cole Haan and Hurley each grew about 30 percent for the quarter, and sales at Bauer Nike Hockey advanced 15 percent.

For the quarter, our other businesses reported $7 million of pretax income versus about breakeven last year.

Better bottom-line results at Nike Golf and Cole Haan, plus the addition of Converse, drove the improvement.

Consolidated SG&A expanding grew 18 percent in the second quarter.

About 8 percentage points of the increase was due to changes in exchange rates and the acquisition of Converse.

For the quarter, demand creation spending increased 25 percent to $341 million.

Changes in currency exchange rates and the addition of Converse accounted for about 10 points of the growth.

Investments in basketball in the U.S., football in Europe and the Rugby World Cup in Asia were key drivers of the remaining growth.

In the second quarter, operating overhead increased 15 percent to 562 million.

Changes in currency exchange rates and the addition of Converse accounted for about 7 percentage points of that growth.

Other expense for the quarter totaled $14 million, with about half 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 second quarter, the effect of netting these foreign currency losses and the favorable translation in foreign currency denominated profits was an additional $30 million of pretax income or about 7 cents per diluted share for the quarter.

Our effective tax rate for the quarter was 34.8 percent, our current estimate for the full-year rate.

As of November 30th, worldwide inventories were 15 percent or $205 million higher than a year ago.

The acquisition of Converse accounted for $48 million of the increase, while inventory in our Europe region increased 115 million.

The increase in Europe was due to currency changes, which added $67 million to the balance and comparisons to unusually low inventory levels last year as we drew down inventories in advance of the supply chain system implementation.

Inventory in our U.S. region was down versus the prior year.

At the end of the second quarter, Accounts Receivable were $115 million or about 6 percent higher than the prior year.

Stronger foreign currencies accounted for $150 million of growth, and the acquisition of Converse added $43 million to the quarter-end balance.

Without these factors, Accounts Receivable would have declined about 4 percent.

For the quarter, we generated $418 million of cash flow from operations, and we used $341 million of cash in investing activities, including the acquisition of Converse.

So in other words, we financed the Converse acquisition with a portion of one quarter's operating cash flow.

Cash used by financing activities totaled $105 million, including $101 million of share repurchases.

As we entered this fiscal year, we told you we expected to report full year results broadly in line with the financial model we talked about before -- high single digit revenue growth, expanding gross margins, and midteens earnings per share growth.

With the first half of the year on the books and the continued strength of foreign currencies, particularly the Euro, we should be able to exceed these goals.

So let's begin with the revenue outlook.

Today we reported a 9.7 percent increase in futures orders for the next five months.

Although we reported futures growth of 10.5 percent last quarter, we told you that those numbers included four to five points of growth from changes in our seasonal order pattern in Europe.

So on a comparable basis, the futures we reported today reflect a significant sequential acceleration of orders.

Assuming the current strength of the Euros continues, we expect to deliver double-digit revenue growth for the year.

As discussed earlier, last year's fiscal second quarter was stronger than normal and the third quarter weaker than normal as we pulled shipments forward in advance of our supply chain implementation in Europe.

In addition, the change in the seasonal pattern of orders in Europe should pull a higher percentage of spring revenues into the third quarter versus the fourth.

So as a result of these factors, we expect revenue growth in the mid to high-teens for the third quarter, with high single digit growth in the fourth quarter.

Our first-half gross margin performance has been very encouraging, and we expect to see gross margin continue to track ahead of prior year levels over the second half of this fiscal year, although we are not yet willing to project the same level of year-over-year growth as we have seen so far.

At this point, we do not expect to see SG&A leverage for the full-year as we continue to invest in demand creation and operating overhead to drive revenue growth and gross margin improvement.

However, we do expect to generate significant expansion in pretax profit margins for the full-year as improvements in our supply chain and product cost management continue to drive better gross margins.

So,in summary, we are very pleased with our results so far this year, and we feel we are in a great position to continue to deliver strong profit growth over the balance of fiscal 2004.

So with that, I will turn the floor over to Charlie Denson.

Thanks, Don.

Good afternoon and happy holidays to everyone.

I don't think it's going to come as a surprise to any of you that we are very pleased with the financial results Don has just reviewed.

The first six months of this fiscal year have been very successful, and we are pleased that the focus we have placed on delivering consistent revenue and earnings growth is paying off.

While we are happy with our performance to date, we have been more excited by the renewed energy and momentum we have seen across the entire industry.

I would like to focus my comments today on three areas -- the rebound of the athletic and footwear and apparel industry, especially here in the U.S.;

Nike's leadership and innovation brand presentation and products, and execution of our operational model, which positions the Company well for future growth.

We spent the better part of the last two years talking about the fact that we are more than just a U.S.-based footwear business.

That we are a multidimensional multinational company that has the diversity and adaptability to deliver consistent financial performance and earnings growth.

This quarter won't be any different.

But unlike the past couple of years where we have stressed our growth internationally, this quarter I am pleased to say we are seeing the industry here in the U.S. at its healthiest state in over five years.

This is the first time in a long time where we can confidently talk about a positive outlook for our U.S. business and the industry as a whole.

What is our definition of a healthy industry?

It's a marketplace that is driven by products, marketing and service, and just as importantly, it is a stable industry in which retailers are differentiating themselves through presentation, product assortments and brand awareness.

And it's a market in which Nike and its retail partners are managing tighter cleaner inventories and using their increasing profitability to invest back into the industry, creating new levels of interest and excitement.

With this momentum comes success and recognition.

While we are pleased with this, we are by no means satisfied, and we have a lot more to accomplish.

As we review some of the progress we have made over the past 18 months, we have to start with our products.

After improving our core offering to key price points, it was felt by many that we had lost our ability to create new, innovative and exciting products.

The kind of product that defines industry leadership and demands premium price points.

We talked about the need to run a complete offense, an offense that not only included key price points but optimized innovation and technology, marketing campaigns, distribution strategies, and brand presentation at retail.

Whether it's Nike Air or Nike Shox, superior technology or our next addition of the Swiss suit (ph), product innovation is where we always start, and Mark will talk more about that in a minute.

But it is the complete offense that sets our business and our brand apart.

We're starting to find our rhythm.

We are back focusing on the fundamentals -- product, communication, distribution and brand presentation -- that build this brand and this business, and we are really looking forward to the next twelve months.

As we head into the back half of this fiscal year, we intend to stick to that game plan.

It's the same game plan we have reviewed with you each quarter for the past three years and the one that has delivered an expanding topline. 14 percent compounded annual growth rate in the second quarter diluted earnings per share and strong cash flows in a very strong balance sheet.

Let me hit on a couple of reasons why I think this is sustainable.

First of all, our management team.

We have talked a lot about the overall performance for the last couple of quarters, but as you all know, results are produced from the performances of people.

Our senior team has now been intact for over three years.

I call this out because they are an experienced, aggressive and disciplined team that understands this business.

Our results have continued to come with the ongoing development of our management group and the teams that they lead.

The second reason for sustainability is discipline in our investments, insuring that we are investing for growth in areas like systems where our supply chain investments are already beginning to show returns and inventory management, time to market and gross margin performance.

Investments in new markets like Brazil, India and Russia where we will look for growth over the next ten years and investments in athletes like LeBron, Carmelo, Wayne Rooney, Serena and the Chinese National Basketball teams where we can build product concepts and collections that will generate new businesses for the brand around the world.

Discipline is also about what you don't do, and we have resisted the temptation to overdistribute products when the brand is hot as it is today, or invest in sports marketing relationships when the cost benefit equation does not work.

In short, we have honed our operational model and delivered consistent financial growth in the results.

We believe our portfolio of businesses is stronger today than it has ever been, and we are intent on growing our business profitability by executing on specific geographic and category growth opportunities across that portfolio.

One place that demonstrates the focus well is our Asia-Pacific region.

As the fastest-growing country in the fastest-growing region, China continues to be a dynamic market in which we are building a solid operational foundation to support our long-term growth targets.

In China, we are building a performance position for the brand in basketball and football -- soccer to those of you in the U.S..

We are also encouraged by the women's opportunity, and we are expanding our retail distribution and laying a strong foundation for brand presentation to consumers.

At the same time, our largest market in the region, Japan, is delivering strong results while remaining a hothead for developing trends that resonate around the world.

We have established a strong position in baseball, invested in distribution of retail presentation, and Japan is on track to deliver its most profitable year since 1997.

Operationally our European business is growing at a measured and, we believe, healthy pace in what is a challenging economic environment.

Our results for the quarter are affected by some of the supply chain shipments we orchestrated a year ago as Don alluded to earlier.

At the same time, our financial results have been terrific as the strong business we have built over the last nine years is now allowing us to enjoy the benefits of a strong Euro.

Over the past few years, the international businesses in our portfolio have driven the majority of our growth in revenue and profits as we have evolved our U.S. business to a more profitable model.

As I said upfront, the industry in the U.S. is in the best shape it has been in years, and we are poised to lead it.

Our U.S. footwear futures growth accelerated this quarter, and we are on track to deliver great results in the second half of this fiscal year.

We just came back from our back-to-school sales meetings, and we feel we have one of our strongest and most complete product lineups in recent years.

Our apparel business has not yet fully hit its stride.

We have made some great progress in our performance apparel, and going forward I am confident we will see continued improvement in that business as well.

As you can probably tell by now, we're feeling pretty good about the track our business is on.

As we keep our sights on building upon our success as a company, as we enter what is sure to be one of the most exciting run of sporting events and performances in recent years, we are confident we are in an unique position within our industry.

As we look to the future, we believe that tomorrow's business success will be fueled by our ability to execute that complete offense I spoke about, one that includes strong marketing campaigns, distribution strategies and brand presentation to the consumer.

And at Nike, this all starts with a commitment to performance, both as a brand and in our product.

I would like to introduce the person that carries that vision as much as anyone my Co-President, Mark Parker.

Good afternoon everyone and happy holidays.

Based on the numbers we have reported today and what you have already heard from Don and Charlie, I think you will understand why we are in an especially festive mood around here.

The U.S. footwear market is at the best we have seen in the last five years, which is certainly good news for the entire industry, but I believe Nike is in the best position to capitalize on the opportunities that arrives from a surging market.

In fact, 2004 has the potential to be the most exciting year in Nike's history.

The overall market is gaining strength and excitement, so it is obvious that the brand that has the greatest market share is in the position to gain the most.

But it's more to more than that.

Nike is at its best when we have three key elements in perfect alignment -- unparalleled product innovation, amazing athlete performance and incisive brand communication.

The good news is that we are putting ourselves in an excellent position to execute on this alignment like no other time in our history.

First and foremost is our relentless commitment to creating performance products that lead the industry.

As you know, it all begins with the product.

Charlie mentioned Nike Shox, and I would like to add my own observation here.

I truly believe that only Nike has the ability to create a completely new cushioning technology in our industry and have it become second only to Nike Air in less than four years.

It is a remarkable testament to our commitment to product innovation and commercialization.

Equally gratifying for me is that as successful as Nike Shox is, our designers continue to create remarkable performance product using the Air technology, further solidifying Air as the industry pacesetter.

In 2003, both of Nike's cushioning platforms earned deserved recognition by Runners World, which bestowed its covenant Editor's Choice Award on the Nike Shox TL and the Nike Air Zoom Elite.

In 2004, the new product pipeline is brimming with examples of Nike's unique understanding of what footwear and apparel athletes need to compete at the highest levels.

Those of you who cover Nike on a regular basis are aware of the major advances we unveiled during the Olympic Games.

For athletes, there will be no exception when it comes to inspired Nike athlete product design and performance.

Unlike in years past, when the focal point of our design efforts was the games, in 2004 we look at the Olympics as one of a series of world athletic venues where we can showcase our performance products.

Let me give you a few examples.

During the upcoming (inaudible) America and Euro Champs football tournaments, we will unveil the Total 93 (ph), which I believe will set the standard for soccer boot technology.

In the NCAA Basketball Tournament, we will showcase the new Air Hirachi 2K4 (ph).

The second element that is lining up well for Nike is our association with the world's top athletes.

This association is critical to our success both for the invaluable performance insights and product design inspiration we gain from them.

One of the most current examples I can give you for the Nike Brand would be LeBron James, whose much anticipated Nike Air Zoom Generation shoe launches this Saturday.

LeBron and Carmelo Anthony are exciting young NBA stars who have captured the attention of the media and fans in a very short period of time.

We are building a long and mutually beneficial relationship with both of them, and I will get back to LeBron in just a minute.

Beyond basketball, Nike's partners, athletes and teams will be making or taking the regional international athletic stages in a nearly continuous stream of events in 2004.

In a couple of weeks, we will ring in the new year with all eight universities in the Bowl championship series wearing Nike footwear, equipment and licensed apparel.

In mid-January, Serena Williams will make her Nike debut at the Australian Open.

This spring we expect Nike's Partner Tools (ph) will once again dominate the men's and women's March madness bracket.

Tiger Woods will embark on another memorable trip to Augusta, and NBA Champion playoffs will tip off.

In summer, the Euro Champs in (inaudible) America will command the attention of football fans worldwide, while Lanz Armstrong will seek his unprecedented sixth straight Tour de France victory.

Then there is the summer Olympic Games in Athens.

In 2004, more than any other time in our 31 year history, we will have the means and the opportunity to showcase Nike's advanced performance products on a local, regional and international level like never before, which leads me to the third element of the alignment, Nike's unique ability to communicate with our consumers and to connect with them on a passionate and emotional level.

From battleground basketball events to our women's fitness campaign in Asia to the current gridiron campaign here in the U.S., we are constantly exploring new ways to reach our consumers and to tell them stories about our footwear, apparel and equipment in ways only Nike can.

Battleground is a great example of how we brought excitement to the basketball market, and we will continue to fuel that market with LeBron James amongst many others.

As in previous basketball initiatives with LeBron, we will continue to communicate directly with the hoop crazy consumer to our 360 degree brand campaign, and again we will be bringing both footwear and apparel products to market that are inspired by this unique young man.

Earlier this week we launched a new television ad, which is part of the integrated campaign that supports the footwear and apparel line.

If you have not seen it on TV, you can view it on our Website, Nikebasketball.com.

You can also check out the entire online experience.

Our integrated 360 degree campaigns make it possible for a global company to be nimble enough to tell stories to consumers in a way that is relevant regionally and locally.

The summer Olympics will be another great platform to spotlight and showcase these stores.

We're planning to make the most of that opportunity.

Eight years ago when Michael Johnson thrilled the world in his gold Nike spikes, that was a tremendous moment for the Nike Brand.

But there was really no retail connection for consumers.

Until recently, in fact, the products and concepts that we have designed for the world's lead athletes have not been commercialized at retail to their full potential.

That will change next summer.

Nike will, of course, be creating our most technologically advanced footwear and apparel for Marian Jones and many of the other world's Olympic medal hopefuls.

At the same time, Nike will be delivering to retail a set of performance products that are inspired by and share a number of technological advancements with the footwear and apparel worn by Olympians across may sport categories.

We will be doing it on a scale that is really unprecedented for Nike.

I see opportunities to grow our business in footwear and apparel by leveraging attributes of Nike's performance positioning to drive greater consumer interest and demand.

It's not about performance versus active life; it is about performance helping to drive a distinct brand point of view across both sports and active life consumer categories, and you will see that come alive this summer.

This is an excellent example of the complete (inaudible) term you have heard me use before where we can be attacking the market on many fronts simultaneously.

Even more gratifying to me given my background in product and design is that the Nike's advance R&D pipelines and footwear apparel and equipment are full product innovations that we will be bringing to market over the next several years.

We have received very very positive early feedback from retailers who have seen our fall '04 product offering.

In many ways, we are seeing Nike design at its very best ever.

Our partner athletes, as well as our customers, should be very excited to see what we have in store for them in the months and years to come.

I know I am.

I would like to sum things up by bringing us back to the next nine months.

I see amazing possibilities for us to showcase our performance product and our brand on many stages across the regions around the world.

If we execute as I believe we can, 2004 could and should be a watershed year for Nike.

Finally, I would like to again wish everyone a very happy holiday season and open things up for any questions you may have for Don, Charlie or myself.

(OPERATOR INSTRUCTIONS).

Robbie Ohms (ph), Bank of America Securities.

A couple of quick questions.

The first question is, can you give us a sense -- you are talking about the $100 and over category looking better -- can you give us a sense from a futures perspective how that looks for you guys?

Second, you gave us the net impact of currency to EPS.

Can you tell us the net impact of Converse to EPS in the quarter?

And then finally, the last question is on LeBron and the launch coming up.

Can you tell us where it is going to be?

We know it's going to be a finish line, but are there other people that are going to have it, like say Foot Locker, for example?

Let me take the first part of that question.

The $100 plus performance category for Nike, from a future standpoint, it looks very positive.

In fact, our performance category footwear from a future standpoint is really turning the corner, including the USA, where that maybe has been more of an issue than anyplace else.

So we are actually quite pleased with where we are going with the performance side of the business and see that continuing really through fall '04 based on the feedback we have been getting from the recent sales meetings as Charlie and I mentioned in our earlier remarks.

Is it a basketball pickup, or is it evenly spread between running and basketball being strong in the $100 and over category?

It's actually spread across, not only running and basketball, but we are seeing it start to pick up in training and football as well.

Wow.

That is great.

The impact of Converse in the quarter was slightly profitable, but not enough to move the needle at all, so not even a penny.

Not even a penny?

Not even a penny in the quarter.

I will take the LeBron distribution.

Right now the LeBron shoe will be distributed similar to the other marque shoes that we have put into the market over the last probably six to twelve months.

I don't believe Foot Locker is scheduled to have the shoe at this launch date for right now.

Margaret Mager, Goldman Sachs.

Happy Holidays to you.

Congratulations on another great quarter.

I have a bunch of questions. (multiple speakers).

Let me ask about the closeouts.

Don, the impact in the past couple of quarters, you mentioned closeout levels are down and closeout margins are up.

If you had to isolate that, is it a big impact or a little impact, and at what point will you just not be able to continue to drive closeouts lower and closeout margins higher?

First of all, it is a fairly significant impact, which is one of the reasons we called it out.

As far as where we are in the footwear zone, our business is very clean on the footwear side.

I think we still have some opportunities in apparel, and certainly we can continue to squeeze the supply chain across the board.

But I think we are very clean right now from an inventory standpoint, and I think we are in great shape.

The other point I want to make here is one of the reasons why the closeout margins are up is that we have a larger factory outlet store network outside the U.S..

We really have not been building new stores in the U.S., but outside the U.S., we have.

That raises our SG&A, but it also raises our gross margin.

So that is one of the benefits of building that outlet network is higher closeout margins.

Okay.

So closeout levels -- if your inventory is very clean, year-over-year you are obviously getting favorable comparisons.

How far along are you on that?

Is that something that continues into the second half and into fiscal '05?

That is what I'm trying to get at with the closeouts.

I think your point that we are getting to the point where the inventories are very clean is a good one, and I would not say that in every market around the world is all the way to bright, but I think in the U.S. particularly we are getting to the point now where we are probably close to the end of that.

That is helpful.

If I could follow up on the announcement that came out intra-quarter regarding your warmed-up relationship with Foot Locker, I think the word "select" was emphasized in your release and talked about on the Foot Locker conference call as well.

Can you just talk about what that means?

How you are going to control the distribution with Foot Locker and across the market so that we don't end up in an oversaturated position at the high-end?

I think as we have said it was not just a Foot Locker issue.

It's really a U.S. distribution philosophy and where we are going, and I feel very comfortable and confident of the track we are on.

I think and I emphasized it in my prepared remarks in the sense that brand presentation and some of the things that are going on right now in retail that are actually part of the ingredients for I think the overall success of the industry is something we have always felt very strongly about and have talked about over the last couple of years.

So as we move in our relationship with Foot Locker, it is certainly better than it was.

I think Phil was quoted somewhere recently as saying it was probably overblown upfront, and it is probably being still overblown right now to some degree.

We feel very comfortable with where we are at with that relationship and the progress we are making towards that.

They have had a great launch of a new concept that we built with them, the 20 program, around basketball and training.

We launched that program last week with media and in-store, and the early read on that product at those key price points of $80 to $100 has been very strong, so we are very pleased with that.

I think that opens up a lot of opportunities going forward as well.

Can you cherry-pick markets geographically?

Like, for example, the major urban markets where they might have the best presence?

Can you get that detailed on your strategies there?

Sure.

Absolutely and we will continue to.

We know how many pair per door of any allocated product we actually put in the marketplace.

So we can get very microscopic with respect to that part of the strategy.

That is helpful.

Thanks and congratulations again.

Virginia Genereux, Merrill Lynch.

I guess two questions.

First, may I ask you guys commented on the U.S. footwear environment being better than it has been in five years.

I am not obsessed with this, but some are asking, U.S. futures -- the up one, which I actually think is great -- can you comment either on the increase over the period on maybe the footwear apparel dynamic whether you are up with Foot Locker?

Can you give us any additional color there?

Your revenues have been coming in a little better maybe than your futures the last couple of quarters.

You are asking about the interplay of footwear and apparel futures for the U.S.?

Virginia, I am not sure we understand,

Yes, Pam.

Last quarter you guys talked about apparel being still down. (multiple speakers)

Yes.

Up one in the U.S. reflects positive improvement and a positive number in footwear, and improvement in apparel but still negative sequentially.

So both major businesses are trending up from last quarter.

Apparel is still down year-on-year.

Charlie, may I ask are futures accelerating over the period?

That would be my assumption.

We do not break it down by month, but the quarterly reports would certainly indicate an acceleration.

Okay.

Great.

If I may on SG&A, Don, it sounds like you were up, that SG&A was up 12 percent constant dollars.

You isolated the currency for us, I think.

What I did is I pulled out the impact of Converse and currency because both of those are not apples-to-apples comparison, and the impact of that is seven points on the 15 percent growth.

So excluding currency and Converse, we are up eight.

Great.

Is that pace?

Can you give us any flavor of the pace with which we should expect SG&A to grow for the rest of the year, or for this quarter, were you doing more on the demand creation side?

Can you give us any color there?

I would rather not make a projection for the year.

But one thing I would point you to in terms of my comments the increase in demand creation was very significant in this particular quarter.

There is a couple of reason for that.

One is we were investing this year, and also last year we had invested most of last year's demand creation in the first quarter against the World Cup.

So the increase you are seeing this quarter of overall SG&A, the biggest percentage growth came (inaudible) for the reasons I just gave.

I think from an operating standpoint, that is about where we have been is in the high single digits, so without making a forward projection, I just want you to focus on demand creation and operating overhead in my comments.

Thank you all.

Nice work.

Jim Duffy, Thomas Weisel Partners.

On the gross margins, if I remember correctly, you had spoken about Q2 and Q3 being the lowest gross margin for the year with Q1 and Q4 being the highest.

The Q2 gross margins are certainly impressive.

Can we expect those to be at least sustainable through the rest of the year?

Again, to go back to the commentary I made earlier, we do expect that we are going to see year-over-year improvement in gross margin.

So with respect to the seasonal pattern, yes, the first and the fourth quarters tend to be highest; second and third somewhat lower.

So I think the best way to think about it is just year-over-year improvement.

As I said, we are not quite ready to call the back half of the year at the same rate as the front half of the year.

For example, one of the items that benefited us a bit in the second quarter is that we did not have the airfreight we had last year because of the port strike.

So that was a benefit in our year-over-year growth in the second quarter.

We won't see that level of benefit again in the third and fourth quarter.

So I think my point is there is a seasonal pattern to the gross margins.

Yes, we expect that to continue.

Yes, we expect to be better than the prior year in the back half, yes, but not at the level we have seen in the front half for the reasons I gave.

Very good.

Can you help us get our arms around how to model for the currency?

You have talked about what the benefit has been in the first couple of quarters.

Should we expect that you are hedging on the EBITDA or the operating income line and you are seeing a benefit from sourcing in dollar-denominated Asian currencies?

Well, the benefit in the margin line in the product purchases we talked about is only 30 basis points for this particular quarter.

For the rest of the PNL, the trend lines you see in the real dollar numbers are the trend lines.

What happens in our P&L is when we hedge we get a loss coming through on the other expense line.

So the way to think about it going forward is look at the line items in the P&L and just look at the trend that you see based on how we are reporting at spot rates.

If we are hedged, you are going to see either a loss or a gain on the other income and expense line.

It seems that the gain will offset the other income?

Yes, it will.

And so over the balance of the year, if the Euro gets even stronger, what you tend to see is the reported numbers on revenue and gross margin and SG&A, they all increase, and then you take a loss on the other income and expense line because you have a hedge contract out there.

One more question, if I may.

What is the status of the relationship with Foot Czar (ph) at this point?

Right now a situation with Foot Czar (ph) is status quo.

They are current in their payments, and at this point, it is pretty much the status quo.

Jeff Edelman, UBS.

Charlie, one question on the futures and sales in the U.S..

I figure your own retail stores probably added about two points of the increase.

Can you give us some sense of where the other swing factors, the difference between the futures number and the reported sales number?

Yes, Jeff.

I think you would be right.

Our retail business is trending very well right now, and we probably would take up some of it.

Then most of it is in the other businesses that we traditionally talk about, which are non-futures businesses -- the equipment business, some of the golf business, although I don't think that is actually in the USA number.

That MTS, which is our licensed products area, would be another one that's been a very strong performer that would be part of that upside.

And then second, you mentioned that you have been very, very diligent about your distribution, to make sure it is not overdistributed.

With the rollout of additional product to Foot Locker -- and I assume that will probably grow in time -- would we expect to see any change in the other distribution that you have got, or is this just going to be a net plus?

No, I would not say it's going to be a net plus.

There is not a big change in the overall side of the market, obviously.

How we distribute it has changed over the last couple of years, and will probably continue to evolve.

We're not looking to put a net plus some out of product back into the marketplace as we move back into certain levels of distribution with Foot Locker.

Dennis Rosenberg, CS First Boston.

Happy holiday.

With the Olympics coming, and the European soccer championship coming, could you talk about demand creation spending in upcoming quarters?

Which quarters will be most affected by that, and to what extent?

I think the overall year-to-year demand creation spend will roughly be equivalent.

We really want to grow our demand creation in line with our revenue growth.

So you are not going to see major increases in our overall demand creation spend year-to-year as a percentage of revenue.

That being said, I think what you will see some uptick as we -- around the Olympics, particularly around the first quarter of next year.

What about for the football championships?

Likewise, I think you will see a little bit actually traded between the last quarter of this year and the first quarter of next year.

It will mostly be fourth quarter of this year, Dennis.

We don't expect to see a large uptick, to Mark's point, in Europe.

It should track pretty much consistent.

We have moved dollars around, so on an annual basis, you will not see a big uptick.

Is that the same with the Olympics, or will we see a big uptick in the first quarter next year?

I don't think you'll see a big uptick.

Again, we'll move dollars around so that -- as you have watched us do this over the last couple of years, with these major events becoming bigger and bigger pieces of the puzzle, if you go back on an annual basis, the numbers pretty much stay in line.

It's just a matter of moving the dollars around within the quarters.

One of the comments I made in the prepared remarks is how we're trying to capitalize, from a commercial standpoint, on these types of events.

Just to put an exclamation point on that, we feel very bullish on our plans right now, between footwear and apparel and equipment, around those events, in terms of really turning them into commercial opportunities for Nike.

Okay, good.

Given these events, would you expect those two events to spur an uptick in European sales?

Do you think that would be the catalyst to get Europe really moving?

If you look at the futures numbers right now coming out of Europe, they are still pretty positive, so I think we have to get through some of the supply chain comparative issues that we're dealing with right now, before it will really sort itself out on an annualized basis.

Obviously, the European championships are a bigger event in Europe than the Olympics, even with the Olympics being in Athens.

So, it's an incredibly important event.

We're very excited, to Mark's point, with the new product assortments that we have got being introduced; not only is there the new football boot, and that series being introduced for the tournament, but we have got a new ball that has already been approved and will be in play next fall, with the English Premier League and the Spanish Premier League.

So, I am very excited about our position in football right now for this summer going into the championships.

It is hosted in Portugal.

We have the home team, and Portugal is going to be one of the favorites going into the tournament.

What are the starting dates for the Olympics and for the football championship?

The football championships, I think, start about the second week in June.

The Olympics, I believe, start in the first week of August.

John Shanley, Wells Fargo.

Good afternoon.

Charlie, I wonder if you could fill us in a little bit more on that pretty sensational improvement in the footwear margins in the domestic business?

Was it across most channels of distribution, or were there some really outstanding channels that performed really well for you?

What is the likelihood of the rate going forward, in terms of the different channels?

I want to make sure I understand you are talking about the gross margin performance at retail or at wholesale? (multiple speakers)

At wholesale.

We really look at it more categorically than we do by retail channel.

So for us, I think we are seeing improvement in the margin line across most of the categories.

I think to Mark's earlier point, it is not just basketball and running, we are actually seeing it across a much wider and broader section of the product line.

So we are very comfortable and confidant that that part of the business is in good shape.

As far as the people that are benefiting by that, you have seen as many of the retail releases as I have.

Obviously the athletic speciality and more of the premium branded retailers are the ones that are profiting probably the most by it.

Do you think that is likely to continue going forward, or do think there will be more parity between the other channels?

Well, I am a little biased in my opinion, but I don't think there's going to be parity.

I think it will continue.

Super.

I wonder if you can also help us factor in when we are likely to see the Foot Locker business starting to become a more normalized business?

We are just trying to figure when we would model increased revenue coming in from Foot Locker over and above what you may have done over the last couple of quarters?

Would that be in the back half, or would we in fiscal '05 before we would see the lion's share of that?

I think you are going to see a little bit of it in the back half.

I think they have already publicly stated that they are moving some of their buy dollars back into our brand, and so you would expect to see some of that.

You really need to go to them I think and talk to them more about that.

As we have said, we are going to pursue their business as aggressively as we always have, and we are going to do it where we both agree on what the expected outcome of those businesses and those decisions are.

So I just go back to this new program that we just launched with them.

We are both, quite frankly, very excited about it.

It is a new product in the marketplace, a key price point in that $80 to $100 zone that really is an exciting product.

It sounds like it.

I know we have talked in the past given us a little bit more specificity in terms of the domestic futures, but I know you just said footwear is positive.

Is it much more positive than it has been running?

I am trying to just quantify it a little bit to try to factor it into our models.

It is accelerating.

So we feel good about the trend line that we are on.

You're not going to get me into pinning me down on a number.

I would not do that.

But it is accelerating, I will say that much for it.

The apparel is improving.

Are there certain parts of the apparel product that is really helping?

Are you getting your regular Nike branded apparel back on track, or is it being done by some specialized product categories?

The parts of the apparel business that are working well right now are women's, both on the performance and active side, the performance product overall.

The part of the business we are really working on trying to improve right now is more of the branded apparel business and more of that value channel.

We see that actually picking up starting really more in fall, the beginning of next fiscal year, and improving steadily throughout the year.

Bob Drbul, Lehman Brothers.

I guess the first question would be within the futures numbers here in the U.S., can you give us a little bit of a sense how they are trending by channel?

I am just curious to see if the moderate business is getting any better for you guys.

I am not going to get into specific channel numbers.

In fact, I don't even have them in front of me, so I won't go into any specifics there, Bob.

But I would say that our premium business is what is driving the brand and the business, and that is where we are having the lion's share of our success.

Within the European business, the UK business, has it gotten any better?

Just a little.

Incrementally.

It is improving, although it is improving slowly.

Is it still negative for you?

No.

One final question.

When you talked about how well the industry is doing at its healthiest level in the last five years, when you think about most retail spaces, a healthy industry leads to capacity additions.

It seems like we are starting to see some accelerated growth in the sporting goods channel.

How comfortable are you guys with what is going on with some of the growth there?

I think relatively comfortable for now.

You know you have got some pretty exciting formats out there that I think are leading the charge, which we feel great about.

But it is a lot of square footage.

Fortunately it's not all dedicated to our product types, although we are getting a bigger and bigger footprint in most of those operations as we go along, and we have success in some of our new businesses and equipment areas.

But at this point in time, we are comfortable.

Great.

Thank you.

Happy Holidays.

We have time for one more questioner.

Noelle Grainger, J.P. Morgan.

Happy Holidays.

Two questions.

First is a quick equip one.

Don, can you give us any sense, can you quantify the impact that the airfreight piece had of the noncurrency I guess 200 basis point margin expansion since that is probably not going to continue?

You know, I don't have the exact number on my fingertips here.

My sense would be that it is around half of the improvement in the U.S.

Half of the U.S..

Okay.

Half of the U.S. footwear number.

Okay.

And then the second question would be in terms of performance premium, you talked about that really driving or picking up the U.S.?

Can you comment on what you see happening in Europe?

Are we moving from retro to performance over there as well, and can you just elaborate on the category's strength?

I would say right now I categorize the business in Europe right now as we are hitting a little bit one of those plateaus.

There are a lot of different variables going on right now in that marketplace.

Probably the biggest one being that it is starting to act more and more like a single marketplace versus a collection of countries, so I think that is having some effect on it.

We're still very bullish on our opportunities in Europe, so the running silhouette is still very strong.

We continue to make some great progress around soccer, and our business over there in that category is still growing at a nice healthy rate.

We are seeing some strong interest in some of the new women's collections, and our apparel business over there in general is still in pretty good shape.

What about retro?

I am sorry.

I did not understand.

Retro has really never had the impact in Europe that we have seen in the U.S., and I don't expect to see that.

Their active life -- what we term as active life business -- is very strong, and I would expect that you would continue to see some of the trends in that zone continue to come out of the European marketplace as well as Japan.

We don't really see retro or classic footwear softening in Europe.

Okay.

Great.

Thanks very much.

Thank you, Noelle, and thanks everyone for listening.

We wish all of you a very happy holiday season.

That does conclude today's Nike Inc. second-quarter 2004 earnings conference call.

You may disconnect at this time.

We do appreciate your participation.