Nike Inc (NKE) 2004 Q3 法說會逐字稿

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

Today's call is being recorded.

At this time, for opening remarks and introductions, I will be turning the call over to Ms. Pamela Catlett, Director of Investor Relations.

Ms. Catlett, please go ahead.

Thank you.

Good afternoon, everyone.

We are pleased you're joining us this afternoon to discuss Nike's fiscal 2004 third-quarter results.

For those of you who need to reference our release, you'll find it on our website, www.nikebiz.com.

You will 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 Densen and Mark Parker, Presidents of the Nike brand, and Don Blair, our Chief Financial Officer.

Each of today's participants will provide brief prepared remarks which will also be available on our website immediately following the call.

Before I turn it over to Don, let remind you that on this call we are going to make forward-looking statements based on our current expectations, and those 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 that we file with the SEC, including Forms 8-K and 10-Q.

Some forward-looking statements concern futures orders that are not necessarily indicative of total revenues for subsequent periods, due to cancellations and the mixture of futures and that one order, which may vary 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, Converse, Cole Haan, Bauer and Hurley are not included in these future numbers.

Finally, 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 website.

In this call we may also discuss non-public financial and fiscal information which is also publicly available on that side, www.nikebiz.com.

Now here's Don.

Thanks, Pam.

Well, as you would expect, we're very excited about the results we have just reported, which once again illustrate the strength of our portfolio of global businesses.

Our revenues grew 21 percent in the third-quarter, including the benefits of stronger international currencies, the Converse acquisition and shipment timing changes in Europe.

On a more normalized basis we estimate our revenues increased about 6 percent in this year's third-quarter.

Diluted earnings per share for the quarter grew 57 percent versus the prior year, bringing year-to-date diluted earnings-per-share growth to 29 percent before last year's accounting change.

The U.S. region continued to strengthen as all three of our product business units posted revenue growth for the first time in seven quarters, and the region continued to deliver expanded year-over-year pretax profit margins.

In Europe our third-quarter revenues grew 36 percent, and our pretax profits more than doubled.

As we've discussed on earlier calls, these results benefited from the weaker dollar and timing changes related to last year's systems implementation and changes to this year's spring footwear selling season.

Even excluding these factors we estimate that Europe posted low single-digit revenue growth and delivered expanded pretax profit margins for the quarter.

In the Asia and America's regions, revenues advanced at a double-digit clip, even excluding the favorable impact of currency, and revenues in our other businesses grew over 60 percent.

Without Converse, these businesses still grew 30 percent.

Our consolidated gross margin for the quarter was 42.1 percent, up 140 basis points versus the third quarter of fiscal 2003.

On a net basis foreign currency movements accounted for about 50 basis points of the improvement.

Higher margins from Nike Retail, wholesale closeouts and in-line products accounted for the remainder of the increase.

As we have discussed before, we believe that the visibility provided by our new supply chain systems and increased management focus will enable us to improve gross margins by reducing overall supply chain costs.

One area where we have begun to make tangible progress is in reducing customer claims and chargebacks, particularly in the U.S. region.

So far this year we estimate that these efforts have added over $15 million to our bottom line, and we believe that there are more such opportunities to be identified and harvested, both in the U.S. and around the world.

As proud as we are of our revenue and product performance, we are equally pleased by the strength of our balance sheet.

Our regional teams continue to do a great job managing accounts receivable and inventory, as our overall day sales outstanding and days in inventory measures both improved significantly.

As a result, we have generated strong cash flow growth this year and increased our return on invested capital to 21 percent.

So let's get behind some of those numbers.

This quarter our international regions continued to drive our growth, delivering a 31-percent increase in revenue and a 54-percent increase in pretax income.

In our European region, which includes the Middle East and Africa, revenues grew 36 percent with about 21 points of growth coming from stronger currencies.

As we have discussed in the past, we estimate that about $66 million of revenue, primarily footwear, moved from the third-quarter to the second quarter last year.

In addition, our spring footwear selling season began in January this year versus February in 2003.

As a result, we estimate that we have moved about $26 million of revenue from Q4 to Q3 this year.

If we remove the effects of currency and shipment timing, we estimate that revenue would have advanced about 1 percent in this year's third-quarter.

For the quarter, footwear revenues advanced 48 percent, reflecting a currency benefit of 23 percentage points and the shifts and product flow discussed above.

We estimate that, excluding all these factors, footwear revenue would have increased about three percent for the quarter.

Apparel grew 19 percent for the quarter and equipment advanced 34 percent.

Gross margins in Europe expanded by 200 basis points versus the prior year and accounted for 60 basis points of our consolidated margin improvement.

Stronger currency was a key factor, driving 160 basis points of the improvement in Europe.

A lower proportion of closeouts sales versus the prior year drove the balance of the improvement.

Pretax income for Europe more than doubled in the quarter to $173 million.

And as in the past, our statement disclosure of regional pretax income is currently available on our website.

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

Revenues increased 21 percent for the quarter, with about 10 points of the increase coming from stronger currency in the region.

For the quarter, footwear revenues advanced 15 percent, apparel revenues grew 30 percent and equipment revenues rose 26 percent.

Although revenues advanced in most countries in the region, Japan and China were key growth drivers, posting revenue growth of 27 percent and 71 percent, respectively.

For the quarter, Asia-Pacific gross margins increased 30 basis points versus the prior year, resulting in a minimal impact for the gross margin improvement for Nike, Inc.

Currency movements added about 80 basis points to gross margins.

But this was more than offset by lower profitability of closeouts.

Pretax income for the Asia-Pacific region grew eight percent in the quarter, as investments in demand creation and supply chain systems implementation drove higher SG&A.

In the Americas region, revenues grew 26 percent for the quarter with about 11 points of the increase coming from currency effects in the region.

For the quarter, footwear revenues grew 29 percent, apparel revenues advanced 21 percent and equipment revenues were 15 percent higher.

Every country in the region posted higher revenues even excluding currency impacts.

For the quarter, gross margins in the Americas region fell five full points year over year, reducing the consolidated Nike gross margin by 20 basis points.

Currency movements were the largest factor as less favorable exchange rates in Mexico, Brazil and Argentina more than offset the stronger Canadian dollar.

Higher distribution costs and lower in-line and closeout profitability also reduced gross margins in the region.

Third-quarter pretax income for the Americas region fell $2 million to 16 million.

Our U.S. region continued to postpositive results as revenue for the third-quarter advanced four percent over the prior year, while pretax income grew 13 percent.

Year to date, pretax income is up 9 percent on a two percent increase in revenue.

In the U.S. region gross margins for the quarter were up 180 basis points, versus the third quarter of fiscal 2003, driving a 70-basis point improvement in Nike, Inc.'s consolidated gross margin.

Wholesale gross margins grew for all three product business units, as a result of higher in-line and closeout margins and lower supply chain costs.

Retail gross margins also expanded.

SG&A spending for the region grew about five percent.

Despite a 25-percent decline in sales and to Foot Star, U.S. footwear sales increased 1 percent in the quarter, driven by a four-percent increase in average price per pair.

U.S. apparel revenues rose 7 percent in the quarter, as continued growth in sports performance products more than offset lower sales of active life apparel.

Licensed apparel sales were flat in the quarter.

U.S. equipment sales increased 13 percent for the third-quarter, led by higher sales of stocks as well as basketballs and baseball equipment.

Reflecting the continued strength of the Nike brand, comparable store sales for Nike-owned retail operations in the U.S. grew one percent for the quarter, led by 8-percent sales growth at Nike Town stores and double-digit comp store growth at our two Goddess stores.

Revenues from the our other businesses grew 68 percent for the quarter, with 39 percentage points of the increase due to the acquisition of Converse.

Revenues for Nike Golf, Cole Haan, Bauer, Nike Hockey and Hurley each grew about 30 percent.

For the quarter our other businesses reported $3 million of pretax income versus a loss of $13 million last year.

Better bottom-line results at Nike Golf and Cole Haan and the edition of Converse added profitability for the quarter.

These gains were partially offset by the timing of demand creation at Bauer, Nike Hockey and losses related to a small skate subsidiary to be wound down over the next few months.

Consolidated SG&A spending grew 18 percent in the third-quarter -- about eight percentage points of the increase was due to changes in exchange rates and the acquisition of Converse.

For the quarter demand creation spending increased 14 percent, to 308 million.

Changes in currency exchange rates and the addition of Converse accounted for over eight points of the growth.

Increased account marketing and endorsement expenses in the U.S., as well as investments in our speed initiative in Asia, were key drivers of the remaining growth.

In the third-quarter operating overhead increased 20 percent to 584 million.

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

Increased accruals for incentive-based compensation added about five points of growth while higher bad debt reserves in the U.S. and Europe accounted for another two points of operating overhead growth.

Other expense for the quarter totaled $17 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 third-quarter the effect of netting these foreign currency losses and the favorable translation of foreign currency-denominated profits was an additional $41 million of pretax income or about 10 cents per diluted share.

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

As of February 29, worldwide inventories were 10 percent or $148 million higher than a year ago.

The change was almost entirely due to the acquisition of Converse, which accounted for $45 million of the increase, and changes in currency exchange rates, which accounted for another $98 million of growth.

Excluding changes in currency exchange rates, inventories grew one percent in Europe and five percent in Asia.

Inventory in the U.S. fell six percent.

At the end of the third-quarter accounts receivable were $82 million or about four percent higher than the prior year.

Stronger foreign currencies accounted for $132 million of growth, and the acquisition of Converse added $55 million to the quarter-end balance.

Without these factors accounts receivable would have declined about five percent.

Year to date we've generated $971 million of cash flow from operations and used $463 million of cash in investing activities, including the acquisition of Converse.

Cash used by financing activities totaled $230 million, including $126 million in dividends and $241 million of share repurchases.

So at this point we believe we're positioned for another good earnings report in the fourth quarter.

So let's begin with the revenue outlook.

Today we reported a 10-percent increase in futures orders for the next five months, in-line with the figures we reported last quarter.

Third-quarter revenue growth was unusually high, due to the timing of shipments in the prior year and seasonal changes this year.

Since these timing issues are largely behind us, we expect revenue growth for the fourth quarter will be much more in-line with our futures direction.

We do not expect to see SG&A leverage in the fourth quarter as we begin marketing campaigns built around this summer's global sporting events, the Tour de France, the European Football Championships and the summer Olympics in Athens.

However, we do expect to continue to expand our pretax profit margins versus the prior year, as improvements in our supply chain, more profitable closeout management and foreign exchange continue to drive better year-over-year gross margins.

As we discussed in the past, our gross margins tend to follow a seasonal pattern, with the highest gross margins reported for the first and fourth quarters.

Therefore, we expect to see fourth-quarter gross margins broadly in line with the levels of the first quarter of this fiscal year.

As we began to assemble our plans for fiscal 2005, we returned to our long-term financial goals -- high single-digit revenue growth, expanding profit margins and increased capital productivity and cash flow.

Assuming a stable foreign exchange environment, we believe we can grow worldwide revenues in the mid-to-high-single-digits.

Better foreign exchange hedge rates will enable us to be more competitive in Europe and Asia and to grow our overall gross margin.

Significant investments in demand creation will continue as we drive our business behind this summer's global events and our marketing partnerships with the world's best athletes and teams.

But we will continue to target operating overhead leverage by holding the rate of growth below the rate of revenue growth.

Finally, under the assumption of a stable currency environment we would expect our hedge losses to decline year on year.

For the first quarter we expect revenue growth will be in the mid teens, as this quarter should benefit from a number of factors, including the acquisition of Converse, favorable exchange rates and improved momentum in the U.S.

Gross margins should also benefit from better hedged exchange rates.

At the same time our demand creation spending will be focused on the first quarter, as we invest behind this summer's global events.

Therefore, even with accelerated revenue growth, we do not expect any appreciable leverage on SG&A expense in the quarter.

So in summary we are very pleased with our results so far this year, and we feel we're in a great position to continue to deliver strong profit growth over the balance of fiscal 2004 into fiscal 2005.

So what that I will turn the floor over to President of Nike brand, Mark Parker.

Thanks, Don.

Good afternoon, everyone.

About three months ago I told you that I believed calendar 2004 has the potential to be the most exciting year in Nike's history.

If the results of our past quarter are any indication, this could be the watershed year for Nike as we have just posted the most successful third-quarter with respect to revenues and gross margins in our Company's 32-year history.

Clearly, we have been reporting solid results over the span of several quarters because we are better communicating and connecting with our consumers, delivering innovative products and creating compelling marketing to support that product and operating our company more efficiently.

Innovative products and marketing are not new for Nike.

Neither is our goal of running the Company more efficiently.

Our revenues are strong, our gross margins are trending up and our average price per pair is decreasing.

This validates the proven consumer appetite for $100-plus performance footwear, and we're pleased that the U.S. footwear industry as a whole is seeing an increasing average price per pair, following Nike's lead.

It's more than momentum or the ephemeral hot streak that can sometimes boost temporarily one brand or another.

Those are the vagaries of business and of changing consumer taste.

So, why is Nike achieving on such a high-level over a sustained period of time?

Over the past three years we have continue to fine-tune strategic unsustainable business model that clearly worked for us.

It works because it is based on a successful diversification of the Nike business portfolio across multiple brands, geographies, categories and distribution channels.

And it works because we have been more focused on our consumer.

By patiently and strategically investing in our business model, we are now capitalizing on improved business operations, economic conditions and consumer trends.

So how are we further differentiating ourselves as a market leader so we're in a stronger position to merge and grow the market?

In many ways, all roads lead to the importance of being consumer focused.

That manifests itself in listening to consumers, creating communications that resonate with consumers and designing innovative products that appeal to consumers.

And it also means creating a business environment that facilitates our ability to do all these things more efficiently.

The emerging economies of Russia, Brazil, India and China all have a strong potential impact on the global economy in general, on our industry and on Nike more specifically.

Our drive and ability to be authentic and relevant to the unique cultures and tastes of each country or region will differentiate ourselves in the marketplace as well as mixing what is relevant in one culture with what resonates in another to lead the consumer in new directions.

Our diversification across geographies has been a key factor in mitigating the dampening effects of any one particular country or region in the world.

Nike's international business is now majority of our Nike brand portfolio, and Asia is projected to continue to be a significant growth driver for our brand and business in the coming years.

Our focus and Asia and around the world is not on any one athlete or country, product or category -- it's more about building a diversified, long-term, sustainable business supported by real brands and products strength.

China is a great example.

Nike first entered China more than 20 years ago, primarily through the factories that manufacture our footwear and apparel.

Of the years we have immersed ourselves in the culture.

When we opened up the first Nike sales office in China in the 1990s, we better understood the overall business, sports and culture of the country.

At the same time we began to invest on both a local grassroots and broader business level.

For instance, in basketball ball we started local school programs and partnered with the men's and women's Chinese national basketball team.

We hosted events supporting brand initiatives like Freestyle and Battleground, and tailored these for the Chinese basketball fan.

We carefully grew our basketball business in China by being connected, insightful, creative and culturally relevant.

We have applied some of that same strategy successfully to grow other sports and our business overall.

So, whether in China, the U.S., or elsewhere, our success has never been contingent on a single athlete or team's endorsement.

I don't have time to detail what we're doing in the other emerging economies, but I think you get the idea.

Perhaps the best description I've heard for our ability to be a multilocal company came from an analyst to said Nike goes native better than any other company.

I view as another way to say that Nike's focused and connected to the consumer, wherever he or she lives, works or plays.

A more in-depth focus on the consumer was the impetus for restructuring our footwear organization more than a year ago, which really enabled us to enhance both our sport performance and our active lifestyle product line.

Since that reorganization, as I mentioned earlier, we have seen our gross margins improved steadily and our average price per pair has been trending up with performance sport products leading the way.

This trend will continue to drive profitability for the entire sector.

I should also add that the innovation pipeline from our advanced R&D group has never been as full of compelling new concepts and technology.

We are now taking what we have learned from the footwear restructure and applying that to our apparel division.

We believe that this will make us even more focused and competitive.

For example, our women's apparel business continues to grow in all regions, in both active life and sport performance products across all channels.

We're accelerating deliveries to meet retail demand following our more active, lifestyle based white label launch in the U.S. and Japan.

We will be launching the highly anticipated new SunSport and Suntech products in all regions, in fiscal quarter four to continue building on brand excitement at Retail.

Our intensified consumer focused and its impact on our operating business model will become yet more evident later this summer, during 2004 Olympic Games.

As some of you already know, during six of the past seven Olympic years, Nike has outperformed the S&P 500 by an average of 21 percent.

And this was despite historically not having a strong retail product tie in to the game.

But in this Olympic year, more than any time in our history, we will bring Olympic-inspired products to market, to capitalize on the excitement generated by Nike partner athletes and national teams at the games.

And in the months ahead, the summer Olympics will be just one in a series of very high-profile international athletic platforms where the Nike brand will showcase in spotlight products stories.

We're obviously very happy about our sustained performance over the past few quarters and proud of the hard work and dedication by our employees and leadership teams that are behind the very positive results.

But we also feel there are many more opportunities ahead to further strengthen the Nike brand and broader Nike, Inc. portfolio of brands to continue to grow the business.

The good news is we have a strong and very competitive leadership group whose depth and versatility makes it possible to attack market opportunities in different ways while maintaining a flexible and adaptable operating model.

We'll continue to challenge our leadership team to find new ways to evolve and improve our business model and, of course, seek all opportunities to be yet more consumer focused and connected.

With that I will now pass it over to Charlie Densen.

Thank you, Mark.

Good afternoon, everyone.

What I really want to know what is the score of Syracuse game.

But we will get that in a minute.

At the risk of stating obvious, we're very pleased with the results we've reported to you today.

We're pleased not only with the quality of these results but also with the brand and the business performance that has generated it.

Within nine months -- with nine months under our belt for the fiscal year, we remain comfortable and satisfied with the course we have set for ourselves.

My comments today will be brief.

But, I do want to touch on a few highlights in the quarter that I think are important to call out.

Then I would like to talk about where we think we're going from here.

As you review the results, our business success for the quarter was driven primarily through our international business, with a 31-percent increase in revenue and a continued expansion of our gross margins, assisted by a weaker dollar.

This also reflected a 14-percent revenue increase on a constant-dollar basis.

There are several variables at work you that yielded these results.

Don has covered most of them, but I would like to hit on a couple of the key areas from both the brand and the business perspective that are driving our success.

The strongest growth driver in the international businesses is, without question, the Asia-Pacific region, led by China and Japan.

Our brand strength continues to improve in both geographies, and the business is following.

We delivered 15 percent growth in footwear and 30 percent growth in apparel for the quarter, and with the futures numbers in Asia up 23 percent we're confident that this will continue.

In Japan we continued to build an authentic brand position that complements our active business and will establish a better balance between the sport and active consumers.

This is critical to the long-term stability of our businesses and our success in Japan, and the progress we're making is something we feel very good about.

China is a story in and of itself.

As the economy continues to grow at a 10-percent-plus per-annum rate, our brand is becoming more accessible to a growing middle-class.

Retail landscape is beginning to expand, with dedicated athletic specialty space, and sport maintains a position as a core part of the Chinese culture.

As a result, our brand is being embraced and accessed by a growing part of the population, and our business for the quarter was up 70 percent -- over 70 percent -- excuse me.

As we think about the future, the large emerging economies represent a significant growth opportunity for the brand.

We're currently completing a transfer of our distributor-led businesses in Russia and India to a Nike-owned model.

Coupled with our more established a direct businesses in China and Brazil, we're well positioned for growth in four of the largest emerging economies in the world -- places where a growing middle-class will create new markets and the world of sport is a centerpiece of the local culture.

As you know, the biggest currency benefit we're receiving is in the euro zone, where we have seen a significant increase in gross margins over the last 18 months.

That said, we still grew 15 percent on a constant-dollar basis.

This was led by the Central European countries, where we have also invested in a direct Nike-owned model.

Western Europe continues to be a story of portfolio successes and challenges.

Italy is growing again.

We have won a constitutional court ruling regarding our trademark litigation in Spain, and the UK is showing signs of recovery with an improved quarter and futures numbers trending up.

Europe has been a strong growth market for us for the last seven years.

We have talked a lot about our ability to grow and expand existing markets.

Europe is probably our best working example.

Our investments in football, or soccer, have strengthened our position as an authentic sport brand with the European consumer and has created energy and excitement in the marketplace.

This has been instrumental in a large part of our growth.

In the future we will continue to add to our brand dimensions, using running and women's fitness to expand the market.

And with the success of players like Dirk Newitsky, Bobby Saul, and Tony Parker in the NBA, we have the key personalities to capitalize on the growing interest in basketball.

The active life segment is another growth driver that is connecting us with the European consumer, and investments with existing retailers in our new franchise form and will enable us to tell a seasonal story and concepts in an impactful way.

As you can see, we continue to expect strong growth out of international business.

But one of the strongest stories we have for the quarter is the ongoing improvement of the U.S. business.

I said last quarter that I thought the U.S. market was as healthy as it is been in five years.

As many of you have heard me say over the last three years, the overall profitability of the industry is what will allow it to reinvent itself.

We're starting to see confidence and reinvestment.

Brand building, new and/or improved formats and overall service levels are becoming priorities again.

These are the things that will bring energy, profitability and growth back to our businesses here in the U.S.

As we look ahead, our U.S. business has many of the components in-place to deliver a solid growth picture, leading the footwear and apparel markets.

We're pleased with our futures orders, being the highest we have released in eight quarters.

Our apparel business is improving.

Performance footwear is strong and the active life business continues to expand.

As Mark referenced earlier, Nike and this industry have shown a consistent history of growing and expanding after an Olympic your.

This summer we're probably better position with stronger stories, products and plans than we have ever seen before.

And if the Olympics are not enough, we have the two most exciting players to have entered the NBA in several years, the European and couple American championships.

Sandwiched in between all of that, the opportunity to witness what may be one of the great just-do-it stories of all times, as Lance Armstrong goes for his unprecedented sixth Tour de France win in a row.

It's going to be a great summer.

Now back to Syracuse.

I think we will open it up to questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Bob Drbul from Lehman Brothers.

A couple of questions, I guess, first for Mark.

You guys really talked a lot about the plans for the Olympics, and I just wondered if you might be able to elaborate a little bit more in terms of some of your focus athletes, some of the teams and the assets that you have that you will be focusing on that we should be looking for.

The second question would be for Don.

You talked a little bit about the level of closeout sales being down, I think both in the U.S. and in other regions.

Can you put some numbers on the level of closeout sales -- the level of closeout inventories that you have sort of year over year?

And really, sort of how that is driving the gross margin?

Okay, Bob.

Its Mark.

On the first part of your question that you had, as Charlie said in the end of his prepared remarks, there's a lot going in the world of sports for Nike over the next four to six months.

The Olympics was mentioned.

Charlie also mentioned the Tour de France -- immediately right in front of us, though, is the NCAA basketball tournaments -- Nike continues to sort of dominate in the relationships we have with about 75 percent of universities in those tournaments.

We have a very exciting set of new products coming out around the tournaments -- one of the highlights there is going to be the Huarache 2K4 basketball shoe.

Its another one of the exciting $100-plus products we have.

It's a really sort of retro-modern design that has been highly anticipated and awaited by retailers and players alike.

We're really excited about that product.

Actually, it debuted down at the All-Star game in L.A. in a very limited quantity -- limited release, and flew out in a matter of hours.

So we are really excited about that product.

And then just quickly down the list there, we have Tiger Woods, showing up again in Augusta, competing for the Masters Championship.

So very exciting -- we have some great new Golf product around that has come out over the last few months, the Night Driver, the Slingshot Irons to name a couple -- real exciting, industry-leading products in golf.

And then, of course, as Charlie mentioned, the European football Championships and the Copa American Championships -- tournament.

There is lots of marketing support for Nike around both events, a real focal point this summer in the world of football.

In we have a very innovative campaign around both events there and lots of new product, including the Total 90 III football boot and the new Aero ball.

So that's exciting.

In then, what are missing?

LeBron James and Carmelo.

I think Charlie mentioned that is well.

We have a very successful product around LeBron -- have new colors coming out on his Air Zoom Generation, which has been received incredibly well.

And we also have signature products around Michael Vick and, of course, Carmelo Anthony and the Jordan line as well.

And then I will come back right to where I started, and that's the Olympics.

As you know from previous calls we have been really rallying around trying how to make the Olympics not only a great brand presence for Nike but a great commercial opportunity as well.

This is probably the first time we have really focused on that in a more complete commercial sense.

And the big to initiative there, as you know, is our speed initiative.

We have taken that from performance sport products all the way through active lifestyle products and across a pretty broad spectrum of retail, from high-and energy accounts that are more lifestyle-based all the way over to the performance accounts as well.

So we're just very, very excited about the next four to six months, for all those reasons.

Bob, with respect to your question about closeout sales, the one region in the portfolio where the closeout sales were a lower percentage of sales was in Europe, and some of that relates to the timing of shipments, as we discussed earlier.

Generally, as you probably know, our closeout sales are less than 10 percent of our overall Nike brand sales.

And the major driver really has been the improved profitability of those closeouts.

So in Europe to closeouts were a smaller percentage of revenue.

Everywhere else, they are broadly consistent with where they have been historically, but they are much more profitable.

And I think that really reflects how tight inventories are in the marketplace.

With respect to the inventory balance our books -- our inventory, as I told you, is about flat across the Company.

And inside that total closeout inventories are actually down year over year.

So as a percentage of our total inventory, we have less closeout today than we did last year.

If I could just as one follow-up, the futures numbers in the U.S. -- can you give us that number ex-Foot Locker?

I'm just trying to understand how much of the Foot Locker business was responsible for that 4.5 percent number.

We generally would not give you that level of granularity, Bob.

But what I think I can tell you, as you would expect, Foot Locker is improving and some other accounts are declining.

But overall, we feel as if our position is in good shape.

Robby Ohmes from Bank of America.

Actually, I think I want to follow-up on Bob's question a little bit.

With the 25 percent decline in sales with FootStar, can of comment a little bit about go forward?

Is there a futures impact with FootStar that you reported today?

And if there is, can you give us a little help on where the offsets to that came from in the quarter and where they might come from going forward?

And other questions, can we get a little more comment on how apparel in the U.S. is doing in the moderate channel?

With respect to the first question, in the third quarter the offset to FootStar came from several accounts -- it wasn't any one account.

And there was some broad-based growth in a lot of places.

With respect to the go-forward -- certainly, with the announcement that FootStar has made today and earlier that they are closing a number of stores, we do, certainly, anticipate that our sales to FootStar are going to be lower than their original orders.

But, given the tightness of inventory in the marketplace, we're very confident at this point that we can move that product with no disruption in the marketplace.

Robbie, this is Charlie.

On the apparel, the U.S. apparel situation, right now we look at U.S. apparel as improving.

It certainly is still a big opportunity as we continue to work on inventory levels at retail and the overall futures picture.

I think the thing we are most excited about right now, again, goes back to what Mark, I think, related to the some of his commentary, is around performance and branding apparel starting to show some very strong signs of improvement in the U.S. market.

I'll just add to that -- this is Mark -- the branded apparel business for Nike is improving.

We see it as rebounding a bit, coming back.

Cancellations are well below what they were last year, indicating, I think, good shipping and productive sell-through numbers in the U.S.

And, as Charlie said, the market is really leaning more and more towards a performance positioning, both on sports side of the business as well as active lifestyle.

We see active lifestyle really being influenced more and more by what we're doing performance-wise in fabrications, in design lines, and styling.

So that's a big part of our Olympic speed initiative.

And you'll see that really influencing a lot of what is going on in the branded active side of the business as well.

We're getting more confident about that piece of the business.

That sounds great.

Thank you very much.

Dennis Rosenberg from Credit Suisse First Boston.

Mark, you talked so very optimistically about Europe.

And yet, if you look at the constant-dollar futures in Europe, they are decelerating.

They were up three percent in the February quarter -- they were up 8 percent in the last quarter.

And in this quarter, you should be getting initial orders for product relating to the soccer championships.

So could you reconcile that?

Hi, Dennis.

This is Charlie.

When we look at the European market today, we're as optimistic as we have never been, certainly for a longer line of sight.

The marketplace continues to be an opportunity for us, longer-term.

We think that the market penetration levels still have some room for market expansion opportunities that I talked about in my prepared remarks is a big part of the plan.

On a shorter-term basis, as far as reconciling the numbers, there's a high number of, obviously, licensed product going into the market with the European championships.

And that will be reflected, I think, in the upcoming results as we look forward to the next quarter or two.

We're spending a lot of money around the marketing of the event itself, and that kicks off, I think, in other two or three weeks and will run through, obviously, the event itself, until the end of June.

So I can speak specifically to any reconciliation of numbers.

I'm not sure exactly what you are referring to, but hopefully that gives you some indication for where we're going.

And another subject, Converse -- you tell us with the numbers are every quarter, but you don't tell us about the strategy.

What is the strategy going to be for Converse?

This is Charlie again.

Right now, we're very pleased with the results of Converse, as you can see in some of the commentary that we have discussed today.

We're going to stay on that path for right now.

They have done a nice job of continuing to grow their business both here in the united dates and in some of international markets.

And I think, if you have had a chance to travel or talk to some of the people in the international markets, the Chip Taylor franchise is probably as strong today as it has been in a long time internationally.

So we're comfortable with the direction right now and we'll continue to evaluate it as we go forward.

And finally, the sales growth in U.S. footwear, less than two percent in the quarter.

When you talk about FootStar sales being down 25 percent, I thought that might have been the reason for the deceleration there.

But then, in answer to a question, you said that you were able to offset that by shipping to other accounts.

So, why the deceleration in the sales growth in the third quarter in U.S. footwear?

Well, that's the comment about offsetting the sales.

That's why we are up one percent.

There were a lot of accounts that were up in several accounts that were down, and generally we were up.

Your futures were accelerating going into this quarter in U.S. footwear.

And we obviously had quite a few cancellations from FootStar.

Okay, but did you ship that product into other accounts?

Not all of it in the quarter.

But the point that I made earlier -- which we absolutely are confident that we have homes for that product.

The marketplace is very, very clean and we're very confident we can move it.

Margaret Mager from Goldman Sachs.

Another great quarter.

Congratulations on that.

I have a question on the outlook for gross margins.

I'm pretty clear what you're expecting for Q4, but as we look out to fiscal '05, can you talk about why the margins are sustainable at the levels that you are achieving currently?

And what would be the factors that could allow you to improve them further as we look out another year?

And then I have a couple questions about the U.S. market.

Okay.

Just so I understand your question, Margaret, another year meaning 2005 or beyond 2005?

Yes, fiscal 2005.

Well, in fiscal 2005 the operational progress that we have made, we intend to continue to do.

And certainly one of the things I talked about a little bit in my prepared remarks was some of the work we're doing on claims.

We're also going to get some additional benefit out of foreign exchange in fiscal 2005 because, as you know, our hedging practice means that we are about twelve months behind the movement in the spot race.

So we will get some benefit there.

I did also talk about some other aspects of gross margin, which primarily is our desire to really drive the business in Asia and Europe.

So I think, on a net basis, we expect to be up on gross margins in fiscal 2005.

I think there's lots of places that we're going to continue to dig for margins, operationally.

We get some foreign exchange benefit and there are some places we want to invest some.

I'll just add too -- this is Mark -- the continued focus on product cost reduction is really -- it's still very intense here at Nike.

So we see some opportunities there through materials consolidation, tooling usage -- is a pretty healthy little laundry list of what we can do to continue to try to make some headway on reducing product cost as well.

That's helpful.

At this juncture, are apparel and footwear margins, gross margins pretty comparable?

Yes.

And there's opportunities in both, I take it?

Yes.

With regard to the U.S. market in particular, I'm just curious what your view is in terms of market growth.

You talked about average price per-pair being up.

Where is the U.S. market going?

Can we keep driving growth in this market?

And if so, what level do you think it can grow at, and how you think about yourselves, in terms of market share?

Is this a sustained market share gain?

Or can you just capture market growth, or can you lift your market share from current levels?

Can you talk about where you think your market share is?

And I'm talking about footwear, because it so much harder to define than apparel.

Margaret, this is Charlie.

First of all, the absolute answer is yes, I think we can expect growth in the U.S. market.

One of the things that leads me to believe this is what I talked a little bit about in the prepared remarks, in the sense that -- for the first time in five or six years we're actually seen some reinvestment going back in and we're seeing increased profitability from the retail sector.

And I think that is a something that I talk about a lot because I think it's hard for just one single brand or one single company to generate enough excitement to carry an entire industry.

But if the entire industry is providing profitability and reinvesting in itself, there's a lot of places that great ideas can be burked and expanded upon.

I think you're starting to see that.

For you who have been around this business for a while, if you walk around retail today, there's probably more energy coming out of something out of some of these new formats and new independents -- and I talked a lot about this a couple years ago.

The new independent, I think, is a new breed of retailer that is actually making this business fun again.

So, those are things that lead me to believe that we can see and expect some overall expansion, because I do believe it is there to be had, if we can create the energy that this industry has the potential to create.

And then I think some of it is just environmental.

You look at the building -- improving success of the NBA with LeBron and Carmelo and what they're bringing back to the game, and some of the other sports environments that obviously are -- you have got some question marks out there.

But you have also got some improving scenarios.

And I think that adds to this as well.

And as far as market share gains, that just comes back to if we can lead the marketplace growth, which is what we have always concentrated on, that's an inherent position to be in to accompany a market share improvement as well.

And to Mark's earlier point, there's still a pretty intense laundry list of things that we can do, not only in product costs but in improving different segments of the business that we are certainly underperforming in today.

Any level you think the market is growing at, Charlie or Mark or Don?

The level?

Yes.

Like is it a 1 percent?

What do you think the market is growing at?

Right now -- I haven't seen any of the most recent numbers, so I am not going to -- I'm going to avoid sticking my foot in my mouth and taking a guess.

But I think that a low-to-mid-single-digit- rate is something that is potentially possible.

I just want to add, too, that I think what puts us in a better position now that maybe a few years ago is that we're much more surgically focused on some of these consumer opportunity segments.

I've often talked about this complete offense strategy from a category price point -- men's and women's standpoint.

And I think we're much better equipped as an organization to really zero in on some of those opportunities and execute.

I think the women's appear this a great example of really lining up against that opportunity across the sports active spectrum and really upgrading the product presentation, detailing, color, flow, assortment planning and really checking off that sort of fundamental list of what it takes to get into a business and succeed.

That's just one example across a broad spectrum.

Noelle Grainger from JP Morgan.

A couple of questions.

First, just on the FootStar athletic stores -- is this the first quarter your business has been down with FootStar?

That's a good question.

I actually don't have that number in front of me for the second, but I would guess the answer is yes.

And is FootStar contributing in the U.S. -- positively to -- the year-over-year growth in futures?

Is the number that you just reported -- the up 4.5 percent?

Obviously, there's dollars in there.

But is it -- ?

I don't believe so, no.

To the point I made earlier -- the product that's on its way here is going to be sold.

And we think the demand is strong in the marketplace.

Noelle, maybe a point of clarification, so we don't have to answer a bunch of other questions.

Are you asking whether there are FootStar futures orders in the futures number that has been released?

No -- clearly there are.

I'm trying to ascertain whether the dollars related to FootStar in your futures number are up year-over-year?

No.

The answer would be no.

SG&A, Don, for fiscal '05 -- did I hear you say you expect to get leverage?

And I guess maybe could you just highlight the major buckets that you have been talking about in terms of kind of what is changing as you look to fiscal 2005, particularly given all of the major sporting events?

I am a little surprised, maybe, to hear that demand -- you would be leveraging demand creation.

What I said exactly was that we will not leverage demand creation.

And that is exactly for the reason you just laid out.

So I couldn't say that one better myself.

We do have quite a few vehicles for us in the next year.

And we think those are things worth investing in.

With respect to operating overhead, as I have talked about on many occasions, we still target and we are targeting to deliver some leverage on operating overhead.

So the proportion is, about two-thirds of our SG&A is operating overhead.

About one-third is demand creation.

So we believe, in total for SG&A, we target some leverage for fiscal 2005.

But it's not going to come on the demand creation line.

My last question would just be on Asia-Pacific.

Mark or Charlie, could you give us a better sense of kind of how your mix of business in Asia-Pacific -- active life versus performance -- kind of compares to your mix in the U.S.?

I am just not -- I know, obviously, performance is less than the U.S. in terms of penetration.

But is it 10 percent or -- I'm trying to get a relative sense

This is Charlie.

Mark will jump in on this, too, I think.

But right now I think, if you think about it, you can say that the two marketplaces are actually coming from opposite ends of the spectrum and both working toward a more balanced portfolio between active and the performance numbers.

Right now a good chunk of our growth in Japan, for instance, which is the most developed market, is starting to come more from the performance side of the business, because we have such a large chunk of that business grounded in the active side.

And we have penetrated baseball and launched baseball last year.

We talked about that a little bit.

That has been very successful.

Soccer or football is becoming -- following the World Cup has become much more influential as a sport.

So we're starting to have success they're.

In China, it's all about basketball.

And that is the big driver in China and Taiwan.

And so we love our position there, because we have so many different tools to use in developing that marketplace.

So China is a little bit more balanced.

It's not near as polarized to one side of that equation or the other.

Yeah, we have had a very robust active life business in Asia, I think as you know.

But we -- yes, particularly in Japan.

But we have actively, very sort of aggressively tried to balance that with a real focus on the performance sport side of the business, in part to establish more brand strength and credibility on that side of the business, because we think that longer-term that's a much better brand position to leverage than just being perceived as an American sport-based fashion brand.

So we're very, very pleased.

China is sort of leading the way in the performance side with basketball, as Charlie said.

But in Japan, for example, really getting much more balanced.

And there's been some very specific strategies and products and concepts geared toward really ampping up the performance side of our business.

And we are very pleased with the results.

Okay -- by the way, 80-75, Syracuse.

Oh, good.

John Shanley from Wells Fargo Securities.

Good afternoon and congratulations on a nice quarter, guys.

I've got a couple questions on the retail side of the business, Charlie, in the U.S. market.

A number of major U.S. sporting goods chains in the last couple days have reported really strong sales and sell-through rates on Nike products and indications that that is likely to increase.

Is the sporting good channel becoming a bigger part of your domestic business?

Would you see that improving or basically having no affect in terms of gross margin contribution?

Yes.

I think -- well, it certainly is becoming a bigger part of our business.

I think, if we go back to the last year and a half, even maybe to two years to 2 1/2 years ago, as you remember, this was one of the areas at retail where we probably had slipped the furthest with respect to brand performance.

And that was one of very specific areas that we focused on both from the product development standpoint -- that retailer and that consumer.

And it's not just a footwear story, either -- it certainly an apparel story as well.

So I think it's going to continue to expand as a percent to total of our business.

I think, again, it goes toward our intent of -- what Mark just referred to -- positioning the brand as an authentic brand -- sports brand.

That's the best point of which we have to leverage the brand, and it's also probably the most stable part of the business on a consistency basis.

And the margins?

Is it comparable to the other channels?

Yes.

We're seeing no big variances or variations from any of the other channels.

And then with the problems with FootStar, do you see your business relationship with Foot Locker in calendar 2004 getting back to something comparable to where it may have been in calendar 2002?

Well, I think, as we have always talked about, our entire -- even in the context of the Foot Locker discussion -- and I would use the same context for the FootStar discussion -- is it's a U.S.A. distribution strategy.

And how that plays out -- athletic specialty has always been one of our priorities -- and will continue to be.

And we continue to expect that to improve.

The relationship with Foot Locker, I think, as everybody knows, as improve.

We are really working on many of the mutual opportunities that we feel we have together.

I know they have referenced their 20 Program and how successful that was.

It has really expanded everybody's thinking around some of the different ways we can approach and attack the business.

So that continues to improve, and we're going to continue to look at the U.S. market as an overall marketplace and the distribution strategies will be U.S.-based and not account-based.

And in Europe, Charlie, you mentioned that the franchise stores are a growing component of the business.

How many are there?

Where do you see the number of units that could potentially be Nike franchise stores in the European market?

Right now I think -- I want to say they we have about eight stores.

There's 7, 8 or 9, right in there.

We're still in the test phase, John.

We don't really know what the long-term number is going to be.

We're not talking about that in that regard.

We're still trying to gain some level of comfort and optimism around the format and what the program can produce.

To-date we are very pleased with it.

And we like what we see so far.

We've got some stores that are performing better than others.

And I think we learn something every time we open one.

So it's been a great test for us, and we are excited about the future possibilities.

Last question, on the European market.

Currency-neutral -- are you gain market share in the Western European markets, particularly in the big five -- and with the nice three-percent comp increases or forward order increase?

I think the most recent data I've seen says that we are.

You see the same data I do.

So I think the last data that I've seen is through December that showed some increase in market-share gain.

So we are as happy as those numbers are truthful.

We're going to have to pick up the pace a little bit, to try and get as many questions in, so a couple more people here.

Virginia Genereux from the Merrill Lynch.

I'll try to be faster.

Don, you mentioned, I think, that currencies might enable you all to become more competitive in Europe and Asia, I think you said.

Obviously, you've got some gross margin benefit there on the hedging side.

When you say more competitive, are you seeing any pricing pressure with the sort of weakening of the dollar internationally?

That's one.

I think that, as Charlie said, we've have had a great run of growth in Europe, and we have been taking a lot of market share.

And we are now starting to converge down toward the market growth rate.

And we want to get that moving again.

So we are starting to see a little bit of pressure, and I think that when the currency has gone in a positive direction, certainly there is some pressure to put some of that back in the marketplace, whether in the form of pricing or in the form of product value.

So, from our standpoint we think this is a great opportunity for us to get the market moving, as well as continue to grow our margins.

And so what we want to do here is balance the investment.

And secondly, you said you had reduced customer claims and chargebacks -- that had contributed 15 million to U.S. operating profit, I think, so far this year.

Can you give us a sense -- you talked about this at your analyst day, Don -- how far you think you are on that opportunity in the U.S. and whether you're sort of -- are you starting at ground zero internationally?

Or is there not as much opportunity because they are less mature markets?

If you can talk a little bit about that, gross margin opportunity?

I think there is opportunity everywhere, and certainly the U.S. market is the one that's the most straightforward because we have got relatively few distribution centers and some larger customers.

So a lot of this is not -- some of it is internal to Nike, some of it is with the customers.

And I'd say we're still in the early innings, even in the U.S.

And outside the U.S., as you recall, we're about twelve months behind in terms of getting SAP in place, which is one of the any one of the neighbors for us as well as having some good, tight, warehouse management systems.

So, this is early days.

But we're very confident that there's a lot of opportunity out there.

And just very last, quickly, share per repurchase Don -- with the stock price being a little higher, you guys have typically been buying back enough to take your share count down year-over-year.

And you have tons of cash.

Would you ramp up the share repurchase to offset options dilution?

Well, generally, that's our goal is to do that.

And we think, certainly from a quarter-to-quarter basis -- we are not chasing it, even if there's a short-term spike in option exercises -- we are not necessarily going to change our repurchase program.

But over the long-haul, meaning a year or longer time horizon, our goal is definitely to offset option dilution, at minimum.

And we are certainly buyers of our stock.

Time for one more question.

I apologize to everyone -- we're going to miss.

Jim Duffy from Thomas Weisel Partners.

Two quick ones.

Were U.S. apparel futures positive for this quarter?

Right now, the U.S. apparel futures were not positive, but they were sequentially improved.

Second question -- can you quantify the apparent growth in your basketball business?

I'm sorry, could you repeat it, Jim?

Can you quantify the apparent growth in your basketball business?

It looks as if you are gaining share there.

I wonder if you can give us a sense of the momentum.

Are you talking about in the U.S. market?

Yes, or overall.

Okay.

I don't have the numbers at my fingertips.

Maybe that's something that we can follow up on or something with you.

This is Mark.

Actually, our basketball business for the quarter, actually, and for futures is quite strong.

We are upwards of about 15 percent in terms of our future numbers.

So we are feeling very bullish.

That's U.S.?

That's U.S., yes.

All right, Jim.

You when the prize for most concise answer.

Mark has one more thing he wants to say.

This is Mark.

I just want to put in a little plug.

If you get a few minutes, I would suggest you take a little swing through the new Nike ID side which just opened up today.

It's a tremendous new and improved kind of view, I think, of the future -- an important part of the future.

And that's a growing interest in customized personalized products.

So take a look.

All right.

Thanks, everybody.

We will speak with you soon.

That does conclude today's conference call.

Thank you for your participation.

You may now disconnect.