Nike Inc (NKE) 2004 Q4 法說會逐字稿

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

Today's call is being recorded.

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

Miss Catlett, please go ahead.

Good afternoon, everyone.

We are pleased you are joining us this afternoon to discuss Nike's fiscal 2004 fourth quarter and year-end results.

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

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, 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 me remind you that on this call we're 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 we file with the SEC, including forms 8-K and 10-Q.

Some forward-looking statements concern futures that are not necessarily indicative of total revenues for subsequent periods due to cancellations and the mix of futures (inaudible) ordered which may very significantly from quarter to quarter.

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

Finally during this 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 nonpublic financial and statistical information which is also publicly available on that site, again, www.nikebiz.com.

Now, here is Don Blair.

Thanks, Pam.

As you now know, we have posted another record year in fiscal 2004.

Our brands continue to build momentum around the globe, and our U.S. retail distribution strategy began to bear fruit, driving our revenues over the $12 billion mark up 15% versus last year.

Changes in foreign currency exchange rates accounted for almost seven points of the growth, while the acquisition of Converse added another two points of growth to consolidated results for the year.

Futures orders for the next six months grew 11% in real dollar terms, almost a full point above last quarter's release.

Excluding the impact of currency changes, futures orders increased 9%, a significant acceleration versus the 6% growth we reported last quarter.

For the year, our consolidated gross margin was 42.9%, up 190 basis points versus fiscal 2003 and the highest in our history.

Currency changes accounted for about 70 basis points of the improvement.

The balance was the result of better margins on both in-line and closeout product, driven by cost initiatives on the product and higher and tighter supply chain.

We also delivered record profits as our full-year diluted earnings per share were $3.51, up 27% versus fiscal 2003 before last year's accounting change.

And we have delivered that record profitability with extraordinary capital efficiency.

For the year, our return on invested capital was 22%, four points better than last year and we delivered nearly $1 billion of free cash flow from operations as we continued to tightly manage working capital and capital spending.

A lot of that cash went to shareholders.

During the year we raised our quarterly dividend 43% and purchased $420 million of Nike stock, completing our four-year, $1 billion program.

Incidentally, the program we just completed is our third share repurchase program since July 1993 and we have completed each program within the period authorized by our Board of Directors.

And today we have announced that our board has authorized a new $1.5 billion share repurchase program to be completed over the next four years.

Those are the headlines, and now let's dig into some of the details.

In our European region, which includes the middle east and Africa, revenues grew 16% in Q4 and 18% for the full year, with most of the growth coming from more favorable exchange rates.

For the year, footwear and apparel revenues both grew 18% while equipment revenues advanced 26%.

In the fourth quarter, European footwear revenues grew 5% as soft demand and the affects of the change in seasonal product flow were more than offset by 13 points of growth from currency changes.

After several years in which we grew substantially faster than the overall footwear market in Europe, our footwear revenue growth last year was more in line with the growth in the overall market.

We remain very confident in the long-term growth potential in Europe as economies in the west improve, the fast-growing markets of the east join the EU and retail presentation improves across the geography.

We are also encouraged by our fall and early holiday orders, which advanced in the mid single digits on a currency neutral basis.

European apparel had challenges early in fiscal 2004, but has posted accelerating growth over the year.

Revenues for Q4 advanced 33%, driven by marketing and product initiatives focused on the European Football Championships.

Equipment also finished strongly as robust sales of football product drove a 43% revenue increase in Q4.

Our gross margins in Europe expanded 340 basis points for the year, accounting for 110 basis points of our consolidated margin improvement.

About 200 basis points of the increase in European margins came from currency changes, while better in-line pricing margins and more profitable closeouts drove the balance of the improvement.

Overall, fiscal 2004 pretax income for the European region was $751 million, an increase of 41% versus fiscal 2003.

As always, our segment disclosure of regional pretax income is currently available on our website.

In the Asia Pacific region, revenues increased 25% for the quarter and 20% for the year.

About 8 points of the full-year increase came from stronger currencies in the region.

For the year, footwear reported 17% growth while apparel grew 23% and equipment advanced 21%.

Revenues grew in nearly every country in the region.

China reported the fastest growth in the region, advancing 66% for the year, while Japan added the most absolute revenue, posting double-digit growth in fiscal 2004.

For the year, Asia Pacific gross margins advanced a full point accounting for 10 basis points of the consolidated gross margin improvement.

Reported fiscal 2004 pretax income for the Asia Pacific region grew 21% to $355 million.

Our Americas region delivered a solid year in fiscal 2004, delivering $102 million of pretax income for the year, up 6% versus the prior year.

Reported revenues grew 19% for the year and 25% for the quarter, with 8 points of full-year growth coming from stronger currencies in the region.

Robust revenue growth in Brazil and Argentina accounted for most of the increases.

Gross margins fell 230 basis points for the year reducing Nike, Inc. consolidated gross margins by about 10 basis points.

In the U.S. we began fiscal 2004 with an evolving distribution strategy and futures orders down 10%.

Our U.S. region finished fiscal 2004 with fourth quarter revenue growth of 6%, futures up 10%, and over $1 billion of pretax income for the year, up 5% versus last year's record level.

It was quite a year.

For the year, revenues in the U.S. grew 3% as footwear grew 2, apparel increased 6% and equipment grew 1%.

Gross margins in the U.S. advanced 140 basis points for the year, driving 60 basis points of our consolidated gross margin improvement.

Half of the improvement came from higher gross margins on sales of in-line footwear, with the balance coming from better margins on closeout footwear, in-line apparel and retail sales.

During the fourth quarter our third largest customer in the U.S., Foot Star, filed for bankruptcy, announced plans to close a number of stores and sold the balance to Foot Locker ,Inc.

This bankruptcy had a minimal impact on our fourth quarter revenues and profits as lower sales to Foot Star were more than offset by higher sales to other customers, including Foot Locker.

At this stage we expect to be paid most if not all of the amounts owed to us by Foot Star.

Earlier today we reported that U.S. futures orders scheduled for delivery over the next six months rose 10% versus the year-ago period.

Orders from Foot Locker including the newly acquired stores were higher than prior year orders from Foot Locker and Foot Star combined accounting for about 3 percentage points of the overall futures growth for the U.S. region.

For the full year, revenues from our other businesses grew 51% to $1.4 billion.

The acquisition of Converse accounted for just under half of that growth.

Revenues at Hurley advanced about 35% while Nike Golf, Bauer NIKE Hockey and Cole Haan each grew over 20%.

For the year, our other businesses earned $75 million of pretaxed profit, driven by the acquisition of Converse and significantly better profitability at Nike Golf and Cole Haan.

Consolidated SG&A spending for Nike, Inc grew 25% in the fourth quarter and 17% for the full year.

Changes in exchange rates accounted for about six points of the increase for both the quarter and the year.

For the year, demand creation spending increased 18% with seven points of growth due to the effect of stronger foreign currencies and about two points due to the acquisition of Converse.

Higher endorsement expenses in the U.S. and incremental investment in retail marketing and advertising around the world were key drivers of the balance of the increase.

Operating overhead increased 17% for the full year.

Stronger foreign currencies accounted for five points of growth, while increases in incentive based compensation added three points and the acquisition of Converse added two points.

Investments in Nike retail stores and supply chain improvements as well as additional infrastructure in our fast-growing non-Nike brand businesses accounted for much of the remaining increase.

Other expense for the year was $75 million, down slightly versus the prior year.

About two-thirds of this year's expense was due to foreign currency losses, mostly from Europe.

These losses were offset by favorable translation of foreign currency denominated profits reported by our International regions.

The effect of netting these foreign currency losses and the favorable translation of foreign currency denominated profits was $157 million of additional pretax income for the year and $42 million for the fourth quarter.

Our effective tax rate for the quarter and the year was 34.8%, 70 basis points above the rate for all of last year, as a result of a higher tax provision on International earnings.

Year to date we have generated $1.5 billion of cash flow from operations and used $545 million of cash for investing activities, including the acquisition of Converse.

Cash flow from operations, as you would see it on our GAAP cash flow statement, less cash used for investing activities is our definition of free cash flow from operations and that totaled $1 billion for the year.

Cash flow used for financing activities totaled $399 million, driven primarily by cash outflows for share repurchases and dividends, offset by proceeds from the exercise of stock options.

As a result, as of May 31, 2004, we had $1.2 billion of cash and short-term investments and our balance sheet is as strong as it has ever been.

As of May 31, worldwide inventories were 8% higher than a year ago.

The acquisition of Converse and currency changes together accounted for about six points of growth.

Inventory in the U.S. fell 11%.

At the end of the fiscal year, accounts receivable were 2% higher than the prior year.

Stronger foreign currencies and the acquisition of Converse together accounted for four points of growth.

Without these factors, accounts receivable would have declined 2%.

Nearly four years ago now, at an analyst meeting here in Oregon, we outlined our financial goals for Nike, high single digit revenue growth, mid-teens earnings per share growth, expanding return on invested capital and accelerating cash flow and more consistent results based on our ability to manage a diversified portfolio of businesses.

In the time since that meeting the Euro devalued , then recovered all of that and more.

Terrorists attacked around the world and war broke out in the middle east.

In the U.S. we made significant changes to our retail distribution strategy and our third largest customer went bankrupt.

We implemented new systems and operations generating over 80% of our worldwide revenues.

We acquired two new brands and we delivered on the financial goals that we outlined those four years ago.

Over the last four years we have compounded revenues at 8%.

We have grown earnings per share at an average of 14% per year and we have raised our return on invested capital from 14% to 22%.

We've generated $2.8 billion of free cash flow from operations and we have returned $1.6 billion of cash to shareholders in the form of dividends and share repurchases.

Great athletes and great teams perform well in the face of adversity but they also have the discipline to stick to their game plan and win the games they are supposed to win.

Dynasties are built on consistency.

Year after year against all levels of competition, great athletes and great teams just win.

In some years, such as fiscal 2004, we may exceed our financial goals due to a positive economic environment and acquisition or a strong product cycle.

In other years we may be below our long-term target, but on average and over the long-term, we believe we can deliver mid-teens earnings per share growth.

Our expectations for fiscal 2005 remain consistent with the point of view we discussed last quarter assuming a stable currency environment.

We are targeting high single-digit revenue growth for the year but expect overall revenue growth will be higher in the first half of the year as we face a more difficult comparison in the second half.

First quarter revenues will also benefit from the Converse acquisition in the second quarter of last year.

As a result, our current estimate for first quarter revenue growth is in the mid-teens.

On the gross margin line, we expect that better foreign exchange hedge rates will enable us to be more competitive in Europe and Asia and grow our overall gross margin percentage.

The increase in gross margins will be biggest in the second and third quarters when the year-over-year improvements in hedge rates will be the most significant.

We are targeting a modest level of SG&A leverage for fiscal 2005 although not in the first quarter.

Our demand creation investment will be weighted toward the first quarter as the world focuses on a summer of sport.

As a result of the Converse acquisition and the July implementation of new supply chain systems in Asia, operating overhead spending will also be weighted toward the first quarter.

As a result, while we expect our pretax profit margin will expand over the course of the full year, we expect it will narrow somewhat in the first quarter.

So in summary, we are very pleased with the extraordinary performance in fiscal 2004 and feel we are in a great position to continue to deliver profit growth in line with our long-term financial model.

So with that I will turn the floor over to Mr. Mark Parker, President of the Nike Brand.

Thank you, Don, and good afternoon, everyone.

As you've just heard Nike's fiscal year 2004 was yet another milestone for our company.

What I find to be personally the most gratifying is that we've generated these strong results by executing a more complete offense.

For each region, product category, and subsidiary business contributed to the overall success of the year.

For those of you who know us well, you know that this is not a seasonal or fiscal year objective, it is an ongoing deliverable, for our success is based on a focus and constant effort to improve on every front.

For example, Don just told you about our record gross margin performance for the year.

Our investment in the Nike supply chain has been a major factor in our ability to drive up our gross margins.

It is contributed to our operational excellence in inventory management including significantly reduced airfreight costs, which, as you know, drives profit margin growth and has a positive impact on our bottom line.

We have intensified our focus on building brand, strength and integrity.

We are better managing our brand and communicating more effectively with our consumers, which, as you know, is a critical factor in our ongoing success.

There is a lot to talk about, but in the interest of time, I would like to highlight just a few areas of our business that I think demonstrate the sustained quality of our complete offense approach.

Last June, we entered fiscal '04 on the heels of the much publicized signings of LeBron James and Carmelo Anthony.

Media skeptics questioned the values of their contracts and coupled with Michael Jordan's final retirement asked the question is Nike vulnerable.

What happened?

In December we launched LeBron's Air Zoom Generation and we saw sell throughs at a rate rivalled in our industry only by a Jordan launch.

The Air Huarache 2k4 followed, again, to strong consumer demand.

Jordan brand led by Carmelo Anthony generated strong sales for the Jordan 19 game shoe and the highly successful Jordan 12 relaunch and Nike Shox continue to excite consumers to the point that one major retailer has informed us that they sold their entire inventory of $125 retail Nike Shox footwear at full price.

Clearly there appears to be a healthy appetite for performance products as is evidenced by our strong growth in sales premium footwear in several categories.

We are seeing great sell throughs at retail and a solid and sustained brand in rising average selling price based on futures orders.

In fact, we see positive signs that this trend will continue.

For the futures period we reported today, we saw strong growth in both units and dollars with average price gains of over 6%.

At the same time, we are fulfilling continued consumer demand with releases of classic Nike and Jordan products like the ever-popular Air Force One, Dunk, and the Jordan 12 just to name a few.

As for what we will be doing in the months ahead in the basketball category, just a few highlights include LeBron and Carmelo's participation in the Summer Olympics and the introduction of the LeBron Low, followed by the second-generation LeBron Signature shoe.

We also have a great new series of Nike Shox footwear coming this fall followed by the Huarache 2k54.

Changing sports, we had another highly publicized athlete signing last summer of a 14 year-old footballer named Freddy Adu.

Despite tremendous media scrutiny of Fred's young professional career, he is already making an impact on the MLS and on football fans in the U.S. and beyond.

But the story of Nike football is now in Europe.

Over the past few months Nike has earned an incredible amount of on field exposure thanks to the success of high profile football teams lile Arsenal, who is undefeated in winning the UK's premiere league title, FC Porto, who won the coveted Champions League title, Manchester United, who won the FA cup in Valencia, winner of the UEFA cup in la Liga in Spain.

Nike's association with these prestigious teams and others are partnership with many of Europe's and the world's top players and our incredible football product innovations clearly are resonating strongly with consumers in Europe.

For the past 12 months, through March 2004, NPD Footwear data showed Nike has passed Adidas in football market share in the big five countries in Europe and in the northern European countries as well.

What is even more amazing it does not include sales since our launch of the Create Magic global brand initiative on April 1st.

And during the 2004 European championships, which are under way right now, more than 7 billion cumulative television viewers will see Nike deliver another season of football innovation.

Off the field Nike football is dominating media around the globe with break through communications on TV, cinema, at retail, online and on the streets tied together by the theme of encouraging kids to create magic.

Nike's objective is to become the leading football brand in the world, just as our innovations are helping to drive energy into the sport, the same innovations are driving our business.

For example, from fiscal year 2002 to fiscal year '04, our global football business has more than doubled in size.

We expect to continue this growth in fiscal '05 and beyond.

As I touched on a minute ago on the product innovation front, we have introduced some of Nike's most innovative and distinctive football products ever, including the Air Zoom Total 93 boot and the T 90 Aeroball series which has sold out in nearly every market.

In apparel we introduced the total 90 Zero Distraction Training and National Team Kit, formed by key national teams, including Brazil, Holland, Portugal, Russia, Croatia, USA, Mexico and Korea.

And finally you have heard me talk for several quarters about our speed initiative and the summer of speed.

Well, it is here.

From day one Nike's purpose has been to serve the athlete by creating products they need to be faster.

Throughout this summer athletes such as Marion Jones, Lance Armstrong, Paula Radcliffe, Serena Williams and many others are competing in footwear and apparel that represent the most advanced performance technology Nike has ever created.

And we are communicating with consumers about speed in an integrated global brand campaign designed to reach both a broad and a very targeted audience.

Looking forward, we will be focusing a considerable amount of attention on women in the coming year, starting with Shox for Women which we introduced earlier this month.

The Nike Shox platform is become second only to Air in our industry and could easily be considered our industry's most successful innovation of the 21st century so far.

With the global launch of the Nike Shox Bella running shoe, the Nike Shox Energia training shoe and Nike Shox Alegria walking shoe, women have Nike Shox's cushioning systems designed specifically for them.

Another big factor in helping to get FY '05 off to a great start.

And I might add to please check nikebiz.com for a peek at some of this products.

And then finally Don talked about the great financial performance of the Nike, Inc. subsidiaries.

I point out that behind that financial success is an increasingly strong track record of brands like Cole Haan and Converse, which we intend to further enhance by leveraging the unique design and innovation technologies of Nike.

We are learning from each other and the Nike, Inc. portfolio is stronger and more integrated than ever.

Before I turn you over to Charlie Denson I wanted to close just by mentioning the ongoing Live Strong initiative with Lance Armstrong.

As Lance prepares to go after his 6th straight Tour d France title we are helping raise $6 million for the Lance Armstrong Foundation by selling Live Strong yellow wrist bands.

I'd encourage you to check out www.wearyellow.com to consider how you might support this effort.

And we wish Lance well on what could be a historic race this next month.

So with that, I will turn you over to my partner, Charlie Denson

Thanks, Mark.

Good afternoon, everyone.

It is a good day today.

As I was preparing my comments for the call this time around, I was going through my traditionally spin, reviewing our performance by region around the world.

It is an expected approach, in most cases probably preferred.

Easy to follow and understand.

I am told a boring report to the Street is usually a good thing.

No surprises, meet expectations.

You deliver the expected and life goes on.

The problem with that, it is counter culture around here.

Our job is to surprise people.

Our essence of existence depends on re-creating ourselves.

Waking up and expect an audience and attacking and counterattacking our competition.

So as I read my first draft, it felt way too predictable.

USA market, the healthiest in years.

European business grows again for the 10th year in a row.

China and Japan lead the fastest growing geography in age specific.

The Americas is becoming a more stable business environment.

Well, now, maybe that is something new.

These were the headlines.

So what else is new?

The danger at times like this is becoming complacent or assuming, even letting a tone of arrogance seep into your consciousness.

I can guarantee you, we are not letting that happen, but we do feel pretty good about where we are right now.

So I thought maybe just this once I would take a little less predictable approach to the call and talk about some other things that are going on around here.

Maybe you will find these items useful, and if not, then at least it will provide you with a little amusement.

Let's talk about what's new.

There is lots of things.

First, we are now shipping direct in both India and Russia, completing our strategy to own our business directly in the four big emerging economies including China and Brazil.

We have a local team of 50 working out of our office in Moscow and we'll have 40 people on the ground in India.

Michael Jordan and the Jordan brand have just concluded a trip to Asia to kick off a focused effort to grow the Jordan business on an International scale.

If his reception is any indication of the demand for the product this could be a great growth vehicle for us in countries like China, Japan and Taiwan.

The reception was incredible and the game of basketball will only get more popular.

The Foot Action saga has now run its course with Foot Locker, Inc. coming out as the proud new owner of the remaining Foot Action stores.

We will look to create points of differentiation with our mall based athletic specialty distribution.

I know you will have ongoing questions here and while we don't have all the answers yet, we will continue to communicate as we work through our plans.

And with the recent consolidation of Galyans we will continue to build on our already solid relationship with the Dick Sporting Goods team.

We have become the number one market share leader in football footwear in Europe.

Now, that is new.

In fact, it's a first.

We are not declaring victory here yet.

With the European championships under way and, oh, by the way, does anybody know the score of Portugal-England game, and our launch of the new Air Zoom Total 90 package we are looking forward to the next two years and the buildup of the World Cup in Germany.

I said up front that the Americas was becoming a more stable business environment and it is.

We are just not planning on it staying that way forever.

The last 200 years says that this could be another calm in the storm.

That said, the passionate appetite for sport has never waned there and we feel we could be more aggressive here if we could mitigate some of the currency and geopolitical risk.

The strategy, to do more local manufacturing, will install a much larger natural hedge position on our assets and inventories and allow us to be a stronger player in a very important piece of our long-term growth agenda.

It is not news, you have heard Mark and Don both talk about it, but exciting just the same is the summer of sport.

We have been talking it since Q2.

The Euro Champs, the Tour de France, Copa America Tournament in South America topped off with the Olympics, September and the shareholders meeting will be here in no time.

Finally, what would a conference call be without an update on our supply chain implementation.

In July we'll add Japan, southeast Asia and our Asian apparel group putting almost 90% of our global business on the new platform.

Everything is on track.

And there is the most recent report on the key indicators, our futures were up nearly 11% in real dollars, Nike retail has had their best year ever and their best comp store gain since fiscal year 1998 in all eight of our business units, four regions, three product types in global golf have finished with year-on-year growth.

We grew $1.6 billion on the revenue line this last year.

For the next call, I will probably return to the expected, predictable review of the regional business environment and our performance, but I can assure you we don't do that with the consumer.

With our results as strong as they are at this time, I felt being a little less predictable was worth the risk.

As we wrap up this call I would like to reflect on one thing.

There are many great things about the written word and its ability to be remembered.

It can be recalled as a fact, as an example, or as a historical accountability.

It was almost three years to the day, with our stock price at 41 and change, that we were described as being in a classic case of growth purgatory.

As I think back on that report, I also conclude that sometimes the written word can even be recalled as a challenge, a motivator, or even an example, that believing is more important than predicting.

So you can understand why I won't make any predictions about fiscal year '05.

What I will tell you is that I believe in our leadership, our management group, and our entire team around the world.

We are focused on continuing to build and enhance our brand, grow our business in a healthy and sustainable way and continue to deliver value to our shareholders.

So let's open it up for questions.

Thanks a lot.

Ladies and gentlemen, today's question-and-answer session will be done electronically.

If you would like to ask a question, please press Star 1 on your touch-tone telephone.

If you are using a speakerphone, please make sure the mute function is turned off to allow the signal to reach our equipment.

Once again, Star 1.

We will pause a moment to gather our roster.

We will take our first question from Noelle Grainger with JP Morgan.

Please go ahead.

Hi.

Can you hear me?

Yes, we can hear you, Noelle.

So, do I get a prize if I know the score?

You sure do.

They are in penalty shots.

Oh, God --

2-2.

That is great, Noelle.

You even had the Syracuse score from last time.

Okay,

Now you get two questions.

That's my prize.

Okay.

First question is on Asia Pacific.

The business has been very, very strong over there.

Sales and bookings close up more than 20%.

Can you talk about the business a little bit, what you see happening over there, and do you view this as the next Europe for Nike?

Well, Noelle, this is Charlie.

I don't think so.

I would love it to be the next Europe in the sense that Europe has grown for ten years in a row.

If we could work that out, then that would be fantastic.

We feel pretty good about our business and our position in Asia.

We continue to build our performance position and get away, a little bit more away from what has traditionally been an American fashion brand, albeit with a sports influence and that gives us more stability in the region and doesn't make us so dependent on some of the fashion related business that tends to ebb and flow in part of the region.

And then I think as you look at the economic growth coming out of places like China, it gives just a lot of different platforms from which we can grow and diversify our business.

Do you want to throw out a revenue opportunity? [ LAUGHTER ]

China.

Dollars? [ LAUGHTER ]

AH, no predictions today.

Okay.

Then my second question would be on Foot Action, Foot Locker, purchase of Foot Action.

You have had your discussions with them at this point in time, do you expect to maintain your current or your previous penetration, grow it, lose it?

How are they currently planning on merchandising that business?

The biggest question I think that still needs to be answered as we work with the Foot Locker group on where these stores go is how to differentiate them.

And I don't think I can really comment any further than that with respect to the level of penetration in the doors.

You'd have to contact the Foot Locker folks for that answer.

I was very pleased to see the stores remain in the pool, so to speak, and that we didn't lose that additional distribution throughout some pretty key markets throughout the U.S.

And I think they are going to try and differentiate those doors and maintain the Foot Action banner which was great news for us.

They said "performance," but do you give them different technologies?

How do you differentiate if they both want performance.

We are still working on different differentiation strategies.

As I said in the prepared comments, we will continue to communicate as those firm up, but at this point in time I don't have anything concrete to report.

All right, thanks a lot.

Thanks, Noelle.

We will go next to Jeff Edelman, UBS.

Please go ahead.

Thank you, good afternoon.

Don, I was wondering if you could explain the currency effect discrepancy between your fourth quarter sales in the Europe region and the futures growth.

Because it looks like there is a 14% currency pickup on the sales line, but only a 3% differential in futures.

Well, the only thing I can tell you is the way we do the calculation, the fourth quarter would have been the average of the fourth quarter against the average of the fourth quarter of fiscal '03, and we do a projection for the futures period based upon essentially current exchange rates.

So we don't try to guess and speculate as to any major moves in the currency and if you just look at the year-over-year rates, that's how we come out.

Okay, so then that's the best guide we should use for sales over the near term?

Well, it is our handicap on currency.

I mean, you pay your money and you take your chances trying to guess where the currency is actually going to be.

So the way our numbers get reported, it will get reported at the rates that are in effect as the quarter goes on, so --.

Okay.

Okay, great, thank you.

Okay.

We will go next to Margaret Mager, Goldman Sachs.

Please go ahead.

Hi.

Hi, Margaret.

I know we are not supposed to say congratulations, but I just want you to know we are giving you a standing O over here at G S.

Thank you, Margaret.

I feel like I am watching one of those great moments in sports.

It is fantastic.

Speaking of that, Portugal just went through to the semifinals.

A good performance should be recognized.

Thank you.

I want to ask about the comment regarding performance footwear and the view that performance footwear is picking up, driving the market, et cetera.

Does this mean that nonperformance footwear is being left in the dust?

Because the way I kind of look at it, it seems to me that the consumer is responding to good design, whether or not it's performance quote, unquote, or nonperformance, quote, unquote, and I just want to know if I am generally seeing the right thing here.

Okay, Margaret, this is Mark.

Let me take that one.

I think your observations are correct in your good design comment.

We are continuing to see performance just move up and up in the futures numbers and average prices obviously coming up with that.

I think the design comment is pretty accurate.

We have actually learned some lessons from some of the great product sell throughs we have had on the active side of the business, which is generally more simple design or finished, more compelling design that is not so busy, not so over designed and we actually take those lessons and applied that to performance product and we are actually seeing the results.

One of the great examples that, I think, is the 2K4, the Huarache 2K4 basketball shoe, which is really inspired by some of the retro shoes that we've had.

By putting modern technology in, finishing and materials into the product and the response to that has been incredible.

So we are seeing that across the board.

Now the active side of the business is still growing.

I would say not at the rate it has been growing over the past 12, 24 months, but it is still growing nonetheless.

We feel good about the position we have on active.

We feel very good about the position we have on performance.

Mark, I have had some comments come to me regarding your strategy for Air Force One product in particular, and what you are doing with Air Force One look-alike product in the moderate price zone.

Can you just talk to that a little bit if you know what I am talking about?

Yeah, no, of course.

We really try to keep the Air Force One and other franchise classic product like that fresh in the marketplace and I think when you put a Nike trademark on a shoe like that, it is worth a lot at retail.

Not to say that there isn't some drafting going on with look-a-like lower priced products, but honestly we are not seeing that affect the sales of that product.

We actually keep a limit on that product with the interest of sustaining its lifespan.

But we treat our franchise classic product with a lot of care and discipline and part of that is actually doing a lot of smaller runs of that shoe, limited edition runs, we are doing signature versions of that like the LeBron shoe, Michael Vick version coming up, so there's ways we can kind of keep that shoe fresh and interesting and relevant and make sure that the Nike, the original authentic version of that product continues to be strong, like other product, like the Dunk, for example, is another great example.

We are really exercising a lot of discipline and restraint there and we are not seeing the sort of knockoff attempts on that product really affect our volumes in any significant way.

Okay, that's helpful.

If I could push it a little bit.

Distribution and this whole idea of consolidation at retail.

How do you react to that?

I guess one way to cut at this question is to ask about the concentration of your customer base in the U.S. market.

Is it becoming more concentrated with these combinations?

And is that an issue because if I take a historical reference point, I am sure your top ten customers look a bit different today than they did five years ago or ten years ago.

So there is a never-shifting landscape at retail but if you could speak to the idea of concentration and your view of that.

Margaret, this is Charlie.

I will take that one.

The concentration right now, I think, is beneficial because I think the better retailers are winning out.

I mean the purchase of the Galyans format right now by the Dick's Sporting Goods team I think is a great move for them and I think will really benefit us in the long term.

I think they do a nice job of presenting brands and managing brands in the marketplace and we have a great relationship with those folks, as well as in the athletic specialty area.

So, as long as we keep seeing improvement from retail distribution in these consolidations and it isn't deteriorating, I think it plays to our strength and our benefit.

The other thing I would just say is that the regional independence today, and I've talked about this quite a bit over the last probably year, I think is probably in the best shape it's been in in quite some time.

We have a very strong series of good, strong independence operating in different regions around the country here in the U.S. that are really driving a lot of the trends, whether in the inner cities or some of the other hot spots or hot shopping districts in the country, and so we are seeing both and I think that it's positive for the brand and positive for the business and I think the numbers are starting to reflect that.

Okay, thanks.

One victory lap and back to work.

Right.

Got it

We will go next to Virginia Genereux with Merrill Lynch.

Please go ahead.

Thank you very much.

And, Pam, can I ask two?

Sure. [ LAUGHTER ]

Okay, thank you.

The first, Don, you guys are obviously doing a great job with the levers and the model, as you say, and on the SG&A spending side, you've had great gross margin expansion.

On the SG&A side, could you comment on some of your investments that they could be setting up for leverage there in the longer term?

Whether it is the last of the supply chain in Asia Pacific this summer.

Can you talk a little bit about where you might get SG&A leverage going forward, X the events?

Well, the first thing I want to talk about is that to some degree the P&L equation that we are running is evolving a little bit.

We are investing, in some cases, on the SG&A lines and we're getting our returns on the gross margin lines and I will give you a couple of examples of that.

We talked about Nike supply chain.

If you look at a lot of the drivers of our gross margin so far this year, cleaner supply chain has been one of the major drivers, it leads to lower airfreight, it leads to lower closeouts, more profitable closeouts, we tend to get more product pushed through the same distribution infrastructure.

Supply chain investments on the SG&A lines pay back on gross margin.

Another example is outlet stores.

We have been building outlet stores outside the U.S. and when we put our own closeouts through the outlet stores we have a higher gross margin.

So that's one thing to bear in mind.

That said, some of the things that you mentioned, we will be completing supply chain implementation within a couple of years.

As Charlie mentioned, we've put down quite a bit of infrastructure both in emerging markets for the Nike brand in places like Russia and India, and also in some of our new branded businesses like Hurley and Nike Golf and Cole Haan.

So all of those investments are paying off pretty well right now, but I think we are going to see some significant acceleration in all of those businesses, including the emerging market businesses.

And I think that is going to help us with SG&A over time, but one thing that we also talked about is as we move Internationally, it gets harder and harder because those businesses tend to be a little more fragmented, but I think we are in great shape running the overall P&L equation right now and that's what we try to do.

Great, understood.

Thank you.

Secondly, if I may, I just didn't understand your commentary, Don, about the August quarter.

I just want to be clear on that.

You said we expect margin expansion throughout '05 and then for the first quarter, you said that it would be narrower.

Should we expect some margin expansion in August?

Just want to be sure I understood your comment earlier.

No, my point was, if you think about a pretax profit margin, we don't expect pretax profit margin expansion in the first quarter at all.

And the reason is that while we are going to get significant revenue growth, a lot of our cost structure investments are going to be front-loaded because you've got the acquisition of Converse and we have got all the demand creation around this summer's events falling into the first quarter.

Got it.

Thank you.

Thanks, Virginia.

Great job.

We will go next to Robert Drbul with Lehman Brothers.

Please go ahead.

Good afternoon.

Hey, Bob.

A couple of questions.

First, can you give us an idea, when you look closely at the business going forward you have some tough comparisons you are coming up against on the order book as well with the strong numbers that you have delivered.

In terms of the overall business, continued market share gains that you see out there and sort of what we should be expecting from Europe?

From Europe?

Yeah, Europe.

Is that what you said, Bob.

Yes.

Okay, this is Charlie.

You know we have been talking about Europe over the last year and fortunately, we got the currency tail wind that is giving us a chance to take a little bit of a break, take some of the pressure off of the business model itself and then we are making some repairs so to speak as we go.

I think I am still pretty bullish about the European marketplace myself.

I think that you are starting to see some consolidation at retail.

I think that's healthy for us.

Foot Locker has continued to do a nice job in Pan European implementation of their format and I think that's been a positive for the marketplace and for the brands overall in general.

So, the other thing that we are starting to do is look at ways to diversify our business.

We have done a fantastic job of keeping everybody focused on soccer or football, but there is a lot of other things going on in Europe in areas like tennis and running, outdoor, even basketball, as you see some of the International stars playing in the NBA.

The women's business is continuing to improve and I think of any of the marketplaces where we can really run this whole concept around a sport business and an active life business, the European marketplace is probably the most balanced with respect to that approach.

So I can think of a lot of things in a lot of ways to grow the business in Europe.

Okay.

And the second question is, in the U.S. essentially.

Can you talk a little bit about the apparel business by channel?

There is a lot of talk about the pro compression, your product out there, active versus performance, like the expectations and what you are seeing in that segment of the business.

We are seeing the apparel business reflect a lot of the same characteristics of footwear with the shift toward performance.

We think that plays to our strength.

It is just beginning.

And it is truly branded performance apparel, via the license business is starting to flatten out a little bit and some of that money open to buy is moving back into branded performance apparel as well.

Pro compression.

It is a competitive marketplace.

It is a market that continues to expand.

We have done a lot of work on our product and feel great about the new product coming.

We have got a major campaign coming this fall focused on pro compression.

And it is going to be fun.

I am looking forward to it.

Yeah, just to add, there is Mark.

I will add that the women's business, the women's apparel business in the U.S. is very strong right now in both the sport and the active side of things.

So we feel very bullish about that.

And then there is a lot of upside still on the active side, the active lifestyle side of the business for Nike, as well.

We've got a real effort around strengthening our branded apparel business and we are starting to see some real results that, I think, will show up even more dramatically in the second half of fiscal '05.

If I can squeeze one more in, Pam.

Got to hurry.

All right.

The golf business.

There's been a lot of talk about, you said your golf business was up 20%.

Can you give us a little bit more of an elaboration in terms of what you are seeing around margins in golf and some of the competitive issues that are out there?

Well, I think for some of the other guys that have had some fairly rough quarters here recently and some tough announcements.

We kind of anniversaried that last year and we are very pleased with our performance this year.

It has been a competitive marketplace for the last 18 months.

We actually feel like we are through the worse part of it ourselves with the introduction of both the Slingshot and the Ignite concepts, we are feeling pretty good about our position in Golf.

Great, thank you.

Thanks, Bob

We will go next to Dennis Rosenberg, Credit Suisse First Boston.

Please go ahead.

Hi, guys.

I had a question about the European futures.

In the press release it said all of the regions posted healthy futures increases in both footwear and apparel.

Are Europe futures up in footwear in constant dollars and if so, what is the reason for the big change?

The answer, Dennis, is they are up and, I think, in my prepared remarks I said they were up in the mid single digits and that is in constant dollars.

Okay.

So, what's causing the big swing given the environment there.

Again, this is Charlie, Dennis.

One of the things, like I said, we've been working on this for a while.

And we are starting to see kind of a balance come through on sport and active.

And I think we are actually doing a little bit better job of building product for that marketplace right now and it is starting to pay off.

We still have work to do.

We still think that there's a lot of momentum that we can build there, but it is going to take a little bit of time.

From a category standpoint, we are seeing football, women's in general, tennis, and some of the active business actually picking up.

Okay.

Do you think that is sustainable?

Yes.

Definitely.

Okay.

And my second question relates to currency, other expense for this coming year.

What do you see, based on currency where it is now, what do you see the other expense line looking like?

And what do you see the net currency impact on earnings for the year?

Well, Dennis, I would rather not make this a model building conversation about specific lines, but the net impact, as we talked about for fiscal '04 on the translation side, was 157 million.

And that's a net number of translation net of hedges.

For next year, we expect that that number's going to be significantly smaller.

So, if you do the math there is about 10% or so of growth that came out of that translation benefit that we wouldn't necessarily expect to see next year.

On the margin lines, we are going to get some benefits next year as I have talked about in the last couple of calls, but we do believe we have got some work to do in the products.

So our margins, we expect, will be up overall but we're going to have to invest back some of that FX on the margin lines.

Thank you.

Thanks.

So we have got time for about two more questioners.

Just to let you know.

We will go next to Robbie Ohems with Banc of America Securities.

Please go ahead.

Oh, thanks.

Just a quick question.

Can you tell us how big the licensed apparel business, the NBA stuff you were doing with the 11 teams that's shifting over to Reebok, kind of how big that was and what you would be offsetting that with as you head into fiscal '05?

Thanks.

Yeah, Robbie, this is Charlie.

I don't have the numbers in front of me, maybe that is something we can get back to you on.

But it's a significant piece of business.

I think we are encouraged and where we will go to replace most of that business is to our increasing college programs.

And I think doing some different things with the different colleges.

We have a few things that we are working on right now that we are excited about.

But most of that will be taken up by the colleges.

Yeah, I will just add, I think baseball is going to be a big opportunity for us.

We have a new Cooperstown collection, so that's going be strong, and then outside the U.S., obviously soccer or football, with all the team franchises we have, will also continue to be really strong.

Great, thanks a lot.

Thanks, Robbie.

One more question.

Our final question will be from John Shanley with Susquehanna Financial.

Please go ahead.

Thanks.

Just a quick question, Charlie, on the European market.

I wonder if you can give us a quick update on the five major markets and how did the brand do in the fourth quarter, particularly in the footwear category, and the futures that you got out of the five big western European countries.

Is that pretty comparable to what the overall European sector is?

Yeah, John, and it is pretty much the same from last quarter too.

We are not seeing any big shifts.

We think that France, which has been a little bit of a challenge, is starting to improve a little bit.

I mean, we are still not out of the woods, there.

But overall, western Europe is performing pretty much the way it has over the last two quarters.

You know you stop and think about all the things that are going on in Europe right now from a sports and event standpoint.

You've got European championship, you've got Wimbledon, French open just finished, Tour de France starts here in about two and a half weeks, the Olympics coming up.

I mean, it's going to be pretty jam-packed and we think we can really work off of that as we move into the second half of fiscal year '05.

How about the UK, Charlie, has there been an improvement in terms of the retail climate for athletic products in that market.

Not really.

I would say pretty static.

Still cleaning up inventories in some of the major retailers and continue to work on some of that.

Still a very viable and vibrant market for us.

A lot of things going on in London.

Niketown London, as I said in my prepared remarks, had its biggest share ever and so we are excited about all that.

The UK is obviously the biggest market in western Europe for us and it's going to continue to be that way for sometime to come.

Okay.

Thanks a lot, guys.

Thanks everybody for joining us.

We will talk to you soon.

Ladies and gentlemen, this does conclude today's teleconference.

We thank everybody for their participation.

You may disconnect at this time.